Production and Trade
Individual producers decide which goods to produce and how to produce
them. Production is a very complex process in any modern economy. For
example, a typical car manufacturer assembles a product out of thousands
of individual parts. It makes some of these parts itself. Most are
subcontracted to parts manufacturers, and many of the major parts
manufacturers subcontract some of their work to smaller firms. The same
is true for most other products you can imagine purchasing. Such
complex production displays two characteristics noted long ago by Adam
Smith—specialization and the division of labour.
Specialization
In ancient hunter–gatherer societies and in modern subsistence
economies, most people make most of the things they need for
themselves. However, from the time that people first engaged in settled
agriculture and then began to live in towns, people have specialized in
doing particular jobs. Artisan, soldier, priest, and government official
were some of the earliest specialized occupations. Economists call this
allocation of different jobs to different people the specialization of
labour. There are two fundamental reasons why specialization is
extraordinarily efficient compared with universal self-sufficiency.