Take a look around you. There are some people who aspire to become an engineer one day, while some want to have a career in financing. Some are working daily in their carpentry, while some trading stocks to earn ‘money’.
We as humans, are at the top of the food pyramid because we have in us, an ability to trade and exchange our produces like these. People working in carpentry produce more of the desks/benches and sell the surplus to the ones who need it, in exchange for the things they need immediately - food and shelter. Since, we are so efficient at the exchange, we can afford to produce more of what we can, in exchange of more of what we want.
The tendency comes naturally to human beings. Long ago, when we lived in tribes, there were some people who were more efficient in making fire, while some to hunt down a prey. So, it was only obvious to combine those two expertise at a common ground and survive within a tribe.
Take an example of a man who has shown more efficacy in cooking food. That man, within a tribe, can then exchange other produces - such as clothes from a tailor, weapons from an armorer, in exchange of the surplus food he cooks. Similarly, in this way, it is only rational if a woman gets even more efficient at her skill so she is able to produce more. In return, she gets what she needs, in exchange for whatever surplus she produced.
Thus, division of labour, by principle, allows us humans to focus on a single, or a few tasks while allows us to depend on multiple other humans like us to carry out other tasks that are vital to our survival. This simple exchange of our expertise is a reason why we are so supreme over other animals.
However, it’s important to note, that division of labour by itself, is limited by the market it is surrounded by. It is key to understand that the focus on one particular skill only makes sense when the market is large enough for it to sustain.
Take the example of the cook again. In a rural village, when the market of the cook is so small, even if the cook is proficient at what he does, there just aren’t enough people who are in need of his produces, so he can exchange it for his other necessities. Therefore, he must also focus on several other aspects of his life to sustain himself, thus should be a generalist in order to subsist. However, if he was in a town like Kathmandu, he’ll find enough people who require his expertise in cooking, thus, enabling him to exchange his surplus food for other requirements he has.
In this way, bigger the market, more people within it can afford to excel in their trades. This is why much of the early civilization fostered around the places where water navigation was possible. Water navigation, through boats and ships, is cheaper to land navigation, thus expanding the broad market size which results to more exchanges.
The dexterity in itself, is influenced by the nature we grow up in, it’s not something that comes from birth. A person born in a well-educated family is likely to become more educated, while a labourer’s child is likely to learn his trades.
Meanwhile, when there is such a division of labour, where the exchange itself is the most critical part of the process, there needs to be a way to facilitate it. One primitive way could be to exchange whatever the surplus one produces, in exchange for whatever the goods one needs. For instance, when I am building a mobile application, I could, in principle, exchange my time with my graphic designer friend’s time to build the marketing kit for my application. However, it meets with one stark limitation factor.
There are many times a situation where, the seller might not need the surplus we could offer them. For example, my graphics designer friend could already know how to build an application, and therefore, doesn’t need my help in that exchange. He might actually require a second-hand car. So, it will be upon me to find something he requires - a second hand car, or find someone who has a surplus of a second-hand car as well as the need to build an application. Such an exchange is complicated, and requires to maintain a deep network of transactions, which just isn’t feasible. Thus, it creates a situation where I, despite of my knowledge of building an application, don’t have any means to get the services from my friend.
As such, we need a common commodity to facilitate such exchanges between the people, so I, in effect, can sell my ability to build applications to someone who really needs it, in exchange for the common commodity. Then, I could use that common commodity to get the services from my friend. The friend then uses that common commodity to get a second-hand car from someone else. You get the idea.
An array of commodities thus, can be found in the past, from cattles to coins. It’s easy to identify what properties the commodity must have - 1. It should be consistent, meaning it shouldn’t just perish out of no where, 2. It must be something that we can use to get the produces we want in an exact amount (For example, if I want to buy a glass of milk, I should be able to pay whatever a glass of milk is worth. Not have to build an entire application.)
Metals, were therefore, found to be used historically, since they can be easily divided into pieces as well as fused (so allowing us to solve the second problem), while also have the feature of being non-perishable (at least, unless you dissolve them into some acid). However, there are two other challenges we now face - 1. You must measure the weight of the metal in exchanges 2. You must figure out a way to assess the quality of the metal (it could easily be some cheaper substance, in an outlook of the actual metal). The problem was solved initially, through stamps, which acted as a QC mark over the metal, and more so, through coins. Coins had specific weight as well as quality standards, as stamped by the Royal Mint in the past, thus providing the confidence to exchange goods in a lucid manner.
The confidence sometimes, was taken for granted by the Royals and the huge empires. They used deception to manipulate the trust the citizens put in them, in order to ‘pay off their debts’. What they did was decrease the quantity of the metals in their coins, thus producing more coins with the same amount of metal at their disposal. In this way, they wrote off their debts, when in effect, all they did was fraud their creditors. I am fascinated by the case, because in such instances, it’s always found that the creditors are the ones who face the wrath, while all the debitors pay off their old loans with the new inflated standards. For instance, when I lend my money to my friend for a 20% interest, and the annual inflation comes to be 50%, my friend will pay me the same amount, except the amount is greatly devalued now. Such a case, when it’s natural course of the greater economy is a risk I must take, but when it’s a fraud, it’s something to reckon about.
However, this simple concept, of the division of labour, of the exchange of labour between people explains the key fundamentals of human economy. In fact, as Adam Smith puts, labour is the real measure of the exchangeable value of all commodities.