Definitions and Basics

Adam Smith, biography from the Concise Encyclopedia of Economics

Smith saw the main cause of prosperity as increasing division of labor. Using the famous example of pins, Smith asserted that ten workers could produce 48,000 pins per day if each of eighteen specialized tasks was assigned to particular workers. Average productivity: 4,800 pins per worker per day. But absent the division of labor, a worker would be lucky to produce even one pin per day….

Michael Munger, Division of Labor, in The Concise Encyclopedia of Economics

Though the scientific understanding of the importance of division of labor is comparatively recent, the effects can be seen in most of human history. It would seem that exchange can arise only from differences in taste or circumstance. But division of labor implies that this is not true. In fact, even a society of perfect clones would develop exchange, because specialization alone is enough to reward advances such as currency, accounting, and other features of market economies.

In the News and Examples

Division of labor and interdependence: I, Pencil, by Leonard Read.

Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year….

Specialization and Wealth, by Dwight Lee., originally published in The Freeman.

A remarkable degree of social cooperation emerges through market communication. Now, let’s consider some of the advantages we realize from that cooperation. At a general level these advantages are obvious. It simply makes sense that we can produce more if our actions are in harmony than if we are working at cross-purposes. But to really understand economics, we must consider the link between cooperation and productivity in detail.

Wealth seldom comes as manna from heaven. It has to be produced by applying human effort, intelligence, and patience to natural endowments that yield their bounty reluctantly. This should be obvious. But one measure of the success of the marketplace at improving our productive powers is that it has become all too easy for people to assume that wealth is part of the natural order of things. Academics and policy wonks consider the distribution of wealth to be the primary issue, while dismissing any concern that their policy prescriptions could hamper its production. They drone on and on about the causes of poverty (or the “improper” distribution of wealth), apparently unaware that determining the causes of wealth is the serious challenge….

Mike Munger on the Division of Labor. Podcast on EconTalk exploring what Smith actually meant by “the division of labor is limited by the extent of the market”.

Mike Munger of Duke University and EconTalk host Russ Roberts talk about specialization, the role of technology in aiding specialization and how the division of labor creates wealth….

Mike Munger, I’ll Stick With These: Some Sharp Observations on the Division of Labor, at Econlib, April 2,1007.

Smith conceived of the process of increasing production as ‘division of labor’ into more and more steps, with each laborer specializing in a smaller slice of the process. But the real revolution took place in the early 1830s, in the U.S., in the mind of a distracted doctor, John Howe.

Adam Smith: The Invisible Hand, a LearnLiberty video.


Division of labor and specialization in corporations: Corporations, by Robert Hessen, from the Concise Encyclopedia of Economics

To look askance at executives who supply little or none of the corporation’s capital, as many of the corporation’s critics do, is really to condemn the division of labor and specialization of function. Corporate officers operate businesses whose capital requirements far exceed their personal saving or the amounts they would be willing or able to borrow….

Division of labor in biology: Gordon on Ants, Humans, the Division of Labor and Emergent Order. EconTalk podcast.

Deborah M. Gordon, Professor of Biological Sciences at Stanford University, is an authority on ants and order that emerges without control or centralized authority. The conversation begins with what might be called the economics of ant colonies, how they manage to be organized without an organizer, the division of labor and the role of tradeoffs. The discussion then turns to the implications for human societies and the similarities and differences between human and natural orders.

Matt Ridley on Trade, Growth, and the Rational Optimist. EconTalk podcast.

Matt Ridley, author of The Rational Optimist, talks with EconTalk host Russ Roberts about why he is optimistic about the future and how trade and specialization explain the evolution of human development over the millennia. Ridley argues that life is getting better for most of the people on earth and that the underlying cause is trade and specialization. He discusses the differences between Smith’s and Ricardo’s insights into trade and growth and why despite what seems to be strong evidence, people are frequently pessimistic about the future. Ridley also addresses environmental issues.

How does Adam Smith’s explanation of the division of labor differ from David Ricardo’s explanation of comparative advantage? Roberts on Smith, Ricardo, and Trade. EconTalk podcast.

Russ Roberts, host of EconTalk, does a monologue this week on the economics of trade and specialization. Economists have focused on David Ricardo’s idea of comparative advantage as the source of specialization and wealth creation from trade. Drawing on Adam Smith and the work of James Buchanan, Yong Yoon, and Paul Romer, Roberts argues that we’ve neglected the role of the size of the market in creating incentives for specialization and wealth creation via trade. Simply put, the more people we trade with, the greater the opportunity to specialize and innovate, even when people are identical. The Ricardian insight masks the power of market size in driving innovation and the transformation of our standard of living over the last few centuries in the developed world.


A Little History: Primary Sources and References

Smith’s pin factory example: par. I.I.3 in The Wealth of Nations by Adam Smith:

Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations….

The Division of Labor is Limited by the Extent of the Market, Book I, Chapter 3 in The Wealth of Nations by Adam Smith

As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market. When the market is very small, no person can have any encouragement to dedicate himself entirely to one employment, for want of the power to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption, for such parts of the produce of other men’s labour as he has occasion for….

International Division of Labor in Chapter 2 of Studies in the Theory of International Trade by Jacob Viner

A few writers prior to Adam Smith stated or approached closely some of the specific economic arguments for unrestricted trade which were later to serve as the core of the free-trade doctrine of Adam Smith and the English classical school….

Division of Labor, in Lalor’s Cyclopaedia of Political Science

When nations become greater and more enlightened, the division of labor becomes more marked….

Advanced Resources

Kling on Patterns of Sustainable Specialization and Trade. EconTalk podcast.

Arnold Kling of EconLog talks with EconTalk host Russ Roberts about a new paradigm for thinking about macroeconomics and the labor market. Kling calls it PSST–patterns of sustainable specialization and trade. Kling rejects the Keynesian approach that emphasizes shortfalls in aggregate demand arguing that the aggregate demand approach masks the underlying complexity of the recalculations that periodically take place in a dynamic economy. Instead, Kling invokes the mutual exploration between entrepreneurs and workers for profitable opportunities that pay well using the workers’ skills. This exploration takes time, involves trial and error, and can have false starts because businesses sometimes fail or employees are difficult to find or match with employment opportunities. Kling applies these ideas to the current crisis to explain why labor market recovery is so sluggish and what might policies might improve matters.

Part 2, Chapter 8, Human Society in Human Action by Ludwig von Mises

The principle of the division of labor is one of the great basic principles of cosmic becoming and evolutionary change. The biologists were right in borrowing the concept of the division of labor from social philosophy and in adapting it to their field of investigation. There is division of labor between the various parts of any living organism.

Related Topics

Economic Growth

Supply and Demand, Markets and Prices

Comparative Advantage and the Benefits of Trade

Exchange and Trade