Wealth of Nations

Chapter 1
Of The Division of Labor
Adam Smith’s Chapter 1 of the Wealth of Nations begins by stating that the greatest improvements in the productive power of labor lie in the division of labor. Even in the production of very simple products, division of labor always increases productivity exponentially.
Adam Smith offers three reasons on how the quantity of work increases. First, the increase of dexterity in every particular workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another ; and, lastly, to the invention of a great number of machines which facilitate and abridge labor, and enable one man to do the work of many.
First, the division of labor creates specialized knowledge of a particular trade or task. It reduces every man's business to some one simple operation, and making this operation as the sole employment of a workman’s life. This, in turn, makes the laborers engaged in this task more dexterous, and therefore more productive.
Secondly, the division of labor saves the laborer time. It saves the laborer time by focusing on one task rather than passing from one task to another, a process that requires him to use different tools and materials, a workman is able to maximize his time, thus increasing his productivity.
Lastly, the amount of time spent by laborers on an isolated task leads to innovation in the methods and tools employed in the task, and therefore to technological innovation that ultimately makes that task easier. The great number of machines helps a workman to make its task easier and faster. Through this, it enables one man to do the work of many. Therefore, increased division of the labor involved in the production of a particular product leads to increase of productivity.
By increasing productivity, the division of labor also increases the opulence of a particular society, increasing the standard of living even of the most poor. Division of labor also means that many people are involved in the production of each and every manufactured product. This is a testament to the interconnectedness not only of the laborers employed in manufacturing, but of all the branches of commerce.

Chapter II
Of the Principle which Gives Occasion to the Division of Labor
The division of labor is not the result of oversight and regulation by an authority, but of human nature. According to Adam Smith, a part that makes us human is our propensity to truck, barter, and exchange items. This propensity can be observed in any society, including the most primitive way. It is, in turn, the assurance of being able to trade what one produces with others that encourages the division of labor. When two parties enter into a trade with one another, both come away with something they were previously lacking. The division of labor will continue to be a powerful force so long as this condition is fulfilled.
Chapter Two also describes the manner in which material exchange spreads the benefits of the division of labor throughout society. At the beginnings of a particular society, it may have been talent that decided which member carried out which task. Division of labor by skill set would have allowed for modest efficiencies and surpluses. These surpluses would have allowed one member of society to trade the fruits of his labor for other objects or things that were needed. In this way, instead of each man struggling to produce some of the things he needed, each of them would specialize on producing an excess of one thing, and exchange it to others to gain all or most of his needs. This would increases the well-being of each member of society that was engaged in such production and trade.
Adam Smith goes on to insist that it is not natural talent that determines the profession of most people, but the habit, custom and education. When a man came into the world, and for the first six or eight years of their existence, they were, perhaps, very much alike, and neither their parents nor play-fellows could perceive any remarkable difference. As times goes by, they come to be employed in very different occupations. The difference of talents comes then to be taken notice of, and widens it by degrees.
In today's modern societies, people are most often employed in a certain way because they came to develop specialized knowledge of their role. This system of specialization and extensive education in particular subjects or trades would be impossible if human beings were not endowed with the propensity for trade. In the absence of this propensity, each person would be forced to acquire a wide variety of skills in order to sustain himself. Adam Smith uses this property to distinguish human beings from animals, who do not have the propensity for trade.

Chapter III:
That the Division of Labor is Limited by the Extent of the Market
The third chapter explains how the size of the market affects the division of labor. As what chapter 3 stated, it is the size of the market that regulates the extent of the division of labor that it can support. The larger the market, the greater the extent to which labor can be effectively divided. Because productivity increases with the division of labor, a large market is needed to consume the products that it gives rise to.
In rural or sparsely populated areas, the market is too small to absorb the products arising from an extensive division of labor, and therefore the division of labor must be limited in such areas. Historically, improvements to art and industry are made only when there is an assurance of a large market that will be able to absorb the products of labor. This occurs either when the market grows, or when a certain settlement has easy transportation to other markets.
Money also serves to extend the market because it facilitates trade to such a significant extent. If it were not for a standardized, universally accepted currency, people would always have to search out trading partners that had to offer exactly what they themselves needed, and vice versa. It would rarely be the case that these offerings and requirements coincided, and therefore people would have less faith in the ability to efficiently replace the surplus they produced with the objects they needed, and would be discouraged from producing such a surplus in the first place.

Chapter IV:
Of the Origin and the Use of Money
Once the division of labor has been accomplished, one man's labor supplies only a fraction of his wants and needs, and it is only through exchange that he can hope to attain them. Adam Smith goes on to speculate how the exchange must have occurred in primitive society, and argues that early trade must have been very clumsy. If bartering is conducted with perishable, non-divisible goods, it is rendered difficult, and many exchanges are simply impractical. It was these concerns, Smith posits, that led to the desire for a common currency. Metal lent itself to the being used as a currency because it is non-perishable, easily divisible, and compact. The text goes on to describe the various metals that were used throughout history as currency. After metal became the principle currency, coinage developed, in order to better ensure accuracy and purity in exchange.

