Adam Smith the division of labour

In his search for the origin and growth of national wealth, following Petty and Quesnay, Adam Smith highlights the division of labour as the core of the analysis. The concept of wealth that Smith introduces is the modern idea of annual product per head, and the division of labour explains how this magnitude can increase. The social division of labour explains that economic activities are and should be differentiated; different men can specialize into different branches of the economy. As in Petty, there are tradesmen, administrators and scholars, but now there are three major social classes: workers, landowners and capitalist entrepreneurs with clearly separated economic functions in the process of production and exchange.

In the first chapters of the Wealth of Nations (Smith, 1776) there is the notion of the 'rude state of society', which is opposed to a more civilized society. This view derives from the so-called 'four stages theory', which describes the evolution of human societies through different stages: hunting, pasturage, agriculture and commercial society (see Meek, 1976). This exercise in comparative economic history is crucial to development thinking. Moreover, this evolution through time is characterized by different 'modes of subsistence' but also by different institutions, which play a crucial role in the process of social change, a view that is now widely shared in modern development policies.

However, the major reason for the increase in national wealth is to be found in the 'technological division of labour', that is to say the subdivision of complex production operations into simple ones, a process which enables each worker to be more productive. In Chapter 1 of Book 1 of the Wealth of Nations there is the famous example of the production of 'pins'; by assigning each of the 18 operations necessary to produce a pin to a different labourer, the average productivity per worker increases. This represents the foundation of what will be later called 'increasing returns to scale', which derives directly from the accumulation of capital in the productive activities. Capital accumulation implies that profits are reinvested in production by means of an increase in the wage bill, thus more workers can be employed and this leads to the possibility of 'dividing labour' and makes it more productive. It is the accumulation of capital, and of circulating capital in particular, which leads to the increase of average labour productivity. The endogenous growth theory has rediscovered the importance of having non-decreasing returns to the input which can be accumulated, which is an old lesson (see Kurz, 2003).

Smith accepts the idea that there are both productive and unproductive activities, or labour, but to him industry and manufacturing are no longer to be regarded as sterile occupations, the distinction is now related to the type of output. Only the sectors producing commodities which can be invested and accumulated for further production can be regarded as being productive; the service sector is sterile because it produces for consumption and its output cannot be accumulated. Agriculture still plays a fundamental role because it generates a surplus of subsistence goods, but manufacturing becomes the driving sector of the economy, because it is in this sector that the technical division of labour can show all its potential. This is a clear antecedent of the modern views according to which less-developed countries (LDCs) should not get trapped in the production of primary commodities, and for which the diversification of output and of exports is a crucial element in the process of development.

The key to the increase of labour productivity is the accumulation of capital in the productive sectors. According to Smith, in order to achieve development and prosperity there is a sort of ideal cycle of investments: first a country must invest in agriculture, making it productive and self-sufficient; then in manufacturing, where the technological division of labour brings about the greatest increase in labour productivity, thus leading to a booming economic phase. The above consideration may hint at the problem of uneven development and at the difficult balance between industry and agriculture in this process. The next step implies investing in domestic trade, for example in transportation, that favours and facilitates exchanges, and lastly the country should invest in foreign commerce (see

Smith, 1776 [1976], Book 2, Chapter 5). The latter two types of investments are motivated by the need to extend the market, or the so-called 'vent for surplus' argument' (see Myint, 1977) in such a way that the productive potentialities of the division of labour are not constrained by lack of effectual demand. One is reminded of the recent development phenomena particularly in East Asia. For sure, Smith is no advocate of planning, but his view of the 'natural order' of investments is a very convenient and efficient substitute for some well-known policies which over the years have been largely used to support and to direct the process of development. These are policies which emphasize the role of infrastructures and that of an efficient and modern agriculture; they are also policies designed to favour the manufacturing sector. Many modern development theories suggest that it is worth investing where the yield is higher, that is to say in the sectors that are more productive than others; export-led policies are based on this idea, as is the distinction between tradable and non-tradable commodities.

Smith is often associated with liberal economic views; he supports free competition but in a very specific sense. The absence of monopolistic power and of exclusive privileges is designed to let the 'natural order' of investments unfold freely, thus leading to the highest increases in labour productivity. The capitalist entrepreneur becomes the fundamental figure in the control and organization of the production process; he is moved by the profit motive and he is able to introduce technical progress and innovations. Smith opposes the alliance between the big merchants, like the East India Company, and the state, which was characteristic of mercantilism, because this is an additional cost on productive activities and because it distorts the natural order of investments. In the Wealth of Nations the famous passage about the 'invisible hand' appears in Book 4 where Smith attacks mercantilist policies which by favouring foreign industry hinder investments in domestic industry (see Smith, 1776 [1976], Book 4, Chapter 2, para. 9).

The accumulation of capital in the productive activities of the economy is the key to the increases in labour productivity. The classical mechanism of growth can be summarized as follows (see more in Stathakis and Vaggi, 2006; see also Eltis, 1984):

Surplus ^ profits ^ savings ^ investments in the productive sectors [^ expected rate of profit] ^ capital stock increases ^ (structural change and division of labour) [^ extent of the market] ^ increases in labour productivity ^ increases in surplus and profits.

A few ad hoc assumptions render this sequence similar to some modern growth theories: from endogenous growth models to Kaldorian views of industrialization-led growth. However, to Smith as to Quesnay, structural change is an essential component of the development process.

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