1.3 The Limitation of the Market

Since the value of the division of labor is in the ability to exchange the product of one's work for the product of others, this value is limited by the extent of the market - which is to say, the degree to which goods are available to be exchanged for one's own product. As such, the benefits of industry, with workshops producing very specific goods in great quantity (such as needles or barrels), are available only to markets that are sufficiently large that there is significant demand for these goods, such that sufficient quantity can be traded.

In rural areas where families are scattered, each household must produce for its own needs. Members of the household must be farmers, bakers, butchers, clothiers, doctors, carpenters, and have some degree of proficiency at a myriad of tasks - which are generally done quite poorly.

In a small town, it may be feasible for a few to specialize: for there to be one miller, one blacksmith, and one carpenter who performs a specific service for the others in exchange for the various wares they produce in their households. But even at this level, specialization is minimal: the carpenter does all tasks involving fabrication with wood - he is a joiner, a cabinet-maker, a wheelwright, a wagon-maker, etc. - as there is not sufficient need for a specific kind of good for him to specialize. Only as towns grow larger can there be sufficient demand for specific goods for these tasks to be handled by specialists.

Further specialization can occur given the use of roads and waterways to transport goods to nearby towns. A dairy in one town can specialize in the production of cheese in excess of the town in which it is located, by carrying its goods to trade in nearby towns. Likewise, a tinker who would not be fully employed in one town can travel among several to satisfy their aggregate demand for his trade.

Improvements in logistics result in a greater capacity for carrying cargo - better roads and larger wagons, broader ships and better waterways, enable the motion of hundreds of tons of goods from one town to the next, and ships traverse the seas - such that one manufacturing operation in a small town can supply a good as specialized as shirt-buttons to all of England, and all of Europe, and as far as India and China.

In Smiths time, the primary channel of commerce were oceans and large rivers, and economic development was thus most evident in towns proximate to waterways. As such, the "inland parts" of nations remained largely devoid of economic development. For much the same reason, the areas of the world that first became "civilized" were on the coasts of the Mediterranean sea: Greece, Rome, Carthage, Troy, Egypt, and Phoenicia. Even in Smith's day, the great cities where industry flourishes are all either coastal or have significant waterways connecting them to the open sea. In contrast, locations that do not have access to the seas are lagging in prosperity, and entirely land-locked nations remain in a "barbarous and primitive" state.

(EN: Much detail on the development of specific nations is given, but it is a historical account up Smith's time in the late eighteenth century, well before railroads and highways brought economic development to the interior areas. As such, it's interesting historically, but not germane to the present world.)