merged

Example 24: A blacksmith who produces a wide variety of products will lose some time in each
change of production. Each transition from producing nails to producing horseshoes to producing
farm implements, etc. will result in lost time.
3. “The invention of a great number of machines which facilitate and abridge labour, and
enable one man to do the work of many.” A worker concentrating on one type of production
is more likely to discover superior methods of production than a worker whose efforts are
spread over many types of production.
Example 25: A blacksmith who produces only nails is more likely to discover a better method of
producing nails or to invent machinery that enhances nail production than a blacksmith who
produces a wide variety of products.
Smith further observes that the division of labor means that even the poorer members of society
benefit from the industry of a great number of people.
Example 26: A day-laborer in Adam Smith’s Scotland purchases a pair of boots. How many
people have contributed to the production of the boots? The cobbler – who manufactures the
boots, the blacksmith – who produces the hobnails, the tanner – who tans the leather, the rancher
– who raises the cattle (source of the leather), the collier – who mines the coal to fuel the
blacksmith’s forge, the miner – who mines the iron ore that the blacksmith turns into hobnails, etc.
In Chapter 2 of Book 1, Smith explains that the division of labor is a consequence of the human
propensity to trade. This propensity to trade arises from the unique neediness of human beings:
“In almost every other race of animals each individual, when it is grown up to maturity, is
entirely independent, and in its natural state has occasion for the assistance of no other living
creature. But man has almost constant occasion for the help of his brethren,…Whoever offers
to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall
have this which you want,…it is in this manner that we obtain from one another the far greater
part of those good offices which we stand in need of.”
In Chapter 3 of Book 1, Smith explains that the extent of the division of labor is limited by the
extent of the market. In a small market, a worker will not be able to specialize in only one type of
production because the market demand for that type of production will not be large enough to
consume all that the worker could produce.
Example 27: A blacksmith employed in a small village would not be able to specialize in
producing only nails, because the village demand for nails would be less than the amount the
blacksmith could produce. Instead, the blacksmith will produce a variety of products in
accordance with the market demand.
Access to low-cost transportation can extend a market and allow for division of labor. Smith
explains that this is the reason why economic development has occurred first along seacoasts
and navigable rivers. The low cost of water-carriage compared to land-carriage creates a more
extensive market and allows for more division of labor. In Smith’s words:
“As by means of water-carriage a more extensive market is opened to every sort of industry
than what land-carriage alone can afford it, so it is upon the sea-coast, and along the banks of
navigable rivers, that industry of every kind naturally begins to subdivide and improve itself…”
Even in a modern economy, large markets can benefit more from the division of labor than small
markets and are thus likely to enjoy a higher standard of living. Population density is a factor
determining the size of a market. Greater population density increases the size of a market, and
is associated with a higher standard of living.
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
19 - 9 The Firm