Markets and firms
Adam Smith (1723–90)
380 BCE In The Republic, the Greek philosopher Plato explains how a city emerges, then grows by exploiting the gains made by dividing labor.
1705 Dutch philosopher Bernard Mandeville coins the term “division of labor” in his The Fable of the Bees.
1867 Karl Marx argues that division of labor alienates workers and is a necessary evil that will eventually be superseded.
1922 Austrian economist Ludwig von Mises argues that division of labor is not alienating but brings huge benefits, including greater leisure time.
Whenever people work in a group, they invariably start by deciding who is going to do what. It was the great Adam Smith who turned this division of labor into a central economic idea. At the very start of his influential book The Wealth of Nations, Smith explains the differences between production when one person carries out the full sequence required to make something, and when several people each do just one task each. Writing in 1776, Smith noted that if one man set about making a pin, going through the many steps involved, he might make “perhaps not one pin in a day.” But by dividing the process among several men, with each specializing in a single step, many pins could be made in a day. Smith concluded that the division of labor causes “in every art, a proportionable increase of the productive powers of labor.”
Smith was not the first to appreciate the value of the division of labor. About 2,200 years earlier Plato had argued that a state needs specialists, such as farmers and builders, to supply its needs. The Islamic philosopher Al-Ghazali (1058–1111) noted that if we take into account every step involved in making bread, from clearing the weeds in the fields to harvesting the wheat, we would find that the loaf takes its final form with the help of over a thousand workers.
"Every expansion of the personal division of labor brings advantages to all who take part in it."
Ludwig von Mises
Many early thinkers linked division of labor to the growth of cities and markets. Some thought that the division of labor caused the growth, while others proposed that the growing cities allowed the division of labor. What was groundbreaking about Smith’s idea was that he put division of labor at the heart of the economic system, insisting that it is the engine that drives growth. The more specialized the workers and businesses, the greater the market growth and the higher the returns on investments.
Karl Marx saw the power of this idea but believed that the division of labor was a temporary, necessary evil. Specialization alienates, condemning workers to the dispiriting condition of a machine performing repetitive tasks. He distinguished between the technical division of labor, such as each specialized task in house building, and social division, which is enforced by hierarchies of power and status.
Labor division is the norm within most companies today. Many large corporations now outsource tasks formerly carried out by their own staff to cheaper overseas workers, giving the division of labor a new, international dimension.
In a busy stockroom, labor may be divided between porters, inventory clerks, a manager, accountants, distribution specialists, IT workers, and truck drivers.
Assembly-line workers in China build computer processors with components made in up to nine different countries.
When people working in industry worry about the strength of their home economy and rates of employment, they sometimes urge consumers to buy home-produced goods. However, it can be hard to know what is home-produced since division of labor has now become global in scope. For example, Apple is a US company, so consumers might suppose that by buying an iPhone they are contributing to US jobs. In fact, of all the processes involved in making an iPhone, only the product and software design and marketing occur primarily in the US.
Each iPhone is assembled by workers in China, using parts—such as the case, screen, and processor—made by workers in South Korea, Japan, Germany, and six other countries. In addition, each of these parts has been assembled by a range of specialists around the world. The iPhone is a truly global product, made by perhaps tens of thousands of people.