Specialization and Exchange
Specialization and Exchange
Modern economies, whether capitalistic or socialistic, whether fully developed or not, are characterized by specialization of the means of production and by exchange of goods and services. The earliest and most common form of specialization is that of labor. Interrelated with it, particularly in modern developed economies, is specialization of machines. In manufacturing, the advantages of both are best realized through specialization of plants and, in some cases, of enterprises. Finally, there is regional and local specialization. All of these forms of specialization imply an exchange economy.
Specialization of labor . The advantages of specialization of labor were recognized at least as early as the times of Plato and Xenophon and were pointed out by several of the mercantilist writers before Adam Smith. In the Republic (n), Plato indeed regarded the city-state as having come into being because of the mutual needs and the resulting interdependence of individuals. Out of this interdependence arises the division of labor, the specialization of individuals in different occupations in accordance with their natural gifts, and the mutual exchange of their products for those of others out of self-interest. A further consequence of exchange is the development of markets and the use of a currency to facilitate transactions. All goods are produced in greater quantities and are of superior quality than otherwise.
By the time Adam Smith wrote The Wealth of Nations, the concept of the division of labor must have been familiar to him from the works of William Petty, Bernard Mandeville, Adam Ferguson, Francis Hutcheson, and others. Smith, however, surpassed their treatment of the subject not only in the thoroughness of his analysis but even more in the importance he attributed to the phenomenon in his theory of economic progress: “The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour” ( 1950, vol. 1, p. 5).
Smith’s description of the “trade of the pin-maker” served to illustrate how a single manufacturing process could be subdivided into a number of distinct operations, each performed by a specialized worker. He applied the term “division of labor,” second, to the quite different case of the separation into production stages of the whole process of manufacture, from raw material to finished product, of a commodity such as woolen cloth (ibid., p. 7); and, third, to the case in which a handicraft worker specialized exclusively in the production of a single commodity, such as nails (ibid., p. 8).
Bücher (1893, pp. 290-293 in the 1901 edition) supplemented Smith’s treatment by adding a fourth and a fifth type of division of labor: the specialization of workers by vocation or occupation, which Smith probably had in mind when he referred to the “separation of different trades and employments from one another” ( 1950, vol. 1, p. 7); and what Bücher called the displacement of labor by machines, the latter taking over and performing production steps previously done by hand. This change in technique is called an increase in the division of labor, on the ground that it involves an increase in the variety of different employments of workers: there are now workers engaged in making the machines as well as in operating them.
Smith found the advantages of the division of labor to be (1) the increase in skill acquired by each workman, (2) the saving in time through concentration on a single task, and (3) the stimulus provided for the invention of labor-saving machines. Cannan has pointed out that Smith ignored (ibid., p. 12n.), and in fact in a degree denied (ibid., pp. 17-18), the advantage (stressed by Plato) to be gained by the assignment of individuals to the tasks for which they are best fitted. However, Babbage ( 1963, chapter 19) convincingly developed the proposition that an important gain from specialization of labor was that it permitted the utilization of precisely the degree of skill or strength requisite for each process, with a consequent saving in costs.
Babbage also recognized that specialization of labor was as effective in “mental” as in mechanical operations (ibid., chapter 20); and he illustrated the point by reference to the various managerial functions involved in the operation of a mine that could be allocated to different specialists. The extent to which the principle of the division of labor has been applied in managerial organization of the modern corporation is well known (see, e.g., Florence 1953, chapter 4).
Although impressed mainly by the advantages of labor specialization, Smith did briefly recognize one disadvantage: When workers are confined to a few simple operations, they become stupid and ignorant ( 1950, vol. 2, p. 267). Marx quoted Smith with bitter approval and added that the division of labor is a capitalist method of increasing relative surplus value by crippling the individual workers (1867-1879, vol. 1, p. 400 in 1906 edition). The further point that a high degree of specialization of labor increases the unemployed worker’s difficulty in finding new employment was stressed by Marshall ( 1961, p. 260).
