Adam Smith's discussion of the payment of teachers is reviewed in terms of industrial organization and agency theory. The implicit student fees necessary to support annual salaries average $1.30 per class meeting in primary and secondary schools and rise to $4.00 per lecture and up for college teachers. While salaries in teaching are much smaller than in the large-scale visual media, implicit valuations per contact hour in teaching are at least 600 times larger than in television. Classroom teaching is expensive because a teacher's scale of operations is sharply constrained by the student-teacher ratio.

Incentives for specialization, trade, and the production of comparative advantage through investment are shown to arise from increasing returns to utilization of human capital. Indivisibilities imply fixed-cost elements of investment that are independent of subsequent utilization. Hence the rate of return is increasing in utilization and is maximized by utilizing specialized skills as intensively as possible. Identically endowed individuals have incentives to specialize their investments in skills and trade with each other for this reason, even if production technology exhibits constant returns to scale.

This is a nontechnical summary of a much longer study which will appear with the same title in Richard Freeman, Birgitta Swedenborg, and Robert Topel, eds. (forthcoming). I am especially indebted to Henry Ohlsson and Birgitta Swedenborg, and to Stan Engerman, Vic Fuchs, Assar Lindbeck, Stephen Lundgren, and Agnar Sandmo for comments on initial drafts. I alone am responsible for the views expressed here.

I. Introduction, 366. — II. The optimal rate of learning, 368. — III. Modifications and extensions, 376. — IV. Discussion and application of the model, 377.

A staunch neoclassical economist, Rosen drew inspiration from Adam Smith's Wealth of Nations, particularly his theory of compensating wage differentials, which Rosen felt was central to all economic problems involving product differentiation and spatial considerations. The main theme of his collection is how markets handle diversity, including the determination of value in the presence of diversity, the allocation of idiosyncratic buyers to specialized sellers, and the effects of heterogeneity and sorting on inequality