The Division of Labour and Economic Development: An Evolutionary ApproachKeiichiro Suenaga
Josai University

I. Introduction
This paper considers the relationship between the division of labour and economic
development from the viewpoint of the theory of economic development or thedevelopment economics. Although the relationship between the division of labour andeconomic development had not been sufficiently discussed since Smith (1776), the rolesof the division of labour have been discussed again in recent years while the era of ’thevisible hand’ (Chandler, 1977) changed to the era of ‘the vanishing hand’ (Langlois,2003) (e.g. Jones and Kierzkowski, 1997; Baldwin and Clark, 2000). Although thedivision of labour has various effects on the economic development of the leader
countries and the catch-up process of follower countries, these effects have notsystematically been considered in the theory of economic development or thedevelopment economics (see Suenaga, 2012a). In this paper, the relationship between
the division of labour and economic development is theoretically considered.
In this paper, we adopt the evolutionary approach as contrasted with the orthodox(neoclassical) economics. Although the effects of the division of labour are indicated ina firm’s cost curve in orthodox microeconomics, the orthodox macroeconomics such as
the theory of economic growth have not sufficiently considered the effects of thedivision of labour (e.g. Solow, 1956; Uzawa, 1964; Romer, 1986; 1990). Moreover, theboundaries of firms have been argued in the approach of transaction cost or the theoryof industrial organization. However, their approaches cannot sufficiently elucidate thereason why the degree of the division of labour between firms or industries haschanged in the dynamic process of economic development (e.g. Milgrom and Roberts,
1992). The economic development is not an equilibrium process but an evolutionary
process with new combinations as Schumpeter (1934) discusses. The dynamic

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approach of evolutionary economics is important in the consideration of industrial
development.
This paper is greatly influenced by many studies such as Langlois (2003) or Langlois
and Robertson (1995). They discuss the boundaries of firms in the long run from theviewpoints of dynamic transaction cost and dynamic capability. However, this paper
considers the division of labour from a broader view, and discusses not only theboundaries of firms but also the boundaries of industries. Langlois (2003) analyzes theboundaries of firms while presenting the hypothesis of ‘the vanishing hand’ as
contrasted with ‘the invisible hand’ of Smith and ‘the visible hand’ of Chandler.
Although our view does not contradict what they state, the decrease in the inter-firmdivision of labour in the era of ‘the visible hand’ is not emphasized because we analyze
from a broader view. In the era of ‘the visible hand’, the intra-firm division of labour by
the ‘management’, which Chandler describes, only increases, instead of the inter-firmdivision of labour. The intra- and inter-firm division of labour is just a phenomenon ofvarious divisions of labour in the whole economy.
In addition, the discussion of the division of labour of Smith and the new
combinations of Schumpeter also build the base of a theoretical framework. Although
their views have not been emphasized in orthodox economics, they are of greatsignificance in the consideration of economic development. In particular, the division oflabour and new combinations of knowledge have very important roles in economic
development, as Smith and Schumpeter mention. We also have the aim of constructing
an evolutionary theory of economic development which systematically incorporate thediscussion about the division of labour and new combination.
The concepts of the division of labour are extremely important for planningcorporate strategy and governmental policy. Although these concepts have not beenemphasized in orthodox economics, it is most important for firms and governments tosystematically incorporate the concept of the division of labour. We expect that theanalysis in this paper will also make a contribution to practical matters.

2II. What is the division of labour?
What is the division of labour? The description of Smith (1776) is still relevant. In
this section, we consider the division of labour based on his description, andsystematize the concepts of the division of labour.

1. Adam Smith’s description of the division of labour
In this subsection, Smith (1776), who analysed in earnest the division of labour for
the first time, is taken up. As we know, he considered the division of labour in detailfrom Chapter 1 to 3 of ‘The Wealth of Nations’. Although one may remember the case ofa pin factory, he only uses this for ease of explanation. He discussed not only thedivision of labour in a factory, but also that in the whole society. Although it issomewhat long, we refer to his description (p.13).
The woollen coat, for example, which covers the day-labourer, as coarse and rough as it may
appear, is the produce of the joint labour of a great multitude of workmen. The shepherd, thesorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, thefuller, the dresser, with many others, must all join their different arts in order to complete eventhis homely production. How many merchants and carriers, besides, must have been employedin transporting the materials from some of those workmen to others who often live in a very
distant part of the country! how much commerce and navigation in particular, how many
ship-builders, sailors, sail-makers, rope-makers, must have been employed in order to bring
together the different drugs made use of by the dyer, which often come from the remotest cornersof the world! What a variety of labour too is necessary in order to produce the tools of themeanest of those workmen! To say nothing of such complicated machines as the ship of the sailor,
the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour
is requisite in order to form that very simple machine, the shears with which the shepherd clips
the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, theburner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer,
the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join
their different arts in order to produce them.

