On Adam Smith’s Understanding of the Significance of the Division of Labour to an Economy Remains Neglected
Let me say, to start, that universal co-operation is a poor allusion for how economies work. It is overly idealist beyond the most elementary level. I prefer Smith’s approach in WN to highlight which we may call passive involvement to downplay the idea that people in markets consciously co-operate across the whole market economy or that there is a mystical “invisible hand” making everything somehow alright.
I have long argued that Smith’s ‘pin factory’ example in WN is interesting but limited and by no means the last word on the central importance of the division of labour to commercial societies. The division of labour in this limited sense is not the defining characteristic of market societies; it existed long before commercial markets emerged and was noted in earlier on-commercial societies long before Adam Smith’s wrote about the pin factory in Wealth of Nations, as he reminded readers in his first sentence on the subject.
I suggest that Smith’s other example of the production of the day labourer’s woolen coat, in chapter 1 in Wealth Of Nations, is more important for our understanding of how market societies are rooted raising, not just labour productivity, but also improve existing products, by creating new products (Schumpeter’s ‘perennial gale of creative destruction’) that lowers unit prices and raises real wages across the economy, which in sum eventually dramatically improves living standards, as we know happened in the 19th-century in northern Europe and North America, and is happening now in China, India, and Brazil.
Smith refers in his neglected example to the “people of whose labour [is] a part but a small part” to procure for the labourer his coat, which “exceeds all computation” to produce even this basic product. I recommend that you study it, not just as an illustration of the extent of an 18th-century division of labour, but also as an illustration of today's inter-sectoral division of labour across all the sub-operations in the products produced elsewhere by distant, unconnected entrepreneurs and operators, who do not know of those who might eventually use what they produce in later links in the supply chain. Their consciousness of co-operation with anonymous others effectively is close to zero.
In my “Adam Smith: a moral philosopher and his political economy”, 2010, 2nd edition, Palgrave Macmillan, I show in Table, 6.1, ‘Manufacture of a Common Labourer’s Coat’ (page 58), the 17 direct trades that manufacture the coats, 4 indirect trades in the carrier business, 5 trades supplying tools, and a further 19 indirect trades supplying the skills used in manufactures related to coat output, as mentioned by Smith in his practical example.
I would also recommend consulting, Allyn Young, “Increasing Returns and Economic Progress,” (The Economic Journal, 1928, 38, 527– 42), where Young widens Smith’s woolen coat example up to the early 20th century, and shows its implications for increasing, NOT decreasing, returns, the latter of which dominated marginal analysis and growth theory in the 20th century (see: Roger Sandilands, “Perspectives on Allyn Young in Theories of Endogenous Growth”, Journal of the History of Economic Thought, September 2000, pp 309-328).
Smith’s actual example represents the division of labour that produced a simple coat in the 18th century, the full implications of which are not drawn out from the more famous ‘pins’ example in Wealth Of Nations by modern economists.
Brad Delong, however, compared the income gap of Yanomamo stone age, hunter-gatherers along the Orinoco River in South America with modern New Yorkers along the Hudson River. That gap was $90 for the Yanomamo and $36,000 for the New Yorkers. Comparing the difference in product availability (using notional Stock Keeping Units) the gap is several hundred for the Yanomamo, to ‘tens of billions’ for New Yorkers. This significant difference indicates that while the Yanomamo hunter-gatherer economy provides what is available solely within the tribe (approximately where today’s extreme, myopic environmentalist fanatics wish to return us to), the New York tribe depends on the availability of billions of products in long, complex, and inter-dependent product and service chains from across the globe, where participants do not know, nor need to know, those involved more than one or two links from where they work their supply chains. Understanding how product and service linked-chains function, both autonomously, in markets or under state regulations, is a challenge to modern political economy to understand and explore, for which Smith’s insights are of lasting value.
One insight is that separate productivity and product changes and incidents of innovation and creativity, all along the linked, but disparate, supply chains alter costs and product availabilities for all those businesses involved, who do not know, and do not need to know, nor can they know in practice, the input and output of businesses more than a few links away, and this is accomplished without any overall supervisory management control. Crucially, nobody is in charge, which is anathema for socialists and all dictators. The real power of markets is in their raising the living standards for billions of modern consumers, no matter how low their starting points of relative poverty in current consumption.
The difference between Adam Smith and Karl Marx boils down to fact that Smith understood the power of free markets to manage the apparent anarchy of complex, linked supply chains better than any known alternatives, such as expecting the sovereign and his ministers to run, manage and review outcomes, as dispersed entrepreneurs do achieve in markets making billions of decisions a day. The knowledge required to run an economy from the top down is clearly beyond any government, while Marx believed that states could manage complex linked supply chains better than markets. The Soviet experiment showed they couldn’t and the slow moves of the Chinese to let go of top down management of an economy shows them that they need to start and continue with these changes.
Hence, Smith’s philosophy can be summed for a modern complex economy as “markets wherever possible, state intervention where necessary” – not the other way round, as statists advocate and practice where they gain political power.