I remembered as a child when my mother bought vegetables from the street vendor. If the amount to be paid came to, let’s say, 6 rupees 65 paisa, she would give the vendor a 10 rupee bill, a 1 rupee bill, a 10 paisa coin and a 5 paisa coin. The uneducated vendor wouldn’t flinch for a moment. He would immediately reach into his cash box and return a 5 rupee bill and a 50 paisa coin.

Now, let’s change the scene. Swap rupees with dollars, and paisas with cents. Now present a similar challenge to an American grocery clerk. He would be flabbergasted with the math he would have to do. If not for the electronic registry that does the math for the clerk, he would have been lost trying to figure out the amount that should be returned to my mother.

When I first came to the United States, my friends and I used to joke about how Americans are not so smart. We used to wonder how America became such a prosperous nation, though Americans overtly don’t appear smarter than people from other nations. So, is the uneducated Indian street vendor really smarter than his American counterpart? It depends. The reason for this is a little deeper than you can imagine.

Primitive man used to live in caves and hunt in the jungle. He used to find his food by himself; he made his hunting tools, made his clothes, built his house etc. With the progression of human civilization, man learned the art of trade. He realized that he doesn’t have to do all the things himself. He gradually started to specialize in a field that gave him a natural advantage. As a result, some picked farming, while others went into weaving. Some went into wine making, while others went into carpentry. Some chose to become goldsmiths while others became watch makers. A farmer would then trade his output in the marketplace for clothes, wine, furniture, jewellery, and watches. Similarly other tradesmen exchanged their output for others’ goods.

Adam Smith termed this phenomenon as “division of labour”. As civilizations progress, the work we do becomes more and more specialized. As we specialize in our natural areas of strength, our work becomes easier, we become more productive, and our quality of life improves.

So, why did the American grocery clerk couldn’t do the fundamental math that an uneducated Indian vegetable vendor could do? The answer lies in the division of labour. The American grocery clerk uses a registry that does the math for him. The registry was probably designed by a highly specialized engineer who has advanced math skills. The engineer traded his math skills by designing the register and thereby made the life of the grocery clerk easier.
So, is the Indian vendor smarter than his American counterpart? It depends on the prism you look through. Karl Marx observed the same phenomenon and reached a different conclusion. In the American store clerk, he saw the division of labor as a process of alienation. As the work becomes more specialized, he felt that the workers become “depressed spiritually and physically to the condition of a machine”. However, evidence indicates otherwise. While America prospered, socialist economies that adopted Karl Marx philosophy degenerated during the same time.

Division of labour is a natural human inclination and an important indication of the progress of a nation’s economy. The freer the society, the more specialized the labour skills become. Same principle applies to corporations too. Take the example of Google- they have been fantastically successful in building search engine, but are having a tough time building another technology product that is half as profitable. Similarly, Boeing specializes in making planes and would fail miserably if they try to make cars or TVs. There are companies like GE that go into several sectors and on surface appear to be successful. However, if you dig deeper many of these companies have a handful of successful products, while the rest is baggage. In a free market, even if a company is successful in building several profitable products, it is a matter of time, before a specialized company comes around and steals their market.

Now, let’s switch our focus to Indian markets. It is interesting to note that one of the world’s largest companies, Reliance pretty much sells everything under the blue sky. They are into a mind-boggling array of businesses and here is a small sample: oil exploration and refineries, polymers, chemicals, yarn, pillows, cushions, sportswear, suits, food and grocery stores, electronics stores, shoes, jewellery, auto repair etc. Other Indian conglomerates like TATAs and Birlas are not left behind in this game either.

What does that tell you? This is a symptom of an economy not operating freely. It is an indication of Indian conglomerates having developed an unfair advantage in the market place. This could have happened either through their political connections or via their ability to work the government bureaucracy in a way that others cannot. In a free market, Reliance, Tata, and Birla cannot excel in so many industries and make profit, as it goes against the natural laws of division of labour.

Now you have one more parameter to measure India’s economic progress. Take the top-100 Indian companies. Identify the total number of sectors they are operating in. On an annual basis, track if the number of sectors they operate in is shrinking or growing. If the number is shrinking, it is a positive indication that the country is moving in the right economic direction.