Money, Banks and Finance in Economic Thought

Adam Smith’s demographic and geographic theory of the bounds on the division of labour: why the division of labour is REALLY limited by the extent of the market

Lange Jerome Lange, Université Paris 1 - Panthéon-Sorbonne

According to Adam Smith, a nation’s per capita wealth depends principally on the extent of its market (which limits both division of labour and capital accumulation). The concept of the market, indeed, may well be the single most important concept of the Wealth of Nations. But what does Smith exactly mean by “the market”, and what then defines its extent? Modern-day economics is a poor guide to address this question. There is indeed a general deficiency of definition of “the market” in present-day economics (Hodgson 2008 ; Satz 2015). The concept’s meaning has also changed, losing its primary sense as place and physical means of exchange to designate principally an institution. Probably the most eminent treatment of Smith’s concept of the “extent of the market” is the one by Allyn Young (1928). Young’s 1928 paper, by offering an operational definition of this concept, filled the definitional void and was consequentially adopted by economists, including by historians of economic thought, as a useful analytic tool. But the verification of its applicability to Smith’s work was neglected. The fact that transport costs are an important part of Smith’s conception of the market is widely acknowledged (Groenewegen 1977; Myint 1977; West 1978). But how geographical factors more widely enter the Smithian definition of markets is rarely enunciated clearly in the secondary literature. The relationship with population, moreover, is almost universally disregarded. Smith saw the extent of the market as embodying the possible extent of trade. This is related to, but distinct from, both aggregate demand and “the economy” as a whole. The possible extent of trade, in turn, is determined primarily by population and space, while wealth and technology enter only later, and indirectly, into the definition of the extent of the market. The extension of the market by the growth of population is related to Smith’s description of how a society evolves through the different stages of economic progress, on which the relation between size of population and extent of the market sheds further light. The growth of population thereby acts on the size of the market through two compounding effects: the multiplication of possible trade relations (by the multiplication of potential trade partners) and the facilitation of trade relations by the diminution of the mean distance between trading partners (an effect of the population concentration accompanying population growth). In this, too, we can find Smith’s theory of urbanisation fuelled by the social (and geographical) division of labour.

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Keywords: Adam Smith, extent of the market, division of labour, population, four stages theory, urbanisation