What Adam Smith Missed in His Understanding of the Division of Labor
Adam Smith famously begins Wealth of Nations with a discussion on the division of labor. Few things are as impactful as specialization within a market setting á la Say's Law. However, Smith also claimed that the division of labor is limited by the "extent" of the market. This is often interpreted as population size, which is not quite accurate.
Émile Durkheim instead argued population density is required to facilitate specialization: the extent of the market is better understood as people's ability to interact with each other by buying, selling, contracting, etc. This is why we generally see cities as engines of growth, not rural areas.
A part of what made industrialization so impactful was people leaving their (miserable) lives on farms to seek opportunities to make a living in cities: the migration of people itself facilitated economic progress by making possible increased specialization under the division of labor and thus enormous productivity gains. (Marx saw this, and based his exploitation narrative on the division of labor, inherited/borrowed from Smith but not yet informed by Durkheim.)
We see this today also, for example in China, where much of the economic growth (the actual growth, not the fake GDP meddling) can be explained by the economic development zones receiving millions upon millions of people from the still heavily controlled Chinese inland. Without this migration and thus the increased density in "deregulated" cities, China would not have become the "wonder" it is.
Yet while population density is a prerequisite for the gradual and "spontaneous" intensifying of the division of labor, by increasing the extent of the market, it would be a mistake to think the story ends there.
Specialization is not a function only of population [density] growth but also of innovative entrepreneurship: the implementation of imagined creative new ways of producing and producing new things.
These are caused by ingenious ideas for how to make the world better (and make more money doing so), and they are introduced to an economy through "islands of specialization" (as I argue in my book, The Problem of Production).
The effect of population growth is thus two-fold: first, because more people means a more intensive division of labor is supported and, second, that more minds are able to identify problems/opportunities and imagine solutions to them.
From the point of view of the economic system, there is both gradual/continuous and spasmodic (in bursts) progress.
What releases the productive powers of the economy is not the population growth itself, but the ingenuity it brings. But ingenuity does not require many minds, it is only made easier by interactions, impressions, and perspectives.
For ingenuity to have an effect, entrepreneurship must happen.
This is why regulations that raise barriers for entrepreneurs are so disastrous: they hamper economic progress by doing away with many of the innovations that would otherwise shape and make better the economy and society.
Before someone retorts that Adam Smith already included innovations in his exposition, let me clarify that while that is true it was only in an improvement sense: the boy tying a string on a vent to save him the trip up the stairs. Smith did not discuss the entrepreneurial undertaking of implementing an imagined production process, which I would argue is the reason we see such enormous economic progress — and why it happens in disruptive bursts, not as continuous improvements.