Thursday, March 22, 2012

A Suggestion on Smithian Growth and the Division of Labour

Patrick Legros, Andrew F. Newman, Eugenio Proto (ECARES, CEPR, Boston University and University of Warwick) post HERE

“Smithian Growth Through Creative Organization”

“We consider a model in which appropriate organization fosters innovation, but because of contractibility problems, this bene t cannot be internalized. The organizational design element we focus on is the division of labor, which as Adam Smith argued, facilitates invention by observers of the production process. However, entrepreneurs choose its level only to facilitate monitoring their workers. Whether there is innovation depends on the interaction of the markets for labor and for inventions. A high level of specialization is chosen when the wage share is low. But low wage shares arise only when there are few entrepreneurs, which limits the market for innovations therefore and discourages inventive activity. When there are many entrepreneurs, the innovation market is large, but the rate of invention is low because there is little specialization. Rapid technological progress therefore requires a balance between these opposing effects, which occurs with a moderate relative scarcity of entrepreneurs and workers. In a dynamic version of the model in which a credit constraint limits entry into entrepreneurship, this relative scarcity depends on the wealth distribution, which evolves endogenously. There is an inverted-U relation between growth rates driven by innovation and the level of inequality. Institutional improvements have ambiguous effects on growth. In light of the model, we offer a reassessment of the mechanism by which organizational innovations such as the factory may have spawned the industrial revolution.

This argument could be interesting, it certainly is promising. However, based on the abstract, I offer an observation.

The source material for Adam Smith’s ‘pin-factory’ (WN I.i.) was from France, which reported a case example involving 18 distinct sub-operations as quoted by Smith. He also mentions that he visited a small pin-maker (he doesn’t say where) employing 10 employees making the pins, some doing more than one operation.

This suggests that the sub-division of labour in the factory that he visited was not as sub-divided than the main French example, which is indicative that the spread of the division of labour is an uneven, possibly, innovative process, not a once-only outcome. That process continued until the pin-makingg process was fully automated into two factories in the UK, down, steadily through the19th and 20th century from many hundreds across the UK, producing the total domestic output. Similarly, in the USA, with computer-run plants and with operators supervising batteries of machines undertaking all the former 18 operations.

In the labourer’s common woollen-coat example, as given by Adam Smith, the link between the “high-level of specialisation” and the “wage share” and “few entrepreneurs” may need some revision. The woollen coat is far more representative of the deeper impact of the ancient principles of the division of labour (since early gatherer, pre-herder, pre-agricultural societies, after 11,000 years ago), than the simple arithmetical example of the pin factory.

The crisscrossing of often long supply chains of commercial societies are the endemic feature of post 15th-century experience that was captured by Smith in this example, and, with the technological advances of the post-17th–18th centuries, the supply chains of the market economies changed everything.

The supply chains have many links and the many, not necessarily related nor directly connected to each other, innovations prompt small changes, as given by Smith in the philosopher, who improved the 'fire engine' (a domestic coal fire) in processes, materials and products in the individual links, and these may have unexpected consequences on more than one product in the multiple chains and products that use that firm’s inputs. These may have little to do with wage rates or the number of entrepreneurs in the same industry. For example, the dye chemicals used in the labourers woollen coat were imported from distant foreign lands, so any of the minor changes in any of the inputs in the ships that carry the chemicals could lower unit costs for all the users (safer ships, larger cargoes, shorter journeys from better navigation, and so on).

This, I suggest, is the motor of Smithian Growth (see Young, Economics Journal, 1928).

Labels: ,


Post a Comment

<< Home