Guang-Zhen Sun - The Division of Labor in Economics: A History

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 Smiths 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 , 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 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 firms 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 participants 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).