WEBVTT NOTE 2.03. Exchange and the Division of Labor 1 00:00:00.000 --> 00:00:05.360 3. Exchange and the Division of Labor 2 00:00:05.360 --> 00:00:11.440 In describing the conditions that must obtain for interpersonal exchange to take place, 3 00:00:11.440 --> 00:00:17.960 such as reverse valuations, we implicitly assumed that it must be two different goods 4 00:00:17.960 --> 00:00:24.520 that are being exchanged. If Crusoe, at his end of the island, produced only berries, 5 00:00:24.520 --> 00:00:31.640 Jackson at his end produced only the same kind of berries, then no basis for exchange between them 6 00:00:31.640 --> 00:00:39.640 would occur. If Jackson produced 200 berries and Crusoe 150 berries, it would be nonsensical 7 00:00:39.640 --> 00:00:46.200 to assume that any exchange of berries would be made between them. It is possible that Crusoe 8 00:00:46.200 --> 00:00:52.440 and Jackson, for the mutual fun of it, might pass 50 berries back and forth between them. 9 00:00:52.440 --> 00:01:02.440 This, however, would not be genuine exchange, but joint participation in an enjoyable consumer's good, a game or play. 10 00:01:02.440 --> 00:01:11.440 The only voluntary interpersonal action in relation to berries that could occur would be a gift from one to another. 11 00:01:11.440 --> 00:01:21.440 If exchangers must exchange two different goods, this implies that each party must have a different proportion of assets of goods 12 00:01:21.440 --> 00:01:28.160 Goods in relation to his wants. He must have relatively specialized in the acquisition of 13 00:01:28.160 --> 00:01:34.880 different goods from those the other party produced. This specialization by each individual 14 00:01:34.880 --> 00:01:41.120 may have occurred for any one of three different reasons, or any combination of the three. 15 00:01:41.120 --> 00:01:48.720 A. Differences in suitability and yield of the nature given factors. B. Differences in given 16 00:01:48.720 --> 00:01:56.200 Capital and Durable Consumers Goods, and C, differences in skill and in the desirability 17 00:01:56.200 --> 00:01:58.360 of different types of labor. 18 00:01:58.360 --> 00:02:06.000 Basically, Class B is resolvable into differences in Classes A and C, which account for their 19 00:02:06.000 --> 00:02:07.000 production. 20 00:02:07.000 --> 00:02:13.280 These factors, in addition to the potential exchange value and use value of the goods, 21 00:02:13.280 --> 00:02:18.640 will determine the line of production that the actor will pursue, if the production is 22 00:02:18.640 --> 00:02:25.440 is directed toward exchange, then the exchange value will play a major role in his decision. 23 00:02:25.440 --> 00:02:31.240 Thus, Crusoe may have found abundant crops on his side of the island. 24 00:02:31.240 --> 00:02:37.160 These resources, added to his greater skill in farming and the lower disutility of this 25 00:02:37.160 --> 00:02:43.900 occupation for him because of a liking for agriculture, might cause him to take up farming. 26 00:02:43.900 --> 00:02:50.700 While Jackson's greater skill in hunting and more abundant game supply induce him to specialize 27 00:02:50.700 --> 00:02:59.360 in hunting and trapping, exchange, a productive process for both participants, implies specialization 28 00:02:59.360 --> 00:03:03.880 of production or division of labor. 29 00:03:03.880 --> 00:03:10.020 The extent to which division of labor is carried on in a society depends on the extent of the 30 00:03:10.020 --> 00:03:12.220 market for the products. 31 00:03:12.220 --> 00:03:17.780 The latter determines the exchange value that the producer will be able to obtain for his 32 00:03:17.780 --> 00:03:18.780 goods. 33 00:03:18.780 --> 00:03:24.940 Thus, if Jackson knows that he will be able to exchange part of his catch of game for 34 00:03:24.940 --> 00:03:31.400 the grains and fruits of Crusoe, he may well expend all his labor on hunting. 