Archive for the ‘Wealth of Nations’ 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

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