Although this description describes how many people participate in the production
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processes of final goods, in his next example, he illustrated how many goods wereconsumed by a consumer (pp.13-14).
Were we to examine, in the same manner, all the different parts of his dress and household
furniture, the coarse linen shirt which he wears next his skin, the shoes which cover his feet, thebed which he lies on, and all the different parts which compose it, the kitchen-grate at which heprepares his victuals, the coals which he makes use of for that purpose, dug from the bowels of
the earth, and brought to him perhaps by a long sea and a long land carriage, all the otherutensils of his kitchen, all the furniture of his table, the knives and forks, the earthen or pewter
plates upon which he serves up and divides his victuals, the different hands employed in
preparing his beer, the glass window which lets in the heat and the light, and keeps out the wind
and the rain…

Although the division of labour in the production process of goods was at the centreof Smith’s descriptions, we should also discuss the division of labour as related to thefinal consumption goods.

2. The construction of the division of labour
Industry A
Firm A

Production
process

Industry B

Industry C
Industry D
Firm B

Consumer
Figure 1 Various production processes and the division of labour in economic activities

Although the division of labour means the separation of economic activities, can wesystematically classify the concept of the division of labour? Figure 1 simply describes
4the production processes of various final consumption goods.1 There are numerous
final goods in a real economy, and these goods are supplied to consumers through a few
thousand, or a few billion (or a few trillion) processes. We can imagine the processes in
the pin factory described by Smith, and the processes from processing silicon raw
materials to producing the final electronic product. When considered in detail, there
are innumerable production processes necessary before final goods are delivered to
final consumers. These production processes intertwine with each other, and constitutethe whole economy. Some processes are often carried out by one firm, and a series ofprocesses or similar goods are often classified in an industry.
In order to realize these complicated economic activities simply, we use the conceptsof verticality and horizontality. These terms are ambiguously used even in academia.
In economics, the vertical relations often mean the relationship between the sectors
supplying inputs and the sectors using the inputs, and the horizontal relations often
mean the relationship between firms which are competing in a market. Althoughvertical relations are not necessarily the relationship between firms, horizontal
relations just mean the relationship between firms. Like Milgrom and Roberts (1992,
p.569), our use of the term ‘horizontal’ conforms to its use in business writing, where it
refers to activities that are not vertically related. Therefore, we use the term ‘vertical’ if
the processes of production have a vertical relationship, and the term ‘horizontal’ if therelationship is not vertical. For example, if we use the concepts of verticality andhorizontality to realize Smith’s descriptions about the division of labour, the verticalspecialization is carried out in the production processes of the woollen coat andhorizontal specialization is carried out in the production of many goods which a
shepherd uses in his life.2
In addition, we should use concepts such as intra- and inter-firm and industry to
Although there is a problem about what to do with capital goods in the short run, we
assume the long run where the volume of all capital goods become variable.
2 The term, ‘vertical international specialization’, is used to describe the division oflabour between developed and developing countries. However, in the case wheredeveloped country manufactures industrial products and the developing country
produces crops (and, if the crops of the developing countries are not materials forindustrial products of the developed countries), the division of labour is not vertical but
horizontal in this paper.
1

5systematically classify the discussions about the division of labour (Table 1). The
example of Smith’s pin factory was just the intra-firm (intra-workshop) division oflabour. Although the division of labour between sharpening pins and putting them into
the paper is intra-firm vertical specialization, the horizontal specialization is carriedout if the firm produces not only pins but also screws. The inter-firm division of labour
between the spinning and weaving processes is called inter-firm and intra-industry
vertical specialization, and that between the commercial and passenger car is calledinter-firm and intra-industry horizontal specialization. Moreover, the division of labour
between an industry which manufactures machine tools, and an industry which
produces airplanes by using the machine tools, is inter-industry vertical specialization,and that between ship and car may be called inter-industry horizontal specialization.3

