1. The basic economic problem illustrates the difficulty caused by the fact that economic goods are limited and subject to resource constraints but wants are unlimited. A choice therefore must be made, which gives rise to opportunity cost.
Specialisation
seeks to lower costs and thereby improve productivity by increasing the
quantity and quality of output from firms. It does this by concentrating
individuals or economic enterprises (or occasionally whole economies) on
particular parts of the production or supply chain. This is often accompanied
by the division of labour, in which individual
workers or small teams of workers focus on particular aspects of the production
process for a good or service.
If
correctly carried out, specialisation increases output and efficiency, leading
to gains in terms of welfare and
pareto efficiency for societies (shown by the outward movement of a production
possibility curve.) It can also lead to lower costs, and possibly to production
at lowest average cost (productive efficiency) and at a point where marginal
cost is equal to price (allocative efficiency.) This would mean that a society
was in effect operating at peak material performance, though since both
productive and allocative efficiency only occur in perfect competition, it
implies an unrealistic level of normal rather than abnormal profit everywhere.
Firms like to lower costs but not revenues.
Specialisation
might therefore help solve the basic economic problem by increasing output via
higher productivity. It could also lead to innovation and dynamic efficiency,
and the allocation of producer profits into research and development, that
would open up new resources to the use of society, just as the energy
revolution in coal led to the utilisation of oil,
and the oil economy opened the way to renewable and nuclear technologies which
had not previously been possible.
By
increasing output, specialisation would improve consumer choice, and create a
bigger market. An economy could therefore expand, as producers discovered
economies of scale and competed
to maintain them, and consumers discovered greater purchasing power.
The
division of labour, however, would be more problematic in its social effects.
This is because it depends either on utilising labour to produce more quickly,
or on associating workers with specific forms of capital to enhance their
performance but remove their agency.
Concentrating workers on particular tasks could be boring, repetitive, and a
disincentive for workers to stay with companies.
Constant
repetition of activity after training would also have a tendency to increase the
elasticity of supply of workers, leading to lower wages, and could lead to
greater external costs in terms of mental health. By encouraging employers to
develop a pool of labour to perform relatively easy tasks, and creating rewards
for companies rather than the workers, employers might be tempted to pay
workers at average cost but to gain marginally. The natural effect of this will
be to encourage disincentivised workers to join unions or to engage in
industrial sabotage, should workers become aware of the exploitation of their
labour value and be able to unionise.
The
opportunity cost of labour is capital, but the choice is not a stark one.
Workers and machines can work together in different stages of the production
process and machines can improve the performance of workers, as can forms of
flexible working. If the combined effect of using more machines, and paying
workers less, is lower incomes, then societies will suffer from the
consequences of an increase of asset values and capital returns for the rich,
and the fall of purchasing power of the poor. Structural unemployment will also
tend to rise, as will ‘part time unemployment’ which is a term not just for the
recovery of time, but also in many cases for falls in living standards.
The
existence of large numbers of poorly paid people who cannot afford the goods
produced at low unit cost by their economy could mean that societies either
become trapped in a dependence on exports (as in the tourism industry) to bring
in money as they cannot sell normal goods domestically, or a dependence on
credit. Credit is subject to periodic boom and bust cycles which will endanger
long-term growth.
Hotelling’s
law applied to companies. If firms have discovered ways to lower costs but
cannot create or maintain barriers to other companies, their methods will be
copied. This will then lead to the pursuit of marginal revenue and greater and
greater standardisation, a lower quality of good or service, more waste as
product obsolescence increases (though this might cause a recycling industry to
develop) and, ultimately, pressure on the production possibility frontier to
shrink as resources are pressurised.
Should production be globalised, there is of course
also the possibility that exploitation increases, as in the development of
modern slavery, and some of the practices of global companies which depend on
totalitarian regimes to produce products in great number via what is in effect
prison or semi-enslaved labour.
On
the other hand, given regulation and the general increase in potential which
specialisation brings, it is more likely that economic development results in
creative destruction, innovation, and productive crises which create
technological and social development. This could even be true of the unionisation
of workers in the face of the division of labour, since trade union movements
have been responsible for most of the legislative and corporate regulation
which improved human life in the twentieth and twenty first century.
Specialisation and the division of
labour, overall and over time, therefore, have helped greatly in addressing the
central economic problem.
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