35 00:03:31.400 --> 00:03:37.080 Then he will be able to devote all his labor time to hunting, while Crusoe devotes his 36 00:04:07.080 --> 00:04:16.080 The division of labour implies that it must be more productive for all concerned than isolated autistic labour. 37 00:04:16.080 --> 00:04:28.080 Economic analysis alone, however, does not convey to us knowledge of the enormous increase in productivity that the division of labour brings to society. 38 00:04:28.080 --> 00:04:35.200 This is based on a further empirical insight, namely the enormous variety in human beings 39 00:04:35.200 --> 00:04:37.640 and in the world around them. 40 00:04:37.640 --> 00:04:44.480 It is a fact that, superimposed on the basic unity of species and objects in nature, there 41 00:04:44.480 --> 00:04:46.640 is a great diversity. 42 00:04:46.640 --> 00:04:53.520 Particularly is there variety in the aforementioned factors that would give rise to specialization, 43 00:04:53.520 --> 00:05:00.440 in the locations and types of natural resources and in the ability, skills, and tastes of 44 00:05:00.440 --> 00:05:02.000 human beings. 45 00:05:02.000 --> 00:05:08.600 In the words of Professor von Mises, one may as well consider these two facts as one and 46 00:05:08.600 --> 00:05:14.800 the same fact, namely the manifoldness of nature which makes the universe a complex 47 00:05:14.800 --> 00:05:17.060 of infinite varieties. 48 00:05:17.060 --> 00:05:21.600 If the earth's surface were such that the physical conditions of production were the 49 00:05:21.600 --> 00:05:41.600 It is clear that conditions for exchange, and therefore increased productivity, for the participants, will occur where each party has a superiority in productivity in regard to one of the goods exchanged, a superiority that may be due either to better nature or to a higher level of productivity. 50 00:05:51.600 --> 00:05:56.040 are given factors or to the ability of the producer. 51 00:05:56.040 --> 00:06:02.600 If individuals abandon attempts to satisfy their wants in isolation, and if each devotes 52 00:06:02.600 --> 00:06:09.640 his working time to that specialty in which he excels, it is clear that total productivity 53 00:06:09.640 --> 00:06:13.060 for each of the products is increased. 54 00:06:13.060 --> 00:06:19.840 If Crusoe can produce more berries per unit of time and Jackson can kill more game, it 55 00:06:19.840 --> 00:06:26.800 It is clear that productivity in both lines is increased if Crusoe devotes himself wholly 56 00:06:26.800 --> 00:06:33.200 to the production of berries and Jackson to hunting game, after which they can exchange 57 00:06:33.200 --> 00:06:36.260 some of the berries for some of the game. 58 00:06:36.260 --> 00:06:42.900 In addition to this, full-time specialization in a line of production is likely to improve 59 00:06:42.900 --> 00:06:59.660 More puzzling is the case in which one individual is superior to another in all lines of production. 60 00:06:59.660 --> 00:07:05.300 Suppose for example that Crusoe is superior to Jackson both in the production of berries 61 00:07:05.300 --> 00:07:07.760 and in the production of game. 62 00:07:07.760 --> 00:07:12.100 Are there any possibilities for exchange in this situation? 63 00:07:12.100 --> 00:07:18.420 Superficially it might be answered that there are none and that both will continue in isolation. 64 00:07:18.420 --> 00:07:24.420 Actually it pays for Crusoe to specialize in that line of production in which he has 65 00:07:24.420 --> 00:07:31.800 the greatest relative superiority in production, and to exchange this product for the product 66 00:07:31.800 --> 00:07:34.740 in which Jackson specializes. 67 00:07:34.740 --> 00:07:41.300 It is clear that the inferior producer benefits by receiving some of the products of the superior 68 00:07:41.300 --> 00:07:51.300 The latter benefits also, however, by being free to devote himself to that product in which his productive superiority is the greatest. 