Looking backwards in time, we can see the advantage of specialisation, but how does it emerge and constantly change. Why do ever newer specialisations emerge?

What is really happening when someone specialises in some area of production is that individual over-produces that product beyond his individual need. He uses the surplus to exchange it for something from another member of his society. It is true that sometimes there is a charity, where there may be a transfer of goods in one direction only. In other instances, a charitable benefactor may exchange goods far in excess of the value of something provided in exchange. But these examples are not a foundation on which the sophisticated society, can be built.

Clearly one type of exchange is the direct exchange that we find in barter. In this scenario each party to the exchange offers something which he values less than what he expects to receive. It is a common misconception that this exchange represents an equality of value. This is a fallacy. In all cases of voluntary exchange scenarios, into which both parties freely and willingly enter, each gives something that he values less than the value of what he receives. Otherwise there would be no exchange. Each individual would not enter the exchange to receive something less valuable than what he receives and there is no reason to make an exchange if what he receives is of equivalent value to what he gives up.

Barter has significant limitations. Each person must want exactly what another person provides. This is called the “Double Coincidence of Wants”. A Double Coincidence of Wants is rare. There is also the problem of exchange of a single very valuable indivisible item, such as a horse, for many less valuable items such as apples. It is very unlikely that a horse owner would be willing to exchange his horse for any number of apples.

Sophisticated exchange will require some medium to facilitate the exchange. If there is no medium, then each product will need to be bartered against another product. Barter is extremely inefficient, requiring each person in the exchange to have the exact product and quantity that the other party desires. We will leave the exploration of how a medium of exchange could develop until later. What we can say is that at some point in the past there was no medium of exchange and then at some point after that, some media had come into use. Silver and gold coins have existed for millennia. We know that Roman soldiers were partly paid with salt. There is also an observed phenomenon, in which Prisoners of War during the Second World War, adopted cigarettes as a generally acceptable Medium of Exchange.

Regardless of the method by which money comes into use, its benefits are profound. There will be much more discussion of the benefits of money later but once money exists, some specialisation has already happened. The presence of money in society allows for the expansion of specialisation because over-production can easily be exchanged for money, which can be saved or immediately exchanged for something which the owner of money desires. If the money is saved, then something much more valuable might eventually be purchased. At all times it must be remembered that money is in a state of barter with every other product or service being exchanged. An apple can buy a silver coin or the silver coin can buy an apple. This primitive barter function of society still exists, thousands of years after society emerged!

There is another point which will be briefly mentioned here. Voluntary exchange (either direct or indirect) and charity are not the only ways to transfer products and services between individuals. People can use violence or threaten violence to steal or acquire goods. Fraud and other methods of deception are ways of depriving other individuals of valuable goods. But if theft, fraud or other methods are used to acquire goods, then there is no gain on one side of the exchange. One individual will always lose. In the case of voluntary exchange, both parties gain. So even though violence and the threat of violence is always present, with theft and fraud always possible, society cannot survive if these methods of acquiring goods become dominant. Individuals must protect against such wrongs, otherwise their society will decline or fail.