Tuesday, 8 May 2012

The division of labour

Gavin Kennedy writes
I have long argued that Smith’s ‘pin factory’ example in WN is interesting but limited and by no means the last word on the central importance of the division of labour to commercial societies. The division of labour in this limited sense is not the defining characteristic of market societies; it existed long before commercial markets emerged and was noted in earlier on-commercial societies long before Adam Smith’s wrote about the pin factory in Wealth of Nations, as he reminded readers in his first sentence on the subject.
When discussing Adam Smith’s approach to the division of labour McNulty (1984: 237-8) comments,
[h]aving conceptualized division of labor in terms of the organization of work within the enterprise, however, Smith subsequently failed to develop or even pursue systematically that line of analysis. His ideas on the division of labor could, for example, have led him towards an analysis of task assignment, management, or organization”. Such an approach would have foreshadowed the much later−indeed, quite recent−effects in this direction by Herbert Simon, Oliver Williamson, Harvey Leibenstein, and others, a body of work which Leibenstein calls “micro-microeconomics”. [ . . . ] But, instead, Smith quickly turned his attention away from the internal organization of the enterprise, and outward toward the market and the realm of exchange, perhaps because he found therein both the source of division of labour, in the “propensity in human nature [ . . . ] to truck, barter and exchange” and its effective limits.
As to the limits of the division of labour George Stigler noted that "The Division of Labor is Limited by the Extent of the Market.". Thus we have a division of labour across the market as well as within the firm. For an interesting example of this market division of labour consider the case of rife manufacture in Birmingham, England in the 1860s,
[o]f the 5800 people engaged in this manufacture within the borough’s boundaries in 1861 the majority worked within a small district round St Mary’s Church. . . . The reason for the high   degree of localization is not difficult to discover. The manufacture of guns, as of jewellery, was carried on by a large number of makers who specialized on particular processes, and this method of organization involved the frequent transport of parts from one workshop to another.

The master gun-maker-the entrepreneur-seldom possessed a factory or workshop. . . . Usually he owned merely a warehouse in the gun quarter, and his function was to acquire semi-finished parts and to give these out to specialized craftsmen, who undertook the assembly and finishing of the gun. He purchased materials from the barrel-makers, lock-makers, sight-stampers, trigger-makers, ramrod-forgers, gun-furniture makers, and, if he were engaged in the military branch, from bayonet-forgers. All of these were independent manufacturers executing the orders of several master gun-makers. . . . Once the parts had been purchased from the “material-makers,” as they were called, the next task was to hand them out to a long succession of “setters-up,” each of whom performed a specific operation in connection with the assembly and finishing of the gun. To name only a few, there were those who pre-pared the front sight and lump end of the barrels; the jiggers, who attended to the breech end; the stockers, who let in the barrel and lock and shaped the stock; the barrel-strippers, who prepared the gun for rifling and proof; the hardeners, polishers, borers and riflers, engravers, browners, and finally the lock-freers, who adjusted the working parts”. (Allen (1929: 56-7 and 116-7), quoted in Stigler (1951: 192-3).)
As an aside, it could be argued that such a decentralised method of production would be a guide to the way production would take place under a functioning version the neoclassical model of the “firm”. (It could be counter-argued that this form of production isn’t neoclassical since it is not clear that the neoclassical separation theorem is satisfied.)

Today rife manufacturing would be within a firm, so the advantages of the division of labour would be captured by the firm. An interesting question would be, Why the change? How have transaction costs changed to justify a movement from market production to single firm production?

Kennedy continues,
I suggest that Smith’s other example of the production of the day labourer’s woollen coat, in chapter 1 in Wealth Of Nations, is more important for our understanding of how market societies are rooted raising, not just labour productivity, but also improve existing products, by creating new products (Schumpeter’s ‘perennial gale of creative destruction’) that lowers unit prices and raises real wages across the economy, which in sum eventually dramatically improves living standards, as we know happened in the 19th-century in northern Europe and North America, and is happening now in China, India, and Brazil.

Smith refers in his neglected example to the “people of whose labour [is] a part but a small part” to procure for the labourer his coat, which “exceeds all computation” to produce even this basic product. I recommend that you study it, not just as an illustration of the extent of an 18th-century division of labour, but also as an illustration of today's inter-sectoral division of labour across all the sub-operations in the products produced elsewhere by distant, unconnected entrepreneurs and operators, who do not know of those who might eventually use what they produce in later links in the supply chain. Their consciousness of co-operation with anonymous others effectively is close to zero.
Markets can harness the division of labour to everyone's advantage without people even knowing it.

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