Russ Roberts

Mike Munger on the Division of Labor

EconTalk Episode with Mike Munger
Hosted by Russ Roberts
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Michael MungerMike Munger of Duke University and EconTalk host Russ Roberts talk about specialization, the role of technology in aiding specialization and how the division of labor creates wealth.

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Readings and Links related to this podcast

Podcast Readings
HIDE READINGS
  • Mike Munger's Home page
  • "I'll Stick With These: Some Sharp Observations on the Division of Labor", by Mike Munger on Econlib. Article related to this podcast.
  • An Inquiry Into the Nature and Causes of the Wealth of Nations, by Adam Smith
  • "What Is Seen and What Is Not Seen", by Frédéric Bastiat
  • "I, Pencil", by Leonard Read
  • "The Division of Labor is Limited by the Extent of the Market", by George Stigler. Journal of Political Economy, January 1, 1951. Online at the Heartland Instute.
  • "Globalization as Framed by the Two Logics of Trade,", by James Buchanan's and Yong Yoon. The Independent Review, v. VI, n.3, Winter 2002, pp. 399-405.
  • More podcasts with Mike Munger
  • Division of Labor, in Lalor's Cyclopaedia of Political Science
  • The Division of Labor. Blog entry by Russ Roberts at Cafe Hayek. More about this podcast.
  • Listening Guide for this podcast. Discussion questions for high school and up.
  • Highlights

