Intro. 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.
Flip 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.
Barter 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.
Smith'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.]
Williamsburg: 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.
Impersonality 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.
One 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.
Turnpike 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.