The Division of Labor in Economics

A History

Guang-Zhen Sun

• Editorial: Routledge
• Año: 2013
• ISBN:
  9781136344381
• Edición: 1
• Categoría: Business
• Categoría: Business General

This book provides, for the first time, a systematic and comprehensive narrative of the history of one central idea in economics, namely the division of labour, over the past two and a half millennia, with special focus on that having occurred in the most recent two and a half centuries. Quite contrary to the widely held belief, the idea has a fascinating biography, much richer than that exemplified by the pin-making story that was popularized by Adam Smith's classical work published in 1776.

1 Introduction

This book attempts to provide a narrative of the history of economic thought and analysis of specialization and the division of labor in the past two and a half millennia, with a special focus on that which has occurred in the last two and a half centuries. In doing so, we necessarily confront, first and foremost, two basic questions. The first is whether there is enough material to make up a book of about 250 pages. Presumably every student of economics knows, or knows of, Adam Smith’s famous story of the division of labor in pin production, and is more or less impressed by the remarkable productivity gains thereof. But what else? Should a survey of responses to this question from contemporary economists be conducted, it is very likely that most would be, essentially, “Nothing”. The belief underpinning this attitude is, I suspect, that the economics of the division of labor has come and then gone, along with the handicraft workshop of which Smith took pin making as an illustrative example.

The second question, closely related to the first (as is its answer), is about the relevance of such an endeavor: why should one, nowadays, bother to understand how and why the production of the pin, or its like, is divided into several stages or parts, each of which is carried out by one or a very few specialized workers? In other words, does the study of the division of labor have an important bearing on economic science, the discipline in which so many so-called revolutions have taken place since its rise in the eighteenth century? One may be even more vexed by the question in light of the fact that the founding fathers of political economy (economic science), not only Adam Smith, generally assigned a prominent role to specialization and the division of labor in their systems of thought and analysis, but it was not fashionable to do so afterwards. Indeed, only a few masters in economics in the nineteenth and twentieth centuries did that. The division of labor, as a subject matter, was either only superficially touched upon or entirely ignored by most economists. Only in recent decades has the situation changed somewhat, thanks to a revival of scholarship on the Scottish Enlightenment and on Smithian economics in particular. Nonetheless, there appears an entrenched belief among many economists that the division of labor is of little relevance to modern economics.

To the first question, the short answer is that the notion of the division of labor has a fascinating biography, much richer and longer than just exemplified by the pin-making model. The pin model indeed may well be seen as the tip of the iceberg of the scholarship of this matter, a body of work with contributions from many and various authors across several civilizations over the course of a long period of time, both before and after the publication of Adam Smith’s The Wealth of Nations (1776), which popularized the pin-making story to the extent that it has since been widely seen, somewhat inappropriately, as the prototype of the division of labor. Before Adam Smith, the importance of the division of labor in socio-economic life figured prominently in the writings of many authors, from Plato and Aristotle in ancient Greece and Kuan Chung and Hsün Tzu in China at roughly the same period of time, to the medieval theologians and philosophers al-Ghazali, Nasir al-Din Tusi, Thomas Aquinas and Ibn Khaldūn. Most importantly, in the emergence of political economy as a separate discipline of scientific inquiry in the seventeenth and early eighteenth centuries, the division of labor, as a significant subject matter, not only received a great deal of attention in the various discourses of the mercantilists and the pre-Smith systematizers but was also not infrequently used as a, if not the, unifying concept to organize analyses of wealth and commerce. It is no exaggeration to claim that the notion of the division of labor was simply indispensable to the emergence of political economy as a science. Contrary to Joseph Schumpeter’s well-known remark to the effect that the uniqueness of Adam Smith lies in his placing the heavy burden of economic analysis on the division of labor, Smith was actually not the first author to do so: Ernst Ludwig Carl (1722–1723) did just that shortly before Smith was born. Smith, however, was the most successful in doing so, so successful that he created a new science and placed it on such a solid foundation that there is a sense in which our contemporary economic thinking is largely shaped by his system of natural liberty. The sweeping idea of this system is the principle of the benefits of the division of labor, which Smith used forcibly to develop a historical jurisprudence to account for the growth and the nature of wealth in commercial society. The pin workshop story, crystallized as a hallmark of Smith’s economics of the division of labor in the popular writings about the man and his work, is no more than a (somewhat poorly construed) example with which to illustrate one aspect of his thought of this matter, to which we shall refer as the differential calculus of Smith’s scholarship of the division of labor in Chapter 4, in contrast to his integral calculus of the division of labor that is far more important and profound. The post-Smith development in economic analysis of this subject is also significant, most especially in the study of the connection between specialization and the extent of the market and its implications for economic progress advanced by Edward Gibbon Wakefield, Alfred Marshall, Allyn Young and George Stigler, the insightful analysis of the division of labor in capitalist manufacture by Charles Babbage and Karl Marx, and the brilliant blending of the division of employment with the dispersion of knowledge in the decentralized price system by F. A. Hayek.

