William Thompson published his Inquiry into the Principles of the Distribution of Wealth in London in 1824. He was an Irish co-operative socialist, a follower of Jeremy Bentham, and a passionate critic of the political economy of his day. He was also, I now believe, one of the most penetrating economic theorists of the nineteenth century — a judgement that the formal economics of the twenty-first century has quietly vindicated, without anyone quite noticing that it did so.
Recently I discovered that Thompson’s opus is a direct precursor of my own 2019 International Economic Review paper. Actually, it is stronger: Thompson sets out philosophically what I expressed in mathematics in my 2019 paper. It is eery to see the precise and clear prose written two centuries ago exactly stating what my mathematics express in my paper.
The Vision
Thompson’s starting point is deceptively simple: wealth is produced by labour, and labour is the sole universal measure of the value of wealth. An object of desire becomes an object of wealth only when labour is required to obtain or transform it. Air and sunlight, however necessary to life, are not wealth; the cultivated field, the milled cloth, and the forged tool are. The price of any commodity, under conditions of free and equal competition, gravitates to the quantity of ordinary labour — that of average skill and diligence in the community’s common occupations — required to produce it.
From this foundation, Thompson builds an account of economic organisation that would feel entirely at home in a modern graduate course in economic theory. Every person in his economy is simultaneously a producer and a consumer. Each producer concentrates on a single trade or occupation, because focused effort in one activity is more productive than dispersed effort across many — what we would now call increasing returns to specialisation. The products of each specialised occupation are then exchanged in a market, and the gains from this division of labour constitute the primary source of economic wealth.
The price mechanism, in Thompson’s account, does two things at once. It coordinates the specialisation decisions of producers — telling each person which occupation to enter — and it allocates the resulting income across the community. Under free competition and equal security (meaning that every producer retains the full product of her labour), prices are driven to their labour-cost equivalents and incomes are equalised across occupations. No worker will accept less for her labour than she could earn in another trade; no occupation will long sustain higher remuneration than others without attracting new entrants to compete it away.
Thompson is equally clear about what happens when this equilibration is blocked. Guild restrictions, apprenticeship requirements, monopoly privileges, and wage controls — the institutions of insecurity, as he calls them — prevent workers from moving freely between occupations and thus prevent the natural equalisation of remuneration. The consequence is not merely unfairness; it is economic waste. The social division of labour is distorted, workers are misallocated across trades, and the total wealth of the community is smaller than it could be.
The Parallels
Two centuries later, I published a formal general equilibrium model in the International Economic Review that reaches precisely the same conclusions by a very different route. The model treats every economic agent as a consumer-producer who selects a specialisation and then trades in competitive markets. The key property that drives the results — which I call Increasing Returns to Specialisation (IRSpec) — is the formal counterpart of Thompson’s insight that concentrated effort is more productive than diversified effort. Under IRSpec, rational agents specialise fully in a single commodity; this is not assumed but proved.
The main results mirror Thompson’s arguments with uncomfortable precision. First, equilibrium prices are determined entirely by the production technologies — that is, by the labour costs of each commodity — and are independent of demand. Thompson states this as an obvious consequence of free competition; the IER paper establishes it as a mathematical theorem. Second, when producers have equivalent productive abilities, free mobility across specialisations equalises incomes and adjusts the composition of the workforce across sectors to meet aggregate demand. Thompson calls this the invigorating competition that follows from equal security; the IER calls it equilibration through the adjustment of the social division of labour. The terminology differs. The idea does not.
What I find most striking, on reflection, is that both accounts depend on a shared and demanding premise that deserves a name of its own. Call it the fluidity hypothesis: labour can move to any of the available professions and populate it to the degree required to fulfil the demand for the good produced by that profession. Fluidity in this sense is not merely the absence of overt coercion; it requires two things simultaneously. The first is extreme openness — no legal, institutional, or social barrier prevents any worker from entering any occupation. The second is agility — workers are capable, with reasonable effort, of acquiring the skills or knowledge that any available specialisation demands. Thompson understood both requirements clearly, even if he did not distinguish them in these terms. His attack on the institutions of insecurity is, at bottom, an attack on the forces that destroy openness; his faith in the educability of ordinary people — a conviction he shared with Owen and with Bentham — is an implicit claim about agility. The IER paper, for its part, requires full fluidity in precisely this dual sense: the equilibration theorems hold only when every consumer-producer can adopt any specialisation, and the social division of labour therefore adjusts freely to prices.
