Sunday, May 27, 2012

More Notes on the Division of Labour (Part Two)

Smith’s example was not unique, nor was he the first to identify pin making.  He asserts at the start of the paragraph “from a very trifling manufacture; but one in which the division of labour has been very often taken notice of, the trade of the pin-maker”.
The paragraph in Wealth Of Nations also follows part of what is written in his manuscript known as the “Early Draft”, which is among some of Smith’s manuscripts that were written 12 years before WN (1776) and is cited in his “Lectures On Jurisprudence” (1762-3) 1983, Oxford University Press. The manuscripts were found in Glasgow University archives by W. R. Scott, author of Adam Smith as Student and Professor, Glasgow. Peaucelle shows that the manuscript details the ‘eighteen operations’ are in identical arithmetic to the productivity improvements that are found in the multi-volume, Encylopedie, Paris (1755) by Diderot and D’Alembert’s, and similarly in Chambers Cyclopedia (4th edition, 1741).  What Smith reported arithmetically relies on these 18th-century sources.
Smith’s Early Draft is interesting because it shows the arithmetic of a similar example and clarifies the divisions of the work among the operators:
The division of labour, by which each individual confines himself to a particular branch of business, can alone account for that superior opulence which takes place in civilized societies, and which, notwithstanding the inequality of property, extends itself to the lowest member of the community. Let us consider the effects of this division of labour as it takes place in some particular manufactures, and we shall from thence more easily be enabled to explain in what manner it operates in the general business of society. Thus, to give a very frivolous instance, if all the parts of a pin were to be made by one man, if the same person was to dig the mettal out of the mine, seperate it from the ore, forge it, split it into small rods, then spin these rods into wire, and last of all make that wire into pins, a man perhaps could with his utmost industry scarce make a pin in a year. The price of a pin, therefore, must in this case at least have been equal to the maintenance of a man for a year. Let this be supposed equal to six pounds sterling, a miserable allowance for a person of so much ingenuity, the price of a single pin must have been six pounds sterling. Supposing that the wire was furnished to him ready made, as at present, even in this case, I imagine, one man could with his utmost dilligence scarce make twenty pins in a day, which, allowing three hundred working days in the year, will amount to six thousand pins in the year; an immense increase! His maintainance for a day therefore must be charged upon those twenty pins. Let us suppose this maintainance equal to ten pence, a most liberal allowance compared with the foregoing, there must be a half penny of this charged upon each pin over and above the price of the wire and the profite of the merchant, which would make the price of a pin about a penny: a price which appears as nothing compared with the foregoing, but which is still extravagant compared with that which actually takes place. For the pin–maker, in preparing this small superfluity, very properly takes care to divide the labour among a great number of persons. One man straightens the wire, another cuts it, a third points it, a fourth grinds it at the top for receiving the head, three or four people are employed about making the head, to put it on is the business of a particular person, to guild the pins is the occupation of another, it is even a trade by itself to put them in the paper. When this small operation is in this manner divided among about eighteen persons, these eighteen will perhaps among them make upwards of thirty six thousand pins in a day. Each person, therefore, making an eighteenth part of thirty six thousand pins, may be considered as making two thousand pins a day, and supposing three hundred working days in the year, each person may be considered as making six hundred thousand pins in the year, that is, each person produces six hundred thousand times the quantity of work which he was capable of producing when he had the whole machinery and materials to provide for himself, as upon the first supposition; and one hundred times the quantity of work which he was capable of producing when the wire was afforded him ready made, as upon the second. The yearly maintainance, therefore, of each person is to be charged not upon one pin as by the first supposition, nor upon six thousand as by the second, but upon six hundred thousand pins. The master of the work, therefore, can both afford to increase the wages of the labourer, and yet sell the commodity at a vastly lower rate than before: and pins instead of being sold at six pounds a piece as upon the first supposition, or at twelve pence a dozen as upon the second, are commonly sold at several dozens for a half penny.”
I have long argued that Smith’s ‘pin factory’ example in chapter 1 of Wealth Of Nations, which while interesting, is by no means the last word on the importance of the division of labour to commercial societies.  I suggest that the implications of Smith’s further example, a few pages on, of the production of the common labourer’s woolen coat is extremely, if not more, important for our understanding of how market societies raise productivity, improve existing products, creates new products (Schumpeter’s ‘perennial gale of creative destruction’), and lower unit prices and raise real wages, which in turn improve living standards.  We know this happened in Europe and North America, and is happening now in China, India, and Brazil. 
Smith shows in his woolen coat example, the long supply chains of productive labourers involved in producing such a simple basic product.  I recommend that you read it, not just as an illustration of the national and international division of labour, but also the inter-sectoral division of labour (to use a modern designation) across all the sub-operations in the products produced elsewhere by distant, unconnected masters and operators, who probably do not know of those who might eventually use what they produce to produce other products, beyond the knowledge of earlier and later inter-mediate links in long production chains.
In my “Adam Smith: a moral philosopher and his political economy”, 2010, 2nd edition, Palgrave Macmillan, ‘Great Thinkers in Economics’ series, I present Table, 6.1, ‘Manufacture of a Common Labourer’s Coat’ page 58, which shows 17 direct trades who manufacture the coats, 4 indirect trades in the carrier business, 5 trades supplying tools, 19 indirect trades supplying the skills used in manufacturing related to the coat output, also mentioned by Smith in his woolen coat example.   I also recommend consulting A. Young’s 1928 paper published in The Economic Journal, where he brings Smith’s example up-to-date and shows its implications of increasing, not decreasing, returns that dominated marginal analysis in the 19th and 20th centuries, and is still taught in Economics 101 today.
Smith’s example of a simple, basic product represents the remarkable division of labour needed to produce a simple coat in the 18th century, the implications of which are not drawn out in the ‘pins’ example, but which is about as far as most students, and their tutors, go through Wealth Of Nations on this critically important subject. 
Brad Delong, however, as I regularly mention, gives to his students details of the income gap of Yanomamo, stone-age, hunter-gatherers along the Orinoco River in South America compared with modern New Yorkers along the Hudson River.   That gap was $90 for the Yanomamo to $36,000 for the New Yorkers.  The difference in product availability (using notional Stock Keeping Units), the gap is highlighted by several hundred products for the Yanomamo, compared to ‘tens of billions’ for New Yorkers.  This significant difference indicates that while the Yanomamo hunter-gatherer economy provides what is available solely from within the tribal territory, the New York tribe depends on the availability of billions of products in long, complex, and inter-dependent product and service chains, where participants do not know nor need to know those involved more than a link or two along the supply chains.
Understanding how product and service chains function, both autonomously and under state regulations, is a focus of modern political economy, for which Smith’s insights are of lasting value. 
One insight is that separate productivity and product changes all along the linked, but disparate, supply chains alters costs and product availabilities for all those businesses involved, who know, and do not need to know, the input and output businesses only a few links away, and this is accomplished without any overall supervisory management control.  This is the real power of markets in raising living standards for millions of consumers. 
The difference between Adam Smith and Karl Marx boils down to fact that Smith understood the power of freer markets to manage the apparent anarchy of complex, linked supply chains better than any known alternatives of the Sovereign and his ministers (or today, Commissars and bureaucrats) making billions of decisions a day (clearly beyond them), while Marx believed that state officials could manage complex, linked supply chains better than freer markets.  The Soviet experiment showed they couldn’t.
Hence, Smith’s philosophy can be summed for a modern complex economy as “markets wherever possible, state intervention where necessary”.


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