The division of labour Essay Example

Additionally, if Neo and Angie, two producers with self-interest, want to have both products, they should focus on their proficient tasks and trade with each other.

Trading contributes to increased production and satisfaction of needs, without altering the total output. In addition, it fosters knowledge of others' demands and informs decisions for increased production, thereby achieving allocative efficiency for small businesses. Similarly, the resource efficiency of an economic system is impacted by the division of labor. The comparison of central-planned economic systems and free-market systems can aptly illustrate this principle.

The primary consideration is the allocative efficiency of an economic system, which refers to its ability to produce the desired goods and services in appropriate quantities. In a central-command economic system, the government makes all allocative decisions and creates large bureaucracies to oversee production. However, this approach is difficult to implement effectively and doesn't allow for free trading, which hinders the effectiveness of the price mechanism.

Government officials arbitrarily set prices of products, resulting in a lack of information regarding people's needs and the scarcity of resources. As a result, decisions are often made to achieve specific macroeconomic goals or political reasons, without considering consumer preferences and resource availability. This neglect of actual market demand causes the division of labor to no longer follow individual comparative advantage, but rather the desires of the government. A good example of this can be seen in China's economy before its 1979 reform, which lasted for about 30 years and resulted in numerous economic inefficiencies.

Chairman Mao stated during his speech on the third 5-year plan of the economy that, at the time, the division of labor was mainly focused on

maximizing steel production. He noted that their planning method was derived from the Soviet Union, where the steel output is set first and then used to calculate necessary resources like coal, electricity, and transportation. Lastly, labor and welfare system costs are determined based on the steel output. Mao emphasized that the output of steel determined everything else, meaning that if steel production decreased, everything else would decrease correspondingly. The Chinese Government wanted to swiftly develop the industry during this period, so the division of labor was centered on the requirements of the steel-making industry rather than following comparative advantage.

Allocative efficiency can be hindered if not given full scope to the "Invisible Hand" by Adam Smith. The free-market economic system has the advantage of earning allocative efficiency more easily due to specialization based on comparative advantage, which is the basis for economic exchange (Frank ; Bernanke, 2001, P68). The price mechanism that leads to allocative efficiency will only work on the basis of free economic exchange (trade). Therefore, the free-market system that follows the division of labor based on comparative advantage has an advantage in achieving allocative efficiency. Productive efficiency is another important factor in the economy's efficiency, as demonstrated by Neo and Angie's success in producing more beefsteaks and salads. Similarly, an economic system aims to increase its economic output.

It has been demonstrated that a key factor in increasing output is the division of labor based on comparative advantage. An example of this efficiency in production through specialization can be seen in the economic cooperation between Hong Kong and the Pearl River Delta (PRD). Prior to the 1980s, Hong Kong's economy relied heavily on

secondary industries such as toy and garment manufacturing. Due to advanced manufacturing technology and a skilled workforce, Hong Kong experienced high productivity in its manufacturing industry. In contrast, the former centrally-planned economy of mainland China only offered lower cost labor in the PRD region.

Despite its existing absolute advantage and high relocating costs, Hong Kong moved much of its manufacturing industry into the PRD once the economic system changed to a free-market. This allowed Hong Kong to focus on developing its tertiary industry, including financial and service sectors. While Hong Kong had the potential to excel in both secondary and tertiary industries like Neo, Robert Frank explains that comparative advantage at a national level can stem from differences in resources, society, or culture. Hong Kong's gift was in its tertiary industry due to its abundance of professionals, convertible currency, and advanced institutions. Even though the PRD was just starting out in a free-market economy with low productivity levels for both secondary and tertiary industries, it still had a comparative advantage in manufacturing without Hong Kong's unique gifts.

The decision made 20 years ago regarding HK-PRD's economy has been proven to be correct and far-sighted. Hong Kong, through the use of regional specialisation with comparative advantage, has become the twelfth largest banking centre, eighth largest stock market, and seventh largest financial centre in the world (Source: Financial Services and the Treasury Hong Kong, 2003). Meanwhile, PRD which had a per capita GDP of only $103 in 1979 as a rural area has now become the wealthiest part of mainland China with a per capita GDP of $2935.

(Source: Guangdong Statistical Year Book, 1998). According to the Hong Kong

TDC (2003), the total output of the Hong Kong-PRD region in 2001 was around US$ 265 billion, which was not only greater than any other region in China but also equal to Switzerland's GDP. These findings highlight the effectiveness of utilizing comparative advantage to increase economic productivity and efficiency.

Although not as apparent as in resource efficiency, it is important to consider the impact of a central-command system on equity. In theory, such a system can enhance equity due to its controllable structure. However, in practice, equity is often lower due to issues such as officials abusing their power and ignoring individuals' comparative advantages.

The production of goods, such as luxuries, may be artificially encouraged to benefit the hierarchy and ultimately result in economic inequality. It can be concluded that the division of labor impacts both allocative and productive efficiency. Economic systems will only increase resource efficiency when division of labor aligns with comparative advantage. Specialization under comparative advantage does not necessarily lead to a decrease in economic equity, whereas other forms of specialization may. Thus, the division of labor with comparative advantage determines the effectiveness of an economic system.