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 enough.flickr.com/caliope dreamsDivision 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.
There are things we take for granted, like computers assembled in Asian factories, shoe imported from Italy, corn and sugar imported from the United States and CNN beaming the news into millions of homes. Have you asked yourself: what made all these possible? Why do some nations fail to copy the success of other nations, who decade after decade have specialized in producing particular products to the exclusion of other countries? If you come from a developing country background, why are you not getting industrialized like America, France, Germany and the BRIC countries?
Low standards of living are why children enter the labor force. Flickr.com/noesunjocOne concept behind these huge movements towards industrialization is comparative advantage. I was surfing the Internet when I found this article by Steven Hinson on cnx.com. I thought he did a disservice to the concept for the layperson, so I decided to reword it for the beginner reader who I presume are part of my readership.
His aim was to explain the concept of comparative advantage which was first proposed by David Ricardo (1772 -1823) in his “Principles of Political Economy and Taxation” (1817) . It has been used to explain mutual gains from trade, why specialization and division of labor works when workers are efficient and that the least cost of production is based on opportunity cost.
I’ll use Steven Hinson numeric examples.
Specialization and the division of labor in relation to comparative advantage
Imagine Sarah owns a small law firm. She is an accomplished attorney who earns $200 dollars per hour and she can type extremely fast at 120 words/hour without errors. Sarah believes she needs an assistant. She hires Andrea. Andrea is paid $20 per hour. He types at 60 words/hour without errors.
You can see that on every count, Sarah can do better than Andrea. She can type better than him and earns more. She has an “absolute advantage.” Does it mean she should do all the work and keep Andrea idle, but still receives his $20 at month’s end? According to the principle of comparative advantage, Andrea should be assigned a task between either typing or assisting in office filing and research, etc. Which would it be?
That is where the concept of opportunity cost comes into play. Opportunity cost, in simple terms, is the cost of the best foregone alternative. In this trivial example, if Andrea is assigned to typing, the best foregone alternative is office work. If he is assigned to office filing and research, the best foregone alternative is typing.
Since Sarah does 120 words/hour and earns $200 per hour, in simple terms, her 3 words of typing stands before $5 of earnings. Andrea does 60 words/hour and earns $20 per hour, therefore, his 3 words of typing stands before $2 of earnings. So, taking 3 words of typing as base, who has the lowest opportunity cost? You calculated rightly – Andrea. He will only be losing $2 for every 3 words of typing. We can rightly assign Andrea to typing while Sarah concentrates on office work like filing, researching etc and still carry out her duties as an attorney.
Efficient use of resources in relation to comparative advantage
Steven Hinson also made use of another example, Accountants and Attorneys. In an office, let there be two accountants and two attorneys. They have to specialize and divide between themselves the work of either producing tax returns or creating trusts. Accountants can produce 0.5 trusts per hour and 1 tax return per hour. Attorneys can produce 1 trust per hour and 0.5 tax returns per hour. Logically, accountants are better at doing tax returns and attorneys are better at creating trusts when absolute advantages are considered. I decided to simplify the relations; let us use the task of creating trusts as base. Accountants can, when the maths is simplified, produce 1 unit of trust for every 2 unit of tax return per hour while attorneys can produce 1 unit of trust for every half (1/2) unit of tax return. So, according to opportunity costs, attorneys have a lower opportunity cost of producing trusts while accountants have a lower opportunity cost for tax returns.
What happens if we let the accountants do all the tax returns and the attorneys all the trusts? Between them, there would be a maximum of 4 trusts per hour and 2 tax returns produced per hour. Remember the ratio of units!
Let’s play around a little. We think that there could be a way of rearranging tasks amongst these professionals so that they do not get redundant in either tasks while specializing and doing division of labor. Repeated tasks can result in boredom, can affect productivity and worker efficiency. Recall that for every 1 unit of trusts, accountants can exchange 2 units of tax returns while for every 1 unit of trusts attorneys can afford to give up half-a-unit (1/2) of tax returns. So, we’ll ask them to switch tasks once in a while based on comparative advantages. When the two accountants are asked to give up tax returns on the margin, they end up with two tax returns and one trust while if the attorneys give up trusts on the margin, they end up with 1 trust and half of a tax return making for a total of 2 trusts and two-and-a-half (21/2) tax returns on the margin.
The concept of giving up objects for another on the margin is behind the mutual gains nations receive by international trade. The casual reader can check up any good economics textbook for an in-depth understanding.
Why is comparative advantage very important?
These three reasons are what made Ricardo’s concept of comparative advantage ground-breaking.
Necessary for industrialization.
An economy with self-sufficient agents will produce within the constraints of the possible production boundaries taking into consideration its resources and manpower and for their own consumption. Economies that operate with comparative advantage can extend their productive possibilities by trading with other nations using least cost production methods, more efficient processes and highly specialized labor.
Production using most efficient methods.
Two prerequisites for industrialization is specialization and division of labor. This was well expounded by Adam Smith, the father of economics. Thus by trading based on comparative advantages, production is maximized much more than without comparative advantage. This is done using least opportunity cost.