One objective of this book is to identify and elaborate on the tradition in economic analysis of the subject by closely examining the studies on this topic that have emerged over the past two and a half millennia, especially from the 1760s through to the 1950s. As is to be shown in detail, most analyses, made by authors of varying backgrounds and eras, which may thus appear rather scattered, can be conceptually unified into a relatively coherent body of scholarship.

As to the second question, to which the above two paragraphs might have provided a partial answer, it would perhaps suffice to mention that since the late 1970s a revival of interest in specialization and the division of labor has emerged in the field of economics. Crucial to this revival is the fact that that more and more contemporary economists, when getting to grips with the fundamental mechanisms of various forms of economic development such as industrialization, urbanization, the increasing heterogeneity of the labor market, institutional transition, economic growth and the structural change of the firm, have become aware of the power of the ideas of increasing returns to the division of labor in accounting for the phenomena they faced. Economies to specialization and the division of labor have played a remarkable part in the recent growth of knowledge in a good number of fields in economic science, for instance in accounting for endogenous growth, spatial agglomeration of economic activities in the city, co-evolution in human capital and the labor market, and the economic nature and internal structure of the firm (refer to Part IV of this book). It is safe to say that the subject has been brought back to the core of economic analysis of broadly defined economic development in the past three decades. At the same time, certain relatively old doctrines, dating back to Adam Smith, have been resurrected in modern analytical apparatus, with, of course, substantial and important extensions. Consciously or not, innovating theorists in social sciences often pick up and refine long overlooked ideas from the tradition, thereby enriching it. The same is true with economic theorists. The other major purpose of this book is therefore to review modern studies, especially those studies conducted since the revival of research interest in the division of labor in the late 1970s, largely in light of the tradition identified through close examination of the classical work on the subject, thereby to highlight and assess recent advances, and occasionally to suggest new directions that appear to be scientifically rewarding.

The reason that the division of labor refuses to die out in economics but is rather in the midst of an unusually fruitful comeback seems, on the face of it, to be simple. Finer specialization and division of labor implies increasing interdependence, largely through the various exchanges, between individuals, households, firms, regions and even nations, and hence the market is expanded and deepened. The various ways in which socio-economic life is organized are all affected by such changes. To study the division of labor is to study the market and the economy. One far less obvious reason, however, lies in the long overdue appreciation on the part of economists of the increasing returns to the division of labor, the central principle of the Smithian economics. Increasing returns to the division of labor differ conceptually from increasing returns to scale at the individual firm’s level. It refers to the fact that the production possibility frontier for the economy as a whole expands with the size of the nexus of exchanges and the economic interdependence among its differing parts. What is sometimes referred to as the Smith Theorem (Stigler 1951) – namely, that division of labor is limited by the extent of the market – is only one part, although one essential part, of the principle. Less understood is the fact that the extent of the market is also dependent on the division of labor, for the latter largely determines productivity and hence the purchasing power of the individuals in the economy at large. Enlargement of the network of the division of labor allows higher degrees of specialization to occur, resulting in a higher productivity for the society as a whole, and hence in economic development. Each market participant’s choice of specialization in the network of exchange and social division of labor not only determines what and how much she or he demands from the market, but also informs the extent of the market available for other participants. Such causal circularity between the division of labor and the market volume would certainly be missed by only looking at the scale of operation of any particular firm or even any particular industry. As is shown in historical detail throughout this book, a major part of the post-Smith economics of the division of labor, including the ongoing research related to this subject matter, can be seen as an extension, elaboration, application or creative critique of this principle, which James Buchanan deliberately refers to as generalized increasing returns (Buchanan 1994).