It has also been claimed (e.g., in Lachmann 1951, p. 426) that specialization of labor produces increased inequality of income, for it promotes a wider spread between the performance and income of individuals of different abilities. Lamp-man (1957, p. 522) has pointed out, however, that any such tendency appears to be offset by other circumstances tending to reduce the dispersion of worker incomes—such as the elimination of lower-skill jobs by the development of specialized machines.
Specialization of machines. Adam Smith’s view that the division of labor is the primary source of economic progress was early disputed by Lauder-dale (1804, pp. 285-304), who maintained that it is not so much through the division of labor as it is through the substitution of tools and machines for labor that mankind comes to enjoy “that extended opulence which expands itself throughout civilized society” (1804, p. 297). Babbage ( 1963, pp. 173-175) illustrated the way in which a machine may be expected to replace labor in a given process as soon as an individual worker concentrates on a very limited and simple operation. Machines contribute to economic progress by providing sources of power that greatly supplement human power; they make possible operations too delicate for the human hand and the production of articles (e.g., replaceable parts of a larger implement) with an accuracy not otherwise obtainable; they reduce the burdensomeness of labor; they are economical of materials; they speed up production; and they result in a reduction in costs of production—provided that they are used to capacity (see also Marshall  1961, vol. 1, pp. 255-266).
While a machine may initially be as specialized as was the worker whom it replaces, it is likely, on further development, to combine a series of operations or even a whole production process. In fact, in recent years, with the development of automatic and semiautomatic mechanisms, machines are often specialized only in the sense that they concentrate on the production of a single commodity or class of commodities. Kimball ( 1947, pp. 461-462) describes, for example, an automatic plant for the production of automobile frames which is essentially one great machine automatically transforming steel plates into the finished product. With the development of modern high-speed electronic computers and data-processing machines, the modern assembly line can turn out a wide variety of different color combinations, body styles, accessory equipment, and types of engines in the automobiles it produces. As a result of automation the machine process has in a sense become less specialized.
While the division of labor, particularly in the earlier phases of the industrial revolution, contributed to mechanization, the latter has in more recent times come to determine in turn the pattern of the division of labor. On the assembly line, the specialization of labor conforms to the pattern of production laid out by the engineers. Many types of machine processes still require manual feeding, control, or regulation; and in these cases the division of labor essentially takes the form of specialization of workers in repetitive operations necessary because automation has not yet reached these processes. The division of labor in these cases is simply the labor counterpart of the specialization of machines. However, in wide ranges of modern industry, automation is releasing labor from the most monotonous tasks, substituting electronic controls for manual controls. The process is accompanied by the development of new varieties of specialization of labor necessary for the development and maintenance of automation systems.
Adam Smith’s important observation that the extent of the division of labor is limited by the size of the market ( 1950, book 1, chapter 3) is equally applicable to the specialization of machines. A large enterprise can fully employ more highly specialized machinery and labor and thus can reduce its cost per unit of output below that of its smaller competitors (Marshall  1961, vol. 1, pp. 285, 315).
Similarly, Chamberlin has ascribed the economies of scale of the individual plant or enterprise to “(1) increased specialization, made possible in general by the fact that the aggregate of resources is larger, and (2) qualitatively different and technologically more efficient units or factors, particularly machinery, made possible by a wise selection from among the greater range of technical possibilities opened up by the greater resources” ( 1957, pp. 175-176). A somewhat different way of viewing economies of scale (e.g., McLeod & Hahn 1949) attributes them to the presence of indivisibilities in the factors of production; as size of plant increases, a more nearly optimum proportion of the factors can be realized, with resulting decline in cost per unit. In a small plant a highly specialized machine cannot be fully utilized, and yet a different production technique that did not employ the specialized machine would be even less economical. Under these circumstances an increase in size of plant, with fuller utilization of specialized units, yields economies of scale even in the absence of either increased specialization or a change in technique.
