The full title of Adam Smith’s major work is An Inquiry into the Nature and Causes of the Wealth of Nations (the “WoN”). Today we observe governments expressing airy aspirations to grow that wealth, but seemingly incapable of first inquiring into the nature and causes of it. There is far too much ‘leaping’ (to policy decisions) before ‘looking’ (inquiring).
Should there ever arise a political demand for such inquiry, Smith’s developed understanding of the issues — his ‘gestalt’– provides a highly fruitful starting point, and getting to grips with it is not a resource-intensive exercise. Foundational propositions come early in the WoN, as exemplified by the very first sentence of Chapter 1, Of the Division of Labour:
“The greatest ‘improvement’ in the productive powers of labour, and the greater part of the skill, dexterity and judgment with which it is any where [sic] directed, or applied, seem to have been the effects of the division of labour.”
So, let’s unpick that first sentence piece by piece, translating into current economic terminology.
First, for ‘improvement’ read ‘growth’ and for ‘productive powers of labour’ read ‘labour productivity’.
Second, the word ‘greatest’ reflects Smith’s judgment that he is identifying the most important driver/cause of such growth, whilst also recognising that there are other factors in play — factors that are considered later on in the book.
Third, the trinity of ‘skill, dexterity and judgment’ is a shorthand expression, quickly expanded later in Chapter 1 to include references to ingenuity and invention. Straight off the bat, the reader is asked to pay particular attention to attributes of the workforce. Today, we would refer to these attributes as ‘human capital’, capital being any currently held asset capable of contributing positively to the value of future production.
Fourth, Smith attributes the growth (‘improvement’) in human capital over time chiefly to the division of labour in the economy, teeing up the question of how it is that the division of labour promotes human capital formation.
The answer to this question is a simple one: focusing the application of physical and/or cognitive effort on a relatively specific task or set of tasks on a sustained basis serves to promote the accumulation of human capital via processes that might nowadays be described as ‘learning by doing’ or ‘learning from experience’. It is a dynamic evolutionary process driven by repetition of tasks and ‘error learning’. In relation to the physical dimension of dexterity, for example, think of how footballers or musicians hone their skills via constant practice and error-learning, then generalise.
Smith puts it this way:
“Men are much more likely to discover [our emphasis] easier and readier methods of attaining any object, when the whole attention of their minds [our emphasis] is directed towards that single object, than when it is dissipated among a great variety of things. But in consequence of the division of labour, the whole of every man’s attention comes naturally to be directed towards some one [sic] very simple object. It is naturally to be expected, therefore, that some one [sic] or other of those who are employed in each particular branch of labour should soon find out easier and readier methods of performing their own particular work, wherever the nature of it admits of such improvement”.
The linkages/connections between (a) effortful, sustained attention, (b) discovery and (c) productivity growth are very direct, and they lead to an envisioning of the mechanisms of the economic system which differs significantly from those of subsequent political economists such as Malthus, Ricardo, and Marx. The ‘gestalt’ does, however, resonate strongly with late 20th century and early 21st century developments in psychology, cognitive neuroscience, and brain science more generally. In a nutshell, it sees focused learning and the discoveries that flow ‘naturally’ from it as the main engines of productivity growth.
To this first insight is added (in Chapter 3 of the WoN) a reinforcing feedback loop: economic growth, by enriching the populace, gives rise to greater and more diverse demands, e.g. labourers can afford a seaside holiday, so railways get built and the “particular work” of the seaside landlady comes into being. The division of labour deepens, creating new opportunities for learning and discovery. The process of accumulating human capital is thereby sustained, on a continuing basis.
The resulting accumulation can be said to be ‘bottom up’ in the sense that opportunities for improvement are universal, across all people and all economic activities. Later in the WoN Smith names the society in which he lived (and in which we still live) as a ‘Commercial Society ‘: “Every man thus lives by exchanging [both buying and selling], …” He could also have said that, in such a society, every worker owns and controls a fraction of the national capital stock.
It is not to be inferred that Smith thought physical capital (machines, buildings and the like) was a negligible factor in determining the level of productivity and its growth. It’s rather that, like for the connections between work/experience, attention, learning and discovery, he sees entanglement (non-separability) between physical and human capital. Thus: “… every body must be sensible how much labour is facilitated and abridged by the application of proper machinery. It is unnecessary to give any example. I shall only observe, therefore, that the invention of all those machines by which labour is so much facilitated and abridged, seems to have been originally owing to the division of labour. … Many improvements have been made by the ingenuity of the makers of the machines, when to make them became the business of a peculiar trade.”
That is, he sees incremental physical capital (investment) as embodying the accumulated human capital available at the time of its construction. It is in this way (embodiment) that new investment makes its chief contribution to productivity growth. Nothing that was built was built without the effort, attention and discoveries of human minds.