Economic Concept: The Division of Labor – Why It Pays To Be Special!
As I have mentioned in a previous article, Adam Smith was the first person to really explain how free-markets lead to wealth creation (and improved standards of living). He is known as “The Father of Modern Economics,” because he was the first to describe how things actually work in everyday life (rather than just how people believed things “should work”).
Prior to Smith, philosophers dabbled in political theory (sort of economics), but they mainly approached the world through a filter of “morality.” That is NOT to say that Smith’s Wealth of Nations was based on immorality; in fact, his first (and more popular at the time) work focused specifically on what made for a good and respectable person in society: The Theory of Moral Sentiments. However, prior to Smith, most study of human-social systems focused on what philosophers thought the world “should be,” rather than how life actually functioned.
The Division of Labor
In his work, Smith coined the phrase “division of labor” (I told you I would get to this): a process whereby a worker or group of workers is assigned (is allocated to) a specialized task in order to increase efficiency. By dividing the workload into steps or segments, the resulting specialization increased production per hour of input. This concept was important at the time, because much of the productivity gains of the industrial revolution were generated from new ways of allocating labor (a limited resource).
In more primitive times, characterized by self-sufficiency and limited economic exchange, individuals produced most of what they needed in life for themselves: food, shelter, clothing, etc. As societies became more complex, individuals began to specialize in certain ways. They became artisans and craftsmen, for example. With the rise of capitalism and industrialization, specialization was taken to a new level. Ever since, economists have associated the increasing growth of output with increasingly complex divisions of labor.
How exactly are standards-of-living increased by this? Labor is saved (per unit of production) when workers specialize in individual tasks. For example, in manufacturing, when the individual steps of producing a finished good were broken down into separate tasks, workers become more efficient by focusing on doing one step only (and usually become quite good at it). This also reduced the wasted transition time required when workers switched between the multiple steps involved in producing the finished product. It was also found that less-skilled workers could be hired to perform specific tasks; thus reducing the time AND cost of training one worker to produce the entire product (such as in a trade-craft apprenticeship). Critics of the division of labor (at lease in industrial settings) point out that it can lead to monotonous and mind-numbing working conditions for individuals.
Specialization Becomes the Norm
Even though the benefits of division of labor became quite clear (particularly in manufacturing) during the industrial revolution, specialization has remained an important part of economic progress—even today. In fact, specialization is a requirement in many fields, due to the massive amount of accumulated knowledge and increasing complexities required in many professions. For example, it has been estimated that it now takes 10,000 hours (experience, training, practice, etc.) to become an expert at something. So, by necessity, individuals need to specialize. Likewise, it has often been observed that the more specialized the skill, the higher the compensation for that skill.
Specialization is also important because individuals, groups, companies and countries have varying skills, capabilities and resources. Some are better at certain things than others. Let’s take the “island” example I used when discussing wealth creation. Let’s assume there are two people living on an island. Each person needs fish to eat and fresh water to survive. One person lives near the ocean and is relatively skilled at fishing (the “fisherman”). The other person lives on the mountainside and is relatively skilled at climbing up to retrieve the fresh water from a spring (the “waterman”).
The fisherman catches one (1) fish per hour (he is quite the angler), but it takes him six (6) hours to climb up the mountain (he doesn’t get much “cardio”) to retrieve the pail of water he needs each day. The waterman can fetch a pail of fresh water in three (3) hours (he is in great shape from spending his life on the mountain), but it takes him two (2) hours to catch a fish. Each person needs three (3) fish and one (1) pail of water each day. So it takes each of them each nine (9) hours a day to produce what they need. However, if the waterman just fetched fresh water and the fisherman just fished, it would only take them six (6) hours a day to produce what they both needed; therefore, the fisherman and waterman could just do what they each do best and trade at a rate of three (3) fish for a pail of water.
So imagine how much progress and wealth has been created from both specialization and the division of labor. Would we still be waiting for the automobile, computer, Internet, television or air conditioner, if an engineer, mathematician or programmer could not allocate all of his or her time to focusing on such specialized skills? Should not such specialized skills attract higher compensation for the value they add to goods and services (remember, the supply and demand for labor determines compensation in a free market)?
This division of labor not only makes wealth creation possible; it allows individuals to choose how they wish to acquire wealth, by following their passions. Each individual in society should chase their own dreams, putting on the table of society what each has to offer. As the late Jim Rohn (noted business philosopher) said: “You don’t get paid for the hour. You get paid for the value you bring to an hour.”
So determine your individual strengths, aptitudes and passion, and focus on applying them.