3. Exchange and the Division of Labor
In describing the conditions that must obtain for interpersonal exchange to take place,
such as reverse valuations, we implicitly assumed that it must be two different goods
that are being exchanged. If Crusoe, at his end of the island, produced only berries,
Jackson at his end produced only the same kind of berries, then no basis for exchange between them
would occur. If Jackson produced 200 berries and Crusoe 150 berries, it would be nonsensical
to assume that any exchange of berries would be made between them. It is possible that Crusoe
and Jackson, for the mutual fun of it, might pass 50 berries back and forth between them.
This, however, would not be genuine exchange, but joint participation in an enjoyable consumer's good, a game or play.
The only voluntary interpersonal action in relation to berries that could occur would be a gift from one to another.
If exchangers must exchange two different goods, this implies that each party must have a different proportion of assets of goods
Goods in relation to his wants. He must have relatively specialized in the acquisition of
different goods from those the other party produced. This specialization by each individual
may have occurred for any one of three different reasons, or any combination of the three.
A. Differences in suitability and yield of the nature given factors. B. Differences in given
Capital and Durable Consumers Goods, and C, differences in skill and in the desirability
of different types of labor.
Basically, Class B is resolvable into differences in Classes A and C, which account for their
production.
These factors, in addition to the potential exchange value and use value of the goods,
will determine the line of production that the actor will pursue, if the production is
is directed toward exchange, then the exchange value will play a major role in his decision.
Thus, Crusoe may have found abundant crops on his side of the island.
These resources, added to his greater skill in farming and the lower disutility of this
occupation for him because of a liking for agriculture, might cause him to take up farming.
While Jackson's greater skill in hunting and more abundant game supply induce him to specialize
in hunting and trapping, exchange, a productive process for both participants, implies specialization
of production or division of labor.
The extent to which division of labor is carried on in a society depends on the extent of the
market for the products.
The latter determines the exchange value that the producer will be able to obtain for his
goods.
Thus, if Jackson knows that he will be able to exchange part of his catch of game for
the grains and fruits of Crusoe, he may well expend all his labor on hunting.
Then he will be able to devote all his labor time to hunting, while Crusoe devotes his
The division of labour implies that it must be more productive for all concerned than isolated autistic labour.
Economic analysis alone, however, does not convey to us knowledge of the enormous increase in productivity that the division of labour brings to society.
This is based on a further empirical insight, namely the enormous variety in human beings
and in the world around them.
It is a fact that, superimposed on the basic unity of species and objects in nature, there
is a great diversity.
Particularly is there variety in the aforementioned factors that would give rise to specialization,
in the locations and types of natural resources and in the ability, skills, and tastes of
human beings.
In the words of Professor von Mises, one may as well consider these two facts as one and
the same fact, namely the manifoldness of nature which makes the universe a complex
of infinite varieties.
If the earth's surface were such that the physical conditions of production were the
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.
are given factors or to the ability of the producer.
If individuals abandon attempts to satisfy their wants in isolation, and if each devotes
his working time to that specialty in which he excels, it is clear that total productivity
for each of the products is increased.
If Crusoe can produce more berries per unit of time and Jackson can kill more game, it
It is clear that productivity in both lines is increased if Crusoe devotes himself wholly
to the production of berries and Jackson to hunting game, after which they can exchange
some of the berries for some of the game.
In addition to this, full-time specialization in a line of production is likely to improve
More puzzling is the case in which one individual is superior to another in all lines of production.
Suppose for example that Crusoe is superior to Jackson both in the production of berries
and in the production of game.
Are there any possibilities for exchange in this situation?
Superficially it might be answered that there are none and that both will continue in isolation.
Actually it pays for Crusoe to specialize in that line of production in which he has
the greatest relative superiority in production, and to exchange this product for the product
in which Jackson specializes.
It is clear that the inferior producer benefits by receiving some of the products of the superior
The latter benefits also, however, by being free to devote himself to that product in which his productive superiority is the greatest.
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.
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.
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.
With all pervasive variation offering possibilities for specialization and favorable conditions of
exchange occurring even when one party is superior in both pursuits, great opportunities abound for
widespread division of labor and extension of the market. As more and more people are linked
together in the exchange network, the more extended is the market for each of the products,
and the more will exchange value predominate as compared to direct use
value in the decisions of the producer. Thus suppose that there are five people
on the desert island and each specializes in that line of product in
which he has a comparative or absolute advantage. Suppose that each one
concentrates on the following products. A produces berries, B produces game,
Name, C produces fish, D produces eggs, E produces milk.
With more people participating in the market process, the opportunities for exchange for
each actor are now greatly increased.
