Smith, Adam. 1776. Wealth of Nations. Chicago: University of Chicago Press.


Smith, Adam. The Wealth of Nations, (1776). Book I, Ch. 1, 2. 10

 

Chapter 1: Of the Division of Labor

The division of labor has caused the greatest improvement in work productivity. For example, in pin-making a single person completing all steps could scarcely make 1 pin a day, much less 20. But with division of labor into a series of 18 production steps a work group can make upwards of 48 thousand pins a day.

The division of labor is more prevalent in highly industrialized countries, especially in manufacturing. It's advantage it that it increases the dexterity of every workman, saves time, and uses human-labor facilitating machinery.

The improvement of dexterity increases the quantity of work a person can perform by reducing work to a single operation that they can quickly master and excel at. It saves time by eliminating the time lag when one person passes from one type of work to another (i.e, retooling, retraining, learning curve, etc.). Finally, machinery can quicken and ease many types of operations, and their production has become a marketplace in themselves. Division of labor has extended into the philosophy and business as well.

Through division of labor workers can produce large quantities of goods (more than if they produced the entire good by themselves), the fruits of which they can use to buy goods from other specialized people. This increases the opulence of the entire society.

Most products now require the interaction of many people to produce and sell it (e.g. a woolen coat). Ultimately all goods are interconnected in a complex relationship of specialized worker output.

Chapter Two: Of the Principle which Gives Occaision to the Division of Labor

"The division of labor arises from a propensity in human nature to exchange" (p. 17). Humans are dependent on each other for many things, and have found that benevolence alone does not satisfy this co-dependency. "He will be more likely to prevail if he can interest their self-love in his favor, and show them that it is for their own advantage to do for him what he requires of him" (p. 18). This occurs most often through barter, or purchase via money.

This exchange mentality gives rise to the division of labor. The ability to exchange the surplus part of one's labor for other goods "encourages each man to apply himself to a particular occupation" (p. 19). The diversity in expertise generates productivity.

Chapter 10: Of Wages and Profit in the Different Employments of Labor and Stock

Advantages and disadvantages of the labor system tend to equality when there is perfect liberty. People will prefer cheaper but equal goods., leading to price equality. Laborers will seek the best paying employment, equalizing labor rates.

Part I: Inequalities arising from the Nature of the Employments Themselves

There are five circumstances that counter-balance labor gain differences between employers:

 

1. Agreeableness of employment. Wages vary by ease vs hardship, cleanliness, honourableness. However, some agreeable employments (like hunting or fishing) are ill-paid because there are too many people involved in them for anybody to make good money.

2. Wages also vary with the cost of learning the business. This is the difference between the wages of skilled labor and common labor. Many jobs require an apprenticeship to learn the trade, which is a cost reflected in the eventually higher wages upon graduation.

3. Wages vary with the inconstancy of employment. Seasonal workers often get paid more to tie them over in the off-season.

4. Wages also reflect the level of trust reposed to the workmen. Jewlers entrusted with precision metals and physicians entrusted with health are good examples.

5. Wages vary with the probability of success. Some professions have a high failure rate, which causes them to have higher wages as an incentive for people to enter them. Players, rock-stars, etc. are also paid according to the scarcity and rarity of their talents.

But it it true that people tend to overvalue their chance of gain, undervalue their chance of loss, especially young people, who choose their profession without fully understanding the risks or compensations involved. Often the danger that can be surmounted attracts people, and thus do not command higher wages.

Profits vary with the certainty of return, though certainly not in direct proportion to it. Profits are less unequal than wages, and their inequality is often only due to the inclusion of wages. In professions like medicine, we often don't distinquish between money received as wages and money received as profit. This same factor can also explain the difference between profits in town vs in the country (volume differences can produce lower profits but higher wages, and vice versa). Often there is less profit in cities, but this is made up for by increased speculation.

But in order for these five counter-balancing effects to be effective in producing equality, in addition to liberty you need:

1. Employments that are well know and estabilished. New , risky trades have higher wages than established ones.

2. Employments must be in their natural state. Changes from the normal condition will produce wage differences.

3. Employments are the principal and sole employers of their laborers. Part-time, additional work is often cheaper than full-time, principal work.