Economic Growth and the Division of Labor

Tyler Broker, the Free Expression and Privacy Fellow at U. Arizona Law School (also my friend), has a very good article at Above the Law. There is much to like in Tyler’s article, but I do want to pick one important nit. Tyler writes:

Indeed, in near-Earth space one can easily visualize how the best aspects of capitalism will be utilized to lift humanity into a new age. Capitalism operates best when markets are allowed to continually grow and expand. This is in part why a capitalist system has been so successful (for some), here in the United States. This country began with 13 colonies and followed with continual territorial and population expansion for the next 200 and counting years. Of course, this expansion came at the great conquest and exploitation of human labor, including enslaving whole civilizations and generations of human beings. An unfathomable wrong yet to be fully acknowledged, appreciated in the scope of barbarity, or morally corrected.

Tyler is correct that markets are best when they can grow and expand. However, Tyler’s comment suggests this growth is in physical territory and labor. While those resources are important, they are not the only thing. Markets also expand by taking advantage of the division of labor and specialization. Early on in his famous book, Adam Smith shows how specializing allows a pin factory to become more productive. When people divide their labor, they can become more productive. This means they produce more with fewer (or the same number of) inputs.

However, the division of labor is limited by the extent of the market. On a deserted island, Robinson Crusoe cannot specialize. When Friday comes, he can. If more people can come to the island, Robinson can specialize more and more.

Expanding the market can mean, as Tyler discusses above, expanding land and labor. But it can also occur by trade. If the world were to discover an alien race beyond the stars and (assuming transaction costs overcome) began trading with them, that would expand our markets.

More land and labor can help markets flourish, but imperialism need not be an end-point for capitalism (I do not think Tyler is suggesting it is, but there are some out there who do argue imperialism is the only way to sustain capitalism). Rather, simply opening up trade, markets can expand, and prosperity can grow.