“What are the causes of the human ability to create economic wealth?” This is one of the key questions that have occupied economists from the onset of their reasoning about economic activity and performance in a human society, exemplified by the title of the magnum opus by Adam Smith (1776), An Inquiry into the Nature and Causes of the Wealth of Nations.
The response to this fundamental question is not only the oldest, but also the most established economic theory: wealth is generated through a social division of labour that is encapsulated in a social trade infrastructure. Productive tasks are spread out among a multitude of individuals, who achieve collectively a higher output than when all of them remain non-specialised. Thus wealth generation is founded on “Increasing Returns to Specialisation”. Through a social trade infrastructure these specialised productive individuals are brought together to exchange, barter and trade the fruits of their labour to allocate the collective output for consumptive purposes.
A social division of labour, therefore, divides and integrates simultaneously. In order to access the identified Increasing Returns to Specialisation, productive tasks have to be divided; similarly, these divided tasks can only be functionally implemented when they are integrated into a social environment that embodies an effective trade infrastructure. Human needs give rise to the double coincidence of wants that can only be resolved through such a trade infrastructure.
The ability to create such a complex social organisation and to let this organisation be sufficiently flexible is uniquely human. In fact, the human condition is exemplified by this unique social ability. Our hominin species Homo sapiens sapiens evolved biologically as well as socially to respond to environmental conditions in a cooperative manner, this is known as the “social brain hypothesis” (Dunbar 2003). The social brain hypothesis leads to the conclusion that this uniquely human characteristic naturally evolved into such a social division of labour.
That the social division of wealth-generating tasks cannot be separated from its integration through a social trade infrastructure gives rise to questions about how a human society accomplishes such a difficult and complex objective. In this work I adopt the hypothesis that such an organisation is conducted and coordinated through socio-economic institutions. These institutions are understood as fictional narratives that build a parallel fictional reality in which humans interact and cooperate (Harari 2014).
Such an institutional perspective is, therefore, inalienable from the idea that wealth is generated through a social division of labour. This has been accepted by many social philosophers and economists, but has been neglected more recently in market-centred thinking about the human economy. I argue here that a return to a more institutional perspective is necessary to make economics relevant again and to address contemporary issues in the global economy in the twenty-first century.
The institutional perspective taken in this book is a very broad one, capturing many forms of the fictional narratives that guide human interaction. I include all forms of conventions, collective behavioural rules and forms of governance in the category of institutions. Institutions range, therefore, from simple human gestures, facial expressions and language to advanced governmental institutions and sophisticated financial instruments in our contemporary global economy.
In this chapter, I set out an axiomatic structure to underpin a thought framework in which one can meaningfully reason about the human economy centred around a social division of labour. Before doing this, I dwell for a short time on the historical roots of the fundamental theory that economic wealth is generated through a social division of labour that is encapsulated in an effective trade infrastructure.
Some Historical Theories of the Social Division of Labour
The idea or principle that economic wealth generation is conducted through such a social division of labour was already proposed in ancient Greek social philosophical discourse. This is exemplified by the description of the ideal “polis” in Plato (380 BCE) as an urban economy that is structured through a clear social division of labour. This was expounded and expanded upon by Xenophon (370 BCE, 362 BCE), who emphasised the necessity of having a proper functioning institutional environment in which a social division of labour can flourish.
Aristotle (350 BCE) developed the conception of economic wealth creation through a social division of labour in its most complete vision during Greek antiquity. He emphasised the importance of specific socio-economic institutions such as property rights and the free exchange and barter of property. This included a treatise on the evolution of money and the foundation of the price mechanism (Aristotle 340 BCE, Book V).
The principle that economic activity is structured as a social division of labour was unquestioned through more than 2000 years of philosophical and social thought spanning Plato, Xenophon and Aristotle. Contributions were made in Islamic Scholastic and Latin Scholastic thought (Sun 2012, Chapter 2), but only during the period in the run-up to the industrial revolution in the seventeenth and eighteenth centuries was the idea significantly revived. The term “division of labour” was actually coined by Bernard Mandeville in an elaborate analysis of industrial shipbuilding and cloth-making in Volume 2 of his magnum opus, Mandeville (1714). In this work, the concept that economic wealth is generated through a social division of labour became absolute and indisputable. Mandeville also uses metaphors to promote this idea, in particular with his famous fable of the bees.
Mandeville brought the ideas of the ancient social philosophers into the world created by the industrial revolution. His contribution also included the introduction of the idea of the channelling of self-interest through the trade infrastructure of the economy. As Prendergast (2016) argues, this was not necessarily founded on an early understanding of “laissez-faire” economic policy by governments of nation-states—that unbridled self-interested decision-making leads to collectively optimal benefits under free trade—but rather a more sophisticated conception of the role of public government in the economy. In particular, Mandeville was hesitant about the potential for coercion in the labour markets in a modern industrial economy.
Classical Political Economy
Although the roots of the emerging field of political economy were already laid prior to his contributions, Adam Smith (1759, 1776) firmly established this new science on the fundamental principle that economic wealth was generated through a social division of labour. This was set out in the first three chapters of Smith (1776), in which he famously expounded on the workings of the division of labour in a pin factory.
Smith also developed some theoretical consequences of the hypothesis of wealth generation through a division of labour. In particular, he linked the proper and efficient functioning of a social division of labour to the notion of competition, and developed the notion of the “extent of the market” to describe the limits of the wealth generation process in a social division of labour. This leads him on to an extensive debate about economic policy founding the development of the economy—embodied by the social division of labour—based on economic liberty and self-guidance. This was expressed most forcefully in Smith’s concept of the “invisible hand”: that selfishness and greed guide the social division of labour to its most optimal state.
After Smith, David Ricardo (1817) provided the next push in the development of the theory of wealth generation through a social division of labour. Based on the vision promoted by Malthus (1798), Ricardo was very concerned about the limits to economic growth. He introduced the theoretical notions of marginal productivity and an equilibrium as a state of the economy in which the rate of return on capital investments is negligible owing to the balance of the for...