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Today we are going to take a quick look at the most revolutionary concept in the history of humanity: The Division Of Labor. This concept is so important that without it, we would not have civilization and, arguably, we would have never evolved into HomoSapiens.

Of course, the division of labor just happened “out there” in the free market, and economics came and placed a label on it. It does not seem much, but classification is the first step toward understanding.

ABOUT COMPETITION AND COOPERATION

Competition in Biology and Society

Competition is ingrained in our DNA. It is a biological trait designed to push us to be the best and hence help us spread our genes to the largest number of people. But competition is inherently unfriendly; destroy your enemy, me first and all that. Clever evolutionary biologists using game theory discovered that sometimes and under certain circumstances, competition did not provide the best outcome for the most capable specimen. Sometimes some sort of cooperation was the optimum solution. This is all great and fascinating, but if we look at humans within short evolutionary time frames (time periods too short for evolution to do anything, e.g. 10.000 years or less) a question arises: why did this people not compete themselves into extinction?

We know that they possessed the competition drive, because we inherited it from them. We also know that they were intelligent enough so that early evolutionary games were outmoded and out-thought.

Competition in a society is nothing more that biological competition with more evolved rules because competition is expressed as actions between specimens. The moment you have two actors interacting with each other, we have a society. But if this is the case, why did they coexist and even cooperate? Would it have something to do with the new-and-improved tool provided to us by evolution? Would it have something to do with intelligence? And if so, how?

Mutual benefit

If our prime instinct at a biological level is to exterminate the competition, what advantage could have we possibly seen in competing peacefully to spread out our genes? The answer is some sort of benefit. This is the only reason why would we leave our competitors unmolested. But what kind of benefit? In a word: trade.

Trade was the benefit that worked for all competing parties. Trade was the one thing that people could not live without. It is quite simple. If I have a surplus of goats but need olives and somebody has a surplus of olives and needs a goat, we will trade. This trade benefits us both, not only because we satisfy our immediate needs, but because we could carry this trade into the future. I would now know that each time I would want olives I would be able to get them. Furthermore, I did not have to know anything about growing and harvesting olives. Even if I would to learn how to do this, there were many other items that I would get by trade. I would not have neither the time nor the energy to grow or manufacture all the other things I was trading for.

Trade was the process that created bonds and overcame our competing instinct. Sure, I could have killed the olive producer and get all the olives for free. Today. But what about tomorrow? Could I kill all the other people I was trading with and get their goods too? Sure. But again, what about tomorrow? It was better to subdue the impulse to compete and keep benefiting from trade. This is the initial impulse for the development of a division of labor, but there is more.

Free trade

As a matter of fact, early economists recognized this point and made it absolutely clear that all artificial restrictions to trade must be abolished. Such restrictions favored:

  • Manufacturing of goods and services in less suitable places, hence lowering their quantity and quality
  • Protection of less efficient people which again lowered quality and quantity

Both negative effects diminished trade and with it, they diminished choices and with them they decreased our standards of living.

They fully understood that free trade (i.e. unrestricted trade) was vital to increase prosperity. But unrestricted trade leads directly to unrestricted competition and this leads to a question: Why would people competing in the same trade not kill each other out?

Catallactic competition

The answer to the question is risk. As with any endeavor in the free market, there is no free lunch. Any aggressive action has risks. It is obvious that in the far past many such aggressive encounters took place, however on average, it is simply less risky to face economic competition than to face violent competition.

This risk assessment led naturally to substitute violent competition with market competition.

Why do Austrians call it Catallactic and not Economic competition? Because the concept of economy incorrectly implies that somehow people involved in economic activities have the same goal. This is clear when politicians talk about the economy in terms of “betterment of society” or “working for everybody”. This could not be farther from the truth and it diminishes Free Market accomplishments.

The power of free markets is that they have managed to bring together a disparity of goals, points of view and methods (often opposing) in a peaceful and prosperous process which benefits us all. It is the benefit that it is single, not the market participants’ goals. As such, the term “economics” does not fully reflect this disparity. Consequently, Hayek developed the term Catallactics which is derived from the Greek meaning 'to exchange' and also 'to reconcile', 'to receive one into favor'.

And so going back to our little problem, the answer is that free markets transform competition from hostility into a mutually beneficial process. In turn, this switch in views also produces a transition from biological competition into social competition (not to be confused with biological competition in society). Social competition is simply competition to achieve the highest position in society. It is not about vanquishing your competition; it is about competing in serving society to be elevated above your competition.

As you can see, even this type of competition is driven by selfish motives. These have never disappeared but at the same time, these motives are now working for all parties. They work for suppliers and they also work for consumers. It truly is a win-win process.

Scarcity

Catallactic competition is only possible because our physical means are scarce. If we would have infinite physical means we would freely take whatever we need. Alas, this is not the case. Time and resources are limited, they are scarce. Hence, a natural method evolved to prioritize which goods and services are more important to us. This method is call the Free Market and consumers vote with their money. It is their buying or abstention from buying that either reinforces or destroys a trade. This method is exceedingly efficient because there are no second chances: serve and thrive or fail and be gone.

Note: please see the Glossary if you are unfamiliar with certain words.

Continue to The division of labor – Adam Smith’s invisible hand - Part 2

 

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