Smith Did Not Write About 20th-century Capitalism

John Christy, Forbes international investment, poses, half-humorously, a conundrum: if specialisation is the engine of growth, as Adam Smith wrote in “Wealth of Nations”, how is that some large firms produce a wide range of goods and do not specialise in just a few?

A useful topic as an examination question in economics 101? Perhaps, even an Honour’s level question to give good students room to show their stuff?

John Christy writes:

“In Japan, however, it's still perfectly normal for big manufacturing companies to make just about everything under the sun. I'm not just talking about Toshiba, but also Hitachi, Matsushita Sanyo, Sharp, Kyocera …the list goes on. Walk into a big Japanese electronics store and you'll see what I mean: All of these companies make every kind of product you can imagine, from flat-panel televisions to toasters. Perhaps the Japanese translator of Adam Smith's Wealth of Nations forgot to include the chapter on specialization.”

From: Adviser Soapbox: Stepping Into Sanyo With Goldman; Forbes.com Home page for the world’s business leaders:

http://www.forbes.com/newsletter/2006/02/28/sanyo-goldman-japan-in_jc_0301soapbox_inl. html

Part of the answer lies in the fact that “Wealth of Nations” looks backwards to the pre-18th century and up to the century in which Smith wrote it (1763-76). He was not writing an economics Textbook, predicting the future into the 20th century. From the standing start of his appearance of the Fourth Age of Commerce, some centuries before the rise of Rome, he concluded that specialisation in the division of labour in a sequential production process and in separate inter-sector production processes, were the engines of growth of economies and for the primitive accumulation of capital stock which funded (from frugality not prodigality) the employment of labour to staff ever-finer divisions of labour that raised labour productivity.

Distribution to mass consumers, a feature of mid-20th century capitalist societies, of which Smith had no inkling in the 18th century, under global brand names, enables large-scale capital controllers to produce variety (using intense divisions of labour in high-quality production centres) on a scale not envisaged as part of the steady, frugal driven, small scale and primitive capital accumulations noted by Smith. Large firms like Toshiba, etc., operate on scales that cannot be confined to a single product in their sectors. Their outsourced suppliers also operate on scales that lead them to specialise in whole sectors, no part of which can economically market to the scales justified by their capital base. They have grown by horizontal, as well as vertical, integration across a business sector for as long as they remain efficient. This happens in Japan (above) and the USA (GE, GM, Bechtel). It also should be noted that these enormous firms source millions of components and services to tens of thousands specialist firms below them.

It is not the case, though I like the imagery, that a translator in Japan ‘forgot’ Smith’s opening chapters on the division of labour and specialisation – the Americans read the English original; it is the case that the world moved on a long way from Smith’s 20-20 vision of the millennia before the 18th century and remind us that he did not write for the 21st century and the age of capitalism.