Adam Smith argues that the division of labor increases labor productivity within an entire economy. A worker would spend more time performing a particular task thus increases his or her skills in performing that task. This is forms the basis of Smith’s argument that the division of labor increases the productivity of the labor force.
From a social point of view, the division of labor is evident when particular aspects of production are separated and located in different firms and geographical regions. Such a phenomenon could not exist in a socialist country which was characterized by firms having all aspects of production and individuals not specializing in particular tasks.
The benefits associated with the division of labor have therefore helped the once socialist economies change into capitalist economies. The patterns of putting all aspects of production in one firm or one region had to change for these economies to adapt to the world market. Similarly, the failure of individual laborers to specialize in particular tasks had to change for these economies to adapt to the world market.
Impact on free trade on the division of labor
According to the free trade policy, the determinant of resource allocation is the supply and demand. It is out of the supply and demand that prices of commodities emerge from. Using the supply and demand determinant as a pricing strategy, free trade can be distinguished from other forms of trade policies.
The restrictions put in place by the government to protect domestic industries have benefits as long as there is a balance between foreign and domestic producers. Free trade has opened up markets and industries to a global scale. This implies that the scale of production in certain industries has increased. With an increase in the scale of production, there is an increase in the division of labor.
Free trade increases production and efficiency. For instance, some countries cannot produce certain goods or services cheaply. However, the same goods and services can be produced in other countries at a cheaper cost. It is, therefore, better for these countries to buy the goods and services from foreign countries at a cheaper cost.
This introduces the issue of specialization where different countries specialize in producing specific goods and services based on the low cost of production. Through specialization, countries can increase their production and become more efficient.
This implies that countries can allocate resources effectively and purchase goods and services they are not able to produce cheaply from other countries. Outsourcing is a common practice in the free international market. For instance, US companies outsource manufacturing of products in other countries where they can produce cheaply.
Both formal and informal institutions play important roles in the disparities of incomes. In a formal institution, expansion of educational infrastructure cannot match up with the expansion of innovation and technology. There is an unequal distribution of resources through redistribution and welfare transfer. Redistribution of resources occurs through mechanisms such as divorce charity, welfare, monetary policies, and taxation.
The currently existing policies and government interventions on redistribution of incomes do not favor income equality. The regulation in labor market lack control over executive compensation. In as much as high-income earners are taxed, the policies on taxation do not favor the low and middle-income earners.
In regards to the informal institution and social norms, executive compensation has been noted to have a phenomenal increase in the US between 1970 and 2000. This rise is disproportionate to the rise in executives’ productivity and efficiency. In Europe during the same period, no such observation was made.
Free trade creates domestic economic instability especially when economies depend entirely on the global market and focus little attention on their domestic markets. This implies that the consumers, businesses, and employees can be affected by the economic crisis of a country’s trading partners.
For instance, if economies in Europe experience a recession, there will be decreased demands for goods and services exported to Europe from the US. Such a concern affects the labor market and hence division of labor by reducing job opportunities.
How Adam Smith uses history in his thinking
The idea of wage compression and minimum wage encourages investment in nonskilled labor thereby reducing the biases witnessed whenever there is technical change. Regulations in the labor market need to be structured in a way that encourages parity in income levels. For instance, there are no regulations to review the compensation for c-level management.
Geography becomes an important factor in explaining the difference because of the historical role it plays in economic outcomes. Some of the nations that are rich today have been rich since history, and this can be attributed to their geographical location. The tropic areas were also once richer than the temperate areas, but the impact of colonial activities turned the tables for these areas.
Institutions vary over time and across countries. They affect both economic prosperity and the distribution of income. Good and effective institutions imply enforcement of the rule of law and property rights. They give rise to well-functioning markets, development of infrastructure, and innovation.
They also increase social welfare. But the change from dysfunctional institutions to good ones may be blocked by powerful groups whose interests may get hurt if the change takes place.
What role does the accumulation of capital play in determining wages according to Smith?
According to Smith, wages are important to workers because it allows them to reproduce themselves. The growth and maintenance of population are viewed as a consequence of economic development. Therefore wages usually have to suffice to support goods living standards, and if wages drop, workers will not be able to afford subsistent living standard.
Smith says that in an economy that is progressively developing under capitalism wages are usually above subsistent levels. The primary reason that Smith gives for this is that an economy requires more labor for capital to be accumulated.
This means that higher wages have to attract more labor from the countryside. Therefore, accumulation of wages will help to increase the division of labor which in effect increases wages above the level of subsistence. In essence, when more capital is accumulated, the wages and standard of living for workers are increased.
Classification of productive and unproductive labor
Smith clear makes a distinction between productive and unproductive labor force. He says that productive labor is involved in increasing the asset stock of a country while unproductive labor drains from the stock. This is why he would classify waiters and performers as unproductive laborers.
A waiter is a servant who serves food and waits on tables at a restaurant. It is not that the waiter does not work, but the kind of work they do will not help to increase the stock of the restaurant’s asset. Instead, the kind of work they do drains from this stock.
Should college professors be classified as productive or unproductive labor?
According to Smith’s explanation of productive and unproductive labor, college professors should be classified as productive labors. Even though they do not produce a tangible product, the professors, the students who successfully graduate still add up to the skilled labor stock of a country. Similarly, even though they consume part of the consumption fund, they have an output that adds up to the stock of a country.
The skilled labor force is part of the total asset of a country. College professors and teachers, who are in the service sector, perform a key role in developing skilled knowledge through education. The labor that is viewed as an asset is an essential part of the economic growth of a country.
More assets are grown out of the labor produced by college professors. When looked at critically, college professors do not create a drain in a country’s stock. Even though Smith did not regard service labor as productive labor, but his argument would classify some service labor as productive labor.
However, college professors also produce workers who join the profession that is considered unproductive. From this perspective, it can be argued that professors do not add to the stock of society’s asset. But instead drains the stock of society’s asset. Nonetheless, if professors produce skilled labors such as engineers, one can argue that they help to increase the social asset base.