The Division of Labour is the Source of Our Prosperity

Lee Friday

In his groundbreaking book The Wealth of Nations in 1776, Adam Smith wrote about the manufacturing of pins, noting that a lone worker, with considerable effort, might make one pin in a day, and certainly could not make twenty. But when the process was divided up into numerous distinct tasks – one worker draws out the wire, another straightens it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head, etc. – Smith observed that a small manufacturer employing ten workers, produced forty-eight thousand pins in a day, which equals 4,800 per worker.[1] In every field of human endeavour, vastly higher production is brought about through the division of labour. Higher production translates into higher standards of living.

Let us go back many thousands of years to a time when self-sufficiency was in the process of being displaced by the barter system (exchanging goods without the use of money). If I am a good toolmaker but not a good hunter, I can sell tools to the hunter for meat. This allows the hunter, who is not a good toolmaker, to devote more time to hunting. The hunter has the skills to provide far more meat than I, but I can make tools better and faster than the hunter. If the hunter were to produce both tools and meat and I did the same, our total production is low compared to what we can achieve by dividing up the labour. Through the division of labour, we become specialists and our total production increases so much that after we trade with each other, we still have extra meat and tools which we can trade with other people. These other people are also discovering the advantages of the division of labour. Living standards rise. Communities are born.

But what if the hunter is not just a superior hunter, but also a superior toolmaker, compared to me. What will become of me? Will I be without a job? Will I starve? Not to worry, I might still have a job as a toolmaker even though the hunter is more skilled, because I might have a comparative advantage as a toolmaker.

Let us return to modern times for a more entertaining example of Ricardo’s law of comparative advantage (aka the law of association), named after English economist David Ricardo. In his book Economics for Real People, economist Gene Callahan writes:

Let’s use as an example a great athlete: Michael Jordan. Jordan’s physical skills are truly extraordinary. There is little doubt that should he choose to apply them to, for instance, house painting, that he could be one of the best house painters in the world.

Yet it’s doubtful that Jordan paints his own house. Although he could probably, with a little practice, do so far better than anyone he can hire, he still finds someone else to paint it for him. How can we explain that fact?

The law of comparative advantage is the answer. Although Jordan is better than his painter at both basketball and house painting, Jordan has a comparative advantage in basketball, while his painter has a comparative advantage in house painting. It’s easiest to comprehend that arithmetically, by using wage rates as a basis for the comparison.

Let’s say that Jordan can hire a house painter for $20 per hour. With a little practice, Jordan could be twice as efficient a painter as the man he has hired. We will imagine that he could market his own house-painting services for $40 per hour.

However, by playing basketball, we will suppose that Jordan can earn $10,000 per hour. Meanwhile, Joe, his painter, who can hardly sink a free throw, couldn’t make more than $1 an hour playing basketball. (Perhaps some people will find his play amusing!) Jordan has a 2-to-1 advantage as a house painter, but a 10,000-to-1 advantage as a hoop star.

Perhaps Jordan plans on working twenty hours in a particular week. If he divides his time equally between painting . . . and playing basketball, his total output for the week can be valued at:

                10 hours painting x $40 per hour = $400

10 hours basketball x $10,000 per hour = $100,000

Total output: $100,400

If Joe divides his time the same way we could value his production as follows:

                10 hours painting x $20 per hour = $200

10 hours basketball x $1 per hour = $10

Total output: $210

Between them, Michael and Joe have produced $100,610 worth of output. Now let’s examine the situation if, as we expect, Jordan hires Joe. Jordan’s production can now be valued at:

                20 hours basketball x $10,000 per hour = $200,000

Total output: $200,000

And Joe’s at:

                20 hours painting x $20 per hour = $400

Total output: $400

Their total output has risen to $200,400. But, more importantly for an understanding of the law of association, both of them are better off, at least in dollar terms. The painter, who was worse at both jobs, was still able to nearly double the value of his output by concentrating on painting, in which he had a comparative advantage, then by exchanging with Jordan. The law of association demonstrates that . . .  it is to everyone’s material advantage to cooperate through the division of labour and voluntary exchange. It is the basis of the extended social order.

