Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts

of George Mason University and Stanford University's Hoover Institution. Our website

is econtalk.org where you can subscribe, find other episodes, comment on this podcast,

find links and other information related to today's conversation. Our email address is

mailadicontalk.org. We'd love to hear from you. My guest today is Michael Munger, Professor

of Economics and Political Science at Duke University. He's a frequent contributor to the Library

of Economics and Liberty and a frequent guest here at Econ Talk. Mike, welcome back.

It's great to be here. Mike, I want to talk to you today about a seemingly simple idea

in economics and a very old idea, which is the division of labor. Sometimes we think

of it as specialization. I want to begin with Adam Smith, who famously said, the division

of labor is limited by the extent of the market. It's a very opaque statement. What do you

mean by that? The division of labor is limited by the extent of the market.

This is something that I've thought about a lot, and I think a couple of years ago I thought

I understood it. Now I've come to believe that I'm not so sure. There's more to that statement

than there seems to be, but still, let's take a shot. The division of labor for Smith was in

some ways the source of the creation of the wealth of the world, and the reason was he thought

competition would drive people to try to come up with new ways to produce things, ways that they

could produce things more cheaply. The biggest way that they could do that, whether they knew it or

not, was what he called the division of labor. You divide the process of making something into

a few more steps. People become good at each of the steps. They design new tools, and they can

produce a lot more. The problem is that if there's only three or four of us in a little village,

and we specialize in producing just one thing, we have way too much of that. So the only thing

...