Wealth of Nations

I started reading Adam Smith's 'Wealth of Nations' the other day. I know I have weird tastes, but I love to learn and there are so many classics I haven't had time to read yet. Sometimes I can't get through them (I choked on Aeschylus a few years ago), but if I can get the right perspective on a book and see the beauty of the author's ideas, I usually learn some great things. There's a reason that certain classics endure for centuries.

Adam Smith

One thing that struck me at the very beginning - Smith makes the case that one of the origins of wealth in certain nations derives from the division of labor. When people focus their efforts on a narrower field of study, they can often be much more productive than if they try to master every piece of the process. He looks at several industries (e.g. pin making - who knew?) and cites examples of the productivity achieved by factories that pipeline the process by dividing the labor. Compared to typical production rates achieved by people working alone, the number of products manufactured by the pipeline process per person is hundreds of times greater than the single-person model.

I don't know whether his theory holds up in every industry (I think it does) or if there is some point at which that correlation between increased productivity and narrower fields of study breaks down (I think it may), but according to his studies, that concept makes a big difference in productivity and contributes greatly to the wealth in a nation.

None of that was really new to me, except maybe that pin-making industry :), but then he threw something at me I hadn't thought of before. In order for this division to work, there have to be a large number of people. Towns and cities, for example, would benefit from this model of the division of labor whereas rural settlements can't afford to have 10 people out of a total population of 1,000 specializing to produce thousands of pins a day.

But here's the kicker. Transportation can enable the formation of larger groups of people even if they are spread out geographically. Thus, through trade, groups of people can rationalize even greater degrees of specialization to provide goods and services to people in other places, knowing that other goods and services that they are not producing may be procured from others who are likewise specializing and producing valuable products. So transportation can form larger 'virtual communities' and enable a greater degree of the division of labor, which leads to greater productivity. The advent of cars, trains, and airplanes has probably done more to increase the world's wealth than I had previously thought.

Then I thought that in our age where we place an ever greater emphasis on services, communication may serve as well as transportation when the desired services are based on information. The advent of the internet has probably contributed and will continue to contribute a great deal to our wealth as we seek to provide value through the exchange of information - ideas, solutions, software, etc. These products may have value, but don't require transportation to enable their utility. But they do require communication. And thanks to the internet, we have a pretty large 'virtual community' that continues to grow.

I love it when an idea helps me see things in a new way. As any economist reading this can tell, I'm no economist, but I may know just enough to be dangerous. I've barely started the book, so I look forward to learning more from our friend, Mr. Smith. Maybe I'll share a little more as I get farther along. If you are an economist, or a wannabe like me, please share your thoughts. I like to learn from living people as well as dead ones.