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Adam Smith: Life
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Smith sets out from the thought that the annual labour of a nation is the source from which it derives its supply of the necessaries and conveniences of life. He does not of course contemplate labour as the only factor in production; but it has been supposed that by emphasizing it at the outset he at once strikes the note of difference between himself on the one hand, and both the mercantilists and the physiocrats on the other. The improvement in the productiveness of labour depends largely on its division; and he proceeds accordingly to give his unrivalled exposition of that principle, of the grounds on which it rests, and of its greater applicability to manufactures than to agriculture, in consequence of which the latter relatively lags behind in the course of economic development. The origin of the division of labour he finds in the propensity of human nature "to truck, barter or exchange one thing for another." He shows that a certain accumulation of capital is a condition precedent of this division, and that the degree to which it can be carried is dependent on the extent of the market. When the division of labour has been established, each member of the society must have recourse to the others for the supply of most of his wants; a medium of exchange is ... found to be necessary, and money comes into use.
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For 300 years before Smith, Western Europe was dominated by an economic system known as "mercantilism." Though it provided for modest improvements in life and liberty over the feudalism that came before, it was a system rooted in error that stifled enterprise and treated individuals as pawns of the state.
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[One] main concern for Smith involved tracing the roots of value. He identified two different kinds of value, "use value" and "exchange value." The concept of exchange value interested Smith considerably. The diamond-water paradox, in particular, proved puzzling to him: Why is it that diamonds, which have very little practical use, command a higher price than water which is indispensable to life? By discovering the true source of value Smith hoped to find a benchmark for measuring economic growth. Eventually Smith settled on labor as the source of value: The number of hours labor that a good can be exchanged for constitutes its inherent worth.
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