WEBVTT

NOTE 14. Cooperation: How a Free Market Benefits Everyone

1
00:00:00.000 --> 00:00:11.200
14. Cooperation. How a Free Market Benefits Everyone. June 27, 2008.

2
00:00:11.200 --> 00:00:17.200
The following attempts to explain the most important idea in the history of social analysis,

3
00:00:17.200 --> 00:00:23.920
the notion, actually it's a description of reality that is all around us but rarely noticed,

4
00:00:23.920 --> 00:00:30.320
has been around for centuries. It was first observed by ancients. It was first described

5
00:00:30.320 --> 00:00:36.240
with rigor by late medieval monks working in Spain. It was given scientific precision

6
00:00:36.240 --> 00:00:42.160
in the Classical period. It is the basis of advances in social theory in the twentieth

7
00:00:42.160 --> 00:00:49.680
century. In fact, it is an essential part of the case for freedom. It was the basis

8
00:00:49.680 --> 00:01:17.200
I speak of the division of labor, also known as the law of comparative advantage or the

9
00:01:17.200 --> 00:01:24.560
Law of Comparative Cost, and also known as the Law of Association. Call it what you will.

10
00:01:24.560 --> 00:01:30.740
It is probably the single greatest contribution that economics has made to human understanding.

11
00:01:30.740 --> 00:01:36.240
This law, a law like gravity, not a law like this speed limit, is a description of why

12
00:01:36.240 --> 00:01:42.700
people cooperate and the ubiquity of the conditions that lead to this cooperation. If you can

13
00:01:42.700 --> 00:01:47.900
can take a few minutes to learn it. You will understand how it is that society functions

14
00:01:47.900 --> 00:01:53.900
and grows wealthy even without a visible hand directing its path. You will also see how

15
00:01:53.900 --> 00:01:58.980
the criticism that the market economy leads to the strong dominating the weak is actually

16
00:01:58.980 --> 00:02:05.980
a sham. This law shows how it is that people can gain, materially and in every other way,

17
00:02:06.800 --> 00:02:12.220
by working together rather than working in isolation. They don't just gain the sense

18
00:02:12.220 --> 00:02:24.220
In the sense of satisfaction that comes with participation and solidarity with one's fellow man, they can actually gain in the real stuff of life, the goods and services that are available to us all.

19
00:02:24.220 --> 00:02:34.220
What's more, they gain more than the sum of their parts. Through cooperation and exchange, we can produce more than if we work in isolation.

20
00:02:34.220 --> 00:02:40.220
This applies in the simplest economic settings as well as the most complex ones.

21
00:02:40.220 --> 00:02:47.220
It helps to lay this out more rigorously so that you can observe the magic of the marketplace at work.

22
00:02:47.220 --> 00:02:51.720
I owe the following exposition to Ludwig von Mises in Human Action,

23
00:02:51.720 --> 00:02:56.720
Murray Rothbard in Freedom, Inequality, Primitivism and the Division of Labor,

24
00:02:56.720 --> 00:03:04.720
and especially Manuel Ayao's Not a Zero-Sum Game, which is available through Mises.org.

25
00:03:04.720 --> 00:03:11.680
Let's say you and I can both make bagels and pies. But there's a problem. You make both

26
00:03:11.680 --> 00:03:16.840
with incredible efficiency. In fact, you do a better job at making bagels and pies than

27
00:03:16.840 --> 00:03:24.580
anyone who has ever lived. You are the world-class all-time champion. Meanwhile, I'm not so

28
00:03:24.580 --> 00:03:32.200
hot at either. My bagels taste as good as yours, but they seem to take me ages to make.

29
00:03:32.200 --> 00:03:37.280
Why pies are the same way? I struggle and struggle, but try as I might, I just can't

30
00:03:37.280 --> 00:03:43.720
seem to crank them out the way that you can. What is likely to happen under these conditions?

31
00:03:43.720 --> 00:03:48.320
The intuitive answer, which you will hear in just about every sociology class in the

32
00:03:48.320 --> 00:03:54.760
country, is that you will make all the bagels and pies. No one else will. You will lord

33
00:03:54.760 --> 00:04:01.340
it over the rest of us, and have massive market power. If anyone wants either, he or she must

34
00:04:01.340 --> 00:04:24.500
Let's say you and I have never met. We are both making bagels and pies. Here is what

35
00:04:24.500 --> 00:04:31.300
happens in a 24 hour period. You make 12 bagels in 12 hours and 6 pies in the remaining 12

36
00:04:31.300 --> 00:04:37.120
I, on the other hand, only managed to make six bagels in the first twelve hours and a

37
00:04:37.120 --> 00:04:41.320
mere two pies in the remaining twelve hours.

38
00:04:41.320 --> 00:04:47.220
If we both work at this pace, the total production is eighteen bagels and eight pies.