In an abstract sense, the social division of labor, especially that which is analyzed meticulously in the writing of authors such as Adam Smith, Alfred Marshall and F. A. Hayek, involves both division or differentiation (of employment among individuals) and combination or integration (of the specialized individuals’ economic activities and outcomes). Divided and specialized, we become more productive, and therefore engage in more exchanges with each other, which can only be effectively and efficiently carried out through the market. Combined and integrated, we can thus realize the gains from specialization, not only in producing goods and services but also in conducting transactions and in providing government of justice. Divided, we can possibly stand; integrated, we are enabled to stand firmly. However, the most meaningful question to ask – and to answer – in economics is not just what happens in the division and combination of labor, but how it happens and why. For instance, in accounting for urbanization, it is crucial to understand how the division of labor makes possible the concentration of productive and transacting activities within the space we call a city. Another example is the internal structure of the firm, which involves not only the form of transactions a firm has with other firms and consumers but also the division and combination of specialized workers within the firm so as to effectively utilize the specialized human capital of the workers. Some important advances in urban economics and the theory of the firm made in the past two decades are essentially revitalizations, with innovations, of the classical idea of creation and diffusion (distribution) of wealth by way of the division of labor in production and voluntary exchanges (both within the firm and without). It would be foolish to announce the death of the economics of the division of labor until we have fully understood how the economy operates in utilizing the benefits of the division of labor and the division of knowledge, a point to which we clearly still have a very long way to go.

The main body of the book is divided into four parts. As is already indicated above, there are perhaps few topics that have received as much attention before and during the rise of political economy in the eighteenth century, from so many masters across time and space, undoubtedly among the best minds human civilization has ever produced, as the topic of the division of labor. The reason, on the face of it, appears rather simple: the division of labor is the foundation of human civilization and a key engine of its development. But to fully spell out all its implications for socio-economic life is such a great task that it would require an intellectual relay spanning centuries and civilizations. Most significantly for economic science, the division of labor, as a subject, played an essential role in the emergence of economics (political economy) as a distinct discipline separable from moral and philosophical sciences during the eighteenth century. How did that happen? Part I aims to provide an account of the pre-Smith studies. It is organized into two chapters: the first on the early analysis and thought of labor specialization and the market by the ancient Greek and Chinese philosophers and the medieval Islamic and Christian theologians and scholars (Chapter 2); and the second on discourses on the science of wealth (political economy) produced in the seventeenth and the first half of the eighteenth centuries that constitute the direct precursors of Adam Smith’s system of political economy (Chapter 3). Chapter 2 begins by examining the major analyses carried out by the Greeks on the subject, including Xenophon and Plato’s insightful observation of increasing returns to division of labor and Aristotle’s theses of money and property rights. The chapter then turns to the no less sophisticated analyses of their Chinese counterparts of the “Axial Period” of human civilization (Jaspers 1953), most prominently Kuan Chung, Hsün Tzu and Ssu-ma Ch’ien, on increasing returns to specialization and the relation of specialization to the market mechanism. It then provides a review of contributions by the medieval Islamic scholars, especially al-Ghazali, Nasir al-Din Tusi and Ibn Khaldūn, which may well be seen as a half-way house between the Greeks and Renaissance European scholars, specifically insofar as analysis of the division of labor is concerned. The chapter concludes with a brief account of the Christian schoolmen’s Aristotelian defense for the private ownership and commercial activities, the underlying institutions of the social division of labor. Chapter 3 describes three major developments in the economics of the division of labor in the seventeenth and the first half of the eighteenth centuries: the study of trade and commerce by the late mercantilists; the first systematic treatments of economic matters centered on the concept of specialization and the division of labor; and the rise of individualism and liberal thought in economic discourses. We review the writing by William Petty and Henry Martyn on the division of labor and trade, Ernst Ludwig Carl’s long-neglected Treatise (1722–1723), the first systematic and somewhat comprehensive treatment of the science of wealth (political economy) and Dr Bernard Mandeville’s groundbreaking work that laid the principle of economic liberalism based on the notion of evolution and the philosophy of individualism, all in some detail.

