Smith and the Division of Labor

Smith’s Wealth of Nations provides a full-fledged alternative to the mercantilist “balance of trade theory” of wealth. The causes of national wealth are the “Improvements in the Productive Powers of Labour,” as we read in the title of book 1, and these improvements depend on the “Division of Labour,” which is the title of chapter 1 of book 1 (Smith, 1776: I.i.1).

The first three chapters of the Wealth of Nations are amazing. There the technolog­ical division of labor coexists with the social one. The pinmaker is in paragraph 3 of chapter 1, and in the next paragraph we read that “the separation of different trades and employments from one another seems to have taken place in consequence of this advantage” (ibid., I.i.4).

The increases in labor productivity that derive from the technological division of labor open the way to the specialization of the different branches of trade, also known as the social division of labor.

In chapter 2, we find the famous “triple B” example: the butcher, the brewer and the baker, from whose own interest, and not from their benevolence, we expect our din­ner (see ibid., I.ii.2). Here the division of labor that Smith is talking about is clearly the separation of arts and branches, of trades and occupations, into different activities and sectors.

The next paragraph reads, “In a tribe of hunters or shepherds a particular per­son makes bows and arrows [...] with more readiness and dexterity” He finds that by exchanging these products for cattle or for venison he can get more of both “than if he himself went to the field to catch them” (ibid., I.ii.2).

It is then in his interest to specialize in “the making of bows and arrows” and to become an armorer.

However, in order to specialize in one specific trade and to abandon other activi­ties, each worker needs to be sure that he will sell his surplus produce. He must have “the certainty of being able to exchange all that surplus part of the produce of his own labour, which is over and above his own consumption (ibid.; see also Smith, 1762-63, 351-52).

And this is why chapter 3 tells us that the division of labor is limited by the extent of the market (see Smith, 1776, I.iii).¹⁵

If we add the accumulation of capital in book 2 (see ibid., II.iii), we obtain a virtu­ous circle of economic growth that can be described as follows (see Stathakis and Vaggi, 2006, 13):

Surplus ⇒ profits ⇒ savings ⇒ investments [Φ expected rate of profit] ⇒ capital stock increases ⇒ (structural change and division of labor) [φ extent of the market] ⇒ increases in labor productivity ⇒ increases in surplus and profits.

However, two points are worth noticing.

First, Smith is well aware of the importance of having an agricultural surplus, as a very efficient production of subsistence commodities seems to be a sort of prerequisite for the social division of labor and for the rise of manufactures. As a matter of fact, Smith clearly says that from the point of view of society as a whole, the social division of labor that leads people to specialize in specific economic activities requires a surplus of agricultural products (see Smith, 1776, I.ix.c.7); therefore, agriculture must be produc­tive in Quesnay’s sense. He also adds that it is the surplus produce of the country that maintains the towns (see ibid., III.i.2).

For this reason, capital must be invested in agriculture in order to have an abundance of food. In book 2 we read, “Unless capital was employed in the production of rude produce to a certain degree of abundance, neither manufactures nor trade of any kind could exist” (ibid., II.v.4).

And on the next page: “The capital employed in agriculture [...] is by far the most advantageous to the society” (ibid., II.v.12).

Second, Smith is very cautious in his description of the relationships between rich and poor nations. He does not think that the latter ones will always necessarily benefit from free trade (see Myint, 1977, 246-48). In the so-called “Early Draft of Part of the Wealth of Nations” he writes, “It is easier for a nation, in the same manner as for an individual, to raise itself from a moderate degree of wealth to the highest opulence, than to acquire this moderate degree of wealth; money, according to the proverb, begetting money, among nations as among individuals” (Smith, 1763, 579: point 42).

There is no automatic mechanism that guarantees the catching up, or convergence, of the poorer countries to the level of income of the rich ones. On the contrary, wealthy nations have an interest in trading among themselves because of their rich markets, rather than with poor countries—England should trade with France rather than with Portugal (see Smith, 1763, 578: point 40). Smith lists several impediments facing poor countries when they have to undertake the first steps of a development process. The most significant of these impediments is “that a nation is not always in a condition to imitate and copy the inventions and improvements of its more wealthy neighbours; the application of these frequently requiring a stock with which is not furnished” (ibid., 579: point 42).¹⁶

Quite often, poor countries do not have the resources to adopt the same techniques of production of the rich ones. Productivity increases and technical progress depend on the accumulation of capital. Of all the impediments, the lack of capital goods is the hardest to overcome.

In the next point of the “Early Draft,” Smith stresses the importance of agriculture and of its productivity. He writes, “That the cultivation of land depends upon the pro­portion which the stock of those who cultivate it bears to the quantity of land to be cul­tivated” (ibid., 579: point 43).

This passage seems to owe a lot to Quesnay’s emphasis on the role of capital in mod­ern cultivation.

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