Skip to main content
Log in

A Benefit from the Division of Labor that Adam Smith Missed

  • Article
  • Published:
Eastern Economic Journal Aims and scope Submit manuscript

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.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Figure 1

Similar content being viewed by others

Notes

  1. See Cheng and Yang [2004] for a survey.

  2. Indeed, the quantity decisions are trivial in this model given the simple technologies.

  3. 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.

  4. 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.

References

  • Cheng, Wenli, and Xiaokai Yang . 2004. Inframarginal Analysis of Division of Labor: A Survey. Journal of Economic Behavior and Organization, 55 (2): 137–174.

    Google Scholar 

  • Cheng, Wenli, and Xiaonan Zhao . 2008. Economic Performance through Time: A General Equilibrium Model. Division of Labor and Transaction Costs, 3 (1): 7–16.

    Article  Google Scholar 

  • Kydland, Finn E., and Edward C. Prescott . 1982. Time to Build and Aggregate Fluctuations. Econometrica, 50 (6): 1345–1370.

    Article  Google Scholar 

  • Leijonhufvud, Alex . 1986. Capitalism and the Factory System, in Economics as a Process: Essays in the New Institutional Economics, edited by R.N. Langlois. Cambridge, New York: Cambridge University Press.

    Google Scholar 

  • Ng, Yew-Kwang . 2004. Welfare Economics: Towards a More Complete Analysis. Basingstoke: Palgrave Macmillan.

    Book  Google Scholar 

  • Read, Leonard . 2008. I, Pencil: My Family Tree as Told to Leonard E. Read, 50th Anniversary Edition. Irvington-on-Hudson: Foundation for Economic Education.

    Google Scholar 

  • Smith, Adam . 1776. An Inquiry into the Nature and Causes of the Wealth of Nations, vols. Chicago: University of Chicago Press.

    Book  Google Scholar 

  • Stigler, George . 1976. The Successes and Failures of Professor Smith. Journal of Political Economy, 84 (6): 1199–1213.

    Article  Google Scholar 

  • Yang, Xiaokai . 2002. The Division of Labor, Investment and Capital. Metroeconomica, 50 (3): 301–324.

    Article  Google Scholar 

Download references

Acknowledgements

The author thanks Professor Gilbert L. Skillman, Professor Yew-Kwang Ng, and an anonymous referee for very helpful comments.

Author information

Authors and Affiliations

Authors

Rights and permissions

Reprints and permissions

About this article

Cite this article

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

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/eej.2011.15

Keywords

JEL Classifications

Navigation