ABSTRACT
Nearly two centuries ago, the ratio of GDP per capita in the richest to the poorest region of the world was about 3:1, and this difference could be largely attributed to variations in land fertility and other geographic advantages.1 Today, however, the ratio exceeds 70:1. A key question is: What has caused this dramatic divergence? One possible answer lies in a rapid and sustained increase in the rate of technical change in the now advanced countries. However, such an answer, in turn, begs its own question, namely: Why did this acceleration occur in the first place? The most plausible answer dates back to Adam Smith’s The Wealth of Nations, written on the eve of Britain’s industrial revolution in 1776. It involves the dramatic impact that the division of labor, or increasing returns to scale broadly defined, has in raising productivity. Book I of The Wealth of Nations begins with the famous dictum, “The greatest improvement in the productive powers of labor, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labor.” Smith then proceeded to elaborate on the remarkable increase in productivity that specialization brought in the case of a “very trifling manufacture,” namely the trade of a pin-maker.2 He noted that the way this very simple object was manufactured was, in fact, highly specialized.