At any given stage in the development of techniques, the extent to which it is profitable to carry specialization of labor and machines varies with the type of production process. For example, a large spinning firm does not exhibit a higher degree of specialization than one of 20,000 spindles (see Robinson  1959, pp. 17-19). In many industries large plants differ from small ones only in the number of identical machines employed. Safety-razor blades, for example, are made by a standard set of machines, each set contributing a relatively small proportion of the plant’s output; the technical economies of specialization of machines are attained equally by a small plant and by a large plant. On the other hand, in the case of such industries as farm machinery, automobiles, and typewriters, the output of a single plant of most efficient scale will account for 5 per cent or more of the total output of the industry [see Bain 1954; see also Economies of Scale].
Specialization of plants and firms . Full utilization of a plant’s most specialized machinery and labor is most likely to be achieved when the plant concentrates on the production of a single type of a commodity so that it may obtain the economies that go with long and uninterrupted runs. The result tends to be the specialization of plants and, to some extent, of firms. For example, a spinning mill may specialize on a narrow range of counts, or a plant producing electric motors may specialize on a single size of motor.
Although individual business enterprises may specialize to the same extent, there are important circumstances in modern developed economies that favor the multiplant, multiproduct firm: the desirability of spreading risks, the advantages of vertical and horizontal integration, and the economies of marketing, finance, and managerial organization (Robinson  1959, chapters 3-8).
As an industry grows, the increasing specialization of firms, the development of by-product industries, and the expansion of subsidiary industries that supply means of production are all sources of what Marshall called external economies ( 1961, vol. 1, book 4, chapters 9-11). More broadly viewed, the whole industrial structure of the economy changes in response to economic growth and technological change. New industries come into existence and old industries subdivide. The industrial operations of an economy are an interrelated whole whose pattern of specialization is constantly changing, constantly revealing a new industrial fabric as economic progress occurs. [See Young 1928; see also External Economies and Diseconomies.]
Regional and local specialization . Well before Torrens and Ricardo, the view was developed (e.g., by Gervaise in 1720) that a nation, by specializing in the production of one commodity and exporting it in exchange for commodities in the production of which other countries specialize, could acquire the imported commodities with a smaller amount of labor than it would take to produce them at home (Schumpeter 1954, pp. 373-376). Although this view might be liberally interpreted to imply an understanding of the principle of comparative advantage, Adam Smith’s illustrations ( 1950, vol. 1, pp. 422-423) suggest that he at least was thinking in terms of the absolute advantage (and, particularly, natural advantage) of one country in the production of a particular commodity. Somewhat later, in 1808, Torrens made it clear that a country’s specialization in the production of one commodity rather than another depends upon the existence of a comparative, not necessarily an absolute, advantage in the production of the first commodity as against the other (Schumpeter 1954, p. 607).
Regions, like nations, are differently endowed with resources (factors of production), and it follows that regional specialization, in accordance with the principle of comparative advantage, leads to increased efficiency in production. Regions differ in climate, qualities of soil, mineral resources, transportation facilities and their cost, quality and wage rates of different types of labor, and interest rates on borrowed capital. Some of these differences would not persist in the presence of perfect mobility of capital and labor; but interregional mobility of these factors, while greater than international mobility, is far from perfect.
Florence (1953, pp. 37-43) has measured the degree of regional localization for different industries and has shown that it varies greatly. Agriculture is moderately localized by climatic, soil, and transportation circumstances. Mining and quarrying necessarily are highly localized. Some industries have become localized by the necessity of having easy access to one or more of the essential raw materials (e.g., steel). Other industries are located close to the markets for their products and consequently are dispersed (e.g., baking). Some industries have become concentrated in particular regions without reference to either sources of raw materials or markets for products (e.g., cotton textiles); their location is to be explained by the availability of sources of labor or power, an advantageous situation with regard to transportation facilities, or even by historical accident. Still other industries are localized by their dependence upon other industries (e.g., textile machinery). [See Spatial Economics.]