39
00:04:47.220 --> 00:04:52.200
In each case, the cost of what you decide to do is the thing you give up.

40
00:04:52.200 --> 00:04:57.480
So for you, the cost of each pie is two bagels, and, likewise, the cost of each bagel is a

41
00:04:57.480 --> 00:04:59.120
half of a pie.

42
00:04:59.120 --> 00:05:03.720
For me the opportunity cost of making a pie is three bagels, and the cost of making a

43
00:05:03.720 --> 00:05:09.360
bagel is a third of a pie. Just looking at this, you might observe that you have your

44
00:05:09.360 --> 00:05:16.760
act together, whereas I'm pretty shabby. What chance in life do I have? Well, my hope

45
00:05:16.760 --> 00:05:21.280
is bound up with the reality that your time and resources are scarce and you want to have

46
00:05:21.280 --> 00:05:27.040
ever more of each. So you begin to think about exchange. Even though I'm not very good at

47
00:05:27.040 --> 00:05:34.040
If you specialize in making pies, you still need some bagels. So you plan to exchange pies for bagels from me.

48
00:05:34.040 --> 00:05:41.040
With this thought in mind, you increase pie production and reduce bagel production.

49
00:05:41.040 --> 00:05:48.040
I, on the other hand, stop pie production completely and devote my time to making bagels.

50
00:05:48.040 --> 00:05:54.600
in mind, you increase pie production and reduce bagel production. I, on the other hand, stop

51
00:05:54.600 --> 00:05:59.800
pie production completely and devote myself to bagel production in hopes of fobbing them

52
00:05:59.800 --> 00:06:06.620
off to you. So, you now spend a mere eight hours on bagel making, in which time you produce

53
00:06:06.620 --> 00:06:13.000
eight bagels. In the remaining sixteen hours of your day, you are able to bake eight pies.

54
00:06:13.000 --> 00:06:20.120
Meanwhile, I can now devote all of my time to bagel making, and I turn out 12 bagels in 24 hours.

55
00:06:21.160 --> 00:06:30.200
Let's total up the production. Before cooperation, 18 bagels and 8 pies. After cooperation, 20 bagels

56
00:06:30.200 --> 00:06:39.960
and 8 pies. So, what is the gain here? Precisely two bagels. Can you believe it? Nothing else

57
00:06:39.960 --> 00:06:46.600
changed. There was no increase in our production potential, no increase in technology, no change

58
00:06:46.600 --> 00:06:52.840
in consumer demand or the weather or the linearity of history itself. All that happened is that

59
00:06:52.840 --> 00:06:59.240
we agreed to produce in cooperative exchange rather than isolation, and voila, two additional

60
00:06:59.240 --> 00:07:01.440
bagels.

61
00:07:01.440 --> 00:07:06.840
You think there's a trick? Go back and check the numbers and the assumptions. I'm just

62
00:07:06.840 --> 00:07:36.840
Let's say we now exchange the goods we make. You give me two of the pies you made in exchange for five bagels that I made. That leaves you with thirteen bagels and six pies, while I now have seven bagels and two pies. This would be reasonable, since those bagels you buy from me would have cost you five hours of production time. Try to find a good bagel for me.

63
00:07:36.840 --> 00:08:00.840
And what do I get if I exchange? I get two pies, which would have taken me twelve hours to make. So there is a sense in which I, by specializing, have saved two hours. And how many hours have you saved by encouraging me to make bagels? Five hours, during which time you made pies.

64
00:08:00.840 --> 00:08:05.840
And what is the cost of exchange in material goods for each of us?

65
00:08:05.840 --> 00:08:09.840
You have given up two pies. I have given up five bagels.

66
00:08:09.840 --> 00:08:18.840
If our time is measured in terms of goods, you have given up the time equivalent of four bagels for five bagels and thereby gained one.

67
00:08:18.840 --> 00:08:27.840
I have given up five bagels but gained the time equivalent of six bagels, since my pie to bagel ratio is three to one.

68
00:08:27.840 --> 00:08:29.840
So who gained the most?

69
00:08:29.840 --> 00:08:37.840
In terms of bagels, we gain the same, one. In terms of time, I have gained more. In terms of pies,

70
00:08:38.400 --> 00:08:48.160
you have saved more. Who is the winner? Both of us. Again, what made us gain? Cooperation and

71
00:08:48.160 --> 00:08:56.960
exchange. Nothing more. Now, you might say that this is absurd. No one sits around drawing

72
00:08:56.960 --> 00:09:12.520
I might be a wonderful musician and web programmer, but my advantage is web programming, so I

73
00:09:12.520 --> 00:09:18.120
leave the music production to other people, even if they do it less effectively.

74
00:09:18.120 --> 00:09:20.120
It's true in the business world.