    Time
    Podcast Highlights
    HIDE HIGHLIGHTS
    0:38Intro. Adam Smith, "Division of labor is limited by the extent of the market." Competition drives people to produce things more cheaply. By dividing process into steps, people become good at it. So good, in fact, that people are led to trade the excess, achieving the gains from trade. What Smith meant, though, was not just barter, but the size of the trading zone for the entire process, inputs and outputs. Whole infrastructure involved in planning to use "the market". Farmer example: even a simple imaginary farmer has to be able to do a lot if we try to imagine creating goods for the market all alone--e.g., to able to make a needle to sew the sacks in which to put the corn. Takes a long time if you only make one needle every two years. Many skills are not intrinsic, but are learned by doing the work. Task-switching takes time.
    7:49Flip side: Variety in tasks--task-switching--is also pleasant. Charlie Chaplin, Modern Times, tightening same bolt over and over again is a nightmare. Virtues to specialization, but too much can get dreary. Leisure is also good. Smith was talking about the wealth of nations. We wrestle with whether wealth-creation is better than leisure, or how much is better. Aristotle: two categories of goods: value in use and value in exchange. Giving presents, vacuum cleaner vs. creating something yourself. How much something costs is one measure of value, but there is also a sense of how much you subjectively value it. Shoe example: Ask Lou Dobbs: Did you make your own shoes? Making shoes is hard! Who should make your shoes? If you made your own shoes and are really good at it, probably you should become a shoe-maker, in which case you'll specialize and make more than you need. Impersonal exchange results.
    12:26Barter vs. self-sufficiency. Even without changing amount of output, simple swaps make us better off than self-sufficiency. But the next level is specialization. By completely specializing in what you are relatively good at, you can do better still. David Ricardo. Resources and training also contribute to Ricardian choice to specialize. Smith's story differs slightly (Buchanan and Yoon paper): opportunity to specialize is greater when the market is larger. For example, you might go from self-sufficiency to noticing that by specializing you can create something specifically for the outside market. The market keeps drawing you further into acquiring talents. Dynamic vs. static. What you are good at isn't something you can measure standing alone--the market draws us to learn what our best skills are.
    22:00Smith's contribution: There is more scope to develop your skills if there are more people to sell to, and enough increase in wealth to warrant the specialization. Shoe making can divide into sewing and heel-hammering maybe because one person is better at each. But that's a Ricardian (comparative advantage) version, leaping first to looking at people's skills. [Smith's point was that even if every worker has identical skills, specialization can lead to greater productivity. An example Buchanan has used in a lecture is the case of hunters. When you have one hunter, he has to do every task for himself. When you have 100, all equally skilled, one hunter can open a service making breakfasts and lunches to go. All the hunters can be equally skilled at hunting and running a restaurant but when there are a lot of hunters, it becomes profitable to run a take-out food service that can't be profitable when there are only a few. So 100 hunters are more than 100 times more productive than one hunter because of the economies of scale in making the breakfast and lunches, freeing up more time for the hunters to be productive in the field. Four times as much resources can mean more than four times as much output even without Ricardian reasons for specialization. Of course, there might be one hunter that is articularly good at running a restaurant or particularly bad at hunting so that it makes sense for that one hunter to be the restauranteur. That's Ricardian comparative advantage.]
    27:54Williamsburg: stylized version of Colonial village life in 1774. Quite a lot of specialization but people are still really poor. Why? Russ asked the shoemaker: How many shoes can you make in a year? A: He can't supply enough shoes to fulfill the demand for the actors in Williamsburg today. Specialization itself isn't enough to create enough wealth. Need more capital. But how do you go from that world to our world? More tools. Need a shoe factory. Unemployment is caused by increases in productivity. Result is you get to have more, and more variety. Costs measured in terms of how long it takes to buy a pair of boots fall dramatically. Today it only takes you a few hours to work enough to buy a pair of boots. And, you know nothing about making boots. Our knowledge has become specialized, but they are easier to get. Paradox.
    35:55Impersonality resulting from specialization. At Wal-mart you can buy the boots with barely any interaction with a human being; and they were even made by someone from another country. The personal touch, emotional connection was lost, but gained very inexpensive shoes. Unplanned, but it is still a choice people make. Kevin Kelly podcast--It's easy to go back into the past you can choose to live in 19th-century America by living among the Amish, in the Amazon, or in a communal environment like a Kibbutz, but most people don't choose this. Should we force people to live communally, or only trade with those they know, or only those they agree with politically? If buyer has an obligation to make sure he only buys from good people, doesn't the seller also have that obligation? "Maybe I wouldn't make the cut." Maybe, when I walk into the store the seller can say "You're a lousy Dad!" or "You're Jewish". Plus, just the time it takes to discover whether the other party is good or not is costly. You'd hardly trade with anyone, and society would poorer.
    47:47One of Smith's insights is that by trading with strangers, that attitude produces wealth. It allows specialization that would not be worth it if you are an artisan. The personal touch raises costs. Hardware store example: sometimes you want information and advice, and are willing to pay more for it. Other times you just want the item without details. Information service. Trade-off. Big box phenomenon--Home Depot, Lowe's vs. the local hardware store, Barnes and Noble vs. the corner bookstore. Next step: consider Amazon.com: Advice function itself is so impersonal it's robotic; and surprisingly, it's helpful! ITunes. The quality of the advice from the robot's experience with so many people can be even more helpful than the personal touch. Smith's 1776 pin factory example, Leonard Read's "I, Pencil". Smith, empiricist, noticed that the number of steps depended on size of market. Munger's empirical study: By 1820 there were already fewer pin factories than in Smith's day; by 1960 fewer still, yet total number of pins produced was enormously more. Employment in pin-making was much lower. Speed of technological improvements does affect unemployment in particular industries, but over longer time, people spend more on other things and create new employment in other areas. George Stigler. What nation lost the most manufacturing jobs between 1990 and 2000? China! Russ, the stickler: it is hard to measure, but the Chinese transformation has caused a lot of job change. Bastiat, Seen and Unseen. The jobs weren't lost--you see the jobs that aren't there any more, but they are connected to the jobs that are created elsewhere.
    56:55Turnpike tolls example. EasyPass is a much shorter delay than handing a quarter to a person. Connecticut study: a third of the toll revenue was going to pay the tollbooth operators, so they removed the toll booths. In every business there is a relentless attempt to strip labor out of the process. Sometimes sad and hard on the people involved, but the world created by specialization is wealthier in terms of choices and improved quality of life.