Table 1 Classification and examples of the division of labour
Vertical specialization

Horizontal specialization

Intra-firm

Sharpening and packing pins

Pins and screws

Inter-firm and intra-industry

Spinning and weaving

Commercial and passenger cars

Inter-industry

Machine tools and airplane

Ships and cars

Although the concept of the division of labour was very important for Smith, theimportance of the concept has declined since his time. It may be because an era of ‘thevisible hand’ had long continued. However, a number of people have recently paid
attention to the concept of the division of labour such as fragmentation, out-sourcing,
off-shoring, unbundling, spin-offs, module-clusters, open innovation, open source,
intra-industry trade, vertical disintegration, selection and concentration, commodity
chains, and OEM (Original Equipment Manufacturing).4 In the following sections,
3 As a matter of course, because the word, ‘industry’, is vague, the classification
changes by the definition of the ‘industry’. Moreover, although we can classify thedivision of labour by geographical factors such as region and country, for simplicity,
this paper does not emphasize those factors.
4 Moreover, the topics, such as comparative advantage, dual sector model, north-south
trade, forward and backward linkage, and the flying-geese theory, also have an
intimate relationship with the division of labour.

6while reviewing various studies about the division of labour, we consider the
relationship between the division of labour and economic development.

III. The static theory of the division of labour
1. Make or buy? 5
Next, while paying attention to the inter-firm (or inter-industry) division of labour
we consider in what kind of situation the division of labour happens. This is also the
problem of ‘make or buy’. In this section, first, we examine whether a firm produces
inputs by itself or procures them from other firms in a situation in which the industrial
structure does not change.
Whether a firm produces inputs by itself or procures them from other firms basicallydepends on the cost. That is, if producing by itself is cheaper, it will produce, and if
production by other firms is cheaper, it will entrust this to other firms. Throughself-production it is also possible to use economies of scale and scope, reducetransaction costs, and expand market control. Conversely, motivation to work
efficiently weakens and management costs rise. Milgrom and Roberts (1992, p. 556)
describe the conditions under which a firm should outsource to other firms. These
conditions include the following:
the use of standard inputs, the presence of several competing suppliers, economies of scale in the
supply firms that are too large to be duplicated by the buyer, economies of scope that would force
the vertically integrated firm into unrelated businesses, and the absence of specific investmentson the part of either the buyer or the seller.

However, in the process of economic development, the proportion of procurementfrom other firms has expanded, though there have been many situations different fromthe situation that Milgrom and Roberts described.6 Their view is also useful to somedegree when considering the process of economic development. However, discussing along-term process of economic development centring on cost is futile, and the reason

The discussion of this subsection is referred at a case study of semiconductor
industry (Suenaga,2007).
6 For example, see Suenaga (2007).
5

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why the degree of the division of labour has changed is hardly discussed.

