ADAM SMITH and
The WEALTH of NATIONS
The WEALTH of NATIONS
The Division of Labor
The central theme of Adam Smith’s classic is that the nature of a nation’s wealth lies in its sustainable
of wealth may seem innumerable; but to Smith, wealth is not a
gift of God (natural resources, particularly silver and gold), but ultimately is derived from harnessing
You can find reference to a “labor theory of value” at least as far back as St. Augustine (12
century, AD) – but the principle seems not to have been well-understood and no one before or since
Smith emphasizes it to such an extraordinary degree.
The two great themes of the book are the “laws of
the market” and the “dynamics of capitalism”.
The laws of the market are largely static, dealing with
how the system operates for any short period of time.
The dynamics pertain to larger issues like growth,
history, and the future.
Scale Economies and the Pin Factory
In its simplest form, division of labor is what makes production within a large-scale plant or factory
Smith expressed this idea with his famed example of the pin factory, in his words, “a very
trifling manufacture” in which one man, working alone, would produce fewer than 20 pins per day.
added (p. 10), however, that:
This business is now.
.. divided into a number of branches.
One man draws out the
wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for
receiving the head; to make the head requires two or three distinct operations.
In all, about eighteen distinct operations, divided among ten workers, yielded a daily output of about
Smith’s reasons for the increase in labor productivity arises are threefold: (1) increased
dexterity, (2) saving time otherwise lost in passing from one task to another, and (3) greater likelihood of
discovering better productive methods.
Whatever the reasons, the concept seemingly flies in the face of the other great law of production:
This leads us to an important technical point – that economies of scale and
diminishing returns to a single input (like labor) are interactive concepts rather than contradictory.
division of labor is facilitated by large-scale production, implying not just a lot of workers but also a lot
of machinery and workspace.
Holding the other factors constant at any specific level yields a short-run
average cost curve like SAC
in Figure 1.
The declining portion of SAC is partly attributable to the
spreading of fixed costs over larger outputs, so that diminishing returns could apply over the entire range
(not just beyond its minimum point B).
The economies of
pertain to expansion of plant