2. The Wealth of Transactions

Classical economics begins with Adam Smith’s “inquiry” into why some nations are wealthier than others. The result of his inquiry was that nations become wealthy through trade and the richest nations are those that trade most freely.

Trade allows each member of an economy to increase his productivity because of what we now call “comparative advantage.” Since the individual member of a trading society is able to trade with other members, he does not need to provide for all of his material needs. Because of his ability to trade, he is able to concentrate on producing a small range of products that he is able to do well because the particular advantages that he has in skill, tools, and natural resources. Because of the concentration of his productivity into a small range of products he produces a surplus that he is able to trade for the other requirements of his survival.

The commercial transaction, or trade, is what generates the wealth of nations.

Smith’s did not discover the power of the comparative advantage (he is believed to have been taught this by the French physiocrats). His genius was his ability to demonstrate its affects with a famous example of a pin factory that produced 50,000 pins a day from a mere twenty workers, each of which would be unable to produce twenty pins a day working alone. Each worker was able to amplify his productivity by a factor of over one hundred by concentrating only on a specific part of the process and passing his unfinished product to another worker.

"But without the disposition to truck, barter, and exchange, every man must have procured to himself every necessary and conveniency of life which he wanted."
Adam Smith, The Wealth of Nations

In our modern era, Milton Friedman offered a better example of the power of comparative advantage. A simple pencil, made of wood, graphite, metal, rubber, and paint can be purchased with only a few minutes of our labor; however, if we were forced to produce a pencil completely on our own, it would take most of us a year’s time. We would need to learn metallurgy, rubber production, the petroleum refining needed to produce synthetic rubber, and many other skills even if we had the raw materials available to us. The pencil is an inexpensive tool only because it is the result of hundreds of trades among very skilled and productive people.

The benefit of Friedman’s pencil illustration is that, in studying it, we can see that if each of us was required to provide for all of his own material needs, we would be reduced to the Stone Age, without pencils, computers, books, and even the paper that requires timber, lumberjacks, and chemicals to produce. Without the commercial transaction, we would have no time or material surplus with which to produce all of the benefits of a higher culture.

The commercial transaction is necessary to produce what we call civilization.