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Ludwig Von Mises

Practical division of labour

But there is more. It so happens that we are all different. Our mental abilities are different. Our skills are different. Our capacities to produce are different. We live in different geographical locations surrounded by different people with different cultures, work habits and access to different raw materials.

As labour has disutility we will attempt to minimize it because disutility increases our uneasiness. In layman's terms, we will take the "path of least resistance" in terms of production. We will try to minimize our efforts during production. What this means is that we will try to produce whatever is easier for us. But as every one of us is different in multiple aspects, what is "easier" for each one of us will be different from each other. As a consequence of this, we will try to produce different goods and services than anybody else. Not because may we want to diversify, but because we are trying to minimize our work.

Take a look at the myriad of different jobs in a city. Those jobs tend to be different. Of course, this natural process does not guarantee that each one of us will produce something different, but it does guarantee that we will at least try.

But there is more. It so happens that as we dedicate ourselves to produce something and we do so repeatedly, we learn and become better and better at it. We become more productive (i.e. we produce more with less disutility). We specialize in it. As this requires time and all our times are different, chances are excellent that we will be the only ones that specialize in a given productive system. Which means that specialization reinforces the division of labour. If you look at job ads, you will notice that they typically seek people with previous experience in the same type of tasks. People recognize and seek specialists because they recognize their enhanced productivity. This further reinforces the division of labour.

But there is more. There are productive tasks that cannot be performed by a single person because it would take too long or would exceed this person's physical capacity. As such, the only practical solution is a division of labour where a given productive task is split in smaller tasks and assigned to different people according to their capacities and skills. Take for example building a house. Although a single person could conceivably build it, it would take so long as to be impractical. As such, all kinds of skilled people are hired to do the many jobs and finish the house in a reasonable amount of time.

Benefits of the division of labour

The most basic question is whether or not the division of labour benefits and if it does who does it benefit? In this case we consider benefits = increased productivity. In order to analyze this problem, we simplify it by considering only two actors A and B and two products "c" and "d". The possible scenarios are:

  1. A can only produce c while B can only produce d
  2. A and B can produce c and d with different efficiencies
  3. A and B can produce c and d but B is far less efficient than A for both products

Scenario #1

This scenario is trivial. If A can only produce c and B can only produce d then they should maximize their respective productivities and trade. As A cannot produce d and B cannot produce c, nothing else can be done.

Scenario #2

Let's begin by stating the following productive capacities per unit of time (let's think year): A can produce 6c or 4d and B can produce 2c or 8d. As A and B produce independently from each other and in isolation, they must produce both c and d and so they produce half of the capacities of c and d per year. This yields:

  • A produces 3c and 2d.
  • B produces 1c and 4d.
  • Total productivity between A and B = 4c and 6d.

Now let's assume that A and B are clever. They produce to trade and furthermore, they specialize to maximize the productivity of the product they can manufacture the most. As such we have:

  • A produces 6c.
  • B produces 8d.
  • Total productivity between A and B = 6c and 8d.

As you can see, the total productivity rises if they both manufacture for trading and they concentrate in what they do best. What this means is that the division of labour does indeed increase total productivity for the benefit of all participants in the trade. The division of labour produces a win-win situation, just by re-allocating existing resources, without improving productivity.

Scenario #3

This is a critically important scenario as we will see later on, where we have a strong producer, A, and a weak producer, B. The productive capacity of A and B are:

  • A produces 1 unit of c every 3 weeks and 1 unit of d every 2 weeks.
  • B produces 1 unit of c every 5 weeks and 1 unit of d every 4 weeks.

Now let's assume that each spends 60 weeks producing c and 60 weeks producing d. What would the total production be?

  • A = 20 c + 30 d
  • B = 12 c + 15 d
  • Total production = 32 c + 45 d

Now we ask that A produce only the product with the higher productivity and B the other one. The results are:

  • A = 60 c
  • B = 24 d
  • Total production = 24 c + 60 d

As c and d are different products, they cannot be compared directly. However, we know how efficient A and B are for the manufacturing of each product. They are:

  • A = 3c/2d
  • B = 5c/4d

Therefore we can convert those products into each other through this efficiency calculation for each step above.

  • A = 30d + 30d
  • B = 15c + 15d
  • Total production = 90d

and

  • A = 36d
  • B = 60d
  • Total production = 96d

Which means that yes indeed by asking the best producer to produce only the product whose production is more efficient, the total productivity of both rise.

Note: the calculations above are simple examples. Similar results can and have been demonstrated mathematically. Furthermore, this law is universally applicable if we choose to perform similar calculations under different conditions. In order to do so, all we need to do is to use money instead of productivity.

The Ricardian Law of Association or Comparative Cost

This law describes the effect we saw above; that in any scenario the division of labour and the specialization of every actor generates productivity gains beyond what any actor could accomplish individually and in isolation. This means that specialization (i.e. division of labour) followed by trading is what made human association mutually beneficial. Understanding the mutual benefits of the division of labour is what increased human cooperation through history. The division of labour and human cooperation are two sides of the same coin. When this understanding becomes widespread, it gives origin to free markets and free markets are what cement societies. If the means to satisfy our needs would be temporary only, societies would disintegrate. However, knowing that our needs will be better satisfied through the division of labour, this makes markets necessary and permanent and in such markets we can better satisfy our needs and this makes societies permanent. Furthermore, through the market people can now produce for the market with full trading intent. It is not necessary any longer to produce to satisfy our needs directly with the product that we produce. We can get this satisfaction through trading, far more efficiently than through any other means.

This law shows that it is always better to produce the product where its production is more efficient and depend from trading to obtain other products (whose production is less efficient) even at the expense of leaving production capacities un-utilized. This is a counter-intuitive paradox but it is real. It operates even when one party is far superior at producing everything that the other party produces. This paradox operates even under the worse possible conditions; this is that labourers and capital (but not goods) are attached to a geographic location. It is for this very reason, because it describes the typical conditions in countries, that this principle is so important.

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

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