Archive for the ‘Adam Smith’ Category

Mankind’s journey from hunter-gatherers to coins as the instrument for doing commerce

October 24, 2007

Below is a diagram I created showing the evolution of mankind from hunter-gatherers to the development of coins as the instrument for doing commerce. I developed this diagram by combining information from these two fabulous books:

  1. Wealth of Nations by Adam Smith
  2. Guns, Germs, and Steel by Jared Diamond

I find it so fascinating to think about a how one thing led to another, which led to another, and so forth.

Hunter-gatherers to coins

What economic incentive is there to form decentralized organizations?

August 20, 2007

Adam Smith wrote a seminal book in 1776 called The Wealth of Nations. It is a classic, laying the foundations for most of today’s economic ideas. Smith’s ideas are deeply ingrained into western societies.

Division of labor is central to Smith’s thesis. Division of labor leads to high productivity. By focusing one’s efforts on a single task, one develops a talent for that task and become very productive. The greater the productivity, the greater one’s wealth.

Division of labor is consistent with one’s self-interest.

Conversely, when a person attempts to perform many tasks he masters none, is inefficient, has low productivity, and is unable to attain wealth. This is not consistent with one’s self-interest.

Division of labor results in a society that does lots of trading (if a person produces only one thing, he must trade for the other things he desires or needs). This creates a highly interconnected, interdependent society.

Today there is much excitement about decentralization. In a decentralized organization there is no one in charge, everyone is independent.

“Units of a decentralized organization are by definition completely autonomous … In decentralized organizations, anyone can do anything … Any and every activity is within anyone’s job description.” [1]

In a decentralized organization each person is not focused on a single task; rather, each person is a jack-of-all-trades. Smith would argue that this leads to low productivity, which leads to low wealth, which is not consistent with one’s self-interest.

So I wonder: what economic incentive is there to form decentralized organizations?

[1] The Starfish and the Spider by Ori Brafman and Rod A. Beckstrom

Great Book = Interesting Information + Arguments

July 29, 2007

What is the longest argument you’ve ever made? What is the longest argument you’ve ever read?

By an “argument” I mean: collect together some information nuggets, show how they are related, and then draw a logical conclusion from them.

Most of the (engineering) books I read are oriented toward providing information and techniques, not toward forming arguments.

Recently, however, I have been reading two outstanding books:

— Wealth of Nations by Adam Smith

— Introduction to Mathematics by Alfred Whitehead

And through careful reading I have become aware of the arguments being made in these books.  I say “careful reading” because their arguments aren’t immediately obvious, at least not to me.

After reading a page I pause and reflect on the ideas presented.  Slowly I am seeing how the arguments are being constructed.

In Smith’s book the arguments are well contained; at the end of each chapter he ties together the various parts of the argument.  Whitehead’s arguments are more complex and subtle; they can span multiple chapters.

Whitehead’s book is on mathematics.  It occurred to me, “Why are there arguments in a book on mathematics?  Shouldn’t it just contain information and techniques, like my engineering books?”  I’ve been puzzling over why I like Whitehead’s book so very much, particularly since I am not especially interested in mathematics. Now I think I know why: because it contains both information and arguments.

The realization that I have come to is that I like books which contain both interesting information as well as arguments.

Whitehead was both a mathematician and a philosopher.  Smith was both an economist and a philosopher.

A philosopher is a master of arguments.

I think great books are those that contain interesting information and are also philosophical (i.e. contain arguments).

In our sound bite society we don’t see many long, elaborate, elegant arguments.  That’s a shame.

Enhancing Productivity by a Division of Labor

July 17, 2007

Maximum productivity is achieved when a task is divided up into sub-tasks and individuals specialize in a sub-task.

Consider the task of making a pin.  This task can be broken up into these 10 sub-tasks:

1. One person draws out the wire.

2. Another straightens it.

3. A third cuts it.

4. A fourth points it.

5. A fifth grinds it at the top for receiving the head.

6., 7., 8. Making the head requires two or three operations.

9. Putting on the head is a peculiar business.

10. To whiten the pins is another.

A person performing all these sub-tasks could make perhaps 20 pins in a day.  Thus 10 persons produce 200 pins in a day.

When each person performs only one sub-task, the 10 persons working together can collectively produce 48,000 pins in a day.  By dividing up the labor there is a 250-fold increase in productivity.

— Extracted from Wealth of Nations by Adam Smith