Division of Labor and Market Size

I remember when I first read Smith’s account of the size of markets and how it relates to the cost of transportation. Zzzzzzzz

Yet, every time I revisit that section, it becomes more interesting. For instance, Jared Diamond in his book Guns, Germs, and Steel attributes a great importance to the size of a population. If you look at it, though, he never really defines what a relevant population is, except to say that populations are historically defined by serious natural borders like mountains, deserts, and oceans. That is, the boundaries of a population are where transportation costs become too high. Diamond’s account of population fundamentally depends upon the Smithian analysis of the size of the market.

I have also recently wondered why businesses do not attain some size, or market share, that is in reasonable equilibrium and stop there. Why always talk of growth? Then it hit me. The greater the extent of the market – the greater the extent of the division of labor. Smith’s argument applies to individual businesses as well. A small hospital serving a small town will have a few generalist physicians. A large hospital serving a large population will have those plus many specialists the small town/market could not support. Grow the market and you can increase the division of labor within the firm to, hopefully, yield even greater returns.

Just a thought.


About William Kline

William Kline is an associate professor in the department of Business Administration at the University of Illinois, Springfield.
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