75
00:09:20.120 --> 00:09:26.120
The boss might do an amazing job at accounting, clean-up, marketing and customer support.

76
00:09:26.120 --> 00:09:31.460
He or she might do these things more efficiently than anyone else, but the cost of doing one

77
00:09:31.460 --> 00:09:34.340
thing is another thing given up.

78
00:09:34.340 --> 00:09:40.000
It makes sense to depend on others so that we can all specialize.

79
00:09:40.000 --> 00:09:44.240
Consider the great 19th century pianist Franz Liszt.

80
00:09:44.240 --> 00:09:48.600
He was the best and most highly paid musician in Europe.

81
00:09:48.600 --> 00:09:51.840
Let's say he was also a great piano tuner.

82
00:09:51.840 --> 00:09:58.580
Would it make sense for him to give up practice time for a concert that would pay him $20,000

83
00:09:58.580 --> 00:10:07.320
in order to tune his own piano? Not at all. He would rather pay someone $200 to do that.

84
00:10:07.320 --> 00:10:13.240
The opportunity cost of piano tuning for Liszt was very high, but for the tuner it was very

85
00:10:13.240 --> 00:10:21.300
low. They exchange, and both benefit. It is the same with doctors and nurses. The doctor

86
00:10:21.300 --> 00:10:26.560
The doctor might be great at prepping patients, but in doing so the doctor is giving up performing

87
00:10:26.560 --> 00:10:31.080
another surgery that would earn him many thousands of dollars.

88
00:10:31.080 --> 00:10:37.360
Note that this makes sense even if one person has an absolute advantage in every area.

89
00:10:37.360 --> 00:10:44.320
What matters for the real world is not absolute advantage, but comparative advantage.

90
00:10:44.320 --> 00:10:48.100
That is where the law of association comes into being.

91
00:10:48.100 --> 00:10:54.640
It is true for two people, two hundred people, two thousand people, or all people all over

92
00:10:54.640 --> 00:10:56.260
the world.

93
00:10:56.260 --> 00:11:01.840
Herein we have the case for international trade, for it changes nothing about people's

94
00:11:01.840 --> 00:11:06.320
mutual advantage that they reside in different lands.

95
00:11:06.320 --> 00:11:11.200
This is why it makes sense for both poor and rich countries to trade as noted by Bartolome

96
00:11:11.200 --> 00:11:15.100
Diabronaz as early as the 16th century.

97
00:11:15.100 --> 00:11:20.540
If it were not for these contracts, some would lack the goods that others have in abundance,

98
00:11:20.540 --> 00:11:25.140
and they would not be able to share the goods that they have in excess with those countries

99
00:11:25.140 --> 00:11:31.920
where they are scarce. Note that these gains come not from design but merely from freedom

100
00:11:31.920 --> 00:11:39.420
to associate, which Pope Leo XIII called a human right in his encyclical Rerum Novarum.

101
00:11:39.420 --> 00:11:45.020
If the state forbids its citizens to form associations, it contradicts the very principle

102
00:11:45.020 --> 00:12:02.540
Both the moral and practical advantages were reiterated by Pope John Paul II in Centesimus

103
00:12:02.540 --> 00:12:04.700
Anus.

104
00:12:04.700 --> 00:12:09.860
It is becoming clearer how a person's work is naturally interrelated with the work of

105
00:12:09.860 --> 00:12:11.060
others.

106
00:12:11.060 --> 00:12:17.460
More than ever, work is work with others and work for others.

107
00:12:17.460 --> 00:12:21.060
It is a matter of doing something for someone else.

108
00:12:21.060 --> 00:12:26.040
Work becomes ever more fruitful and productive to the extent that people become more knowledgeable

109
00:12:26.040 --> 00:12:31.300
of the productive potentialities of the earth and more profoundly cognizant of the needs

110
00:12:31.300 --> 00:12:34.960
of those for whom their work is done.

111
00:12:34.960 --> 00:12:40.580
The law was formalized by David Ricardo in England and further emphasized by economists

112
00:12:40.580 --> 00:12:46.260
The significance is impossible to exaggerate.

113
00:12:46.260 --> 00:12:50.920
It means that it is not necessary that all people of the world have the same talents

114
00:12:50.920 --> 00:12:53.980
in order to benefit from cooperation.

115
00:12:53.980 --> 00:13:00.300
In fact, it is the very diversity of the human population that makes it advantageous for

116
00:13:00.300 --> 00:13:05.040
them to work together and trade to their mutual benefit.

117
00:13:05.040 --> 00:13:11.640
What this means is that isolation and self-sufficiency lead to poverty.

118
00:13:11.640 --> 00:13:16.080
Cooperation and the division of labor are the path to wealth.

119
00:13:16.080 --> 00:13:21.640
Understand that, and you can refute libraries full of nonsense from both the left and the

120
00:13:21.640 --> 00:13:22.640
Right