Thompson himself identified the principal enemies of openness with some precision. Guild restrictions on who may practise a trade, apprenticeship requirements that impose years of unpaid or low-paid labour as a condition of entry, and monopoly privileges granted by statute to existing practitioners — all of these reduce the effective supply of labour to the favoured occupations and keep wages in those occupations permanently above the level that free competition would sustain. The result, as Thompson observes, is not merely that some workers earn too little; it is that the wrong workers are in the wrong occupations, producing the wrong things, and the wealth of the community is systematically below what a fluid economy would generate.
Two centuries later, the empirical economics of occupational mobility has begun to catch up with this insight, and the results are not reassuring. Kleiner and others have documented that occupational licensing — the modern descendant of the guild system, requiring state certification before one may practise a trade — reduces cross-occupation mobility by approximately twenty-four per cent relative to unlicensed occupations. The mechanism is exactly what Thompson predicted: licensing creates entry barriers that shelter incumbents and deter potential entrants, compressing the supply of labour to licensed occupations and preventing the equalisation of wages that a fluid labour market would produce. The institutions of insecurity have been modernised; their economic consequences have not changed.
Openness alone, however, is not sufficient. Even in the absence of formal licensing barriers, occupational transitions are costly — and the nature of those costs matters for what fluidity can achieve. Cortes, Jaimovich, Nekarda, and Siu have shown, studying workers who change occupations in the United States, that the costs of switching are dominated not by the distance between the skill requirements of the old occupation and the new one, but by a general entry cost that is approximately the same regardless of where the worker is coming from. This finding has a significant implication for the fluidity hypothesis: agility is not primarily a matter of possessing skills that are close to those already required. It is a matter of bearing the fixed cost of entry into any new professional role — a cost that reflects the need to acquire occupational knowledge, to build networks and reputation, and to navigate the social expectations that every established profession carries. The barrier to fluidity, in much of the modern labour market, is not specialised knowledge but the generic cost of becoming anyone other than who one already is.
The structure of the economy itself can create barriers to fluidity that are independent of any particular institution. del Rio-Chanona and collaborators, and more recently Knicker and colleagues, have mapped the network of feasible occupational transitions and found that it is far from complete: some occupations serve as hubs through which many workers can move in many directions, while others are relative dead-ends from which exit is difficult and the destinations few. Structural bottlenecks of this kind impose limits on fluidity that no amount of institutional liberalisation can remove, at least in the short run. Workers trapped in a low-connectivity occupation face limited routes out, whatever the formal rules may say, and the social division of labour cannot adjust as freely as the IER paper’s equilibration theorems would require. The fluidity hypothesis, in other words, is an ideal that the topology of the labour market may prevent from being achieved in full — a qualification that Thompson, writing before the industrial specialisation of the nineteenth century had hardened occupational boundaries into something approaching a caste system, could not have foreseen.
One additional condition bears on fluidity, though it operates from a different direction. George Stigler, in a celebrated 1951 paper in the Journal of Political Economy, argued that the division of labour is limited by the extent of the market. A process is worth specialising in only if the resulting volume of production is large enough to employ a specialist full-time; below that threshold, the activity remains bundled with others in a single occupation. The implication for fluidity is indirect but real: an economy with large, well-integrated markets supports a finer and more extensive division of labour, and therefore offers more specialisations into which fluid labour can flow. Fluidity and the extent of the market are, in this sense, complements. The agility of workers to move between professions is more valuable — and the gains from specialisation larger — in an economy whose markets are wide enough to sustain the full range of specialisations that technology makes possible. Thompson’s vision of a community of co-operative producers exchanging freely is, among other things, a vision of markets whose extent is sufficient to validate the degree of specialisation that his economy requires.
The most striking anticipation appears in Thompson’s analysis of trade between co-operative communities. He argues that when communities exchange their surplus produce from positions of equal security — neither compelled to sell, neither able to exploit the other — the natural exchange ratio must be labour for labour: the price of each commodity equals the labour embodied in producing it, and demand plays no role in determining that price. This is, almost word for word, the paper’s Corollary 2.
