Updated: 3/26/20
Two people work better than one; together they can earn a good pay for their labor. For if one falls, the other can lift up his friend (Ecclesiastes 4:9).
This passage is a defense of the benefits of the division of labor. Its context has to do with people who are either on someone else’s payroll or who are in a joint venture. The benefits of the division of labor extend far beyond this employment setting. What I write here is an extension of Chapter 14 of my commentary on Ecclesiastes, Autonomy and Stagnation.
First, consider the Christian theology of this passage. The operational model for this recommendation is the Trinity. God is three Persons. In relation to the creation, each Person has specific tasks. Jesus said of the Holy Spirit, “However, the Comforter—the Holy Spirit whom the Father will send in my name—he will teach you everything and he will remind you of everything that I said to you” (John 14:26). In addition, “When the Comforter—whom I will send to you from the Father, that is, the Spirit of truth, who goes out from the Father—comes, he will testify about me” (John 15:26). Jesus said this of His ministry: “I can do nothing from myself. As I hear, I judge, and my judgment is righteous because I am not seeking my own will but the will of him who sent me” (John 5:30). Within the Godhead, there is a division of labor.
Second, the Bible insists that finitude is basic to the creation. It is basic to mankind. This inescapable fact of finitude has implications for society. Here is one of the implications in the area of economic practice: specialized knowledge. A person can become well-informed about a few topics, but there are many other topics. When he specializes in order to become an expert, he cannot master most other fields. Ecclesiastes reminds us that there is a way around the limitation of men’s knowledge: cooperation. In this case, it is cooperation based on pay. Each of two men wants better pay for himself. The way for each of them to get better pay is to increase his output. How is this possible? By cooperating with the other person. This joint operation is more efficient than two individual operations. A well-organized joint venture is more productive than a related pair of well-organized individual ventures. This is true in every area of life. It is not confined to business.
This text does not give us information on how to organize joint ventures. It is not part of a how-to manual. But it is part of a how-not-to manual. It warns against autonomy. Autonomy is self-defeating in a competitive marketplace. It is not as efficient as cooperation. Output per unit of resource input will be lower than in joint ventures.
Individualism is rugged. It is rugged because it is inefficient. The division of labor benefits those who are less rugged. They can achieve together what they could not have achieved individually. The division of labor makes each of the participants more efficient. It also reduces risk for all participants. “One man alone can be overpowered, but two can withstand an attack, and a three-strand rope is not quickly broken” (Ecclesiastes 4:12). The larger the community of cooperation, the less there is to fear from invaders.
In the United States, there is a popular legend: America’s age of rugged individualism. This legend is usually associated with the development of the West, 1830–1880, which means the comparatively empty land west of the Mississippi River and east of the Rocky Mountains: the Great Plains. The story lacks strong evidence. Except for the isolated fur trappers in the Rocky Mountains from 1810–50, peaking in the 1840s, the settling of the West was a joint effort. There were lots of small family-owned farms, but there was also community. These farms were connected by economic and social ties.
Beginning with Adam Smith, economic theory has always acknowledged the greater productivity of the division of labor. It has not focused on the decision-making of isolated individuals, with the lone exception of the analysis of a hypothetical Robinson Crusoe. He was a rugged individualist. That is to say, he was a low-output individualist. Whenever an economist uses this example, he uses it as an introduction to the division of labor. At some point in the narrative, Crusoe meets Friday, just as he did in the famous novel. At that point, the economist begins to focus on exchange. This has been an efficient teaching strategy. That is why I use the story of Adam in the garden. That is the original Robinson Crusoe story. In the Preface to the 1993 revised edition of Man, Economy, and State (1962), Murray Rothbard wrote this.