2. The division of labour on the orthodox economics
Next, we consider the division of labour in areas of orthodox economics such as thetheory of economic growth or the theory of firms. The theory of economic growth iscalled the static theory here because it is based on the mechanism of equilibrium andassumes that the industrial structure does not change. The economic growth theory of
Solow (1956) regards the accumulation of capital stock per capita as an importantfactor in economic growth, and technological advances are considered as manna fromheaven. Although the vertical specialization such as the production sector of capital
goods and consumer goods is modelled on the two sectors model of economic growth of
Uzawa (1964), the economic growth is not given by the division of labour.
Romer (1986; 1990) endogenises technological advances into the theory of economic
growth, and the vertical specialization between the R&D sector and the production
section is incorporated into the model. However, the factor of economic growth is the
R&D based on monopolistic profits, and the rate of economic growth is decided at the
beginning (although the uncertainty is often incorporated into the model). In theendogenous growth theory, the horizontal specialization such as variety of goods
incorporated into the model, and the increase of the variety of goods often means
economic growth. However, the increase of variety is also attributed to the R&D basedon monopolistic profits. The increase of productivity by the division of labour, or theevolutionary process by the division of labour and new combinations is not sufficiently
discussed in those models. Although Yang (2003, ch.14) sets a model of economic
growth through learning by doing based on division of labour, the relationship between
the division of labour and economic development is not considered.
On the contrary, the effects of the division of labour have been considered in
microeconomics. As we know, the cost curve of firms in the short run becomes aninverted S type by the effects of the division of labour. This reflects the analysis ofSmith. However, the effects are only static in the model, and the dynamic effects suchas learning-by-doing or invention of machine by the division of labour are not8incorporated into the model. If the dynamic effects are considered, the cost curve shifts
downwards, the production volume enlarges, and the division of labour is more
pronounced. 7 However, these dynamic effects are not generally considered in
microeconomics.
On the other hand, while trade volume has increased in recent years, the interest in
the division of labour has been increasing. For example, in the theory of fragmentation(e.g. Jones and Kierzkowski, 1990), the inter-firm vertical specialization is consideredby incorporating the segmentation of the production process and introducing theconcept of ‘service link cost’.
However, the dynamic process such as the relationship between the division oflabour and economic growth has not been emphasized in the theory of economic growth
in macroeconomics and the theory of firms in microeconomics. In next section, we refer
to some studies which elucidate the relationship between the division of labour andeconomic development, and consider the dynamic theory of the division of labour andeconomic development.

IV. The dynamic theory of the division of labour
This section refers to some studies which analyse the relationship between thedivision of labour and economic development, and considers the dynamic theory ofdivision of labour assuming a change in the industrial structure. First, the effects ofthe division of labour, which Smith points out, are discussed, and the views of Smithand Schumpeter are compared. Secondly, the creation of knowledge as the essence ofinnovation is explored from the viewpoint of the division of labour. Thirdly, whilereferring to the study of Stigler (1951), the relationship between the industrial life
cycle and the division of labour is discussed. Fourthly, we consider the research of
Baldwin and Clark (2000) on the computer industry and discuss modulation andindustrial development. Finally, while paying attention to ‘the vanishing hand’ ofLanglois (2003), the relationship between the division of labour and the development of

7

See Young (1991) about learning-by-doing.
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institutions is discussed.8

1. Smith’s division of labour vs. Schumpeter’s new combination
Smith (1776, p.9) points out the following three factors as the effects of the divisionof labour: 1) the increase in productivity, 2) saving time, and 3) the invention ofmachines. Although his discussion concerns the division of labour in a workshop, thedivision of labour between factories or industries also promotes the increase of
productivity and the invention of machines.9 Although the division of labour is limitedby the extent of the market, as Smith points out, the extent of the market develops
with the increase of productivity by the division of labour. As a matter of course,
however, the extent of the market is enlarged by external factors such as the discoveryof new markets and the invention of new forms of transportation (and communication)
methods.10 The mechanism of growth of productivity by the division of labour is called‘the Smithian growth’ in this paper.11 Moreover, the increase of productivity by thedivision of labour enlarges the extent of the market, and it promotes the division oflabour again: that is, there is a cumulative causation among the extent of division oflabour, the increase of productivity, and the extent of the market (Figure 2).12
MarketDivision

Productivityof labour
Figure 2 Smithian growth and cumulative causation

Although the studies of Stigler (1951), Baldwin and Clark (2000), and Langlois(2003) are referred at a case study of semiconductor industry (Suenaga, 2007), thispaper examines the division of labour and economic development from a broader view.
9 However, when the division of labour is carried out in distinct places, the effects ofsaving time vanish. On the other hand, time is saved by the invention of newtransportation machines and the development of communication technology.
10 If these inventions are triggered by the division of labour, they are endogenous
factors.
11 The definition in this paper may be different from that of Parker (1984) and Mokyr(1990).
12 See also Young (1928).
810

