The Wealth of Nations is a profoundly influential work in the study of economics and examines exactly how nations become wealthy. Adam Smith advocates that by allowing individuals to freely pursue their own self-interest in a free market, without government regulation, nations will prosper.
Imagine you want to start a factory to produce pins, and hire an uneducated worker to produce them.
Your worker performs all 18 steps in the process of making one pin by himself, and the result is rather poor: he barely produces a single pin in a work day.
But what if you hired a team of 18 uneducated workers, employing a division of labor, so that each worker specializes in one of the 18 steps?
Would the result be just 18 pins per day? Not really; the team could produce almost 50,000 pins a day!
A division of labor significantly increases productivity. But how does it work?
When one worker has to switch between many different types of work, it costs time. By employing a division of labor, one worker can focus on one skill; and that wasted time is turned instead into productive time.
What’s more, people are more likely to innovate in areas where their whole attention is devoted to a specific task. Innovations in turn result in increased productivity.
For example, the first fire engines were greatly improved when a boy employed a string to open and shut the truck’s water valve. Unsurprisingly, the boy’s job before this invention was to manually open and shut the valve!
As productivity increases, a surplus of unwanted products often results, which can be then traded away. For instance, a butcher who finds himself with a surplus of meat could trade the meat for bread from the baker.
But what about products that aren’t in demand? What if the baker doesn’t want the butcher’s meat?
This predicament is why money was introduced. The butcher can sell his meat to whomever is a willing customer in the market, and then use the money to purchase bread from the baker.
And what if the butcher doesn’t want bread, but rather cheese? He can go to the market and buy cheese with the money he earned from selling his meat.
In this way, people are able to specialize in their respective crafts or fields, another kind of division of labor. A division of labor increases productivity; which in turn gives rise to the market where craftsmen can trade surplus produce.