Division of Labor

Perhaps Adam Smith's most famous dictum is that “the division of labour is limited by the extent of the market.” By allowing individuals to specialize in the production of some goods and trade them for different goods (including arts and sciences) produced by other individuals, the division of labor was, in Smith's eyes, the ultimate source of wealth and economic development. The bigger the market, the more numerous and varied the number of tasks and opportunities become.

For Smith, the benefits of the division of labor derive from three sources: (1) increased dexterity of a worker, (2) time saved from switching between tasks, and (3) increased likelihood of new inventions. The first two effects are today referred to as increasing returns. Unlike David Ricardo, Smith considered ...