In contrast, Schumpeter (1934, p.66) insists that there are five cases of new
combinations that are factors of economic development: production of new types ofgoods, or change of properties of the existing goods; introduction of new methods ofproduction that may be based on new scientific discoveries; opening of new markets;
use of new sources of raw materials and intermediate goods; new organization of
production. It is very interesting that their ideas are in opposition at first glance: ‘thedivision of labour’, which Smith emphasizes, and ‘new combinations’, which
Schumpeter regards as a factor in economic development. Simply speaking is the factorof economic development a ‘dividing’ or ‘combining’ process? Schumpeter emphasizes
the importance of economic development through creative destruction rather thaneconomic growth such as the increase of productivity. Therefore, the invention ofmachines, which Smith points out, is most important in Schumpeter’s economic
development. As Nelson and Winter (1982, p.130) states that ‘innovation in theeconomic system – and indeed the creation of any sort of novelty in art, science, or
practical life – consists to a substantial extent of a recombination of conceptual andphysical materials that were previously in existence’, the invention of machines isalmost brought about by the new combination of existing materials. In that case, afield of new combinations is built by the division of labour, a few innovators make a
new combination, and economic development may be realized.13 Therefore, we canthink that the views of Smith and Schumpeter are not contradictory but
complementary. In this paper, their views are called the ‘Smithian = Schumpeteriandevelopment’ (Figure 3): the division of labour promotes the possibility of new
combinations, the realization of new combinations enlarges the extent of the market,
and there is a cumulative causation among the division of labour, the realization of
new combinations, and the extent of the market.

As a matter of course, this process does not automatically arise. Although new
combinations like this are combinations of existing knowledge, new technologicalparadigms, which have great potential for developing the economy, often arise by the
combination of scientific and technological knowledge. See Suenaga (2012b; 2015),
about these combinations.

1311MarketDivisionNewof labour

combination

Figure 3 Smithian = Schumpeterian development and cumulative causation

2. The division of labour and new combinations of knowledge
Although we discussed the process by which the division of labour promotes
economic growth by the increment of productivity and the inventions of new machines,
how does innovation or the invention of new machines come about? It is a new
combination as Schumpeter says, and a combination of existing knowledge in mostcases. The division of labour plays an important role in the emergence of new
combinations. Let us refer to the superior insights of Smith (1776, p.12) again.
Many improvements have been made by the ingenuity of the makers of the machines, when to
make them became the business of a peculiar trade; and some by that of those who are called
philosophers or men of speculation, whose trade it is not to do any thing, but to observe every
thing; and who, upon that account, are often capable of combining together the powers of themost distant and dissimilar objects. In the progress of society, philosophy or speculation becomes,
like every other employment, the principal or sole trade and occupation of a particular class of
citizens. Like every other employment too, it is subdivided into a great number of different
branches, each of which affords occupation to a peculiar tribe or class of philosophers; and thissubdivision of employment in philosophy, as well as in every other business, improves dexterity,and saves time. Each individual becomes more expert in his own peculiar branch, more work isdone upon the whole, and the quantity of science is considerably increased by it.

The specialization in particular processes such as a new combination of knowledge ismade possible by the division of labour, and the possibility of a new combination isborn (or promoted). Sometimes the combination of knowledge is realized by the
combination of some forms of technological knowledge and sometimes by the
combination of scientific and technological knowledge (Yamaguchi, 2006). Although
there are various patterns of combination between scientific and technological12knowledge, new technological paradigms and industries may be born if the relevantscientific knowledge, the base of these combinations, has great economic possibilities.14
That is, the divisions of labour and new combinations of knowledge become significant
factors in economic development.
However, while the social stock of knowledge enlarges with economic growth, therealm in which each activity carries out the creation of knowledge is subdivided by thedivision of labour. Although the division of labour in the creation of knowledge makes
efficient creation possible, new combinations which straddle between realms may behampered.15 Furthermore, as Chesbrough (2003) points out, the era is changing froman era of ‘closed innovation’ in which research and development take place within acompany, to an era of ‘open innovation’ in which there is also collaboration with
universities and other companies. Large central laboratories, which used to play asignificant role in the basic research, have been reduced, and the division of labour
between research and development is carried out by some firms, or by business firms
and academic institutions. In recent years, although many researchers have paid
attention to institutions such as the collaborative consortium among industry,
academia, and government, how scientific and technological knowledge are boundtogether is a crucial problem while the activity of knowledge creation such as advancesin scientific and technological knowledge has been divided.