The Long Shadow
Thompson did not emerge from nowhere, and his vision did not vanish after 1824. Adam Smith had already identified the division of labour as the primary source of national wealth in 1776; Thompson radicalised that insight by insisting that the gains from specialisation belong, as a matter of both efficiency and justice, to those who do the specialising. The classical tradition he belonged to was subsequently buried — partly by the marginalist revolution of the 1870s, which shifted the focus of economic theory from production to preference — and it remained buried for the better part of a century.
The excavation began quietly. Allyn Young’s remarkable 1928 paper in the Economic Journal revived the idea that increasing returns operate through the division of labour rather than through the scale of individual firms. Decades later, Xiaokai Yang and Yew-Kwang Ng constructed the first formal general equilibrium framework built around consumer-producers and economies of specialisation — the direct ancestors of the IER model — and collected the resulting literature in a volume on Increasing Returns and Economic Analysis (1998). Sun, Yang, and Yao provided the first rigorous existence proof for equilibrium in such economies, incorporating transaction costs, in their 2004 paper in the Journal of Economic Behavior and Organization. My own 2019 paper in the IER stripped away the transaction costs to isolate the pure effects of IRSpec, and a subsequent 2020 paper in the Journal of Economic Behavior and Organization extended the framework to include collective goods provided by specialised professionals.
None of these papers cites Thompson. That omission is now harder to defend. The vision that animates the entire programme — every agent a producer and a consumer, specialisation as the engine of wealth, prices anchored to labour costs, free occupational mobility as the equilibrating force — is Thompson’s vision, articulated in 1824, and formalised in rigorous mathematics only in the decades since. And the fluidity hypothesis that lies at the heart of that equilibration — the claim that labour can populate any profession in response to the demand for its product, provided only that workers face open entry and possess the agility to specialise — is equally Thompson’s, expressed in his attack on the institutions of insecurity and in his faith in the capacities of ordinary working people to organise their own productive lives.
The two centuries between the Inquiry and the IER paper represent the time required to give that vision a proof. They do not represent the time required to have the idea.
Whether this counts as progress depends, I think, on where one started.
References
- William Thompson, An Inquiry into the Principles of the Distribution of Wealth Most Conducive to Human Happiness (London: Longman, Hurst, Rees, Orme, Brown, and Green, 1824).
- Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776).
- Allyn Young, “Increasing Returns and Economic Progress”, Economic Journal 38 (1928): 527–542.
- George J. Stigler, “The Division of Labor is Limited by the Extent of the Market”, Journal of Political Economy 59 (1951): 185–193.
- Xiaokai Yang and Yew-Kwang Ng, Specialization and Economic Organization: A New Classical Microeconomic Framework (Amsterdam: North-Holland, 1993).
- Kenneth Arrow and Yew-Kwang Ng (eds.), Increasing Returns and Economic Analysis (London: Macmillan, 1998).
- Guang-Zhen Sun, Xiaokai Yang, and Wai-Man Yao, “General Equilibria in Large Economies with Endogenous Structure of Division of Labor”, Journal of Economic Behavior and Organization 55 (2004): 237–256.
- Guido Matias Cortes, Nir Jaimovich, Christopher J. Nekarda, and Henry E. Siu, “The Micro and Macro of Disappearing Routine Jobs: A Flows Approach”, NBER Working Paper 22005 (2016).
- Robert P. Gilles, “Market Economies with an Endogenous Social Division of Labor”, International Economic Review 60 (2019): 821–851.
- Robert P. Gilles, Marialaura Pesce and Dimitrios Diamantaras, “The Provision of Collective Goods through a Social Division of Labour”, Journal of Economic Behavior and Organization 178 (2020): 287–308.
- R. Maria del Rio-Chanona, Penny Mealy, Mariano Beguerisse-Díaz, François Lafond, and J. Doyne Farmer, “Occupational Mobility and Automation: A Data-Driven Network Model”, PNAS Nexus 1 (2021).
- Morris M. Kleiner, Ming Xu, and Evan J. Soltas, “Occupational Licensing and Labor Market Fluidity”, NBER Working Paper 27525 (2020).
- Jonas Knicker, Karl Schmedders, and others, “The Network Structure of Occupational Transitions and Labour Market Fluidity”, Journal of Political Economy (2024).