Once an industry has become established in a region, there are substantial advantages in what Weber called agglomeration (1909, p. 20 in 1929 edition)—the concentration of related industries at a single point (usually a metropolitan area) within a region. Marshall ( 1961, vol. 1, book 4, chapter 10), who included these advantages among his external economies arising from the general development of an industry, stressed the importance of a locally available supply of trained labor with the special skills particularly required, and the existence of subsidiary and auxiliary industries. Others have pointed to the advantage offered by easily available services for replacement and repair of machinery; to the convenience to customers when the industry is concentrated in a single location (Weber 1909, pp. 129-130 in 1929 edition); to the availability of expert services (Florence 1953, p. 85); and to the possibility of a higher degree of specialization of plants when they are closely associated in a particular locality (ibid.; Stigler 1951, p. 192).
Exchange . For Adam Smith the specialization of labor is feasible only in an economy in which exchange of products between workers or firms is possible; it must be a market economy. In fact, Smith believed that the division of labor originated in a propensity in human nature “to truck, barter, and exchange one thing for another” ( 1950, vol. 1, p. 15). The inconvenience of barter results, in turn, in the invention of money, and thus in the emergence of a price system. In this way, “society itself grows to be what is properly a commercial society” (ibid., p. 24). Since the extent of the division of labor is limited by the extent of the market, economic progress requires the development of improved means of transportation and the expansion of trade from a local basis to a world basis (ibid., book 1, chapter 3).
Actually, trade and exchange preceded the appearance of the division of labor (Biicher 1893, p. 296 in 1901 edition). Exchange of surpluses among household producing-units in primitive communities is a common phenomenon, often unaccompanied by specialization of labor by households or even within the household. On the other hand, extensive division of labor within the household can develop without resulting in exchange (ibid., pp. 304-305). However, division of labor within the household is the beginning of the development of separate occupations; and the development of labor specialization in occupations is the essential basis for the development of trade. So Smith’s hypothetical anthropology was not too far from the truth.
For Smith, exchange performs the function of enabling the laborer to dispose of his surplus product and to obtain in turn an equivalent value of the surplus product of other laborers ( 1950, vol. 1, p. 17). There is no gain from trade; exchange simply makes possible the specialization of labor, which is the source of increased production. Similarly, foreign trade provides an outlet for a country’s surplus produce, which arises from specialization in the production of those commodities which it can produce more cheaply than other countries can and which it exchanges for the surplus products of other countries.
That exchange is not simply a device for disposing of surpluses but is mutually advantageous in a positive way is implicit in the principle of comparative advantage as applied to either international or interregional trade (see Ohlin 1933, chapter 2). If, for example, the endowment of factors in region A gives it a comparative advantage in the production and export of agricultural products, and that in region B gives it a comparative advantage in the production and export of manufactured products, the effect of interregional trade will be to improve the terms of trade of agricultural products for manufactured products in A and those of manufactured products for agricultural products in B. The real income of the factors of production will increase in both regions. [See International Trade, article on Theory.]
Similarly, the development of the marginal utility theory of value was accompanied by a recognition of the mutual gains from exchanges between individual buyers and sellers (e.g., Jevons 1871, pp. 153-158 in 1879 edition). Although the price of the commodity is equal to its marginal utility for both buyer and seller, the exchange results in an increase in total utility for each of them. Marshall ( 1961, vol. 1, pp. 124-137) analyzed the gains from trade by means of the concept of consumer’s surplus—the excess of the price which a consumer would be willing to pay for a unit of a commodity, rather than go without it, over the price that he actually does pay [see Consumer’S Surplus]. More recent analysis can demonstrate the gains from trade more effectively by means of indifference curve analysis. [See Utility.]
Bernard F. Haley
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