Chapter 1 begins with the action axiom and deduces its immediate implications; and these conclusions are applied to “Crusoe economics”—that much maligned but highly useful analysis that sets individual man starkly against Nature and analyzes his resulting actions. Chapter 2 introduces other men and, consequently, social relations. Various types of interpersonal relations are analyzed, and the economics of direct exchange (barter) is set forth. Exchange cannot be adequately analyzed until property rights are fully defined—so chapter 2 analyzes property in a free society. Chapter 2, in fact, marks the beginning of the body of the book—an analysis of the economics of voluntary exchange. Chapter 2 discusses the free market of barter, and the subsequent chapters treat the economics of indirect—or monetary—exchange. Thus, analytically, the book deals fully with the economics of the free market, from its property relations to the economics of money (p. lvi).
Free-market economic theory is a theory of voluntary exchange. It is significant that the most widely read and most influential college textbook in economics, written by Paul Samuelson, does not begin with Robinson Crusoe. It also does not begin with voluntary exchange. It begins with central economic planning. In the original edition, published in 1948, in Chapter 1, the Introduction, he began with this topic: “Poverty Amidst Plenty.” He wrote the following: “Modern economics tries to explain, among other things, how it is the nations are alternatively afflicted with the dizzy ups and downs of business activity” (p. 3). He went on: “It is the first task of modern economic science to describe, to analyze, to explain, to correlate these fluctuations of national income. Both boom and slump, price inflation and deflation, are our concern” (p. 4). In the section on “Economic Policy,” he wrote: “This brings us to the important problem of economic policy. Ultimately, understanding should aid in control and improvement. How can the business cycle be diminished? How can economic progress be furthered? How can standards of living be more equitable?” (p. 5). This is the heart, mind, and soul of Keynesian economics: government planning to direct the national economy. It does not begin with individual decision-making. This book marked the beginning of Keynesian influence in academic economics, and it achieved dominance within a few years. I discuss this in greater detail in Chapter 40:8:2
Economic theory always deals with large aggregates of individuals: booms, busts, price inflation, etc. But free market economic theory does not begin with aggregates. It begins with decision-making individuals acting on their own initiative. The crucial policy question confronting free market economic theory in my generation is this: “Does the free market best coordinate the economic activities of individuals, or does the mixed economy of Keynesian intervention best achieve this goal?” The intra-humanist debate between methodological individualism vs. methodological holism goes on continually in modern economics, just as it went on in classical Greek political philosophy. Humanism never comes to a conclusion about either the correct policy or the correct methodological approach to solving the issues of economic policy. My approach is different: methodological covenantalism. It is based on the doctrine of the Trinity: unity and plurality, the one and the many.
Adam Smith began The Wealth of Nations with his now-famous discussion of the pin makers. Smith creatively borrowed from an extensive literature in French of the pin-making industry. He never offered any footnotes, which would have gotten him kicked out of a graduate program in economics today, but in the late-eighteenth century, this kind of creative borrowing was common. Here is the passage: Chapter I, paragraph 3.
To take an example, therefore, from a very trifling manufacture, but one in which the division of labour has been very often taken notice of, the trade of a pin-maker: a workman not educated to this business (which the division of labour has rendered a distinct trade), nor acquainted with the use of the machinery employed in it (to the invention of which the same division of labour has probably given occasion), could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches, of which the greater part are likewise peculiar trades. One man draws out the wire; another straights it; a third cuts it; a fourth points it; a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on is a peculiar business; to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands, though in others the same man will sometimes perform two or three of them. I have seen a small manufactory of this kind, where ten men only were employed, and where some of them consequently performed two or three distinct operations. But though they were very poor, and therefore but indifferently accommodated with the necessary machinery, they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand eight hundredth, part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.
This description of a pin factory is an impressive illustration of the increased productivity that is made possible by the division of labor. Smith adopted the logician’s strategy of arguing from something that is well known, a pin, to something that is less well-known, the manufacture of a pin. Then, having made his point (sorry; I could not resist), which was primarily a rhetorical point rather than analytical in terms of economic theory, he went on to the real topic of his book: the increased productivity and therefore increased national wealth that is the result of voluntary exchange. He was self-consciously arguing against government regulation of business enterprise. That had been the error of his predecessors a century earlier, whom we now call mercantilists.
