Adam Smith: mediums of exchange

Adam Smith, on pg. 24, speaks of the division of labor bringing about an inefficiency in the trade of commodities, though only when there is no agreed upon medium of exchange. Smith gives the example of a specialized producer, like a butcher, having too much of one commodity; that is, the butcher will have more meat than he or she will ever consume, and so the butcher will likely trade meat for goods. Because there are goods which, due to the butcher’s specialty, he or she cannot produce but requires nonetheless, a trade must occur.

And herein lies the problems which Smith speaks of; the butcher has difficulty finding those who have something of use to offer to him, the butcher will have difficulty ensuring trades of equal value, and the butcher will frequently trade for greater quantities of a good than wanted. There would be too few people that would want meat in exchange for wood, and there would seldom be agreement amongst individuals when it comes to the value of meat in terms of wood. These are the problems that arise when labor is divided without a medium of exchange. Smith’s solution to the problem is to have an acceptable medium of exchange which all men will desire; thereby allowing a unit of trade that is accepted by all members of the society. Smith makes explicit that this must occur after the division of labor, not before.

Now, I have no disagreement with Smith on this point; rather, I think this observation must be carried out further. Smith’s discussion provoked a thought within me about complex systems and mediums of exchange.

Within biology, the division of labor can be viewed as functionally divided within each hemisphere of the brain, or we can view various homeostatic processes as being functionally divided between cell types: i.e., macrophages and astrocytes. And with these functional divisions, there needs to be some medium for communication between one another. Indeed, such a medium does exist. The common mediums of exchange within a biological system are ion channels, protein transporters, and etc. In the same way that the world operates on a few central currencies, so too do biological systems have a hierarchy of mediums of exchange.

We can infer, then, that complex systems increase in efficiency when a common medium of exchange is introduced. To explain this further, let us discuss biology.

Suppose that each part of the brain relied on different units of exchange; that is, suppose the frontal cortex could only speak with F’s and P’s, the parietal cortex with P’s and C’s, and the temporal lobe with F’s and C’s.

If this were the case, then the frontal lobe could only communicate an F to the temporal lobe and a P to the parietal lobe. If the frontal lobe wanted to communicate F to the parietal lobe, then it would have the problem that the butcher would have: namely, the parietal lobe is uninterested in F’s like how not everyone is interested in the butcher’s products. In order for the frontal lobe to communicate with the parietal lobe, it would have to do the following trade: frontal lobe gives temporal lobe an F if and only if the temporal lobe gives the parietal lobe a C and convinces the parietal lobe to give the frontal lobe a P. This is not very efficient.

Thus, to increase the efficiency of the system, a universal medium of exchange needs to be introduced. If the brain spoke in P’s, then it could respond to the amount of P’s sent with each signal, the frequency of P signals, and etc.

The downside, however, is that miscommunication becomes easier; for instance, if the parietal lobe sent a P signal to the frontal lobe, it would willingly accept the signal. However, with multiple signal types, the parietal lobe would have a harder time sending signals to the wrong area. To compare, if I gave $50 USD to a stranger when I meant to give it to someone named John, the stranger would willingly the money; the money is a signal commonly accepted by many. Yet, if I were going to give 50 pieces of wood to John, then strangers would be less willing to accept; thus, lowering the probability of false transmission.


We may conclude, then, that complex systems work better when there is a common medium of exchange, like when a community speaks the same language, but that there are some cons which are necessarily linked to the increase in efficiency: namely, miscommunication. The miscommunication stems from the willingness of the receiver to accept the signal, or, in more biological terms, the willingness of a membrane to be permeable to ions.


$20,000. That is what I wasted on university before realizing my passion is just to read, write, and think.

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