3. Industrial life cycle and vertical specialization
The research of Stigler (1951) is taken up in this subsection, and the relationshipbetween the industrial life cycle and vertical specialization is considered. 16 He
described the relationship between the developmental stage of an industry and theIn Suenaga (2012b; 2015), the patterns of combination are classified into fourmodels. In addition, while paying attention to the hierarchy of scientific knowledge
which is the foundation of technological paradigms, the emergence and hierarchy oftechnological paradigms is discussed.
15 However, when confronted with the difficulty (e.g. deficit or recession), newcombinations which straddle between fields may occur. See also Freeman and Perez(1988).
16 Although Stigler (1951) uses the term ‘vertical disintegration’, it is a synonym for‘vertical specialization’ used in this paper.
14

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tendency toward vertical specialization of that industry. Generally, vertical integration
is predominant in an early stage of an industry, and vertical specialization advances
when it enters a stage of growth. The tendency toward vertical integration is brought
about again when the industry enters a stage of decline. When an industry has
developed, the production processes which a firm has vertically integrated are carriedout by many firms, and a few firms, which develop their own significant processes, may
gain large profits.
According to Stigler, a new industry is often outside the norm for an existing
economic system and the needed raw materials are often uncommon, so a firm in the
new industry has no choice other than to choose self-production. Moreover, special
manufacturing equipment might be necessary, along with its design and production.
Moreover, the necessity to look for skilled workers who are well-versed in special tasks
might arise. It is often necessary to solve technical problems when a product is being
used and to persuade users to switch to the new product from older ones. However, it isalso difficult to find agencies to take charge of such persuasion work.
As this new industry reaches a steady state and its prospects become clear, otherfirms enter with their specific businesses. Various companies individually focus theirbusiness practices, and the vertical specialization of the industry advances. For
example, some firms specialize in the production of special raw materials andmanufacturing equipment, other firms specialize in marketing and agency, and otherfirms specialize in worker training.
Thereafter, when this industry declines, companies that have played asupplementary role will begin to decline. When independent firms go under, the firmsthat remain will have to carry out the business.
Stigler takes up the case of the textile machine industry as an example, anddiscusses the relationship between industrial development and vertical specialization.
The textile machine industry was born as a part of the textile industry: the textile
factories had their own machine sector because they needed to manufacture and repair
their own machines. After that, the industry was divided into many departments suchas power-driven machines, machine tools, factory construction, and distribution, and14

vertical specialization developed. While the market for cotton goods declined after the
1920s, the firms which constructed the machines went on to manufacture newmachines such as other industrial machines and refrigerators.

4. Modulation and industrial development
In this subsection, we discuss the relationship between modulation and industrial
development, based on a study of Baldwin and Clark (2000). According to them (p. 5),
there are two turning points in the process by which an artefact evolves: (1) the point
at which an artefact can no longer be made by a single person; and (2) the point at
which an artefact can no longer be comprehended by a single person. Crossing into thefirst region requires a division of labour; crossing into the second requires a division of
the knowledge and effort that go into creating a design. Although the division isrequired when the system becomes complicated, the design rules such as thearchitecture and interface of the artefact should be clarified to allow this division tohappen smoothly.
For example, in the case of a complicated system such as the computer, detailed
rules are required for the design. However, in the early stage of development of thecomputer industry, the design rules were not clarified and the modulation had not yet
evolved. The first type of computer to appear as a true module type computer was
IBM’s system/360, launched in 1964. Before then, computer products wereincompatible with each other. If customers wanted to change the systems they had,they could not help but completely rewrite the application software and buy new
peripherals. To maintain compatibility between products, IBM adopted the module
design, and the series was a great success in the computer market.
It was the quality of the architecture and the establishment of the design rules thatmade it important to work in this mode of modulation. Because the parameters had
been clarified enough, the developer of each module was free to make an effort toimprove the functioning of that module. There is also the effect of the intra-firmdivision of labour: there is an intimate relationship between the division of labour andinnovation.
15

However, firms that manufactured modules compatible with IBM products appeared,
and they made the products highly competitive by specializing in specific areas. The
industry was changed from a substantial monopoly by IBM to a huge module cluster.
As printers, terminals, memory, software, and CPUs came to be produced by special
firms, the position of IBM in the computer industry decreased.
That is, when the system becomes complicated with the development of the product(or industry), the incentives for adopting modulation increase. Although the intra-firmdivision of labour would be promoted if the modulation succeeded, the inter-firmdivision of labour might be brought about because some firms begin production of
specific modules. In addition, there are also cases where firms of follower countries
begin production by utilizing their comparative advantages such as low wages.

