Division of Labor and Social Order

Mises UniversityJuly 20-26, 2014

Crusoe’s and Friday’s Production Possibilities

Crusoe’s MPPL Friday’s MPPL

C B C B 6 2 5 ½ 5 1 ½ 4 ½ 4 1 3 ¼ 3 ½ 2 ¼

ProficiencyEfficiency

Crusoe and FridaySelf-sufficiency

Production in Self-sufficiency Crusoe allocates 3 units of labor: 6 c and 3 ½ b Friday allocates 3 units of labor: 5 c and 1 b Total production: 11 c and 4 ½ b

Opportunity cost of producing more berries Crusoe: 6 c to produce 1 more b (6c/1b) Friday: 5 c to produce ¼ more b (20c/1b)

Crusoe and FridayDivision of Labor

Production in the Division of Labor Crusoe allocates 3 units of labor: 0 c and 4 ½ b Friday allocates 3 units of labor: 12 c and 0 b Total Production: 12 c and 4 ½ b

Opportunity cost of producing more berries Crusoe: 6 c for producing the last 1 b (6c/1b) Friday: 3 c to produce the first ½ b (6c/1b)

Effects of the Division of Labor

The division of labor increases productivity• Specialization of factors according to efficiency• Via trade each person’s standard of living rises Crusoe trades 1b for 6½c and has 6½c and 3½b Friday trades 6½c for 1b and has 5½c and 1b Specialization, per se, may augment or degrade efficiency

Law of Association

Each factor is efficient in some line of production.• Opportunity cost of producing more berries Crusoe trades 6c/1b and Friday 20c/1b• Opportunity cost of producing more coconuts Crusoe trades 1b/6c and Friday 1b/20cEmployment can be indefinitely expanded.

Limits to the Division of Labor

Extent of the market• Market integrates the entire world into one division of labor • Government intervention of trade retards the division of laborExtent of saving-investing• Without S-I: limited division of labor• With S-I: indefinitely extended division of labor

Overcoming Limits to the Extent of the Market

Eliminate state intervention in trade• State intervention can forcibly prevent trade• State intervention can forcibly require tradeEliminate economic decision making by state officials• Entrepreneurs economize production and investment by using economic calculation• Self selection by monetary incentive on the marketChoose whether or not to eliminate natural barriers

Overcoming Limits to Saving-Investing

Capital accumulation• Lower time preferences.• More saving-investing.• Build up the capital structure.• Improve technology in new capital goods.• Greater productivity.• Higher standards of living.

Crusoe’s Capital Accumulation

Crusoe’s production stages to construct a net3rd Stage – Gathers vines and twine: 7 units of labor2nd Stage – Fashions the net: 5 units of labor1st Stage – Fishes with the net

MPPL in Fishing

5 fish – 1st unit of labor4 fish – 2nd unit of labor3 fish – 3rd unit of labor

Crusoe’s Capital Accumulation

Allocate labor to get the highest DMVPDMVP depends on MVP and Time Preference

MVPL DMVPL

5 f 5 fish in 6 days and ½ hour6 c (after plain saving)2 b 6 coconuts in ½ hour 2 qt. berries in ½ hour

5 fish in 6 days and ½ hour(before plain saving)

Crusoe’s Capital Accumulation

Decision to construct a net depends upon: • Value of the fish produced by the net: sum of DMVPs• Cost of the labor used to produce the net: value of other goods foregone

Crusoe’s Capital Accumulation

Preferences – (S-I)5 fish per wk. over 25 wks. starting in 6 days1 hr. sleeping and 1 hr. berry picking over 6 days(plus 1 hr. berry picking every 5 wks. over 20 wks.)

Crusoe’s Capital Accumulation

Chooses the extent of his S-I: time preferences.

Invests in the capital goods that render the largest differences between value and cost.

Obtains the greatest value by investing so that the difference between value and cost in each line is the same.

Social Capital Accumulation

Specialization in S and I as well as Production• Low TP savors; superior foresight investorsEconomic calculation reveals value differences• Continuously emerging value differencesIndefinite extension of the division of labor• With net S-I add production processes and stages to the capital structure

Standards of Living since the Birth of Christ

Ludwig von Mises

Human society is an intellectual and spiritual phenomenon. It is the outcome of a purposeful utilization of a universal law determining cosmic becoming, viz., the higher productivity of the division of labor. As with every instance of action, the recognition of the laws of nature is put into the service of man’s effort to improve his conditions.

Human Action, p. 145.