Wealth of Nations: Book 1: Chapter 4: Of the Origin and Use of Money

Book One, Chapter 4 traces the probable emergence of currency. Division of labor produces a variety of men, each with stocks of goods of their own labor which he may wish to trade for other men's goods. But how can that trade occur when any given person may not want what you wish to trade or in the innate quantities your good presents itself in? If I herd cattle does all trade have to be in relation to 1 cow? This poses any number of problems.

Societies established a center object of trade. Shells, salt, oxen or even nails in one remote Scottish village served as the currency of choice. Over time metals proved to have many characteristics which prove valuable in the establishment of currency. Metals like gold, copper or silver are durable, divisible, and lack much in the way of practical use like oxen would. But metals by themselves could prove hard to manage given dividing them from one pound bars could be trying, or subject to fraud. Maintaining accurate scales was also a barrier to trade of metal. The formulation of mints as a standard way of assuring the value of the metal became commonplace.

Then Smith describes how the Pound was originally a pound, but shrunk over time as a way to allow greedy princes and sovereigns a way to cover their debts, but the long term effect was to benefit debtors across the board at the expense of creditors. I don't know whether Smith realized it, but he basically outlined the basic concept of inflation and an expansionary money supply.

He concludes by making a few points which I assume he will expand on through future chapters. First value has two types. Value of use (like tools) which are poor instruments of exchange, and value of exchange(like coins) which have little practical use. Second he outlines a framework for what I can only assume is the foundation of price theory.

Wealth of Nations: Book 1: Chapter 3: That the Division of Labour is limited by the Extent of the Market

The core of this chapter is basically a two pronged descriptive analysis of how division of labor occurs.

First if you have a small village and a large town, you can expect that in the small village any given worker would be forced to cover many different trades. This is simply illustrated by the simple porter (think moving company). In a tiny village he maybe a porter maybe once a week or once a month if he was lucky. So on many of his days, he'd be doing other tasks which the small population of the village would be lacking in. "So you don't need stuff moved today, how about I mow your lawn or fix your leaky faucet?" While in a large town, he'd be a porter every day, and there would be a gardener every day, a plumber everyday. The demand for these services is large enough to support the trade in that market.

The second point is that the first can be partially negated if a healthy trade route was available. He compares how land transport at the time (some horses and a wagon) compared in cost to a ship transport. The net result was the cost of transport from one place to another is pretty cheap if you can get there by water. As examples of the benefit he compares the economies and productive nature and division of labor in great empires who either had constructed or utilized waterways to prosper, to the less civilized people who as a by product of geography had no such available option.

The points are pretty salient. You can have divided labor provided you can export the excess cheaply in exchange for stuff you can't make. The basic take away is the trade can produce greater affluence than isolation. I think it is important to review the second point in a modern context. Think for a second how much you pay for a package to be delivered by air quickly versus by ship and cargo crate. I think that as fuel prices get more expensive over time, a resurgence of rail versus highway shipping of goods could be a very likely outcome. Some wine shippers in Ireland are already toying with wind sail powered ships versus their diesel counterparts.

The notion that urbanization leads to greater societal wealth seems to have borne itself out with the grand urbanization in the last century. Think of the wealthiest countries and look at their population concentrations, you'll see large city after large city. Even looking at China's modernization over the last 20 years is a case study in the largest human migration in human history.