69 00:07:51.300 --> 00:08:09.300 Thus, if Crusoe has a great superiority in berry production and a small one in game production, it will still benefit him to devote his full working time to berry production and then exchange some berries for Jackson's game products. 70 00:08:09.300 --> 00:08:27.300 In an example mentioned by Professor Bolding, a doctor who is an excellent gardener may very well prefer to employ a hired man who, as a gardener, is inferior to himself, because thereby he can devote more time to his medical practice. 71 00:08:27.300 --> 00:08:48.300 This important principle, that exchange may beneficially take place even when one party is superior in both lines of production, is known as the law of association, the law of comparative costs, or the law of comparative advantage. 72 00:08:48.300 --> 00:08:55.580 With all pervasive variation offering possibilities for specialization and favorable conditions of 73 00:08:55.580 --> 00:09:03.660 exchange occurring even when one party is superior in both pursuits, great opportunities abound for 74 00:09:03.660 --> 00:09:10.380 widespread division of labor and extension of the market. As more and more people are linked 75 00:09:10.380 --> 00:09:16.700 together in the exchange network, the more extended is the market for each of the products, 76 00:09:16.700 --> 00:09:23.020 and the more will exchange value predominate as compared to direct use 77 00:09:23.020 --> 00:09:29.060 value in the decisions of the producer. Thus suppose that there are five people 78 00:09:29.060 --> 00:09:33.780 on the desert island and each specializes in that line of product in 79 00:09:33.780 --> 00:09:39.500 which he has a comparative or absolute advantage. Suppose that each one 80 00:09:39.500 --> 00:09:46.260 concentrates on the following products. A produces berries, B produces game, 81 00:09:46.260 --> 00:09:54.540 Name, C produces fish, D produces eggs, E produces milk. 82 00:09:54.540 --> 00:10:00.860 With more people participating in the market process, the opportunities for exchange for 83 00:10:00.860 --> 00:10:04.460 each actor are now greatly increased. 84 00:10:04.460 --> 00:10:11.780 This is true even though each particular act of exchange takes place between just two people 85 00:10:11.780 --> 00:10:14.940 and involves two goods. 86 00:10:14.940 --> 00:10:21.060 Exchange value now takes a far more dominant place in the decisions of the producers. 87 00:10:21.060 --> 00:10:27.180 Crusoe now knows that if he specializes in berries, he does not now have to rely solely 88 00:10:27.180 --> 00:10:33.420 on Jackson to accept them, but can exchange them for the products of several other people. 89 00:10:33.420 --> 00:10:40.000 A sudden loss of taste for berries by Jackson will not impoverish Crusoe and deprive him 90 00:10:40.000 --> 00:10:43.860 of all other necessities, as it would have before. 91 00:10:43.860 --> 00:10:50.860 Furthermore, Berries will now bring to Crusoe a wider variety of products, each in far greater 92 00:10:50.860 --> 00:10:57.220 abundance than before, some being available now that would not have been earlier. 93 00:10:57.220 --> 00:11:03.520 The greater productivity and the wider market and emphasis on exchange value obtain for 94 00:11:03.520 --> 00:11:06.700 all participants in the market. 95 00:11:06.700 --> 00:11:12.780 It is evident, as will be explained further in later sections on indirect exchange, that 96 00:11:12.780 --> 00:11:19.800 The contractual society of the market is a genuinely cooperative society. 97 00:11:19.800 --> 00:11:25.860 Each person specializes in the task for which he is best fitted, and each serves his fellow 98 00:11:25.860 --> 00:11:30.100 men in order to serve himself in exchange. 99 00:11:30.100 --> 00:11:37.900 Each person, by producing for exchange, cooperates with his fellow men voluntarily and without 100 00:11:37.900 --> 00:11:39.160 coercion. 