Look on the back of a twenty pound note; you will see a 2 dimensional rendering of a man and a line of text which says, “The Division of labour in pin manufacturing (and the great increase in quantity of work that results).” It doesn’t sound particularly inspiring; you might be questioning whether such a discovery has a worthy place on the back of our currency. After all, pin manufacturing is not the most important of industries. But what he found has had a profound affect on the way we work, live and the role of government.
Why don’t we make our own things?
Why don’t we build our own houses, grow our own crops, farm our cattle, educate our own kids, design and make our own clothes? Well if we did, most of us would be living in wooden shacks, practically starving and have a fashion sense of a prehistoric man. The reason we don’t is because it is more efficient for someone else to do it, who is specialised in a particular skill.
Adam Smith noticed in a pin factory, a group of workers who produce their own pins from start to finish were significantly less productive than a group specialising in one aspect of pin manufacturing. He estimated that by dividing labour up in a factory there would be between a 240 and 4,800 fold increase in productivity. By focusing the skill of the workers on one task, the worker was able to learn some efficiency tricks, what to do and what not to do in his specific role.
This same principle can be applied to the economy as a whole. Why do we have electricians, doctors, hairdressers etc? – it’s because specialisation increases the total amount of goods and services that we can have.
Consider this quote from Milton Friedman.
“Not one person in the world knows how to make this pencil.”
What he means is the lead (graphite) in the pencil comes from a mine in China. In that mine hundreds of miners are specialised in its extraction. The miners use tracks and tools, tools which are produced by other specialised people. The wood comes from Northern Europe, where lumberjacks work with saws made by blacksmiths. The rubber is grown from trees in Malaysia. Literally thousands of people, all specialised in their own tasks, have been required in order to produce the pencil for you in exchange for 20p.
Such is the power of the division of labour.
The Invisible Hand
Another aspect of Adam Smiths work was the famous ‘invisible hand’.
Adam Smith was amazed by smugglers. During the 1770s, when the Wealth of Nations was written, there were heavy taxes on certain imported goods; smugglers would avoid importing these goods through the major ports to avoid this tax. It was during this observation that Adam Smith realised that although these smugglers were acting in their own interest, they were also acting in the interest of their customers. By avoiding the tax they were able to provide the goods for a lower cost. It was as if they were guided by an invisible hand.
If somebody wants an income, then they need to produce something that somebody else wants to buy. In order to promote ones own interests, they are serving the interests of his customers.
Gorden Gekko’s famous speech in the film Wall Street, said “greed is good”. And in according with Adam Smiths invisible hand, he’s right. So long as there is effective competition and the markets are working efficiently, the greedier someone is, the more they will have to produce to get it. In other words…“In competition, individual ambition, serves the common good.”
No comments:
Post a Comment