Specialisation and the Division of Labour
The importance of specialisation (also known as the division of labour) was explained by Adam Smith, one of the early writers on economics in _'’The Wealth of Nations’, _in 1776. Smith showed how the production of simple manufactured items, such as pins, could be greatly increased if the production process was divided up into a number of separate, simple and repetitive tasks, each worker should concentrate on one task rather than doing them all.
In the modern economy, a car factory is a good example of the division of labour. Cars are put together on an assembly line, which may be more than a mile in length, with workers stationed at many points along it. The car starts off as just a body shell, and components are added as the vehicle is moved along the line. Each worker performs one task, such as fitting the wheels or installing the rear lights. At the end of the line a completed car emerges.
Watch this short video clip about the world’s first car assembly line – the Model T Ford:
You will see that the division of labour enables great increases in productivity (output per unit of factor of production), for both labour and capital. Workers and machines can be given specialised tasks, at which they become very efficient:
- Workers only have to be trained to do one task, to which they are best suited, saving time and money
- Machines can be kept constantly in use, as they perform the same task repeatedly on each car
- Workers are more productive as time is not lost moving between different tasks
The division of labour is fundamental to a modern economy, making it possible to produce very large quantities of goods and services at prices many consumers can afford.
The principle of specialisation applies at a number of levels:
- Workers tend to have just one job, such as retail worker, teacher, plumber etc.
- Within a country there is regional specialisation; i.e. in the UK the car industry is concentrated in the West Midlands, and financial services in London
- Internationally, there is specialisation. Some countries for instance produce mainly agricultural products, others concentrate more on manufactured goods, and some, including the U.K. Are mainly providers of services.
This specialisation is what creates the need to trade. At an individual level, workers exchange the rewards from their labour (wages), for the goods and services they consume. At an international level countries buy and sell (import and export) to and from each other. Some countries specialise more in primary products __(agriculture, forestry, fishing, minerals). Others concentrate more on __secondary sector __production, where raw materials from the primary sector are transformed into manufactured goods. The richest countries, including the U.K. now mainly produce services in the __tertiary sector, which includes healthcare, IT, banking, legal services and so on.
The Functions of Money
There are four vital functions that money performs in a modern economy:
- A medium of exchange - It avoids the problem of barter and the double coincidence of wants
- A means of deferred payment - Provided people have confidence that money will retain its value, people will be willing to lend money to borrowers in return for earning interest. Investment by firms, and buying houses on a mortgage depend on this
- A measure of value - Because things have a money price, we can establish the relative value of different items. For instance, a ring price at £100 is worth 10 DVDs costing £10 each. Also it enables us to compare prices for the same item sold by different sellers, helping us to get the best value
- __A store of value __-We could keep all our wealth in real assets, such as houses, jewellery, vintage cars or rare breeds of animals. But there future value is uncertain AND may require maintenance costs.
NB: Rapid inflation may prevent money performing any of the above functions. If it loses value significantly, people will not be willing accept it in payment, either now or in the future. Rapid inflation also means frequent price changes, so it will be hard to compare the value of items. Also, people won’t want to keep much wealth in money if it is losing value.
Money and the Division of Labour
As we have seen, specialisation creates the need to trade (exchange one type of good or service for another). In a very simple economy, with limited specialisation (eg. hunting and gathering societies) it may be possible to directly exchange one thing for another. This system is called barter.
But this won’t work in a modern economy, where specialisation is much more complicated. I can’t easily, for instance directly exchange 10 minutes of my teaching time for a loaf of bread. This involves finding someone who both wants to sell bread and buy some economics tuition. This is called the double coincidence of wants.
This is why we have money, which is defined as anything that is generally accepted as a means of payment for a debt or to acquire goods and services. Historically, precious metals, melted down and made into coins have fulfilled this role. They have the crucial characteristic of liquidity, which means that people can use them to pay for things very easily, quickly and without other costs. By contrast, a house is not liquid, because although I could use it to buy lots of things, it would take time to sell it and there would be a lot of costs to estate agents and solicitors.
In the modern economy, coins are a tiny part of the monetary system, together with bank notes they make up _cash, ___which is the most liquid kind of money.
But most money these days is the content of our bank current accounts. We can quickly and easily use this to pay for things, either by withdrawing it in cash or using our debit card. But note that money we keep in a current account usually earns little or no interest.
We can also use other assets to pay for things, but generally they are less liquid. Bank deposit accounts, which earn higher rates of interest, for instance may require the account holder to give the bank advance notice of withdrawals and there may be a penalty in lost interest. Deposit accounts are generally used for saving rather than to pay for current spending.