Smith contends that specialization—that is, the division of labor—is the central component to economic efficiency. The basic concept of the division of labor establishes that specialized persons performing specialized tasks creates a more productive system than that of individual persons attempting to perform every aspect of a trade. Smith posits that this division of labor—and the corresponding increase in productivity—to a large degree creates wealthy nations. Smith illustrates this concept by relating it to pin-making. He explains that most individuals could not produce more than one pin per day, but that ten people each performing repetitive specialized tasks can produce 48,000 pins in a day. Smith then extends his theory on specialization to include divisions of labor between trades, creating a more efficient and productive macroeconomy.

The division of labor contributes to economic efficiency in three ways. First, specialization enables workmen to cultivate increased skill through repetitive performance of their task. Smith remarks that the speed at which a worker can become an expert at their simple task is astounding. Second, the division of labor eliminates time wasted moving between tasks. Third, specialization encourages the creation of specialized machinery, which can allow manufacturing to be accomplished more efficiently.