101 00:11:39.160 --> 00:11:58.160 In contrast to the hegemonic form of society in which one person or one group of persons exploits the others, a contractual society leaves each person free to benefit himself in the market and, as a consequence, to benefit others as well. 102 00:11:58.160 --> 00:12:09.660 An interesting aspect of this praxeological truth is that this benefit to others occurs regardless of the motives of those involved in exchange. 103 00:12:09.660 --> 00:12:22.160 Thus Jackson may specialize in hunting and exchange the game for other products even though he may be indifferent to, or even cordially detest, his fellow participants. 104 00:12:22.160 --> 00:12:34.160 Yet, regardless of his motives, the other participants are benefited by his actions as an indirect but necessary consequence of his own benefit. 105 00:12:34.160 --> 00:12:43.160 It is this almost marvelous process whereby a man in pursuing his own benefit also benefits others, 106 00:12:43.160 --> 00:12:51.160 that caused Adam Smith to exclaim that it almost seemed that an invisible hand was directing the proceedings. 107 00:12:51.160 --> 00:13:07.160 Those critics of Adam Smith and other economists who accuse the latter of assuming that God or nature directs the market process by an invisible hand for the benefit of all participants, completely miss the mark. 108 00:13:07.160 --> 00:13:22.160 The fact that the market provides for the welfare of each individual participating in it is a conclusion based on scientific analysis, not an assumption upon which the analysis is based. 109 00:13:22.160 --> 00:13:30.160 The invisible hand was simply a metaphor used in commenting on this process and its results. 110 00:13:30.160 --> 00:13:37.780 Thus, in explaining the origins of society, there is no need to conjure up any mystic 111 00:13:37.780 --> 00:13:43.020 communion or sense of belonging among individuals. 112 00:13:43.020 --> 00:13:48.740 Individuals recognize, through the use of reason, the advantages of exchange resulting 113 00:13:48.740 --> 00:13:53.960 from the higher productivity of the division of labor, and they proceed to follow this 114 00:13:53.960 --> 00:13:56.500 advantageous course. 115 00:13:56.500 --> 00:14:02.980 In fact, it is far more likely that feelings of friendship and communion are the effects 116 00:14:02.980 --> 00:14:09.060 of a regime of contractual social cooperation rather than the cause. 117 00:14:09.060 --> 00:14:14.460 Suppose for example that the division of labor were not productive, or that men had failed 118 00:14:14.460 --> 00:14:17.220 to recognize its productivity. 119 00:14:17.220 --> 00:14:22.860 In that case, there would be little or no opportunity for exchange, and each man would 120 00:14:22.860 --> 00:14:24.860 The Theory of Money and Credit 121 00:14:52.860 --> 00:14:58.820 Silence would be prevalent, and it seems highly likely that feelings of mutual hostility would 122 00:14:58.820 --> 00:15:00.280 be dominant. 123 00:15:00.280 --> 00:15:06.300 As in the case of animals quarreling over bones, such a warring world could cause only 124 00:15:06.300 --> 00:15:10.460 hatred and hostility between man and man. 125 00:15:10.460 --> 00:15:14.300 Life would be a bitter struggle for survival. 126 00:15:14.300 --> 00:15:20.580 On the other hand, in a world of voluntary social cooperation through mutually beneficial 127 00:15:20.580 --> 00:15:42.580 Exchanges, Where One Man's Gain is Another Man's Gain, It is Obvious that Great Scope is provided for the Development of Social Sympathy and Human Friendships, It is the Peaceful, Co-operative Society that Creates favorable conditions for Feelings of Friendship Among Men, 128 00:15:42.580 --> 00:15:49.660 The mutual benefits yielded by exchange provide a major incentive, as in the case of Crusoe 129 00:15:49.660 --> 00:15:56.820 above, to would-be aggressors, initiators of violent action against others, to restrain 130 00:15:56.820 --> 00:16:02.260 their aggression and cooperate peacefully with their fellows. 131 00:16:02.260 --> 00:16:07.780 Individuals then decide that the advantages of engaging in specialization and exchange 132 00:16:07.780 --> 00:16:12.380 outweigh the advantages that war might bring. 