One of the earliest attempts to relate the division of labour to the size of firms was Robinson (1931). In The Structure of Competitive Industry Robinson offered an analysis of the factors that determined the optimum size for a firm. For Robinson the interaction of five factors determined the size of the firm: technique, management, finance, marketing and risk of fluctuations. These various theoretical optima have then to be reconciled in the size or constitution of a real firm after allowing for difficulties and anomalies of growth. The division of labour has a role to play with regard to technique and management. Because of this we will concentrate on these two factors here.
For Robinson the optimum firm is that firm which in existing conditions of technique and organising ability produces at the minimum of long-run average costs. Under the conditions of perfect competition we would expect to see the optimum firm emerge but under conditions of imperfect competition, Robinson notes, it may not materialise. Consider, for example, the case of monopolistic competition in which a firm will be in equilibrium at less than the minimum of average cost.
The first application of the division of labour to the size of the firm that Robinson considers is the relationship between the division of labour and the optimum technical unit. Robinson follows Adam Smith in seeing three different reasons for the division of labour giving rise to more efficient production. First is the increase in dexterity of workmen; secondly, the saving of time which is commonly lost in passing from one type of work to another; and thirdly, the invention of a great number of machines which facilitate and abridge labour, and thus enable one person to do the work of many.
With regard to the issue of dexterity, Robinson notes Smith's observation that a person who works at a given task for some time is likely to develop a skill or knack for doing that task. In addition the division of labour can allow those people with a natural skill for carrying out a given task to specialise in that task.
Adam Smith (and Robinson) also saw an advantage in the division of labour in that specialisation at a task saved the time that would otherwise be spent on passing from one task to another. Time could be saved because workers do not have to move between machines or processes. Also time would be lost if machines had to be reset to perform a different function. The division of labour saves time by concentrating both workers and machine upon a given function, and a larger factory enjoys an advantage over a smaller one in so far as it makes this concentration possible.
The third economy Smith saw is due to the development of specialised equipment to carry out the tasks that the manufacture of an item is divided into. Separation of a process into its constituent parts makes development of machines to carry out those parts easier.
It is important to keep in mind when considering the size of a firm that the principle of the division of labour requires a firm of sufficient size to obtain the maximum profitable division of labour. This size will differ across industries depending on the nature of the production process for that industry and how detailed a division of labour can be implemented for that particular process. Larger firms will, often, have the capacity to implement a greater division of labour than a smaller firm, giving the larger firm an advantage in terms of efficiency.
The next issue discussed by Robinson is what he calls `the integration of process'. Robinson explains that often a large firm has fewer rather than more processes of manufacture. They can utilise a large machine which has been designed to takeover what would otherwise be a series of manual, or at least less completely mechanical, operations. A complicated machine can perform two or three or more consecutive processes and it can thereby eliminate the labour and time which would be required to up the work on each of the successive earlier machines. Only large firms can keep such a machine running at its full capacity and this fact gives the large firm an advantage over the smaller, and less mechanised, firm. But this difficulty can be overcome by the small firm as long as the size of the market for the process is large enough. If a given process requires a scale of production too great for a smaller firm the small firm can outsource the process to specialist firm. But such outsourcing if only possible if the extent of the market for a particular process is large enough to allow the division of labour to develop to the point where a specialist firm is viable. Robinson refers to this outsoucing as 'vertical disintegration'.
The second of the areas for which Robinson sees the division of labour having a role to play is with regard to management. A manager in a small firm will have multiple tasks to preform, some of which he will be good at, others that he will not be so good at. In a larger firm a division of labour can develop which allows managers to specialise on those function for which they are best suited. The larger firm gains in two ways from its division of managerial labour: 1) special abilities to be used to their fullest extent. Talents are not wasted by having managers carry out functions which could be better assigned to another manager with a particular ability at that function. 2) a manger who specialises in a given task will increase their knowledge of that task.
A potential downside of the managerial division of labour is the problem of coordination. As the division of labour becomes greater the problems associated with the coordination of the different parts of the production process also increases. As new tasks are created by dividing up the production process, new administrative functions are also created to coordinate the ever more disjoint production process. The advantage that a larger firm has over the smaller depends, in a large part, on how well it solves this coordination problem.
An additional theoretical problem with Robinson's discussion follows from the implicate assumption in the competitive model that complete contracts can be written. In such a world it is not clear why a firm is needed to carry out production at all. As Coase (1937) first highlighted in a world of complete contracts any organisation form can mimic any other meaning that production could be carried out via the market just as efficiently as within a firm.
- Coase, R. H. (1937). `The Nature of the Firm', Economica, New Series 4 No. 16 November: 386-405.
- Robinson, E A G. (1931). The Structure of Competitive Industry, Cambridge: Cambridge University Press.