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The Division of Labor

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Both Smith and Ricardo were deeply interested in specialization. In Smith, the division of labor comes from an expanding market. For Ricardo, specialization comes from differences that make trade possible. Ricardo’s insight was that even if you are inferior in everything, you can have a comparative advantage in something making specialization and trade worthwhile.

A year or so ago, I heard my colleague James Buchanan talk about this, partially drawing on this paper [2] of his with Yoon.

Here’s the example he gave that helped me understand the difference between Smith and Ricardo. Suppose you have a 100 hunters going out into the field. Suppose they’re all identical. All equally good at everything, including hunting. When the number of hunters gets large enough, reaching say, 100, it can now become profitable for one hunter to stop hunting and specialize in starting a business providing take-out breakfasts and lunches for hunters on their way out into the field. This specialization isn’t profitable when there are five hunters. It becomes profitable when there are enough hunters going out in the morning. And it can be profitable even when all hunters are equally good at hunting and running a cafe.

Once someone specializes in food prep, Smith’s pin factory story comes into play. You get the use of specialized equipment to make labor more productive. If you’re making lunch for yourself, you use a knife to cut the meat for your sandwich. When you’re making 100 sandwiches, an automatic meat slicer becomes profitable to employ. You might start a bakery to make the bread for the sandwiches if you’re making enough of them. And the slicing equipment and the ovens can be improved via innovation—innovation worth investing in if the return is large enough.

Ricardo’s point is that it probably isn’t the case that all the hunters are equally good at hunting and running a cafe. Some are either phenomenally good at running a cafe relative to their hunting ability so that some can run the cafe either at lower cost (foregone hunting output) or higher productivity in the cafe.

Mike Munger’s essay [3] goes into these issues and my podcast with him [4] explores them as well. Interested readers might also enjoy my essay on comparative advantage and specialization [5].

This interaction between specialization, technology and capital, and assigning people to the tasks they’re best fit for, is the source of our standard of living. It’s the reason we live so much better than a self-sufficient person.

Next week’s podcast is with John Bogle.