133 00:16:12.380 --> 00:16:17.860 Another feature of the market society formed by the division of labor is its permanence. 134 00:16:17.860 --> 00:16:24.440 The wants of men are renewed for each period of time, and so they must try to obtain for 135 00:16:24.440 --> 00:16:29.180 themselves anew a supply of goods for each period. 136 00:16:29.180 --> 00:16:34.680 Crusoe wants to have a steady rate of supply of game, and Jackson would like to have a 137 00:16:34.680 --> 00:16:38.180 continuing supply of berries, etc. 138 00:16:38.180 --> 00:16:44.060 Therefore the social relations formed by the division of labor tend to be permanent as 139 00:16:44.060 --> 00:16:51.380 individuals specialize in different tasks and continue to produce in those fields. 140 00:16:51.380 --> 00:16:58.180 There is one less important type of exchange that does not involve the division of labor. 141 00:16:58.180 --> 00:17:03.980 This is an exchange of the same types of labor for certain tasks. 142 00:17:03.980 --> 00:17:11.080 Let's suppose that Crusoe, Jackson and Smith are trying to clear their fields of logs. 143 00:17:11.080 --> 00:17:16.820 If each one engaged solely in the work of clearing his own field, it would take a long 144 00:17:16.820 --> 00:17:18.500 period of time. 145 00:17:18.500 --> 00:17:25.460 However, if each put in some time in a joint effort to roll the other fellow's logs, the 146 00:17:25.460 --> 00:17:30.780 productivity of the log rolling operations would be greatly increased. 147 00:17:30.780 --> 00:17:35.300 Each man could finish the task in a shorter period of time. 148 00:17:35.300 --> 00:17:41.580 This is particularly true for operations such as rolling heavy logs, which each man alone 149 00:17:41.580 --> 00:17:47.740 could not possibly accomplish at all, and which they could perform only by agreed-upon 150 00:17:47.740 --> 00:17:49.480 joint action. 151 00:17:49.480 --> 00:17:55.840 In these cases, each man gives up his own labor in someone else's field in exchange 152 00:17:55.840 --> 00:18:02.880 for receiving the labor of the others in his field, the latter being worth more to him. 153 00:18:02.880 --> 00:18:09.320 Such an exchange involves a combination of the same type of labor rather than a division 154 00:18:09.320 --> 00:18:18.040 of labor into different types to perform tasks beyond the ready capacity of an isolated individual. 155 00:18:18.040 --> 00:18:25.120 This type of cooperative log rolling, however, would entail merely temporary alliances based 156 00:18:25.120 --> 00:18:43.180 The Great Scope of the Division of Labor is not restricted to situations in which each 157 00:18:43.180 --> 00:18:49.680 individual makes all of one particular product, as was the case above. 158 00:18:49.680 --> 00:18:55.220 Production of labor may entail the specializing by individuals in the different stages of 159 00:18:55.220 --> 00:19:00.540 production necessary to produce a particular consumer's good. 160 00:19:00.540 --> 00:19:07.340 Thus, with a wider market permitting, different individuals specialize in the different stages, 161 00:19:07.340 --> 00:19:12.580 for example, involved in the production of the ham sandwich discussed in the previous 162 00:19:12.580 --> 00:19:14.140 chapter. 163 00:19:14.140 --> 00:19:21.720 Social productivity is greatly increased as some people and some areas specialize in producing 164 00:19:21.720 --> 00:19:28.780 iron ore, some in producing different types of machines, some in baking bread, some in 165 00:19:28.780 --> 00:19:33.040 packaging meat, some in retailing, etc. 166 00:19:33.040 --> 00:19:40.180 The essence of developed market economies consists in the framework of cooperative exchange 167 00:19:40.180 --> 00:19:43.540 emerging with such specialization. 168 00:19:43.540 --> 00:19:50.020 Such specialization of stages requires the adoption of indirect exchange discussed in 169 00:19:50.020 --> 00:19:51.500 the following chapters.