The Division of Labor

by Russ Roberts on April 2, 2007

in Podcast, Standard of Living

Both Smith and Ricardo were deeply interested in specialization. In Smith, the division of labor comes from an expanding market. For Ricardo, specialization comes from differences that make trade possible. Ricardo’s insight was that even if you are inferior in everything, you can have a comparative advantage in something making specialization and trade worthwhile.

A year or so ago, I heard my colleague James Buchanan talk about this, partially drawing on this paper of his with Yoon.

Here’s the example he gave that helped me understand the difference between Smith and Ricardo. Suppose you have a 100 hunters going out into the field. Suppose they’re all identical. All equally good at everything, including hunting. When the number of hunters gets large enough, reaching say, 100, it can now become profitable for one hunter to stop hunting and specialize in starting a business providing take-out breakfasts and lunches for hunters on their way out into the field. This specialization isn’t profitable when there are five hunters. It becomes profitable when there are enough hunters going out in the morning. And it can be profitable even when all hunters are equally good at hunting and running a cafe.

Once someone specializes in food prep, Smith’s pin factory story comes into play. You get the use of specialized equipment to make labor more productive. If you’re making lunch for yourself, you use a knife to cut the meat for your sandwich. When you’re making 100 sandwiches, an automatic meat slicer becomes profitable to employ. You might start a bakery to make the bread for the sandwiches if you’re making enough of them. And the slicing equipment and the ovens can be improved via innovation—innovation worth investing in if the return is large enough.

Ricardo’s point is that it probably isn’t the case that all the hunters are equally good at hunting and running a cafe. Some are either phenomenally good at running a cafe relative to their hunting ability so that some can run the cafe either at lower cost (foregone hunting output) or higher productivity in the cafe.

Mike Munger’s essay goes into these issues and my podcast with him explores them as well. Interested readers might also enjoy my essay on comparative advantage and specialization.

This interaction between specialization, technology and capital, and assigning people to the tasks they’re best fit for, is the source of our standard of living. It’s the reason we live so much better than a self-sufficient person.

Next week’s podcast is with John Bogle.

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{ 7 comments }

Sam Grove April 2, 2007 at 2:50 pm

It may also be that some prefer operating a cafe to hunting, even if they are as good at hunting as others.

triticale April 2, 2007 at 3:23 pm

To paraphrase Stalin, how many divisions does labor have?

Francois Tremblay April 2, 2007 at 5:07 pm

This is ridiculous- didn't you realize how easy your example is to refute? If one of them opens a business and the others don't, obviously the one who does is NOT equal to the others. He has more desire for entrepreneurship!

Bryan April 3, 2007 at 3:01 pm

Russ, have you seen the TV show "How It's Made"? It's a Canadian-produced series that airs here on the Discovery Channel. Every episode features 4 or 5 different everyday objects: elevator handrails, Venetian blinds, guitar strings, coffee machines, wigs, etc. The cameras go to the various factories/workshops and show you step-by-step how the object is manufactured. The series is an ode to the division of labor.

Tense Alcyoneus April 4, 2007 at 10:07 am

Wow. Excellent way of explaining it.

Brad Hutchings April 4, 2007 at 6:35 pm

I really enjoyed this essay and podcast. There are a couple of what you might call "micro-businesses" I've been involved with in the past couple of years. One is a friend who runs a shoe trading show, so I loved the comment about women and shoes, considering that this show is 99% guys who drop huge jack on their sneaks ;-) . I'm just a dabbler and now have about 40 pairs of shoes in boxes in my closet. That's just the Nikes ;-) .

But anyway, I've been trying to come up with an explanation for someone who isn't interested in economics per se about what the first mover advantage to setting up these shows boils down to. My friend has seen a few would-be competitors come and go. The business is just right for a couple of guys covering a few cities, but if you get more people involved or try to just do one locale, there's not enough money in it, and way too many people pulling money from you. There's also a lot of brand recognition (like Singer or Dritz — Dritz if you're familiar with the pro-am sewing scene, another micro-biz I've learned about lately) that gives him staying power.

Anyway, very very thought provoking essay and podcast. Thank you!

lon smith April 9, 2007 at 10:36 am

the specialization example that stuck with we was that MIchael Jordan could probably mow his lawn better than his lawn boy, but it was still better for him to hire it done and concentrate on what he did best

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