Friday, February 8, 2013

Evolution of complex division of labor the secret behind globalization and increased standards of living.

When Adam Smith published his famous work, “Wealth of Nations”, he foresaw the replacement of a guild-regulated system of artisanal manufacturing by factories. Underpinning his prediction was division of labor, or the specialization of workers in tasks that compose the sequence of tasks that make up the production process. He realized that division of labor was factored on the extent or reach of markets which depends on population density and transportation costs to either shrink or expand. What Adam Smith foresaw was the evolution of economic networks of cooperation from reciprocal and redistributive networks to large, complex but flexible networks of cooperation that depend on impersonal markets and the forces of competition.

Extend the reach of your market and network. One man is not dreams
Division of labor and worker specialization has since been instrumental in the Industrial revolution and contributed greatly to the enormous wealth enjoyed in many developed nations today. As it evolved, it created a system of complementarity between inputs at various stages of the production process which complementarity is difficult to disengage by producing smaller units of factories based on those inputs because of the lack of alternative supplies or alternative consumers of the intermediate goods in the process. Therefore, in its evolutionary history, division of labor has seen the emergence of large manufacturing firms who can by becoming more efficient due to increasing returns to scale enhance their market power and assume monopoly rent but which powers can be short-cutted by government regulation through mandating a climate of competition, therefore transferring this power from producers to consumers through enhancing consumer surpluses.

That is the story of the evolution of the markets and capitalistic societies, according to a work published in 2007 by Axel Leijonhufvud. I thought it was worth writing upon here because the evolution of markets and the capitalist system has resulted in enormous evolution in our social systems, has changed considerably the way we earn income, the way we work and has encouraged the emergence of robots who today are replacing humans at brain-numbing tasks.

Some one thousand years ago, life expectancy was short, workers were uneducated, tied to their feudal lords who controlled much of the land and productive resources and had to undergo hard physical labor. The economic network of cooperation, a system whereby people, directly or indirectly, cooperate on producing output, earning income both through market and non-market work, was narrow both in time and space. The much there was of international trade was sparse. Today, our economic networks of cooperation are large, elaborate, complex but flexible. We are dependent on people we might never have seen, met or been aware of and sometimes earn income from entrepreneurs who do not even know we exist.

Axel Leijonhufvud argues that these complex networks of cooperation is made possible by division of labor through increasing the functional differentiation of the male and female who make up its elements and of the implements and artifacts that they use. Increased functional differentiation or specialization has resulted in increased standard of living although political risks, monetary instability, trade protectionism, high taxation and bureaucratic obstacles have sought to shrink these networks. Over the years, man has designed means of innovating and inventing to resolve this shocks, hence the evolution of his networks of economic cooperation.

Axel states that at the start, man innovated exchanges, starting with barter exchanges which eventually culminated in money exchanges, in order to make transactions voluntary, increase freedom of the individual to choose what to buy, how to work and what to produce, and all these at terms acceptable to all parties involved in the economic interaction. Monetary exchanges and impersonal markets have considerably contributed to the complexity of his networks and also to the increasing complexity of division of labor.

Within firms, he states that workers are now faced with specializing at tasks that serve as a vertical hierarchy, were one task in the production process is complementary to another in the process that a stoppage in one could lead to zero output. Workers hence do not need to learn a wide range of skills, leading to worker-product alienation when compared to artisanal production and increased emphasis on worker discipline. He has also seen a tendency for labor to hire capital, where capital hiring labor is the norm, due to the problems of bargaining over the increased profit resulting from the increasing returns to scale and monopoly rent further evolving complex division of labor network.

An outstanding result of the increasing complexity in economic interactions due to the increasingly complexity of division of labor is that firms no longer seek monopoly power but rather they seek to increase consumer surplus by evolving the inputs to the production process but this eliminates the small companies and retailers who cannot compete. Also, service industries are now favored before manufacturing and gradually, robots will be another factor in the move towards increased mechanization of the production process, replacing humans more and more in several occupations. He foresees that the next industrial revolution might be a “trade in tasks”.

If you do desire to read the article, you can download a pdf copy.

Journal Reference:
Leijonhufvud, Axel (2007) "The Individual, the Market and the Division of Labor in Society," Capitalism and Society: Vol. 2: Iss. 2, Article 3.DOI: 10.2202/1932-0213.1025.

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