Part II is exclusively comprised of a review and reinterpretation of the Smithian economics of the division of labor and the market process, with primary emphasis on the nature of Adam Smith’s study of the creation and diffusion of wealth by way of the division of labor and unfettered market processes. The simplicity of Adam Smith’s chief scholarship on the division of labor, as is generally portrayed in the popular writings of the subject and even in many textbooks on the history of economic thought – that specialization promotes labor productivity and that the division of labor is limited by the extent of the market – is quite deceptive. Smith’s thoughts on and analysis of the subject is actually far richer, more comprehensive and deeper than such simple formulation. Creatively weaving the study of generation and distribution of wealth into an overall framework of natural jurisprudence, Smith successfully developed his own system of natural liberty, in which the benefits of the division of labor that are fully realized in an unfettered market system account for both the development and the nature of commercial society. In some (important) sense, Smith’s (1776) Wealth of Nations can be seen as a “constitution” for the commercial society that, according to the hypothetical historical development model, evolved from barbarous and rude societies. The first “article” of the “constitution”, then, is the author’s often cited, and perhaps the most often read, first three chapters of The Wealth of Nations. However, these three chapters are only the opening section of a long and vastly rich treatise, which unfolds and branches out throughout the five books of the work, centered on, often implicitly, the theme of the division of labor. It is Smith’s integrative and historical treatment of the subject, namely, his analysis of the determinants and implications of the extent of the market, and of how the division of labor realized by an efficient market system relates to a broad range of issues important to development and justice, that makes his scholarship of this matter, and hence his system of political economy, extremely rich, sophisticated and influential. In so doing, Smith firmly laid down the foundation of economic liberalism and set out a promising research program that would keep economists busy for more than 200 years. One particularly interesting point Smith explicitly mentioned but did not substantially elaborate is the interdependence between the division of labor and the extent of the market. The very interesting evolution of ideas, starting from Smith and running through Edward Gibbon Wakefield (1835), John S. Mill (1848) and Alfred Marshall (1920), and to some extent culminating in Allyn Young (1928), along this line of inquiry also receives a detailed account in Part II.

Differing from the line pursued by Alfred Marshall and Allyn Young, which focuses on the co-movement of the market of industrial products and the division of labor among firms or industries in production, two other significant post-Smith developments were made, one on the far-reaching implications of the extensive use of machinery in capitalist manufacturing, mainly by Charles Babbage and Karl Marx in the nineteenth century, and the other on the problem of utilization of the dispersed knowledge among individuals that results from the interpersonal division of labor, by F. A. Hayek in the first half of the twentieth century. The lion’s share of Part III is thus devoted to the odd couple of Marx and Hayek. Largely in criticizing Smith’s classical treatment of the division of labor, Marx developed his theory of the capitalist division of labor, while Hayek, in purposely extending Smith’s scholarship on the division of labor, set out a new research program centered on the division of knowledge in society. Chapter 5 reviews the pioneering studies by Charles Babbage and Andrew Ure, and the systematic analysis by Karl Marx of the division of labor in capitalist manufacturing, of which the salient feature is extensive use of machinery. The most important insights Marx gained from his meticulous examination of the nature and the history of technology used in capitalist production are, first, the implication of mechanization of capitalist manufacture for organizational form, as embodied in the replacement of market coordination by employment authority within a workshop or a factory, and, second, the self-generating dynamics of the capitalist production. Chapter 6 turns to the studies conducted by the Austrians, especially by F. A. Hayek, that center primarily on the issues rooted in the division of knowledge among specialized individuals, which follows as an immediate consequence of the division of labor. Hayek contends that the price system works well, not only because, as is typically postulated in the neoclassical microeconomic textbooks, the impersonal price signal carries information of aggregate demand and supply and thus allows the well-formulated self-equilibrating mechanism of the price system to allocate resources across society. More importantly, the price system is an information generator, through which the necessarily dispersed information of local circumstances throughout the economy is acquired, transmitted and utilized. Because Hayek’s penetrating analysis of the knowledge problem is only one part, though probably the central part, of his lifetime endeavor to revitalize and advance the study of spontaneous social order, we also extend our attention to the overarching notion of spontaneous order as well as Hayek’s important refinement of catallactics.

We examine in Part IV the analyses of economic development as framed in th...