The application of this law to international trade is a straightforward extension of our analysis above. Even if a country is worse at producing everything than is some other country, it can still net a material gain by specializing in the areas where it has a comparative advantage and trading for other goods. It is only in the obviously unrealistic scenario where everyone is exactly the “same amount” better or worse than everyone else at every job that the law of association would find no application.[2]

Consider another example. Linda Jones owns a retail clothing store. She is more skilled than all of her employees in every single aspect of the business: preparing business plans, accounting, inventory management, identifying fashion trends, store manager, sales, cashier, janitor etc. If Linda tended to all these duties herself, her business would not grow beyond a very small size. She realizes this of course, and hires other people who have a comparative advantage in many of these jobs. This allows her to concentrate on those tasks where she has the comparative advantage: business plans and fashion trends.

We must be clear about what is really happening in all of these relationships – Linda Jones and her employees; Michael Jordan and Joe the painter; the pin manufacturer and his ten workers; the hunter and the toolmaker. None of them enter into these arrangements out of pure benevolence. The hunter does not trade with the tool maker because he wants to help the tool maker. The hunter wishes only to help himself. The toolmaker is motivated likewise. However, when the trade is made, they both benefit. The same holds true in our other three examples.

As Adam Smith said, “He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. . . . he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.”[3]

The hunter could simply kill the toolmaker and steal all his tools, thereby immediately benefitting from the murder and theft of resources. We can be sure that such behaviour occurred, and still does today. However, most people come to realize that such actions bring only short term prosperity. When the tools break or wear out, the hunter is back where he started. Humans learned long ago that sustainable prosperity requires cooperation and voluntary trade.

The division of labour does not guarantee you will like your job, but it is a virtual guarantee you will have a job. Here is Gene Callahan on specialization:

Some of the critics of modern industrial society bemoan . . . specialization. People, they complain, become narrow-minded, mere cogs in a machine, and find their work boring and repetitive under a system of ever increasing division of labour. Economics cannot answer such complaints. . . . it doesn’t attempt to recommend one set of values over another. It can’t say that those who chose a more interesting and varied life over greater material prosperity have chosen badly. However, economics can inform anyone who wishes to impose such a choice on all of society that without the division of labour the Earth could support only a tiny fraction of its current population. Perhaps those who survive the transition period will find their world more satisfactory than ours, but the billions who die during the transition might be forgiven for dissenting.[4]

Governments constantly prohibit people from participating in the division of labour (a) in an absolute sense, thus creating unemployment, and (b) in a relative sense, meaning that many people have jobs, but not necessarily the jobs they would have chosen in the absence of government interference. The degree of interference varies from country to country, and it occurs at every level of government. Here are some of the ways that governments interfere with the division of labour:

Minimum Wage Laws – creates unemployment by discriminating against low skilled workers

Antitrust, Competition Law – reduces competition for corporations, which results in higher consumer prices

Illegal Drugs – see my essay: Police, Courts, and Prisons, Part 9

Tariffs – reduces competition for corporations, which results in higher consumer prices

Welfare – encourages indolence, irresponsible behaviour, and unemployment, at taxpayer expense

Business Regulations – see my essay: Capitalism, Part 3

Unions – coercively protects union members from competition from non-union members

 

[1] see Adam Smith The Wealth of Nations (Random House, Inc., Modern Library Paperback Edition, 2000) pp 4 – 5

[2] Gene Callahan, Economics for Real People (Ludwig von Mises Institute, 2nd Edition, 2004) pp 62 – 64

[3] Adam Smith The Wealth of Nations (Random House, Inc., Modern Library Paperback Edition, 2000) pp 484 – 85

[4] Gene Callahan, Economics for Real People (Ludwig von Mises Institute, 2nd Edition, 2004) p 61

Leave a Reply

Your email address will not be published.