4.3.2 Division of Labour and Specialization
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4.3.2 Division of Labour and Specialization
What are the origins of contemporary economic globalization?
The theory of the invisible hand is that we are born with the desire to improve our situations. We want to make more money with less effort and buy more stuff at cheaper prices. Adam Smith believed that the value of a product comes from the labour or work that goes into it. To make more money, people can make their labour more valuable or they can produce more goods or services with their labour.
Adam Smith focused on two things:
Division of labour: For example, if two people build a fence, and one is good at sawing wood and the other good at nailing, they are going to be more than twice as fast as one person making that fence on his or her own. They will certainly be more efficient than two who are both unable to saw a board accurately!
Adam Smith's most famous example of the division of labour is with the manufacturing of pins. Back in Smith's day, one person could make only a few pins a day but 10 people could produce 48 000 pins in a day. In other words, a factory owner could increase productivity up to 48 000 times by dividing the labour! Quite a difference! And quite a bit more profit to be made! However, someone has to bring those ten people together into one place. A factory owner must have the money or capital to pay for pin-making tools and salaries.
Adam Smith focused on two things:
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the
division of labour, or separating the work into distinct parts
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specialization, or people doing what they are good at
Division of labour: For example, if two people build a fence, and one is good at sawing wood and the other good at nailing, they are going to be more than twice as fast as one person making that fence on his or her own. They will certainly be more efficient than two who are both unable to saw a board accurately!
Adam Smith's most famous example of the division of labour is with the manufacturing of pins. Back in Smith's day, one person could make only a few pins a day but 10 people could produce 48 000 pins in a day. In other words, a factory owner could increase productivity up to 48 000 times by dividing the labour! Quite a difference! And quite a bit more profit to be made! However, someone has to bring those ten people together into one place. A factory owner must have the money or capital to pay for pin-making tools and salaries.
Specialization is key to economic efficiency. Various individuals or nations may have differing costs of production. That gives them a
comparative advantage in production.
For example, a country such as China has a comparative advantage over Canada in manufacturing plastic products because their workers are paid less than ours are. On the other hand, Canada has a comparative advantage over China in processing forest products because Canada has a lot of trees. Therefore, trade benefits both. The theory of specialization applies to individual people, to farms, to factories, and to national economies.
For example, a country such as China has a comparative advantage over Canada in manufacturing plastic products because their workers are paid less than ours are. On the other hand, Canada has a comparative advantage over China in processing forest products because Canada has a lot of trees. Therefore, trade benefits both. The theory of specialization applies to individual people, to farms, to factories, and to national economies.
Courtesy of Edward Burtynsky
Remember Evan and his sidewalk pop sales? If he had to pay another 10¢
for each can of pop, his profits would be reduced 10¢. Adam Smith
thought this problem would be solved because higher wages would also
increase the supply of labour. Because the workers would be paid more
money, they would be able to feed their children better and care for
them when they were sick. As a result, infant mortality (the number of
children who die) would go down and the supply of labour would increase.
The result would be more people from whom manufacturers could hire-and
wages would be kept down.
The invisible hand and economic growth: Adam Smith believed the invisible hand causes the economy to grow. The manufacturer wants to sell more pins. He hires more workers. He pays them well so they will work better. Now, workers have more money, and they can afford to buy more things — including more pins. This increases the demand for his pins. Then, he must produce more, and he hires more workers for his larger factories. A system where competition exists among producers allows the invisible hand to work.
This laissez-faire system is how most the world's economies work today. However, if the manufacturer is told that he must sell his pins at a certain price or the workers must earn a certain wage, then the mechanism of the invisible hand cannot work.
The invisible hand and economic growth: Adam Smith believed the invisible hand causes the economy to grow. The manufacturer wants to sell more pins. He hires more workers. He pays them well so they will work better. Now, workers have more money, and they can afford to buy more things — including more pins. This increases the demand for his pins. Then, he must produce more, and he hires more workers for his larger factories. A system where competition exists among producers allows the invisible hand to work.
This laissez-faire system is how most the world's economies work today. However, if the manufacturer is told that he must sell his pins at a certain price or the workers must earn a certain wage, then the mechanism of the invisible hand cannot work.
| Click on the link below to watch the video for an overview of trade and globalization. |