Readers Question: Why does specialisation necessitate an efficient means of exchanging good and services, such as the use of money as a medium of exchange?
Specialisation in the labour market means workers concentrate on specific jobs. Rather than learn every trade – electrician, plumber, manager, doctor, teacher – it is more efficient and practical if we specialise in one particular job.
However, if we were just a barter economy – without money. This specialisation would be a lot more difficult.
If I grew potatoes and you kept chickens – we could swap potatoes for eggs and vice-versa. This is a very primitive form of specialisation – and it does work – even without money. However, this is very limited if we want to develop the complexity of the economy.
When you go to the dentist, he doesn’t want paying in potatoes – there are only so many potatoes you can consume at a particular time. Potatoes are difficult to store, and it’s awkward to carry sacks of potatoes around with you to pay for different items.
If there is a form of money which is widely accepted, then you can pay the dentist with these coins, and he can then decide if and when he wants to buy potatoes – or if he prefers to buy imports of rice from abroad.
Also, some things are quite indivisible. If you work in designing new aircraft wings, this skill is not something you can barter when buying potatoes from a farmer. Your intellectual knowledge is valuable to an aeroplane company – but it is so highly specialised it is useless in bartering with anyone else in the economy.
Without the ability to get paid in a form of money which is widely accepted – we would have to stick to very limited jobs with a tangible and tradeable output.
Specialisation in production
In some industries – economies of scale are so large that it can be worth a firm specialising in producing a certain stage of production. For example, in the past, a car factory would produce and put together all the components of a car in one factory. But, now there will be firms who specialise in just producing engines. These engines can then be exported to different car factories, where they are used in the assembly of the finished car.
This requires good transport links and the ability of firms to pay suppliers for specific elements of car production.
By outsourcing aspects of the production, firms can concentrate on particular aspects and get greater economies of scale