5. The development of the market and the division of labour
In this subsection, the relationship between the development of markets andinstitutions and the division of labour is discussed, based on the theory of Langlois(2003). He presented the hypothesis of ‘the vanishing hand’ as opposed to the
hypotheses of ‘the invisible hand’ (Smith, 1976) and ‘the visible hand’ (Chandler, 1977).
According to Langlois, Smith thought that the division of labour was advanced by theinvisible hand of the market as the market expanded, though Chandler thought thatthe visible hand took the place of the invisible hand. However, Langlois pointed outthat the view of Chandler was only valid for a specific historical environment.
Moreover, he insisted that the era of ‘the invisible hand’ had changed to the era of ‘thevisible hand’ by about 1880, and had become the era of ‘the vanishing hand’, that is theera of the division of labour, by about 1990.
‘The vanishing hand’ hypothesis of Langlois is as follows. As the population and theirincomes increase and the barriers to exchange decrease, the division of labour that
Smith indicated progresses. Each role becomes more specialized, and coordination
through the market increases. However, the speed of change is variable for thetechnology, organizations, and institutions that form the basis of this process. The‘management revolution’ that Chandler described is a result of this imbalance. That is,16although technology with high productivity makes for the necessity of newcoordination, the imbalance increases when the development of the market andinstitutions that fill such a necessity is delayed. This imbalance causes the‘management revolution’ that Chandler described. However, as the market expands
and the institutions that support exchange develop, centralized management of theprocess of production decreases gradually, and vertical specialization advances again.
Although Langlois puts forward the hypothesis of ‘the vanishing hand’ because he isinterested in firm boundaries, this paper pays attention to the development of thedivision of labour through the enlargement of the market rather than focusing onwhether the division of labour is intra-firm or inter-firm. As the market expands, thedivision of labour in a firm develops if it is difficult to divide the tasks between firms,
and does not develop if this is not difficult. We can also think that, in the era of ‘thevisible hand’, the division of labour of intra-firm instead of inter-firm has justdeveloped.

V. Conclusions
In this paper, we considered what is the division of labour and the factors and effectsof the division of labour. Although the divisions of labour are, as shown in Figure 1.1,classified into items such as vertical and horizontal specialization, or the intra-firm
and inter-firm division of labour, the factors and effects of the division of labour are notsimple in the dynamic processes that drive economic and industrial development.
Although the division of labour is limited by the extent of the market, as Smith (1776)
states, the degree of the division of labour may change according to the stage ofindustrial development, as Stigler (1951) points out. Moreover, when the technology
becomes complicated and modulation evolves the state of the division of labour changes,
as Baldwin and Clark (2000) describe. Furthermore, the degree of the division oflabour is affected by the development of market and institution, as Langlois (2003)
depicts. Although the division of labour gives rise to improvements of a specific process
and to economic growth, as Smith or Baldwin and Clark illustrate, it may cause thecreative destruction noted by Schumpeter (1934). In particular, the divisions of labour
17and new combinations of knowledge play an important role in economic development.
Although the relationship between the division of labour and economic development is
not simple, it is no doubt obvious that the division of labour affects economic
development greatly.
However, it is not important in orthodox theory. In the process of economic
development, the proportion of procurement from other firms has expanded, though
there have been many situations different from the situation that Milgrom andRoberts (1992) described. Their view is also useful to some degree when considering
the process of economic development. However, discussing a long-term process of
economic development centring on cost is futile, and the reason why the degree of thedivision of labour has changed is hardly discussed. In addition, the dynamic process
such as the relationship between the division of labour and economic growth has notbeen emphasized in the theory of economic growth in macroeconomics and the theoryof firms in microeconomics.
As we discussed, it is required for properly capturing the structural change of thedivision of labour and analyzing the effects to industrial structure and corporate
strategy. Although the firms and countries, which could not cope with the structuralchanges, decline, the analytical framework have not been sufficiently supplied inorthodox economics. We expect that the analysis in this paper will be systematicallyincorporated in the theory of economic development and the discussions about
governmental role and corporate strategy.

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