Explaining the Division of Labor
So I tried it again, an article on economics that attempts to reach an audience disinclined to read about economics. It begins: "The following will explain the most important idea in the history of social analysis. The notion (actually, it's a description of reality that is all around us but rarely noticed) has been around for many centuries. It was first discovered by late-medieval monks working in Spain. It was given scientific precision in the classical period. It is the basis of advances in social theory in the 20th century."
Comments (12)
Very nice article. What was fun is that I immediately identified with the less efficient baker :-) and decided I'd switch to bagels before you even mentioned it. But it didn't occur to me to sell to the other baker. Instead, I just figured I'd open my store in a town that either did not have a bagel store or had sufficient business to support an additional store. So, I learned something...thanks.
Published: March 26, 2008 12:11 AM
The division of labor in primitive form is explicated by Plato and Aristotle, well before the medieval monks.
Published: March 28, 2008 10:49 AM
There are two things seriously wrong with this article. The first is that the law of comparative advantage is not the same thing as the division of labour. The division of labour is when, say, one person specialises in pie fillings for another who specialises in pie crusts; this article is not about the division of labour at all.
The other thing wrong with this article is that it gets the law of comparative advantage thoroughly wrong too, by applying it within a country and leaving out all the other things going on locally that stop it working. In particular, there is only a certain demand curve for those baked products, and there are supply curves for their ingredients etc, and there are yet other options that the less efficient baker can switch to (if we count the "null option", unemployment). It quite often happens that the more efficient producer can produce profitably at levels which allow him to produce so much that neither of the less efficient producer's products break even - that is, even with the opportunity costs described, the cost of ingredients etc. is too high for him because prices have risen from the demand from the more efficient producer. The intuitive answer of the more efficient producer taking over the whole supply really can happen.
Where the law of comparative advantage works is in situations between countries, where all the other issues are sealed away within each and the simplification used in the argument really works out. But the example used doesn't work, because it leaves out too much that really is there, complicating the issue.
Published: March 29, 2008 2:48 AM
pm lawrence says:
"The intuitive answer of the more efficient producer taking over the whole supply really can happen."
where? i can't think of one example.
"the law of comparative advantage is not the same thing as the division of labour."
i agree, but as a consequence of the law of comparative advantage, where people perform different tasks and trade to their mutual benefit, specialization necessarily occurs. so it's a by-product.
Published: March 29, 2008 8:23 AM
pm lawrence says:
"Where the law of comparative advantage works is in situations between countries..."
-with the proviso that the international monetary system is sound. when the world ran on what approximated a gold standard, prices did actually reflect comparative advantage. nowadays it's possible for currencies to remain over/undervalued for long periods of time, distorting the international (as well as national) allocation of resources. whole industries can shift across borders before the currency re-aligns.
doubtless, as the chinese yuan revalues against the greenback, us manufacturing will enjoy some sort of a re-birth. but many skill sets will have been dissipated, and reacquiring them will be difficult and painful. large currency swings are immensely damaging, and hedging is a bandaid on an arterial cut.
Published: March 29, 2008 10:30 AM
Following my "The intuitive answer of the more efficient producer taking over the whole supply really can happen.", Newson asks "where? i can't think of one example".
I was commenting on the possibilities that economic theory allows, not claiming that it ever actually has happened - though I agree that a real world example would go a long way to show it, apart from the distortions that are ever present in the real world. That is, just as the author provided made up numbers for the sake of illustration, I could put in made up tables for the supply of ingredients and the demand for products that would show an equilibrium with the less efficient producer producing zero. It's just too much trouble for a mere comment, where raising the issue is all the criticism I need make (I don't have to provide a better article to be able to criticise this one).
The nearest thing to real world cases I can offer is the sort of industry shake out that occurred just after home computers were introduced, or that happened to car and motorcycle manufacturers in their early days. Those situations were more complicated in a number of ways, particularly that niches were available for some producers to move into and that those weren't clear scenarios with just two players.
Specialisation isn't what makes for what is traditionally called "division of labour", though that occurs. What makes division of labour is that the activities of producing are broken down - and then specialisation and increased efficiency of each stage makes the whole process more efficient (where applicable). What the author had in mind was that the less efficient producer would concentrate on bagels and sell them to the more efficient one, but that would only be division of labour if those went into later stages of processing - not his scenario at all.