Increased standard of living.
Specialization and efficiency translates into quality products, best use of resources, lower priced goods and services, high Gross Domestic Product (GDP) etcetera.
The concept of comparative advantage might seem trivial but it played a very important part in the industrialization process of many nations.
You must have a family of your own. You must have experienced the joys and pain of raising children, earning a living, doing shopping, paying taxes and mortgages, and most especially planning for daily life. You might not need the skills of an accountant, although for some families it might come in handy, but you surely must need the skills of a business manager to successfully run your house while putting in that of a deft consumer.
Make a journal of the daily activities of you and your spouse. If you are not yet Taking care of a room like this requires division of labor. Flickr.com/Lorenamarried, try to imagine yourself so. You will discover that a home functions and is organized like a firm and its processes can mirror the production processes of the typical firm.
The goal of a typical home is to maximize family well-being. The husband and wife will do all within their power to make sure that they perform the above home activities in such a way that the marginal costs of caring for the family’s daily needs and the marginal benefits of doing so satisfies allocative efficiency. They will both not have the tools of business managers and the record keeping abilities of accountants and marketers, but they surely understand the juggling act involved in producing products like a meal, clean homes, healthy and enviable kids, a healthy home environment along with affordable housing. They both understand division of labor.
Every family have their unique way of production. Some were taught by their parents, in-laws or grandparents. Others might utilize a skill that is uniquely theirs, which confers them with power of monopoly. Whichever way, I wish them success.
The inputs to the process
On a typical day, at the rising of the sun, a couple who share the same bed have one goal in mind. They share the same goal as billions of couples all over the world. At sunset, when night approaches, whether they have succeeded is anyone’s guess. That goal is to make sure the home runs smoothly and is a haven of love, peace and joy. Secondary to it, is to give the kids an environment where they can develop their abilities to continue from where their parents left off.
To make this successful, some couples have different factors of production in their favor. They could be living in their own home, whether bought outright from real estate agents or by mortgage and are still paying the mortgage, they have innate abilities and skills which have as foundation what their parents taught them years ago, they derive joy from doing both market work in the home if they work –from-home or nonmarket work in the kitchen, garden and bedrooms, whichever, using savings from income and inherited wealth. Not to be forgotten is the fact that they both strive whether with few, much or enough resources to make the effort that is necessary and sufficient to make the home what they wanted it to be; to attain a quality of life which they envy and would want others to envy.
A family is a little factory that has constantly churned out in mass numbers kids, love and joy, and contributed enormously to the well-being of its members for generations and centuries and will continue to do so. Even in the face of an apocalypse, the family factory is the only industry that might survive.
The production process modeled
Imagine a family of four: husband, wife and two kids. The mother stays at home while the husband works, whether fulltime or part-time. Daily, this couple juggle the act of combining the exigencies of the marketplace, the workplace, the home and the need to efficiently and effectively use the resources they have, bearing in mind the opportunity costs of doing so, so that at the end of the month they could have savings as a store of reserve for the rainy day. Some run into debt and borrow to survive, although borrowing to survive could be a decision enhancing their ability to make savings for their future consumption needs.
Due to customs and tradition, we would expect the wife to do the cooking. It will not be out of place for the husband to help her out, especially during the weekends. It would be a joy if they both carry out the shopping, although decisions as to what to buy and store in the kitchen will be the province of the wife. As for organizing the house and the activities that makes the home run smoothly, it is the responsibility of both of them which any rational and reasonable person would expect the wife to take a greater share of the production at this stage because she stays at home.
Women love catching up with the Joneses. Men do also. From experience, I have found that the wives are prone to fix appointments like what wedding invitation they can attend and should not attend come Saturdays, what family to invite over for the holidays and whether their kids can go over to grandpa and grandmas during school break. The wife takes care of helping the kids do their homework and expects the husband, no matter how tight his schedule, even if he runs a corporation, to help her out. Mothers usually are wont to talk to the kids about sex, but fathers should take the pain to explain sex and sexual matters to their kids before it is too late. That responsibility should not be left to the mother.
Broaching that vexing issue: finances. Generally, where there is a man, he usually takes care of financial matters like mortgages, taxes, loans and allotment for the family car. They should both plan their consumption together, especially as it relates to credit cards, while the wife is probably more efficient and effective when it involves utilities and kitchen appliances.
As for taking care of the garden, the husband can initiate cutting grass with the wife with the kids looking on and maybe gathering the rubbish for the trash bin. If she is desirous, planting flowers that are in season will bring joy to the home.
Finally, the spiritual needs of the home, attending church services and bible readings, requires the support and input of every member of the family.
The essence is to make the home a haven of love, joy and peace
The above model is simplistic but is what I believe you can find in any family desirous of love, joy and peacefulness. A home where happiness reigns is a home where wealth can settle in, where incomes make meaningful impact and the children live up to their potential. No two families will earn the same income, but every family should make it an ambition to have an equal opportunity to be able to produce and provide what they sought out the day the husband and wife said: “I do.”
