Economic Laws I: The Division of Labour
There’s probably not one concept in economics that’s credited more with being the underpinning of society as the division of labour. By which is meant a process whereby two agents, each producing one thing, together produce more if they specialise than if both had produced each of both goods on their own.
Let’s make up an example:
(Statistical resources in our References section!)
If a farmer by the name of Wheat planted and harvested wheat, then ground it to flour, then baked his bread, he would have to divide his time up between the three endeavours. To keep it simple, let’s assume he worked nine hours a day and each activity cost him a third or three hours each. Let’s assume in three hours per day he could produce three units of wheat W, in another three hours three units of milled flour M and then in the remainder three units of bread B.
So literally “at the end of the day” he would own 3 W + 3 M + 3 B.
Equally, farmer Miller and farmer Baker would each be just as productive and also divide their time exactly in the same way, then each would have three units of each at the end of each day (we abstract from things like maintenance, weather, the seasons etc.). So this is how our little economy fares each day:
Nothing extraordinary here, everything as expected. So why would any of these three be better off if they delegated part of their chores and instead concentrated on one only?
Actually, they wouldn’t be in this example:
“If the earth’s surface were such that the physical conditions of production were the same at every point and if one man were as equal to all other men as is a circle to another with the same diameter in Euclidian geometry, men would not have embarked upon the division of labor.” Ludwig von Mises: “Human action”, Chapter VIII. Human Society – 3. The Division of Labor.
But the above example is not what would have happened at any given moment in any given real society: each of the three would probably have been better at one of these three tasks than at the two others even before the effects of training through repetition set in whereby further productivity gains are reaped. Call it endowment, talent, fate, even in monozygotic twins you’ll see some sort of differentiation which at last gains the upper hand and sets them apart in skill, qualification and propensity. Men are born equal in their propensity to differ.
Now, for argument’s sake let’s assume the three men (or women, or households or families, clans, communities or nations or continents – we’ll get to that later) each only excelled at one specific task, while at each of the other two they’d still be each other’s match, even then it would benefit the three to cooperate.
Let’s say, each of the three would be able to produce three units of two of the goods in three hours, but had the skills to make four of the third good.
Then the original calculation would at first look like that:
So, actually the ingoing proposition is that such a community produced not 27 but actually 30 units by virtue of each other’s superior skills in just one area. Soon the three would have discovered that each of them had one unit left over per day with which they could have started a trade (or barter rather). However, looking at each other’s specialty they would equally have figured out immediately that they could be even wealthier if each of them had concentrated on what each of them knew best. So farmer Wheat finally concentrated on sowing and reaping, farmer Miller became a full-time miller grounding the wheat and farmer Baker became a full-time baker baking the bread for himself and the other two. This is how their final arrangement in a first step would look like:
Now, by each dedicating their full time to what each could do best all three were now at least 20% better off and none would work more for that gain. In fact they now have gained the freedom to decide what to do with the surplus. Either they could sit idle for almost two hours a day, they could “save” that productivity gain and take a vacation every so often or, more likely, sit at home separately or together to invest some time to improve their production processes even more to reap even more productivity gains. One day when they got together to help farmer Wheat erect a new stable they might have discovered how clever Miller’s son was with woodwork and Baker’s son with laying bricks, and, bingo, the new professions of carpenter and bricklayer were born. And we now also know why some builders go by the name of Baker while carpenters call themselves Miller senior and so forth.
But wait, some may say, haven’t we beautified those figures whereby these three are each other’s match and together can only win by dividing up the labour between them? What about the poor guy who is inferior in each skill – wouldn’t he be priced out of the market and need protection?
Well, let’s look at another initial example whereby, say, farmer Baker is inferior in all three disciplines while the others are capable as before:
Now, together they only have 26 units with poor sod Baker only contributing six. We must assume in this as in any example, that Baker can still subsist on six units just as in modern society where some just scrape by and others live in luxury (for whatever reason, one could surely be just better endowment, one chance or fate, but even if it were corruption it would not invalidate the law of the division of labour).
Since Baker is less good at all three disciplines than the other two, but each of the other two still excels at one, their concerted choice of specialisation will still meet with little discussion:
Again, just by making that choice, all three are better off in terms of collective production: 30 units as against 26 is still a 15% gain in “Gross Domestic Product”! Still, you may ask, how would that benefit poor Baker though? Well, here another law of economics comes into play: supply and demand! If productivity rises and more goods are produced during the same time and with, all other things being equal, the same amount of input and effort, then not only are costs lower (which in the long run always set the lower threshold of any market price or else the manufacturer would lose not gain, for which another word is bankruptcy in the last analysis), but supply would be greater while demand would not have increased, thus prices tend to go down. Note, that in this example only the supply of wheat and flour have gone up so far, not that of bread, thus, although Baker is objectively less productive overall and less competitive in the other twos’ fields, still he stands a chance to ask a price relatively higher than the others so that even he will get his fair share of their produce. That price is “somewhere in between” in the sense that if he raises it too high Miller and Wheat will begin to bake their own of course. Still, that would throw Baker only back to where he was before the division of labour began.
Since this leaves six units of flour unbaked it will attract another baker eventually and from here on events cannot be predicted, as it depends not only on this new cooperator’s particular skills and productivity but also on what he left undone instead, like if he was a bricklayer or redundant (unlikely – that’s a modern invention which we’ll look into at some later stage) before seeing an opportunity in baking. Note: while university economics simplifies things by discussing equilibria there is no such thing in the normal, observable, course of economic events but again this will be the subject of a future article.
This is by and large how the division of labour works and also shows that shortly after these arrangements are made time does not then stand still as these productivity gains will be “spent” but in ways not predictable from the outset. No one knows if any of the three decides to work less to play the violin, build violins, build a ship and discover America or a better plough like John Deere.
And this is by and large why also a cleaning woman and a surgeon are better off if one specialises in operating in the operating theatre while the other cleans after him because when the time comes that the cleaning woman needs an operation operations are far cheaper than if surgeon had decided to do the cleaning himself, even if he were actually better at it than she.
What goes for three individuals equally holds true for three or an infinite number of families, three communities, three clans, three nations, three continents or, who knows, in some distant future three galaxies or an infinite number of each – it can actually only get better from here on!