Diamonds are Forever - The Division of Labor
I'm posting a 14-part series of mini-essays on diamonds (but really about the economic point of view). Here's part 3.
The Division of Labor
It’s obvious that the distribution of the world’s resources is vastly unequal.
What’s sometimes overlooked is that this fact confronts mankind before trade, or any other human activity, alters the distribution and ownership of resources.
Inequality is built into the structure of reality.
A four-letter word in the lexicon of some, inequality of resource distribution is one of the important drivers of the division of labor at national, regional, and individual levels. And without the division of labor, humans would be condemned to live isolated, impoverished lives. Imagine trying to produce everything you wish to consume without making a single trade.
The world’s stunning resource diversity contributes to the law of comparative costs (i.e. “comparative advantage”) because such regional diversity gives rise to different opportunity costs associated with producing various goods and services.
While there is one tiny, active (and open to the public) diamond mine in the United States (in Murfreesboro, Arkansas), it’s relatively costly for the United States to produce diamonds. They’re sparse, buried deeply, and of lower quality than can be found in other locales. It’s therefore unsurprising that the United States produces hardly any diamonds.
The top five diamond-producing countries—Russia, Botswana, the Congo, Australia, and Canada—boast large, high-quality diamond deposits, relatively close to the earth’s surface. Botswana, roughly the size of Texas, is home to seven of the world’s best diamond mines.
Americans could outlaw the purchase of any foreign diamonds. Buy American (diamonds)!
As a result, we would mine deeper, dig harder, and pay more for our jewelry. The unseen cost would come from all the labor and machinery inefficiency diverted to diamond production, at the expense of other things we’re better at producing. We’d be wealthier to rely on international trade for the bulk of our diamonds.
There’s another aspect of the division of labor that’s relevant here too, and it occurs at the individual, rather than the national level. Adam Smith famously observed that “the division of labor is limited by the extent of the market.” It only makes sense to specialize in that for which a sufficiently large market exists.
Most people treat diamonds as luxury items. We thus wouldn’t expect to see them produced and traded in primitive societies. When basic wants are still unsatisfied, no one would find it profitable to specialize in the production and sale of diamonds. While primitive tribesmen might trade items such as seashells for jewelry, we wouldn’t find them opening mines or going to school (there wouldn’t be “schools”) to become gem cutters.
The extent of the market is an upper bound on specialization.