1.1.5a Specialisation and the division of labour

The Division of Labour

1. Adam Smith showed the division of labour can sharply raise productivity, a founding insight of the whole subject.
2. Because specialists can no longer meet all their own needs, specialisation and exchange go hand in hand.

Productivity Gains

$$Labour\; productivity=\frac{Total\; output}{Number\; of\; workers}$$

1. Skill and practice build up as tasks are repeated.
   1. Workers get faster and better at a task they do all day.
2. Less time is lost switching between jobs.
   1. Staying on one task avoids the time cost of moving between different jobs.
3. Machinery is easier to use on narrow, repeated tasks.
   1. Simple, specialised tasks are easier to mechanise, raising output further.

Costs of Specialisation

1. Repetitive tasks can cause boredom and lower motivation, which may reduce quality.
2. Highly specialised workers face structural unemployment if demand for their skill disappears.
3. Over-dependence on narrow tasks makes firms vulnerable when one specialised worker or supplier fails.

Specialising to Trade

1. Specialisation forces exchange, because specialised producers can no longer meet all their own needs.
2. Trade raises total output, because each party concentrates on what it does relatively well.
   1. It also widens consumption and can cut unit costs through larger-scale production.
3. But over-dependence on trade leaves a country exposed if supply is disrupted.
   1. Transport and transaction costs, and lost self-sufficiency in essentials such as food or energy, can offset the gains.

Does specialisation always pay off?

1. It holds because, for firms, the productivity and cost gains are usually large, which is why the division of labour is so widespread.
2. But the gains depend on motivation, since a bored workforce can offset them with lower quality and higher staff turnover.
3. But the gains from trade are largest when parties differ in what they produce efficiently, and smaller when transport and transaction costs are high.
4. On balance, specialisation is powerful but works best alongside training, some job variety and a secure supply of essentials.

1.1.5b The functions of money

The Functions of Money

1. In a barter economy every trade needs a double coincidence of wants, which is slow and often impossible to arrange.
2. That bottleneck limits how far specialisation can go, since producers struggle to exchange what they make.
3. Money removes the bottleneck by acting as a widely accepted go-between, so any good can be bought or sold.

The Four Functions

1. Together these four functions are what turn an ordinary asset into money; failure on any one makes for weaker money.
2. The medium-of-exchange role is the most fundamental, since the other three all build on money being accepted in trade.

Money and the Economy

1. It makes exchange fast and low-cost, which supports deep specialisation.
2. It lets prices coordinate millions of decisions through the price mechanism.
3. It enables saving, borrowing and investment across time.

Do money's functions always hold?

1. It holds because, while money is trusted and stable, it performs all four functions and underpins specialisation, the price mechanism and saving.
2. But money works only if people trust it to hold its value.
3. But high inflation erodes the store-of-value function first, so people may turn to barter or a foreign currency, as in Zimbabwe.
4. On balance, money's functions depend on stability, which is why controlling inflation matters in the later macro themes.