Specialization and Division of Labor: A Survey

The paper first briefly reviews the literature of specialization from Petty up to the 1980s. The classical research line of specialization that is followed by Young, Stigler, and Houthakker is distinguished from neoclassical economics structured by Marshall. The modern literature of formal models of specialization and division of labor is then surveyed in detail. Three lines of research are identified. One is associated with neoclassical trade theory which assumes constant returns to scale and explains the pattern of specialization and division of labor by exogenous comparative advantage between countries. The second line is associated with new trade and growth models which endogenize one aspect of the division of labor, the number of goods, by formulating the tradeoff between economies of scale and economies of variety of consumption or producer goods. The third line is associated with the models that endogenize all aspects of the division of labor individuals' level of specialization, the length of a roundabout production chain, and the number of goods in each link of the chain. In particular, the implications of new classical economics and inframarginal analysis for the resurrection of the spirit of classical economics in a modem body are explored.