The basics of economics were described earlier. This page describes many aspects related to productivity. As usual, these are best understood in relation to the default state of Subsistence, where each person lives on ten fish a day.
The population of the island increases to 200 people. Each person still catches 10 fish a day. The condition of each person is unchanged, because the average productivity per person is the same.
Starting from the state of Subsistence, the 100 people realize that each can catch 13 fish per day by swimming more quietly. Some catch 13 fish a day and feast, while some still catch only 10 fish a day, but do so in less time and enjoy their leisure time. The 100 people live in relative comfort, because of their improved productivity. Improving average productivity per person is, virtually by definition, the key to improving their conditions.
Each of the 100 people gets 10 fish a day. Half of each day is spent catching 10 fish, and the other half of each day is spent cleaning the 10 fish.
But 50 of the people are better at catching fish, or prefer to do so; while the other 50 people are better at cleaning fish, or prefer to do so.
So 50 people switch to catching fish for the whole day. The number of fish caught each day by each such person doubles, as they are now spending the whole day doing so (rather than just half a day).
Similarly, the other 50 people switch to cleaning fish for the whole day.
The result is that 100 people still catch and clean a total of 1000 fish a day, so that each person still gets 10 fish a day to eat.
Even this simple scenario exposes a whole host of issues. Suppose that the group organizes into 50 pairs of people, each pair consisting of one fisher and one cleaner. The fisher may complain that the associated cleaner is not cleaning the fish properly. Conversely, the cleaner may complain that the associated fisher is not catching good fish. How should such complaints be addressed? This involves setting up a dispute resolution system, with contracts, independent judiciary, etc.
As another example, say that one person is a particularly good fisher: then many people may want to be the cleaner associated with that fisher. How should that be decided?
Similarly if one person is a particularly bad fisher. Similarly if one person is a particularly good cleaner, or a particularly bad cleaner.
Similarly, more than 50 people might prefer to fish; or more than 50 people might prefer to clean.
How should such decisions be made? One solution involves setting up a barter or pricing system. A fisher who catches 20 good fish each day may find a cleaner willing to accept just 9 good fish a day. A fisher who catches 20 bad fish each day may need to offer 11 bad fish to get a willing cleaner. Similarly for particularly good or bad cleaners. See Trade .
The division of labour described above is beneficial, by itself, as each person gets to do their preferred task (catching fish or cleaning fish). However, it confers another advantage: after a while, as each person is doing just one task (be it catching or cleaning the fish), each person get quicker and better at his single task (see "Of the Division of Labour" in "The Wealth of Nations" by Adam Smith). With their increased productivity, the 100 people can catch and clean a total of 1200 fish a day, or 12 fish per person per day. Some choose to feast on 12 fish. Some others are content with 10 fish a day, in less time per day, and enjoy some leisure time.
A fisher may realize that 20 fish a day can be caught with the aid of a fishing net. But two days' work is required to make a net.
If each fisher only catches 10 fish a day, the minimum needed for survival, then nobody can afford to take two days to make a net.
However, say that each fisher can catch 12 fish a day. Some may catch 10 fish each day and enjoy a little leisure time each afternoon. Some may work for 5 days to catch 60 fish, then relax every sixth day.
By contrast, a fisher may use this excess catch to make a net. In other words, the fisher may work for 10 days to catch 120 fish. As the fisher eats only 10 fish a day, the fisher has 20 fish left over. This is enough to spend 2 days making a net. Thereafter, the fisher can use the net to catch 20 fish a day, enough to enable the fisher to work only every other day. This is a vast improvement in the fisher's condition.
Such a net constitutes capital. The management of such capital assets is capitalism. The fisher had to work harder than others to build up a surplus of fish that could then be consumed while making the net. By temporarily working harder, the fisher acquires a capital asset that enables the fisher to thereafter work less hard.
The arrangements described above can become more complex. E.g., some people may become particularly good at making nets. A fisher can make a net in two days, which entails the loss of two days of catch, or 40 fish. By contrast, a skilled net-maker can make a net in just one day. So a fisher who needs a new net can obtain one from a net-maker, and pay a commensurate amount in fish, say 25 fish. Both the fisher and the net-maker benefit from this arrangement:
Such arrangements constitute employment: the fisher employs the net-maker, and pays for the service provided. As the tasks involved become more complex, virtually everybody gets their livelihood from such an employment arrangement.