Division of Labour Use Value and Aggregate Effective Demand Essay

Division of labor is one of the most important concepts forwarded by Adam Smith. He believed it could improve the wealth of nations when each nation focused on production of only those things for which it had the resources and talent available. For example a country rich in oil should focus on export of oil, more exploration, and advancement in that field and related fields. Similarly another country that has coffee beans in great supply should concentrate on production of better coffee and export of the same. But if the oil country tried to become better at coffee and coffee country tried to drill for oil, this would not help either nation because the nation that is naturally endowed with oil or coffee can produce those items at much cheaper cost thus adding to its wealth and also is able to export to other countries at affordable rates. The other country must focus on whatever it can produce cheaply and export the same to other countries to make the profits and compensate for lack of other material. This would add to the wealth of each nation as each focuses on only the one that it can do the best. With expertise gained in the area, it can be done faster and cheaper. This is closely connected with the concept of exchange where a person would exchange something they have for what they do not have. A country would purchase more coffee from Brazil in exchange for oil because they both need both products but are producing only one of them.

Common stock refers to the pool of talents that humans have which can be utilized to make the final product. For example a country may be rich in cotton, another in cheap labor and the third in machinery. Together they can make excellent garments but alone none can use their talents to make anything worthwhile. So they pool their expertise and make the best garments to export to the world.This helps each nation add to its wealth and also believe in the principle of interdependence.

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The concept of division of labor was effectively ignored by neo-classical economists like Paul Samuelson. They believed that it has been ignored because it doesn't exist as each country is more concerned about achieving economies of scale than worrying about specialization and division of labor. As noted by Stigler (1976)… "almost no one used or now uses theory of division of labor, for the excellent reason that there is scarcely such a theory. & #8230; there is no standard, operable theory to describe what Smith argued to be the mainspring of economic progress. Smith gave the division of labor an immensely convincing presentation -- it seems to me as persuasive a case for the power of specialization today as it appeared to Smith. Yet there is no evidence, so far as I know, of any serious advance in theory of the subject since his time…" (p.1209)

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According to Karl Marx, Use-value of a commodity is the worth retrieved from it when utilized. For example water has a very high use-value but not diamonds. When water is consumed, a person feels immensely satisfied; this satisfaction is the use-value of water. Diamonds or other precious may not offer similar satisfaction when utilized. However use-value is not the same thing as exchange-value. Exchange-value is the money offered for the commodity. Water has a high use-value and low exchange-value; diamonds on the other hand have low use-value but very high exchange-value.

To express the idea of use-value and exchange-value, he used the C. And M. function, C stands for commodity and M. stands for money. He believed that in older economies where barter existed, the economy functioned as C-> C. which means a good for sold in exchange for a good. Then….....