Adam Smith: Technical Change and the Division of Labour
Smith defined the task of The Wealth of Nations (1776 [1976], hereafter WN) as consisting of an investigation into “[t]he causes of this improvement, in the productive powers of labour, and the order, according to which its produce is naturally distributed among the different ranks and conditions of men in the society” (WN I.5).
Smith saw a virtuous circle at work: the increase in labour productivity is the result of a deepening of the social division of labour, which is propelled forward by a growth of markets. The growth of markets, in turn, is seen to depend on the speed with which capital accumulates; this is why the “frugal man” is the hero in Smith’s story. Higher labour productivity, in turn, implies higher incomes and profits and therefore more capital accumulation, and so on and so forth. According to Young (1928: 529), Smith’s “theorem” is “one of the most illuminating and fruitful generalizations which can be found anywhere in the whole literature of economics”.This story encompasses a major theme of classical economic thinking; namely, that in addition to the intended consequences of human activities there are typically also nonintended ones, some positive, some negative. These, in turn, induce further activities and thus engender further consequences. There emerges the picture of an incessant flow of
technical and organizational change, which on the one hand solves imminent problems, but on the other creates new ones. These changes are both a source and an effect of the continual transformation to which the market system is subjected: the process is characterized by cumulative causation.
According to Smith technical change is economy wide: it affects not only all producing sectors - primary production (agriculture, and so on), manufactures, trade and services (commerce) (see WN I.x.b.43) - but also banking (WN II.ii.39).
The division of labour is a catch-all concept comprising all forms of technical and organizational change. Smith (and others before him) argued that labour productivity increases because of (1) improvements in the dexterity of workers as a gain from specialization; (2) the time saved through avoidance of shifts from one activity to another and the related better utilization of ever more costly plant and equipment; and (3) the invention of machines that replace labour in an increasingly complex labour process (see WN I.i.6-8).Smith pointed out that some activities that were originally a part of the division of labour within the firm may eventually become a different “trade” or “business”, so that the division of labour within the firm is but a step towards the division of labour among firms. This process of subdividing the labour process ever more deeply engenders also what today is called research and development (R&D). In describing this process Smith used the combinatory metaphor:
Many improvements have been made by the ingenuity of the makers of the machines, when to make them became the business of a peculiar trade; and some by that of those who are called philosophers or men of speculation [that is, scientists], whose trade it is, not to do anything, but to observe every thing; and who, upon that account, are often capable of combining together the powers of the most distant and dissimilar objects. (WN I.i.9)
Interestingly, the productivity and well-being of society, Smith insisted, depends first and foremost on the “quantity of science” applied in the economy (WN I.i.9).
While Smith saw that successful innovations give rise to “extra profits” of the innovating firm and introduce some temporary monopoly elements into the system, free competition would, in the long run, establish a tendency towards a uniform rate of profits. Smith’s argument is thus implicitly based on the hypothesis that each single firm operates under constant returns, while total social production is subject to increasing returns. Smith’s analysis foreshadows the concepts of learning by doing (Kenneth Arrow), learning by using (Nathan Rosenberg) and of dynamically increasing returns (Allyn Young). Technical change is endogenously generated from within the economic system; it is not exogenously given from the outside as in some later theories.