Division of Labor & Time Structure of Production

Whatever Happened to the Division of Labor?:

... mainstream economics treats production as timeless and capital as homogeneous. That is, it describes production as an instantaneous transformation of inputs into output. In mathematical form: Output = f(Labor, Capital), where “f” stands for a mathematical function that turns labor and capital into output. Now “capital” in this expression would have to stand for the wire, the cutters, the whitener, and other things that go into pin production, which implies that all kinds of capital inputs are perfectly interchangeable with one another–that is, homogenous. For some purposes that may be a useful simplifying assumption, such as when explaining why adding units of (homogenous) capital at some point increases output at a decreasing rate, the principle of the diminishing marginal product.

But treating production as timeless and capital as homogenous doesn’t allow us to distinguish different stages of production (or capital heterogeneity, as Austrian economists would call it) from one another and it doesn’t allow us to include the passage of time in the production process. It does, however, sometimes allow economists greatly and unhelpfully to simplify certain concepts in microeconomics, such as market competition, as well as allow them to use the kind of aggregates we see in current versions of macroeconomics, such as Keynesian macroeconomics.

Heterogeneous capital and the passage of time, or what taken together has been called the “time structure of production,” are not only features of Adam Smith’s DOL; as you might suspect, they are also essential for understanding how real economies develop. Fortunately, those Smithian insights are today still a vital part of Austrian economics, especially in Austrian theories of capital and the business cycle.

Many libertarians harbor an understandable suspicion bordering on hostility toward modern macroeconomics, given the crony bailouts and economy-distorting stimulus policies that a number of macroeconomists have advocated in recent years. Beware though of tossing the Smithian baby out with the Keynesian bathwater!