This is true even though each particular act of exchange takes place between just two people
and involves two goods.
Exchange value now takes a far more dominant place in the decisions of the producers.
Crusoe now knows that if he specializes in berries, he does not now have to rely solely
on Jackson to accept them, but can exchange them for the products of several other people.
A sudden loss of taste for berries by Jackson will not impoverish Crusoe and deprive him
of all other necessities, as it would have before.
Furthermore, Berries will now bring to Crusoe a wider variety of products, each in far greater
abundance than before, some being available now that would not have been earlier.
The greater productivity and the wider market and emphasis on exchange value obtain for
all participants in the market.
It is evident, as will be explained further in later sections on indirect exchange, that
The contractual society of the market is a genuinely cooperative society.
Each person specializes in the task for which he is best fitted, and each serves his fellow
men in order to serve himself in exchange.
Each person, by producing for exchange, cooperates with his fellow men voluntarily and without
coercion.
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.
An interesting aspect of this praxeological truth is that this benefit to others occurs regardless of the motives of those involved in exchange.
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.
Yet, regardless of his motives, the other participants are benefited by his actions as an indirect but necessary consequence of his own benefit.
It is this almost marvelous process whereby a man in pursuing his own benefit also benefits others,
that caused Adam Smith to exclaim that it almost seemed that an invisible hand was directing the proceedings.
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.
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.
The invisible hand was simply a metaphor used in commenting on this process and its results.
Thus, in explaining the origins of society, there is no need to conjure up any mystic
communion or sense of belonging among individuals.
Individuals recognize, through the use of reason, the advantages of exchange resulting
from the higher productivity of the division of labor, and they proceed to follow this
advantageous course.
In fact, it is far more likely that feelings of friendship and communion are the effects
of a regime of contractual social cooperation rather than the cause.
Suppose for example that the division of labor were not productive, or that men had failed
to recognize its productivity.
In that case, there would be little or no opportunity for exchange, and each man would
The Theory of Money and Credit
Silence would be prevalent, and it seems highly likely that feelings of mutual hostility would
be dominant.
As in the case of animals quarreling over bones, such a warring world could cause only
hatred and hostility between man and man.
Life would be a bitter struggle for survival.
On the other hand, in a world of voluntary social cooperation through mutually beneficial
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,
The mutual benefits yielded by exchange provide a major incentive, as in the case of Crusoe
above, to would-be aggressors, initiators of violent action against others, to restrain
their aggression and cooperate peacefully with their fellows.
Individuals then decide that the advantages of engaging in specialization and exchange
outweigh the advantages that war might bring.
Another feature of the market society formed by the division of labor is its permanence.
The wants of men are renewed for each period of time, and so they must try to obtain for
themselves anew a supply of goods for each period.
Crusoe wants to have a steady rate of supply of game, and Jackson would like to have a
continuing supply of berries, etc.
Therefore the social relations formed by the division of labor tend to be permanent as
individuals specialize in different tasks and continue to produce in those fields.
There is one less important type of exchange that does not involve the division of labor.
This is an exchange of the same types of labor for certain tasks.
Let's suppose that Crusoe, Jackson and Smith are trying to clear their fields of logs.
If each one engaged solely in the work of clearing his own field, it would take a long
period of time.
However, if each put in some time in a joint effort to roll the other fellow's logs, the
productivity of the log rolling operations would be greatly increased.
Each man could finish the task in a shorter period of time.
This is particularly true for operations such as rolling heavy logs, which each man alone
could not possibly accomplish at all, and which they could perform only by agreed-upon
joint action.
In these cases, each man gives up his own labor in someone else's field in exchange
for receiving the labor of the others in his field, the latter being worth more to him.
Such an exchange involves a combination of the same type of labor rather than a division
of labor into different types to perform tasks beyond the ready capacity of an isolated individual.
This type of cooperative log rolling, however, would entail merely temporary alliances based
The Great Scope of the Division of Labor is not restricted to situations in which each
individual makes all of one particular product, as was the case above.
Production of labor may entail the specializing by individuals in the different stages of
production necessary to produce a particular consumer's good.
Thus, with a wider market permitting, different individuals specialize in the different stages,
for example, involved in the production of the ham sandwich discussed in the previous
chapter.
Social productivity is greatly increased as some people and some areas specialize in producing
iron ore, some in producing different types of machines, some in baking bread, some in
packaging meat, some in retailing, etc.
The essence of developed market economies consists in the framework of cooperative exchange
emerging with such specialization.
Such specialization of stages requires the adoption of indirect exchange discussed in
the following chapters.