3.9.1776

Many thanks for this excellent podcast and its accompaniment, Professor Roberts. I particularly enjoyed your comments on Smith’s idea that ‘the division of labour is limited by the extent of the market’. It reminded me of a Freeman article by your GMU colleague Steven Horwitz, ‘Understanding Say’s Law of Markets (January 1997)’:

‘To a degree, Say’s Law is just an extension of Adam Smith’s insight that the division of labor is limited by the extent of the market. Smith’s point was that the degree of specialization that one would see in a given market depended upon how much demand there was for the specialized product. Thus, small towns rarely have ethnic restaurants beyond the very popular Chinese and Italian, nor do they have radio stations that specialize in very narrow musical formats (oldies from the 1970s only, for example). Larger, wealthier communities can support this degree of specialization because there is sufficient demand, deriving from a larger population and a larger degree of wealth being produced. It is in this sense that production (supply) is the source of demand.’

For the curious, here is the pertinent text from Smith’s Wealth of Nations:

‘As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for (I.iii.1).’