This article takes its inspiration from a number of “Meet the Experts” articles on innovation. As innovation and the conditions surrounding it are topics of particular interest in today’s FX industry, this article aims to explore and filter the concept of innovation through a re-interpretation of Adam Smith’s ideas on the division of labor. Why resurrect Adam Smith in this context? In his first chapter of The Wealth of Nations, published in 1776, Smith puts forth a concept that articulates a dual blueprint for convergent/divergent processes. The balance point between these two processes marks the opportunity for innovative thinking as well as the difference between thriving and languishing in a rapidly changing industry, similar to what we find in today’s FX environment.
Innovation from the Outside/Inside
In Jannick Malling’s article, Innovation through Collaboration, Malling states that the term “innovation” is often confused, and ascribed an external characteristic: an arrival of something new from “outside” the previous state of things. Instead, as he correctly points out, the production of innovation is embedded within an organization’s strategic disposition and operational processes. A company that actively implements divergent thinking, a precondition to innovation, is more likely to re-arrange the elements within its conceptual box; often experimenting with abstruse conjunctions among existing parts. The trick, however, is negotiating the balance between structural cohesion and experimentation (without letting one overtake the other). When it comes to the latter, the role that human capital plays in “modulating” the structure of production is a key to finding the balance point between a more convergent or divergent mode of operating.
Enter Adam Smith and the Division of Labor
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Smith’s brilliant exposition on the division of labor outlines the effects of increased productivity through specialization. By allocating tasks to a dedicated or specialized workforce, the velocity-potential of production is released: task categories are mobilized and transformed into potentially seamless/simultaneous multi-operational trajectories. The “artisan’s” path is replaced by multi-staffed relays. As a result, the production ratio per worker is exponentially increased in contrast to the sole efforts of the artisan handling all tasks in subsequent order.
First Model of Efficiency and Convergence
This illustrates a model of efficiency and convergence. The input/output, means, and resources are determined within a collective mode of organization. On the extreme end, such a model can easily be associated with that of an automated assembly line (think Ford Model T). The problem with this image is that it can easily be interpreted as a direction toward rigid hierarchy, overly-mechanistic procedures, and ultimately, mal-investment in human capital. Rigid hierarchy creates multiple tiers of “marginal” input, often including information relayed by those most knowledgeable and sensitive to the slightest of industry changes, and typically implements a bottom-up communication protocol that hinders organizational agility. Mechanistic processes implicitly speculate that a business environment remain static. Along these lines, human capital can easily be reduced to various levels of function and repetition.
This model of efficiency and convergence presents a classic target among critics of Smith’s division of labor concept. As most business leaders know, such a model renders a company highly vulnerable to changes in the external business environment as well as targeted movements by more agile competitors.