120 • SECTIONAL ADDRESSES. 



only, were the generally commonplace things which they said about 

 ' improvements ' related to anything which could properly be called a 

 doctrine of increasing returns. They added nothing to Adam Smith's 

 famous theorem that the division of labour depends upon the extent of 

 the market. That theorem, I have always thought, is one of the most 

 illuminating and fruitful generalisations which can be found anywhere in 

 the whole literature of economics. In fact, as I am bound to confess, I 

 am taking it as the text of this paper, in much the way that some minor 

 composer borrows a theme from one of the masters and adds certain 

 developments or variations of his own. To-day, of course, we mean by 

 the division of labour something much broader in scope than that splitting 

 up of occupations and development of specialised crafts which Adam 

 Smith mostly had in mind. No one, so far as I know, has tried to enumerate 

 all of the different aspects of the division of labour, and I do not propose 

 to undertake that task. I shall deal with two related aspects only : the 

 growth of indirect or roundabout methods of production and the division 

 of labour among industries. 



It appears to be generally agreed that Adam Smith, when he suggested 

 that the division of labour leads to inventions because workmen engaged 

 in specialised routine operations come to see better ways of accomplishing 

 the same results, missed the main point. The important thing, of course, 

 is that with the division of labour a group of complex processes is trans- 

 formed into a succession of simpler processes, some of which, at least, 

 lend themselves to the use of machinery. In the use of machinery and 

 the adoption of indirect processes there is a further division of labour, 

 the economies of which are again limited by the extent of the market. 

 It would be wasteful to make a hammer to drive a single nail ; it would 

 be better to use whatever awkward implement lies conveniently at hand. 

 It would be wasteful to furnish a factory with an elaborate equipment of 

 specially constructed jigs, gauges, lathes, drills, presses and conveyors to 

 build a hundred automobiles ; it would be better to rely mostly upon ■tools 

 and machines of standard types, so as to make a relatively larger use of 

 directly-applied and a relatively smaller use of indirectly-applied labour. 

 Mr. Ford's methods would be absurdly uneconomical if his output were 

 very small, and would be unprofitable even if his output were what many 

 other manufacturers of automobiles would call large. 



Then, of course, there are economies of what might be called a 

 secondary order. How far it pays to go in equipping factories with 

 special appliances for making hammers or for constructing specialised 

 machinery for use in making different parts of automobiles depends again 

 upon how many nails are to be driven and Jiow many automobiles can be 

 sold. In some instances, I suppose, these secondary economies, though 

 real, have only a secondary importance. The derived demands for many 

 types of specialised production appliances are inelastic over a fairly large 

 range. If the benefits and the costs of using such appliances are spread 

 over a relatively large volume of final products, their technical effectiveness 

 is a larger factor in determining whether it is profitable to use them than 

 any difference which producing them on a large or a small scale would 

 commonly make in their costs. In other instances the demand for 



