ADAM SMITH: The Division of Labor (Healthcare, for example)

In last week’s reading of Rothschild’s Fiddle there’s a scene where Jacob takes Martha to see the doctor.  Dr. Maxim examines her and concludes “Ah well, the old woman’s lived her life, praise the Lord.  How old is she?”  “Seventy come next year.”  “Ah well, her life’s over.  Time she was on her way.”  Jacob’s not a trained physician but he’s not satisfied with that diagnosis and offers his own advice.  “We ought to cup her, Dr. Maxim, sir,” he said in a low voice.  “Haven’t the time, my good man.  Take your old woman and be off with you.  So long and all that.”

Adam Smith’s theory of the division of labor may help shed some light on that scene.  Consider healthcare from Smith’s point of view.  Who should make the final decision regarding medical treatment?  Trained physicians?  Patients (or family members acting on their behalf)?  Insurance companies?  Government?  Smith says in a free market system there’s an “invisible hand” that guides the allocation of resources.  He believes the “division of labor, from which so many advantages are derived… is the necessary… propensity to truck, barter, and exchange one thing for another.”  In this case Jacob wants to exchange his money for Martha’s healthcare.  What are the advantages of  Smith’s theory here?  Jacob is a coffin maker by trade.  He doesn’t know much about taking care of sick people but he sells coffins and gets money in return so he can buy the things he needs.  Dr. Maxim probably couldn’t make good coffins but he knows a lot about healthcare.  Dr. Maxim is much better qualified to make decisions concerning the proper care for Martha.  But in this case here’s the disadvantage of Smith’s theory.  Jacob loves Martha (in his own kind of way); for Dr. Maxim she’s just another patient.  He’s got a room full of them waiting for his services and there are only so many hours in a day.  How do we determine the best allocation of resources (Dr. Maxim’s time) in this situation?  And who’s best qualified to make this determination?  These are questions we still wrestle with today.

Adam Smith’s “invisible hand” is a vivid image but it’s open to different interpretations.  How exactly does this invisible hand work?  Supporters of a free market system see millions of people making daily decisions about how they spend their own money.  For them this freedom to choose is by far the best way to determine how resources should be allocated.  Let the customer decide; not just when they buy a bar of soap but also when they need healthcare or education.  That’s the best way to insure maximum utilization of resources.  Let people decide for themselves.  Other folks don’t like Smith’s model.  Healthcare and education are inherently different than buying a bar of soap.  In Rothschild’s Fiddle Jacob illustrates the point when he says “he’d have cupped a rich man, but for a poor one he grudges even a single leech.”  Rich people have more options than poor people.  They can buy a better brand of soap.  They can afford better healthcare.  They have better educational opportunities.  This isn’t fair.  We don’t need an invisible hand.  We need a plan.  Adam Smith thinks these government “plans” just muck things up and tend to prevent the free flow of goods and services in the marketplace.  He also believes governments “are themselves, and without exception, the greatest spendthrifts in society.”  Plans cost money and politicians are always eager to spend other people’s money so they can put their own plans in place.  But Smith was also a professor of moral philosophy and he understands how good and honest people (including politicians) can distrust free market results.  Smith says “The difference in natural talents in different men is, in reality, much less than we are aware of… The difference between a philosopher and a common street porter, for example, seems to arise not so much from nature as from habit, custom, and education.”  That’s why many people believe education (and healthcare) are too important to be left to chance by some mysterious “invisible hand.”