May 21, 2022 9:48 pm

Benefits and risks of the division of labor

Adam Smith would still be present among us today, although something had prevented him from writing beyond the first 25 pages of the approximately 1,000 that make up the Inquiry into the Nature and Causes of the Wealth of Nations, the first edition of which was published in 1776. I am exaggerating, but every exaggeration contains an important grain of truth. What was the insightful observation, best presented through an example, and why is it still relevant?

I conveyed these questions to Scotsman David Hume (1711-1776), to philosophers, the author of A Treatise on Human Nature, published in 1739, and to economists, a pioneer in explaining how countries’ balances of payments they absorb an increase in the gold extracted from the mines located in one of them. A close friend of Adam Smith, they began to correspond in 1752; the last letter that Hume sent to Smith is dated August 23, 1776, two days before he died. By the way: Hume died in the year Smith published The Wealth of Nations. On the Royal Mile, in the city of Edinburgh, two statues of these two illustrious Scotsmen were installed.

–What did Adam Smith explain at the beginning of the play?

–The benefits, but also the risks and limits, of the division or specialization of work. He raised it in an excellent way, alluding to the manufacture of pins.

–I hear it.

–Imagine a couple of factories exactly the same from the point of view of their facilities and the quantity and quality of the employed personnel. Let us also imagine that making pins requires three operations: cutting a coil of metal into bits, sharpening one end of each bit, and forming a head on the other end. So far, all the same.

-What is the difference?

–That in the first factory, each operator is in charge of carrying out the three operations, while in the second, one of them is asked to cut the roll, another to sharpen one of the ends, and the third, make the heads.


–At the end of a working day of equal duration, in the first factory each of the workers will have manufactured, say, 8 pins, a total of 24; while in the second no one will have made pins, but the joint effort will have produced… 60 units.


–No, the 24 pins became 60 due to the increase in productivity resulting from the increase in skill generated by the division of labor. It occurs in all walks of life. The grandmother changes the grandson’s diaper better than the new mother, not because she is more intelligent, but because, as Jorge Porcel would say, “they are years.”

–In terms of risks, this is not free.

-Indeed. If in the first factory one of the workers is missing, the total production falls from 24 to 16 units; while in the second it decreases from 60 to… 0! In an open economy, GDP per inhabitant is higher than in a closed economy, but the former is at the mercy of the vicissitudes that occur in the rest of the world.

-And so?

-You have to know that the decisions are unique: it is not worth applauding the division of labor for the benefits it generates in flourishing times, and condemning it in times of crisis.

-What can you do about it?

–A factory that needs 100 workers has probably hired 105; in the same way that an opera house hires a replacement for the main tenor, in case he loses his voice just before a performance. In addition to which, prudence advises operating with some degree of productive diversification, and forming precautionary reserves.

-Are you suggesting that Argentina stop producing soybeans, in case world demand for the product collapses?

I said caution, not nonsense. Would you advise Saudi Arabia to limit its oil extraction to its internal demand, generating the corresponding import substitution? A real stupidity; as it would be if the Saudis made their decisions on the basis that the demand for oil will be eternal and that its reserves are infinite.

– In addition to the benefits and risks, Smith raised the question of the limits of the division of labor.

-He affirmed that the degree of labor specialization depends on the size of the market. Another sharp observation. Example: a doctor who treats in Trenque Lauquen is necessarily much less specialized than another who treats in Córdoba or Buenos Aires; and either of these two, in turn, less specialized than those who, located in New York or Boston, have patients from all over the world as clients.

–This last point was highlighted by Allyn Abbott Young.

-That’s how it is. In the monograph that he published in 1928, ignored for decades –except, in his country, by Guido José Mario Di Tella–, and revived by Paul Michael Romer in 1986, Young explained that the reduction in unit costs as the level of of production, do not result so much from a process that occurs within each factory, but rather from greater specialization. Crucial data in small economies, such as Uruguay, which can benefit from specialization, not because of the size of their internal market, but because of their economic openness.

– What other valuable things did Smith say, after the first 25 pages?

–That it is not the benevolence of the butcher that feeds us, but the fact that he (or she) lives from it. Illustrating a fundamental fact: the effort and assumption of risks must make sense to those who carry them out. Principle that, since Deng Xiao Ping, the Chinese authorities apply; and since Hugo Chavez, the Venezuelan authorities ignore. With results that are visible to, it seems, almost everyone.

–Which connects with the invisible hand.

-That’s how it is. New powerful intuition, which holds that there is no conflict between each one pursuing their own interest and the resulting GDP. Many years later, the intuition became a theorem, when the conditions under which the principle of the invisible hand operates were specified. Thus was born the literature of “market failures” and that of “State failures”; proposing, in each case, what is better, the invisible hand of the population or the visible hand of the State. You Argentines know a lot about this.

-Modern times, the great film by Charles Chaplin, isn’t it a criticism of the division of labor?

–It is more a criticism that the times and characteristics of production are determined by the machines. Can someone be a genius as a filmmaker and shortsighted as an entrepreneur? It can: Chaplin insisted on silent films when sound films appeared and paid the consequences.

David, thank you very much.

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