    Comments and Sharing



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    COMMENTS (8 to date)
    SCott Clark writes:

    Why do the podcasts only last about one hour? Is that a self-imposed constraint? On all the episodes in recent memory, it sounds like you still have plenty more to cover and plenty more worth covering. I know I have more time to listen. Maybe this is a tribute to your hosting abilities, and maybe it is a tribute to your guest selection, but it sounds pretty effortless, it sounds like, especially in certain areas, you could keep going for another half hour or more, without it being too taxing. I guess I am trying to say I desire more infotainment, so I am gonna ask you to work a little harder for the same amount of compensation I give you now.

    Tim writes:

    There is an article here about the "100 mile suit". Every part came from within a hundred miles of home."The suit took a team of 20 artisans several months to produce -- 500 man-hours of work in total..."

    Tim writes:

    The 100 mile suit can be seen here.

    All it needs now is a sticker on the back saying "I protested against economic globalization and all I got for it was this lousy suit."

    Mike Munger writes:

    Wow, Tim! Nicely done. Thanks!

    As for Scott C: I felt the same way, that there was more to say. But in MY case, I can definitely say this is due to Russ's hosting abilities. He has a childlike enthusiasm for ideas, and that's what makes it all work.

    Of course, having Milton Friedman and other first rate guests doesn't hurt. But in MY case: Definitely the host.

    Dianne writes:

    I had a couple of comments/queries in relation to the Stigler article.

    (1) I agree with Stigler that industries may not become monopolistic (at least in the early developmental stages of an industry) because of certain functions that may be subject to diminishing returns. However, I would have thought that product differentiation would also play a role in limiting the extent of monopolisation. One firm will not dominate because some customers prefer the product of another firm. The two Cola companies are a good example I think.

    (2) In regard to Stigler's discussion on vertical integration, I'm not entirely satisfied by his conclusion that, as an industry declines, surviving firms must re-appopriate functions. I don't diagree with this, but I think that anti-competitive behaviour may also play a role in encouraging firms to vertically integrate. For example, a mining operation may own the only rail haulage line between the mining region and the sea port to limit competition in the sale of the mined product. The obvious extension of this is that the anti-competitive behaviour reduces the efficiency with which the mined product can be produced.

    Any comments on either of these comments?

    Mike Munger writes:

    To Dianne:

    Stigler's article is about central tendency, and contains a bit of wishful thinking, I believe. An interesting update, and some empirical work, can be found in Levy's paper:

    Levy, David. “Testing Stigler’s Interpretation of ‘The Division of Labor is Limited by the Extent of the Market.” Journal of Industrial Economics. 32 (1984): 377-389.

    I am skeptical of the idea that anti-competitive behavior can be manifested through anything other than simple horizontal market power. If a firm has market power at some stage, then it can price that product accordingly. But the idea that market power metastasizes to other stages of production because of control of one stage is dicey. Profits cannot be greater for a railroad (for example) if it offers discounts to a farm owned by the railroad.

    But then, I am a Stiglerian on the questions of monopoly power, including tied goods and vertical arrangements, so this may be a matter of dogma.

    Kevin writes:

    I really enjoyed your humor Dr. Munger! These podcasts are extremely helpful to me as an undergraduate college student. Thanks.

    John Henry writes:

    Another great podcast! I think that an hour is about right. I'd like to see an hour every day and would gladly pay twice as much as I do now. But I will settle for an hour a week and look forward to every Monday.

    Now to substance:

    Smith and most economists as well as you miss the cost of changeover as a cost reduced by division and specialization of labor.

    If I am a pin artisan making the whole pin I need to cut the wire, then put down the cutter and pick up a hammer to form the head. That step of putting down one tool and picking up another is between each process step. It might also mean getting up from one workstation and moving to another betwen some steps.

    There is probably also time lost re-establishing the rhythm each time they move to a new task.

    This does not seem like much but given enough occurrences, it adds up.

    Where the worker who is specialized might spend 90% of their time producing at normal efficiency, the artisan might spend as little as 30-50%.

    That assumes that the artisan is equally compentent at each task as the specialized laborer. As I think you noted, that is not likely to be the case.

    As you might guess from my e-mail this "changeover" from one product/process to another is my speciality. I help manufacturers get from product A to B more quickly.

    My site www.changeover.com had more info

    John Henry

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