4. The Division of Labor

For exchange to take place, each party must have a different proportion of assets of goods in relation to his wants.  Each party must have relatively specialized in the acquisition of different goods from each other.  This specialization could have occurred for one of three of reasons:

1. Differences in suitability and yield of nature-given factors.
2. Differences in given capital and durable consumers goods.
3. Differences in skill and in the desirability of different types of labor.

Suppose Crusoe has found abundant crops on his side of the island, that he has greater skill in farming and prefers this work to other forms of labor, while Jackson’s greater skill is in hunting and his side of the island has a more abundant game supply. 

With no trade, both men have to do both tasks to enjoy the benefits of both farm crops and game.  But when there is a possibility for trade, Crusoe will naturally dedicate himself to farming and Jackson to hunting, since they will be able to trade later. 

Specialization greatly increases productivity for the following reasons:

• Individuals can focus on one task and improve and refine their techniques.
• No time is wasted switching tasks, experimentation and time learning new basic techniques.
• Focused on producing a single product, there is great incentive to develop new technologies that will increase productivity.                        

This division of labor brings enormous benefits to the individuals in the society, through increased productivity.

The extent to which the division of labor takes place depends on the extent of the market for the products.  This determines the exchange-value that the producer knows he will be able to attain for the goods.  The higher the exchange-value, the more it will tend to be higher than the use-value, and thus exchanges and the division of labor will take place.

A corollary of the division of labor is the division of knowledge.  The sum total of knowledge in a society is massively increased when the knowledge is divided between individual brains, and not replicated among all brains.

Division of labor may entail the specializing by individuals in the different stages of production necessary to produce a consumers’ good.  Thus, with a wide market for products, different individuals can specialize in different stages, and many more stages of production are possible than with no division of labor.  However, in a barter economy, this is difficult due to difficulties with calculations.

Exchange may beneficially take place even when one party is superior in both lines of production.  This is known as the Law of Comparative Advantage.

Even if Crusoe is better than Jackson at producing every type of good, it is still beneficial for him to trade with him and for both men to specialize.  It will pay Crusoe in this case to specialize in that line of production in which he has the greatest relative superiority in production. 

As a contemporary example, a lawyer who is an excellent typist, would benefit by hiring a typist (even if that typist could not type as well as the lawyer could) because then he will have more time to devote to lawyering.  By hiring the typist, the lawyer is able to specialize in the occupation where he has a comparative advantage.

This important principle was unknown to early economists, who believed that if one party gains from an exchange, the other party must lose.  They saw the world as “zero-sum”; that is, all individuals are competing for a fixed amount of resources.  In fact, the world is not zero-sum, because by trading and the law of comparative advantage, all parties benefit.

We have seen how voluntary exchanges will take place between individuals and the division of labor will result.  It is important to note that this process occurs naturally.  No one is “directing” this society, commanding other individuals to perform certain tasks.  This society has not been planned. 

The society has become more productive purely through individuals acting to make themselves as productive as possible, so that they may consume more and satisfy more of their ends. 

Economist Adam Smith named this process “the invisible hand” since, as if by magic, societies tend to organize themselves into arrangements where they are at their most productive, undirected by a central authority or planner.  Using a praxeological approach to economics, it is clear to see how this invisible hand operates. 

Suppose there is a society composed of five individuals, who each specialize in producing the following products:

• A… berries
• B… game
• C… fish
• D… eggs
• E… milk

Naturally, they are all specializing in the line of product in which he has either an absolute or a comparative advantage.  With more people participating in the market process, the opportunities for exchange are greatly increased.  Exchange-values become more dominant in the minds of the individuals. 

Crusoe (individual A) now has four individuals that will potentially exchange their products for his berries.  If Jackson (B) loses taste for berries, he will not have to change occupation, because there are three other individuals who may want his berries.  Furthermore, Crusoe now has a much wider variety of goods that he can obtain in exchange; he is not limited to Jackson’s grain.

As more individuals are added, the division of labor increases further and production for the market and specialization dominate.  The actions of individuals, each seeking to attain their own goals, naturally lead to a highly productive organization of society dedicated to satisfying consumers’ needs.  When a need (a “market for a product”) arises, an eager entrepreneur emerges hoping to increase his personal productivity, not for the good of society, but for the good of himself.

Later on, when we consider interventions in the economy, using force (for example, by a government), we will see that such interventions can only ever be “bad” for an economy, where bad is defined as not satisfying as many consumers’ ends.  A totally free market (free from intervention) is the best possible arrangement for satisfying consumers’ desires.

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