Abstract
This paper argues that there is an important benefit from the division of labor that Adam Smith failed to mention, that is, the division of labor shortens the time required for capital formation and makes continuous roundabout production possible. The paper presents a simple model to demonstrate this benefit, which is referred to as the “continuity-in-capital-formation” benefit of the division of labor.
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Notes
See Cheng and Yang [2004] for a survey.
Indeed, the quantity decisions are trivial in this model given the simple technologies.
The key difference between Structure C and Structure B is that the division of labor exists in the former but not in the latter. The division of labor between the two groups may be co-ordinated through market exchange or directed by a central planner or an entrepreneur. We assume here that there is no cost associated with co-ordinating/directing the division of labor, and will relax this assumption later.
We use the term “transaction cost” to refer to the cost associated with the division of labor regardless whether the division of labor is coordinated by the market or directed by a central planner.
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Acknowledgements
The author thanks Professor Gilbert L. Skillman, Professor Yew-Kwang Ng, and an anonymous referee for very helpful comments.
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Cheng, W. A Benefit from the Division of Labor that Adam Smith Missed. Eastern Econ J 38, 310–318 (2012). https://doi.org/10.1057/eej.2011.15
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DOI: https://doi.org/10.1057/eej.2011.15