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Ludwig Von Mises

As labour is one of the three requirements for production to occur and production is necessary to increase our standards of living, it is only fair to study how labour works, its properties and consequences. But we get to that we need to understand what happens when two people who labour meet. We have not studied the interaction between two labouring people. In order to do that, we need to start from the beginning.

Exchange in isolation

So far we have talked about labour as something performed by people in isolation. We know (because it is obvious) that a person labouring on one task is not labouring on another. We can't do two things at the same time. Another way of looking at this truth is to say that said person had exchanged what this person was doing for what this person could have been doing. In economic terms this is called an "opportunity cost" or the cost of the task not performed (more of this in a later lesson).

The point that concerns us right now is that this person labouring in isolation did exchange one thing for another. As such, this person laboured (acted) and therefore we must conclude that action is always an exchange, even in isolation. But if this is the case with only one person in isolation (i.e. the simplest case possible), it must necessarily be true with two or more people interacting with each other.

Furthermore, when a person laboured in isolation it laboured on task A and not on task B. Which means that this person valued the satisfaction that task A would provide over the satisfaction that task B could provide. In other words, labouring is also about value scales.

Exchange between people

If action is always an exchange, then action between two people must also be an exchange. When two people act (i.e. they do something to satisfy their needs) and they do so inter-acting with each other, they are exchanging something. But this interaction could be voluntary or involuntary.

Involuntary exchange

Let's say that you are walking one night in a dim alley when a thief jumps in front of you gun in hand and demands: your wallet or your life! (yes, a little too Hollywoodesque but you get the point). Obviously you agree. You give this person your wallet and in exchange this person does not put a bullet in your skull. You did so because you valued your life more than your wallet. The thief valued more your wallet than the problems it would create firing one bullet. And so the exchange took place. However, from the exchange it is clear that you did not benefit because for you losing your wallet had negative value to you (i.e. had disutility) while for the thief gaining your wallet had positive utility. Therefore the end result of the exchange is disutility for you and utility for the thief. This may not be a satisfactory exchange for you, but it is an exchange nevertheless. It is for this very reason that in any involuntary exchange one party gains benefits while the other loses benefits. This type of exchange occurs involuntary cooperation.

Voluntary exchange

Let's take the same example as before. You are taking a walk through a dim alley when a stranger approaches you and asks: hey buddy, I need money for a taxi but have none, would you like to purchase my watch? After you review the watch and haggle over the price, you take your wallet and give this person the agreed upon price while this person gives you the watch. In this case the exchange was obvious, money for the watch. This exchange also took place voluntarily since none of the actors were compelled to act. Each one of them could, at any moment, reject the exchange. But they did not. Why? Because of self-interest. You wanted that watch and you considered the price you paid for it a bargain. The stranger wanted money for a taxi and considered the money he received for it a steal. In other words, you valued the watch more than your money while the stranger valued the money more than the watch.

As you can see the scales of value in this exchange are opposite. It is for this very reason that the exchange took place, because both parties considered the exchange as a win situation (a win-win outcome). Put it in different words, both parties benefited.

In a voluntary exchange it is impossible to have a party whose benefit decreased (i.e. the value of the received good is less than the value of the given good). It is for this reason that for a voluntary exchange to take place it must be voluntary.

A voluntary exchange occurs because two or more parties seek to satisfy their mutual needs using the means that the other party has. At the end of the exchange each party has satisfied their needs. This they would not have been able to achieve without a voluntary agreement.

Society

The satisfaction of our needs through exchanges with other people is what Praxeology calls society. As you can see this term has no cultural implications whatsoever, but purely economic ones. What defines a society is the win-win process through which the participants seek to satisfy their needs. As you can see, this process has absolutely nothing to do with political systems or democracy. It has to do with the voluntary exchange of goods or services. Praxeology defines society as:

A group of people satisfying their needs through voluntary exchanges.

Items for voluntary exchange

As we have said above, voluntary exchanges take place because there is an opposite value scale between participants. If this scale is not opposite, exchanges won't take place. But we can now ask what would happen in the limit. What would happen if both parties in an exchange have the exact same value scale for the mutual items? Then the exchange won't happen either because each party would see no further satisfaction of their needs from the exchange.

This situation of exactly equal value scales also reveals something else. There are two possible scenarios. The first one is trivial. Both goods or services to be exchanged are the same. For example, would you exchange a 10 Yen used bill for another 10 Yen used bill? Why bother, right?

The second scenario is more interesting. This is the case where the two goods or services to be exchanged are different but they have equal value scales. You have an extra pair of red socks and your brother has an extra pair of yellow socks. You are both willing to exchange them but neither of you like red or yellow socks. Will an exchange happen? No because the exchange won't help to satisfy your need for socks of a different colour.

And so we know that if items are the same they will have the same value scales and hence no exchange will ever take place. This means that for exchange to take place a necessary condition is that goods or services to be exchanged must be different. This does not guarantee that an exchange will take place, but without it, it is guaranteed that it won't.

And so we reach the conclusion that:

For an exchange to take place, exchanged goods or services must be different.

Logical division of labour

People produce naturally because they want to satisfy their needs. But as we have seen above, they can also satisfy their needs through an action called exchange. But if exchange is to take place, the exchanged goods or services must be different. Which means that the exchanging parties must produce different goods and services. Which means that the exchanging parties will divide labour in the sense that they will labour to produce different goods or services.

This means that we can logically deduce that the division of labour will take place as a means to satisfy our needs.

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

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