1.1.4 division of labour

Besides the invisible hand, actually a very unclear description of the market mechanisms, see natural price/market price, the division of labour is the best-known concept of Adam Smith, although the example used by Adam Smith is bad.

Wealth of Nations starts with the a description of the advantages of the division of labour, illustrating it with the production of needles. To produce needles wire must be cut into pieces, after that the pieces must be heated, ground, a hole must be made, they must be polished and so on. If one worker does all this works alone he won't be very efficient because he has to go around (from the fire to the polishing for instance), he has to change the tools very often, and he will be less skilled than someone who does only one work.

This kind of division of labour reduces the know-how needed for the production of an item to its maximum.

Nevertheless, far more important is the specialisation, and that's a very different phenomenon. Specialisation is needed if for the organisational or technological reason a work becomes so complicated that only a specialist can do it.

This phenomenon is completely different. In the first case, when a work can be split in simple words, the workers are actually kind of an appendix of a machine. Perhaps that's where the strange idea come from that labour is a homogeneous production factor and a more complex work nothing else than a multiplied simple work. Besides that, if every work is just a mechanically executed action which can be learned in a few hours, this kind of work will sooner or later be substituted by a machine. A tendency that exists without any doubt.

However, the opposite specialisation exists as well and this kind of work cannot be substituted by a machine. If this kind of work is dominant one, than the role of capital, even if we stick to the classic concept of capital, something we have no intention to do, see interest rate, is is unclear, because capital can't substitute this kind of work.

With Wealth of Nations, it started an unfortunate process which will last for the next 250 years. Only labour, capital and land are considered as productive factors. Know how doesn't play any role, although know how is the decisive production factor. Only Alfred Marshall realised that. That makes a big difference. If the wealth of society depend on capital, saved income of the past, the ones who have capital dominates the economy. If know how is the decisive factor, those who possess the know how dominates the economy.

If only capital, labour and land are conisdered productive factors, we get to a somehow mechanical view of the economy. Capital and capitalist are the same things. The capitalist is not caracterised by his entrepreneurial activities, but by the fact that he has capital. That means, that the capital flows alone to the most profitable use. There is no decision making needed, there is not even an individual able to make any decision.

We will still talk very often about productive factors throughout this manual. Only Joseph Schumpeter and Jean-Baptiste Say go into the right direction. Joseph Schumpeter considers the entrepreneur as the driving force of economic growth and Jean Baptiste Say realised that the entrepreneur gets a remuneration for his entrepreneurship. If this were not the case he would offer his workforce to someone else and borrow his capital to someone. Only if the use of his capital and his workforce in his own company is more profitable than working for someone else and borrow his capital he will engage in entrepreunerial activieties.

What seems to be obvious for the common sense, is not obvious at all for academic economists. Without entrepreneurs, without creativity, spirit of innovation, courage a market economy doesn't work. In modern textbook capital moves alone to the best use. There is no entrepreneur required.

The case of Keynes is somehow different. For the sake of analysis Keynes exclude explicetely any kind of change in the fundamental economic structures. No change in the productive structure, no change in the size of the markets, no innovations, no change in the intensity of competition, no innovations etc. Keynes assumes a situation, where with the same economic structures there are idle productive resources that can be activated through expansive monetary or expansive fiscal policy. There is no doubt that situations like that exists. The capacity utilisation rate of the same structures changes in the curse of time.

However, besides that, Keynesianism is more compatible with a market economy than the neoclassic theory or Marxism. In Keynesian theory, capital is just money and therefore not a productive factor. If capital is not a productive factor and land is irrelevant in industrialised countries, only cualified work is a productive factor. That includes entrepreneurship, innovation, creativity, know how. This is more compatible with market economies, where capital is destroyed everyday and created, but the creation of capital doesn't depend on capital, as the classic economies assumes. The resources needed are bought with money, not with capital.

Beside the big contradiction, see for instance natural price/market price, there are a lot of small ones. Sometimes he tells us that taxes can have a positive impact because it makes alcohol and tobacco more expensive and impedes therefore poor people from consuming it, see a literary perspective. That means, that the poor people are responsible for their fate.

In this paragraph, he relativises that a little bit, although his conclusions are strange.

The difference of natural talents in different men, is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not on many occasions so much the cause, as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education. When they came in to the world, and for the first six or eight years of their existence, they were, perhaps, very much alike, and neither their parent's nor playfellows could perceive any remarkable difference. About that age, or soon after, they come to be employed in very different occupations. The difference of talents comes then to be taken notice of, and widens by degrees, till at last the vanity of the philosopher is willing to acknowledge scarce any resemblance. But without the disposition to truck, barter, and exchange, every man must have procured to himself every necessity and convenience of life which he wanted. All must have had the same duties to perform, and the same work to do, and there could have been no such difference of employment as could alone give occasion to any great difference of talents.

