The Wealth of Nations Chapter 3: That the Division of Labour Is Limited by the Extent of the Market

While I was getting licensed to work in financial planning, I took a job doing assembly line work for a company that makes generators and power tools. For a time, my day was composed solely of taking folded cardboard boxes, opening them up, and putting them on the conveyor belt assembly line. From there, the next person would place a metal transfer switch box for a specific line of generator inside, and then it would go down the line for the next 10 people to each do their individual tasks. While I wouldn’t consider “box opening” a specialized skill, I could do that single task every 30 seconds for 10 hours a day, 5 days a week (and there were two lines, so two people doing that at a single warehouse of a single company). I did not include “box opening specialist” on my resume when I came to work with Tim.

Though Smith did not see the level of specialization we are familiar with today, he was able to define its limit in very basic terms: so long as there are enough people willing to pay for a specialized service, people can continue to specialize/niche/divide the labor into smaller parts. So long as there is a demand for 6,000 transfer switch boxes per week (30 seconds x 10 hours x 5 days), someone can be a full-time box constructor. Once the company is not able to sell that many per week, the individual is no longer needed to make that many, so they have to be a box constructor and something else.

As Smith notes in his day, “Country workmen are almost everywhere obliged to apply themselves to all the different branches of industry.” Even today, if you had to bet on broad handyman skills of someone from the country vs the city, it’s a fairly simple choice. If you had to bet on the broad handyman skills of someone 60 years ago vs today, it’s likewise a fairly simple choice. Smith also speaks to how this applies at a macro level. It’s common knowledge that if you have to transport lots of heavy goods, it’s easier to ship them over water than carry them over land. With this in mind, Smith records that “of all the countries on the coast of the Mediterranean sea, Egypt seems to have been the first in which either agriculture or manufactures were cultivated and improved to any considerable degree.” While all were accessible from the Mediterranean, what Egypt had that other countries did not was a very long navigable waterway in the Nile river that was entirely in its domain (and could not be blockaded by other countries). This river connected peoples throughout the country far from the coast to be able to “truck, barter, and exchange” (from chapter 2), which gave access to a larger market, which allowed for further specialization, and thus increased the wealth of the Egyptians above the wealth of other countries.

Smith compares Egypt with inland Africa that could not (and still cannot) connect to the Mediterranean or other large waterways, leaving them only to exchange with their small local markets. As a result, Smith comments that the populations of inland Africa “seem, in all ages of the world, to have been in the same barbarous and uncivilized state in which we find them at present.”

The more access to large markets (people who want to buy your goods and services), the more we can specialize, the more we can decrease the cost of those goods and services, the more people can afford them, the more we can improve the lives of others, the more we can build wealth for ourselves and those we’re serving.

Let us know

• What good or service is much less expensive than it used to be?

• What are the downsides (costs) of specialization/division of labor?

Until next time, happy reading!

P.S. For those who have a desire to help those in underdeveloped countries, such as those in inland Africa, watch this two minute trailer of a documentary attempting to prove that giving goods (rice, shoes, etc.) damages their economies, and that instead we ought to be helping them access broader markets (which requires just property rights and rule of law).