Specialisation, the division of labour and money

Why splitting production into tasks raises productivity, its costs, how specialisation leads to trade, and the functions of money.

Adam Smith’s pin factory.

In The Wealth of Nations (1776), Adam Smith described a small pin factory. A single worker making whole pins alone, he wrote, could certainly not make 20 a day. Ten workers who split the job into about 18 separate operations made more than 48,000 a day between them. Today’s car factories, call centres and supermarket supply chains work on the same principle.

Why does splitting up a job make people so much more productive?

Source: Adam Smith, The Wealth of Nations (1776), Book I, Chapter 1.

Specialisation and the division of labour.

Specialisation is when an individual, firm, region or country concentrates on producing a limited range of goods or tasks.

The division of labour is specialisation within a firm: production is split into separate tasks, each done by a different worker.

Productivity is output per worker per period of time. Specialisation raises productivity, so more can be produced from the same resources: the PPF shifts outwards.

Why we need money.

If people specialise, they must trade to get everything else they need. Without money, trade means barter, which needs a double coincidence of wants: the chair maker must find a baker who wants a chair. Money solves this. Its functions:

1. Medium of exchange: accepted in payment for goods and services.
2. Unit of account: a common measure of value, so prices can be compared.
3. Store of value: it keeps its value over time, so it can be saved (though inflation weakens this).
4. Standard of deferred payment: debts can be agreed now and paid later.

Think first

Four people make chairs.

Either each makes whole chairs from start to finish, or each does one job: cutting, shaping, joining or finishing.

Which way is likely to make more chairs in a day?

Splitting production into separate tasks, the division of labour, usually raises output a lot: each worker gets faster at their task, no time is lost switching jobs, and specialist tools can be used. Adam Smith described this in a pin factory in 1776.

Step by step

1. Four workers each making whole chairs produce 8 a day between them: 2 each.

2. With each worker doing one task, the same 4 workers make 20 a day. Productivity rises from 2 to 5 chairs per worker per day.

   Check: With the division of labour, the same 4 workers make 20 chairs a day. What is the output per worker?

   20 ÷ 4 = 5 chairs per worker per day, up from 2.

3. Why? Workers get faster with practice at one task. No time is lost moving between jobs and tools. Specialist machines can be used for each step. And workers can be matched to the tasks they are best at.

4. There are costs. The work becomes repetitive, so motivation and quality can fall. Workers with narrow skills may struggle to find new jobs if their task is automated. And production depends on every step: if one stage stops, the whole line stops.

   Check: Which is a disadvantage of the division of labour for workers?

   Doing the same task all day can cause boredom, mistakes and staff turnover.

5. Specialisation also happens between regions and countries: each concentrates on what it does best and trades for the rest, which is why trade raises living standards.

A common mistake

The hours worked are the same. Output rose because productivity, output per worker per hour, rose: each worker specialised in one task.

Exam question

Explain how the division of labour can increase productivity, and one disadvantage.

Model answer

The division of labour is when production is split into separate tasks, each carried out by a different worker.

It raises productivity, output per worker, for several reasons. By repeating one task, workers become quicker and more skilled at it. Time is not lost moving between different jobs and tools, and specialist tools and machinery can be used for each stage. Workers can also be given the tasks they are best suited to. As a result, the same workers can produce far more: in Adam Smith’s pin factory, ten workers splitting the job made tens of thousands of pins a day.

However, doing the same task all day can be boring, which can lower motivation and lead to mistakes and higher staff turnover. Workers with narrow skills may also find it hard to move to new jobs if their task is automated.