Labor divided into the production of different goods or even into various tasks involved in the production of a single good is one of the earliest observations on the nature of human civilization. From a scientific point of view, civilization or society is the division of labor. Unfortunately, opinion down through time mistakenly considers it a mixed blessing, indicating that it is a great force for both good and evil.
This common opinion falters largely on the basis of observation, measurement, and personal bias, absent economic law. The prevailing fallacies can only be eradicated with the theoretical perspective provided by the Austrian School of economics and its predecessors.
Unfortunately, Adam Smith’s central importance on this topic and his basic mistakes continue to have an unhealthy impact on the economics profession and social ideology more generally.
Smith famously opens his Wealth of Nations (1776) with a chapter on the division of labor and the illustration of it in the example of a pin factory where the production of pins is divided into ten tasks with pin production multiplied many times over an imagined level from separate individual production. Smith explores some reasons why division is more productive without asking how labor comes to be divided in the first place, although he does pose differences and discrepancies between countries.
Given its placement at the very beginning of the Wealth of Nations, it would not be surprising that many readers would assume that division was the cause of wealth. The problem was that Smith did not explain the cause of the division, who divided the labor, and why. Smith’s readers are left to speculate about these important questions.
Nowhere in Smith’s discussion of the division of labor is the entrepreneur, owner, or delegated manager. Smith had a labor theory of value which was adopted by Karl Marx. However, as a student of Richard Cantillon, Smith did at least recognize in Chapter 6 of Book 1 the necessity to pay the “undertaker” or entrepreneur for the “hazards” or uncertainty of his endeavors and to recover and be compensated for the capital provided as a capitalist.
Otherwise, the entrepreneur allows workers free reign over the workshop. Smith does speak of “philosophers” or speculators who invent the tools and machines used in the division of labor, but he is otherwise silent as to how the division takes place. Nowhere is the mechanism of division discussed.
Like others before him, Smith also had negative things to say about the division of labor. Specifically, Smith believed that it led to worker ignorance and degeneration and a kind of sub-human stagnation among certain types of labor. Smith said that he thought this could be overcome with education and more social spirit. He simply did not grasp the simple idea that menial tasks would be hired out to uneducated people with low motivation, providing them with easier and better work conditions and more regular compensation than farm work.
Smith was probably unfamiliar with the real-world division of labor. He famously attacked and challenged his friends and teachers for using his pin factory example, even though Smith himself had stolen the example, in whole cloth, from an earlier writer published in a famous encyclopedia. It was his lack of familiarity that opened up his discussion to his personal biases.
Ludwig von Mises, like Bastiat before him, also placed the division of labor as the key component of social organization, economic development, and economic progress. Mises regularly noted that the international division of labor is the source bed of human progress. The key difference between Adam Smith and Mises is that Mises explained the reason for dividing labor, even at the primitive level. People are motivated by profit—psychic or otherwise—to discover, implement, and copy practices that are productive, efficient, and profitable.
Not surprisingly, Mises placed the entrepreneur as the central force in the division of labor. Following Richard Cantillon, he developed his theory of entrepreneurship and profit where people acted for self-betterment in the face of an uncertain future, with their reward being profit. The possibility of losses was the daily and ultimate check on their actions. Mises’s perspective is theoretical, not observational or a matter of measurement, and hence rejects personal bias in his analysis.
Smith either ignored the entrepreneur and, in some cases, berated his role in society. Therefore, when combined with his labor theory of value, it undermines his whole economic doctrine as suspect and misleading. Karl Marx discovered his foundation in Smith’s labor theory of value and must have found solace in Smith’s attacks on the division of labor.
No doubt, socialists must find Smith’s entrepreneur-less division acceptable to their plans. The multitude of pro-government intervention economists, especially technocrats, must find Smith’s directionless division alluring for their own personal plans to remake society to their liking. Marxists, socialists, and interventionists have no problem with the idea of the division of labor, but they reject its central organizing feature: the entrepreneur.
At an even more basic level, the Smithian view—ala homo economicus—falters on the notion that every person is essentially identical. In the context of the division of labor, Mises, Rothbard, and Salerno have emphasized the uniqueness of the individual and explain that the differences in abilities, experiences, and tastes are the primary source of gain from using the division of labor, more broadly. The results are best harmonized by the free market to the benefit of both the individual and consumers. See chapters 9 and 10 from the Rothbard Reader.
Richard Cantillon did not emphasize the division of labor as a separate topic, but in addition to providing a lasting theory of entrepreneurship that remains robust to this day, he examined the acquisition of skill and capital in specialized professions and the necessary resulting increase in wage rates. In the process, he discovered a widely-acknowledged core concept of economics: opportunity cost.
He referred to it as “intrinsic value,” which at the time meant value placed onto or inside of something that resulted in increased value or wealth. Specifically, a family would not undertake the lengthy and costly process of apprenticeship of a son unless the resulting wages were greater than the opportunity costs. Cantillon’s example was similar to the consideration of a family making the decision to send children to college.
Adam Smith placed exaggerated importance on the division of labor in a French pin factory from a previous generation while failing to describe the Industrial Revolution that was taking place in his life. With the division of labor, Smith’s “invisible hand” took on the perspective of an innate, magical, egalitarianism that produced economic development and growth based, not on the profit motivation, but rather on our innate propensity or habit to truck, barter and exchange rather than the personal drive for self-betterment. As a result, Smith’s textbook was largely devoid of the true economic engine of entrepreneurship.
For a modern elaboration of the process fully described and motivated see Per Bylund’s “The Division of Labor Is at the Very Core of Economic Growth,” from Chapter 6, “The Realm of Entrepreneurship in the Market: Capital Theory, Production, and Change” in the book The Next Generation of Austrian Economics: Essays in Honor of Joseph T. Salerno, edited by Per Bylund and David Howden, published by the Mises Institute.
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