Adam Smith: Specialization of Labor Leads to More Wealth

This article is an excerpt from the Shortform book guide to "The Wealth of Nations" by Adam Smith. Shortform has the world's best summaries and analyses of books you should be reading.

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What is specialization of labor? What impact does it have on workers and on the economy as a whole?

According to Adam Smith, specialization of labor contributes to the wealth of a nation. In his seminal work, The Wealth of Nations, Smith explains three ways this happens. He also discusses how a market’s size affects the amount of specialization that can occur.

Continue reading to learn Smith’s views on labor specialization.

Adam Smith on Specialization of Labor

Specialization of labor is the practice of dividing one complicated task done by one worker into a series of smaller, simpler tasks done by multiple workers. For example, if you’re making bread without specializing, one worker will grow the wheat, grind it into flour, and then use it to make the loaf. With the specialization of labor, you’ll have a farmer who specializes in growing wheat, a miller who specializes in grinding flour, and a baker who specializes in making bread.

According to Adam Smith, specialization of labor allows for much greater productivity overall. The same number of workers will produce far more loaves of bread if they specialize than if each worker completes the entire job. Smith provides three reasons why specialization increases productivity.

The more a worker performs a task, the more skilled they will become at it. A highly skilled worker will complete the task even faster, allowing for more productivity overall.
A specialized worker saves time by not switching between tasks. Different stages of tasks may require the worker to use different tools or work in different locations. This means it takes time to switch from one task to another—time that could have been spent working.
A specialized worker will be more likely to come up with more efficient ways of completing a task. If someone spends all of their time concentrating on one task, they will understand the task better than anyone else. This will help them come up with new tools, methods, or machines that allow them to complete the task more efficiently.

(Shortform note: Historians and archeologists have supported Smith’s claims about specialization increasing productivity, finding that the specialization of labor played an important role in developing the earliest civilizations during the neolithic period. Once irrigation and the domestication of cereals created a surplus of food, workers formerly employed in food production could begin specializing in pottery, brick-making, metallurgy, textiles, baskets, and other niche occupations that were unsupportable in hunter-gatherer societies.)

Large Markets Enable Specialization

Smith explains that a worker’s ability to specialize is determined by the size of the market in which they participate. The larger the market, the more workers can specialize; the smaller the market, the less they can specialize. This is because a worker’s ability to specialize is dependent on the quantity of raw materials available for purchase, as well as the quantity of customers to whom they can sell their goods. The more customers willing to buy a particular good, the more time and effort a worker can afford to invest in creating that good without having to switch tasks and make something else. This allows them to specialize in making that good more efficiently.

For example, let’s say you make condiments and you want to specialize in mustard. Your ability to spend all day making jars of mustard is limited by the number of people in your town who want to buy them. Once you’ve sold all the jars of mustard you can, you’ll need to switch to something else, like mayonnaise or ketchup, or you’ll have piles of unsellable mustard. However, in a big enough town, you’re less likely to run out of people who buy mustard and you can specialize in making mustard all day, every day.

Smith suggests that this is why the most economically developed societies usually have access to ports, canals, and other trading routes. They develop more advanced economies because their workers participate in larger markets and can therefore afford to specialize more.

(Shortform note: In addition to higher degrees of specialization, economists have connected market size to increased rates of competition and innovation. Larger markets with more participants will require sellers to outcompete and keep up with their rivals. This not only leads to more innovation, but also to faster widespread adoption of new technologies such as steam engines or assembly lines because companies don’t want to fall behind.)

Adam Smith: Specialization of Labor Leads to More Wealth