Book I, Chapter II

This is a typical Adam Smith paragraph. His way of thinking is "intuitive", which is perhaps not the best method, but far better than mathematical modeling, which narrows the perspective. This kind of "intuitive thinking" explains in part the success of the book.

We will return to the topic, the belief that certain nations, ethnic groups have invariable characteristics later on when talking about Ernst Bloch. If we look at history, it is quite obvious that no nation and no ethnic group have stable characteristics in the course of history and that the opportunities for individuals depend more on the environment than on their nature.

We will talk about the dynamic between society and the individual and how individuals are influenced by the society and how society is influenced by individuals later on.

What is actually strange is the conclusions drawn by Adam Smith. He realises that different capacities are not the result of a "genetic disposition", but the result of differences in the access to training and education.The conclusion that normally one should draw from that, and that is actually drawn in any highly industrialised country, is that the government has to guarantee equality of opportunities.

The conclusion drawn by Adam Smith is very different. The fact that in a society some people has to do the arduous, boring and stupid jobs is the price to pay for the division of labour. In other words. It is necessary that some people do these jobs so that others have a comfortable life. It is to assume that a society organised this way is not very stable.

Ideas of this kind have little chances to be realised in a democracy. If we want an illustrative example of the progress in the way of thinking, this is a good example. In the highly industrialised country, there is no discussion that basic education must be free. The discussion is about didactical methods, organisation and contents to be taught.

The author would say that the only thing stable in history is the belief that some things are stable and never change. However, in contrary to what is believed by Karl Popper, that ideologies like the scholastic theology or Marxism can be corrected through arguments and reasoning, the author believes that some ideologies simply smoothly expire, because the world changes and things assumed stable become simple irrelevant.

The theory of David Ricardo is based on three basic assumptions, which were true in his times, but irrelevant today. Capital is not scarce and economic growth doesn't depend on capital. Land is not scarce either and in the highly industrialised countries the population decrease, but doesn't increase. We can, therefore, learn, that in a little more than 200 years the world can change completely. The Ricardian theory has become just irrelevant.

Forty years ago, South Korea and China were underdeveloped countries. Nowadays, China is competing with the United States. Nowadays 99 percent of the population would say that South America never will reach the living standard of Europe and the USA. The author would say, that this is very possible.

The author doubts that anything can be learned from history. Historical situations are the result of accidental incidents, which never repeat. However, there is one thing we can learn from history. The only stable thing in the history of humanity is the belief that some things are stable.

Some remarks are strange.

Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog.

It seems that Mister Smith sometimes drunk a little more than what was advisable. Why should a dog exchange a bone with another dog? The author in all his live never saw two people exchanging the same thing. It is to assume that a bigger dog would take the chocolate from his smaller fellow by force and would not change it for its bone. The same thing will happen to human beings if the government doesn't intervene.

Adam Smith assumes that human beings have a special inclination for interchanging goods. The author would say that two persons only interchange goods if both of them get and advantage or if at least none of them is worse off after the exchange.

The author would never say that Vilfredo Pareto said something meaningful, but concerning the exchange of goods, his analysis is right. If two persons have the same amount of something but different preferences, they will exchange, see Vilfredo Pareto. If they have the same amount of item A and item B, but different preferences, they will exchange until the utility of the last item of A from person X equals the utility of item B from Y.

Adam Smith is obsessed by the exchange. With the world of the animals, he had many problems. He affirms for instance that animals don't communicate. Actually, even insects communicate. It seems that Adam Smith never took breakfast in the garden, because if he did it, he would know that if one bee has discovered the marmalade pot, there will soon be many bees and breakfast is finished.

Division of labour is only possible and make sense if the market is big enough. In both scenarios, in the original scenario of Adam Smith and in the more realistic one of specialisation, the market must be bigger.

The original version of Adam Smith is that the, for instance, ten workers who produced a complete needle will focus on one task. One will put the wire into the fire, another will put the whole, another will polish it and so on. If the output is increased this way, they need a bigger market, otherwise, it is not possible to sell the output.

In case of specialisation, the situation is different. Let's assume that someone produced a lot of different things and specialised know-how on the production of what he can do best. That means that all the other things he produced before, he has to buy know. This is only possible if he can sell this single item on a bigger market and that he can buy the other things needed in that bigger market.

If we were a little bit finicky, we would say that actually, the pillars of the market economy are only vaguely described by Adam Smith and some of his concepts. For instance, the assumed homogeneity of labour and the idea that the value of an item is determined by the quantity of work incorporated are incompatible with a market economy. Equally incompatible with a market economy is the idea that capital moves alone to the most profitable use and that there is no entrepreneur needed.

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1.1.4 division of labour

division of labour an specialisation