Chapter V:
Of the Real and Nominal Price of Commodities, or of their Price in Labor, and that Price in Money
In this chapter, Adam Smith explains that the source of value of all commodities derives not from their money price, but from the amount of labor required to purchase them. He is led to his point by considerations of seemingly nonsensical pricing differences. A diamond, for instance, is extremely expensive, but unnecessary for life. Water, on the other hand, is very inexpensive or even free of cost, but is absolutely essential to to preservation of life. Smith explains the difference between these prices by looking at the differing amounts of labor that was required to bring those products to market. While the money price of a particular commodity may fluctuate for a variety of reasons, the amount of labor required to purchase it remains constant. The wealth of a particular individual is therefore determined by the quantity of labor that he can command. If labor is the ultimate determinant of value, then the question arises of how to ascertain a proportion between two different quantities of labor, especially if they are fundamentally different.
Smith resolves the problem of accounting for different kinds of labor by re-introducing the concept of money. Because of the difficulties of equating various kinds of labor, commodities are more often exchanged for other commodities than for labor. It is convenient to estimate the value of one commodity by its exchangeable value, and therefore by its money price. He explains that, though money in the form of precious metals is sufficiently well-suited to serve as the measure of the exchangeability of commodities, it is imperfect because of the fluctuations in the value of these metals. However, though the money price of a commodity may change over time as a metal becomes more or less scarce, the price of a particular commodity will rise or fall to reflect its real value, which remains unchanged so long as the factors directly concerned with its production remain unchanged.

Chapter VI:
Of the Component Part of the Price of Commodities
Smith argues that the price of any commodity is complex, reflecting three different components. These components consist in the rent of the landlord, the wages and maintenance of laborers or animals used to produce the profit, and the profit made by the farmer or entrepreneur. The fact that the price of all commodities contains these three components may be obscured by the fact that in many cases, the roles of laborer, farmer or entrepreneur, and landlord are united in one person.

Chapter VII:
Of the Natural and Market Price of Commodities
In every society, there is a naturally regulated average rate of both labor and profit for different sectors. If the price of a commodity is sufficient to cover the rent, wages, and profit of stock associated with its production, it is said to be sold for its “natural price.”
Additionally, there is the “market price” of a commodity, which reflects not the cost of the rent, wages, and labor associated with it, but the demand that exists for the commodity. If demand exceeds supply, the market price rises above the natural price. The upper limit of the market price is then determined by the greatness of the deficiency of the commodity in question, and the wealth of those who are competing to purchase it. If the quantity of a commodity exceeds demand, then the price of the commodity will fall. When a dearth or an excess of a commodity in relation to demand continues for an extended period of time, members of society are prompted to act in a way that brings the price into line with its natural price (either by devoting more resources to the production of a particular commodity and thereby increasing its quantity, or by diverting resources elsewhere).
Smith goes on to detail that there are certain methods whereby the manufacturers of a particular commodity seek to raise the market price. These methods may include procuring trade secrets that lower the cost of production, or controlling the supply of a particular commodity by creating a monopoly.

Chapter VIII:
Of the wages of labor
The wages of labor, in an unsophisticated system, consist of what the labor produces. In such a system, no landlord or master (employer) shares the price of what the self-employed laborer produces. It is the tension between masters and laborers that creates the market price of labor. In general, the interests of laborers and those of masters are starkly opposed to one another. Smith explains that while labor unions are perceived as ubiquitous, and are intimidating to masters, the union that exists among masters is at least as well developed as the one existing among laborers. Because the masters are a small and powerful group, this union is “tacit, but constant and uniform.” Masters, in combination, are more formidable than laborers because their greater wealth lets them subsist for a longer time without income, whereas laborers, who live with meager wealth, depend heavily on their wages for their daily subsistence, and cannot afford to do without them for long.
When laborers are abundant and employment is scarce, laborers bid against one another for employment, bringing down the price of labor. When masters compete for labor, the wages of labor increase. A situation in which the market price of labor is either significantly above or significantly below its natural price will be checked by actions of the laborers, who either devote themselves to a particular employment due to the high wages, or who turn their attention to other employments because wages are too low. In order for a consistent rise in wages over time, the revenue in a particular society must increase at a steady rate. Smith uses the colonial United States as an example, comparing it to England. In the colonies, he writes, revenue is greater than in England, but the wages are lower, because there is constant competition among workers. However, in the colonies, where there is an influx of capital that is equal to or greater than the rate at which the amount of labor increases, laborers are not involved in competition. Therefore, wages are relatively high. Growth keeps wages high. In a stagnant economy, even a wealthy one, the lowest classes will be desperately poor.