The division of labor, or specialization, is dividing a manufacturing process into different tasks to be completed by multiple people more efficiently than if one person had performed all the tasks. In such a system, individual actors specialize in routine, repetitive, and mundane tasks in which they obtain a high degree of skill. Because each laborer is completing only one repetitive task at which they are highly skilled, they complete the task more efficiently, and the entire series of tasks is completed more efficiently than if one actor had performed every task required to manufacture the product. This is the central component of economic efficiency. Smith reasons that the more sophisticated the division of labor is, the more productive the industry will be. Smith relates this theory not only to manufacturing, but also to include divisions of labor between trades, creating a more efficient and productive macroeconomy.

In The Wealth of Nations, Smith pioneers the now popular idea of free market economics. Smith uses the invisible hand as a convenient method of describing the market forces, shaped by individual, self-interested, decision-makers in a free market, which direct