There are many other forms of complication that fiat currencies and other things add to the simple scheme of comparative advantage between countries, yes, but nevertheless it works best if you start with that using simplifying assumptions, then correct for the differences - such as, the way the globalised economy is starting to take on the disqualifying features of internal production, e.g. making Chinese consumer goods with imported materials affects the competitiveness of home country manufacturers at the input end as well as the output end (the floor is rising as well as the ceiling coming down - and when they meet for the less efficient producer, it's game over).
The biggest problem I know from global trade using fiat currencies is the cumulative effect on overseas investment, since what looks like investment, if done with funny money, is actually a wealth transfer - acquiring overseas revenue yielding resources not by increasing them with real investment but by acquiring them with funny money. (Often it is the middlemen who supply consumer goods for funny money who do this, almost literally passing the buck.) This distortion is more important because it is cumulative, but it has little to do with this article's topic - it has to do with the sins committed under the name of free trade, the wider area that includes this one.
Published: March 30, 2008 4:07 AM
pm lawrence says:
"What the author had in mind was that the less efficient producer would concentrate on bagels and sell them to the more efficient one, but that would only be division of labour if those went into later stages of processing - not his scenario at all.
division of labour is not explicitly mentioned in the article (to do so would be belabouring the point), but concentrating on one particular product line (bagels or pies) is the same as concentrating on one sub-component (think pie-mince), it's only a question of degree. each actor will master his niche (albeit with differing talent) to a greater extent than would have been the case had both stuck with pies & bagels.
Published: March 30, 2008 7:35 AM
The reason for simplifying assumptions here is to see the core of the logic. It is excessive aggregation that obscures the truth about the gains from trade here, such as when the commentator above speaks of whole countries trading with each other. Countries don't trade.
Published: March 30, 2008 11:00 AM
Division of labour was explicitly mentioned in the article (I read it). It is also in the title, which may be down to the editor. Although "concentrating on one particular product line (bagels or pies) [may well be - that wouldn't necessarily be so in a different example - ] the same as concentrating on one sub-component (think pie-mince)":-
- the process involved and being described is not the one commonly called division of labour; and
- the cause of gain is different (comparative advantage yields gains, where applicable, even if there are no efficiency gains from specialisation).
"Countries don't trade."
Sigh. That is a simplifying description, itself. When treating countries as black boxes so that the internal stuff like local price responses to demands for ingredients get sealed away, you also - inherently - seal away the identities of the individual traders; all you can see is the countries involved. You then have to speak of countries trading.
On the other hand, when you do not do this, when you reveal the interactions of individual traders in all their glory, you get at traders within a single country too - and you have to show the effects from price and supply changes on inputs too, and other things like the response of demand curves, then work out all their interactions. Then, you don't get comparative advantage working out in all cases after all. The simplified case presented was simply wrong, from leaving out relevant stuff at that level. As Einstein is reputed to have remarked, "make everything as simple as possible, but no simpler" [emphasis added]. In disaggregating, it failed to bring in everything relevant to the disaggregated level - it fell between two stools.
Published: March 30, 2008 6:15 PM
"I speak of the division of labor, also known as the law of comparative advantage or the law of comparative cost, and also known as the law of association. Call it what you will"
to pm lawrence:
touche! i should have said it's not explicitly defined. i think you're interpreting division of labour only it in a multi-person firm, or when each task is only part of the final product .
i see the division of labour even for sole-traders like the story characters, where their output is the final good (or service). real world examples would be general practictioners and medical specialists, or solicitors and barristers.
Published: March 30, 2008 7:10 PM
read: general practitioner.
Published: March 30, 2008 7:14 PM
It's not so much what I'm "interpreting", it's that I'm trying to stick to what is generally understood by the terms. Without a common language, ther is no communication.
I have thought of a description that might make these issues clearer. Suppose - hypothetically - that there is no difference between the operations of these firms, that they use the same inputs (including labour) in the same way with the same efficiencies, only for some unspecified reason the less efficient firm has more spoilage of goods awaiting sale. It should be clear that this scenario leads to precisely the same numbers as those the author suggested; it should also be clear that - ceteris paribus - we get more efficiency by arranging for all inputs to be processed and chanelled via the other producer, simply by observing that any intermediate production mix can be improved by channelling some more away from the less efficient producer regardless of which products are affected and in which proportions. Short of yet other market distortions, market incentives will push that way.
This may be described, treating each firm as a black box, in terms of the supply and demand curves of the firms' inputs and ouputs. It therefore follows - from the black box treatment - that you will get similar equilibrium behaviour for firms with those input and output behaviours, even where spoilage isn't the reason. The spoilage case merely serves to demonstrate a clear source of absolute inefficiency, enough to destroy the general argument.
Published: March 31, 2008 2:07 AM