Book I - Of the Causes of Improvement in the Productive Powers of Labour, and of the Order According to which it’s Produce is Partially Distributed among the Different Ranks of the People
-Pallavi S.
3rd year, BA. Economic (H),
Christ University,
Bangalore
In the first chapter, Smith details specialization as the key to economic efficiency through the division of labour. Specialisation has made the process thousands of times more productive. This enormous gain in productivity has led to specialisation being within trades and even between them. Even whole countries specialise,exporting the goods they make best and importing the other commodities that they need. Three factors …show more content…
He gives the example of a butcher, a brewer and a baker. The baker and brewer require meat, yet, the can only offer the butcher with their good ie: bread and beer respectively; both that the butcher has in sufficient quantity. Rather than everyone having to rely on finding some person with exactly the inverse of their own needs, some medium of exchange had to be found. It had to be something that most people would be happy to trade for their own product and could then trade with others. But, whether exchange is mediated through money or not. The word value has two meanings – one is value in use, the other is value in exchange. Smith writes, water is extremely useful, but has almost no exchange value, while a diamond is largely useless but has enormous exchange value. Today one might solve the diamonds and water problem with marginal utility theory: since diamonds are so rare,an additional one is a great prize, but since water is so plentiful, an extr a cupful is actually of little use to us. Or we might use demand analysis. Butsuch tools did not exist in Smith’s time. The real measure of the exchangeable value of all commodities is the labour put into their production. The reason why we put effort into creating the product we sell is precisely to spare ourselves the effort of creating the things we buy. When we trade, what we are buying is the labour of others. Ultimately, wealth is not money – it is the amount of other people’s labour that we can command, or purchase. Usually, of course, we estimate exchange value in terms of money, because money is far more tangible and easy to measure than labour. But it is not a perfect measure. The metals we use for coinage, such as gold and silver, fluctuate in value over the long term, depending, say, on the productivity of the mines and the cost of transportation. Labour remains the real price: money prices are