It is important to understand that Paul Samuelson represented a return to the methodology of mercantilism: government planning of the overall market economy. But there was this difference: the mercantilists were self-consciously writing to defend the expansion of state power for the purpose of expanding the state. Samuelson argued that planning is for the benefit of people who are trying to keep their jobs safe from economic recessions. The results of these planning policies in both cases were the same: the expansion of the state, the reduction of individual freedom, and the reduction of the wealth of nations.
Workers in a pin factory do not enter into exchanges with one another. There is a central plan within the factory, and the pin makers carry out their assigned tasks systematically. This is why Smith’s intellectual achievement was remarkable. He has persuaded most of his readers that his analysis of voluntary exchange, which was an extension of the topic of the division of labor, was a legitimate extension of his description of the vast productivity of a pin-making factory when compared to those with isolated, individual pin makers. Here is his argument. Premise: if we want greater wealth, we must attain greater efficiency in production. Logic: (1) to attain greater efficiency, we must have a greater division of labor; (2) to attain a greater division of labor, we must have additional voluntary exchange; (3) government intervention reduces voluntary exchange. Conclusion: laissez faire, i.e., “allow to do.” Let businesses alone.
In the pin factory, there is a central plan. Employees are told what to do, and if the tasks are simple and repetitive, this is what they do. In a free market economy, which is essentially a gigantic auction, there is no central plan. There are rules governing the ownership of private property. These rules shape the kinds of exchange practices that develop out of them. How is it, then, that the exchange of goods and services between individual owners creates the division of labor that makes possible the massive increase in productivity that we see in a pin factory? If the productivity of the factory depends on the central plan, why doesn’t the productivity of the market economy also depend on the central plan? The most incisive answer to this question is Ludwig von Mises’ 1920 essay, “Economic Calculation in a Socialist Commonwealth.” He argued that without prices created in open markets, government economic planners would not have accurate knowledge. They would not know what to produce.
This is the issue of economic planning. This raises these questions. First, where is the locus of legal sovereignty to make the plan? Second, how does this legal sovereignty, which is individualistic, produce an economy that is as efficient as a centrally planned pin factory? Third, if legal sovereignty is individualistic, why is the productivity of an individual pin maker so much lower if he works by himself in his shop, and not in a factory?
The answer, according to Smith and other free market economists, is this: exchange is based on the greater efficiency of the individual in knowing what is efficient in his own field. He has specialized information. He is self-interested with regard to improving his condition in life. To maximize his productivity, he needs to find a market for the output of his specialized information. Economic theory’s analysis of efficiency applies to any person who decides to make an exchange. When two people decide individually that they can improve their individual conditions by cooperating, the same kinds of efficiency associated with the productivity of a factory become available to each of the individuals. Each person specializes in what he does best, just as each of the pin makers specializes in what he does best. Each person makes use of invested capital, just as each of the pin makers makes use of invested capital. The difference is this: each of the business owners owns his own capital, whereas the pin makers do not own the capital that makes them productive.
There is a famous aphorism: “You scratch my back, and I’ll scratch yours.” Neither party can efficiently scratch his own itching back. In a joint back-scratching venture, each of them gets his back scratched. Although very few unmarried couples ever enter into this peculiar exchange, the aphorism is easily understood.
Why do people enter into an exchange? To accomplish something jointly that they cannot efficiently accomplish by themselves. They make this decision as individuals. They see an opportunity for cooperation. Each of them wants what the other one possesses. They can exchange information. They can exchange services. They can exchange products. What they usually exchange is money for knowledge, services, and products. One person gives up money. The other person gives up knowledge, or skills, or a product that he produces for a living. But both of them are exchanging services and goods. Money simply makes the exchange process more efficient. It makes it easier to locate people who are willing to make an exchange.
One of the themes that I keep coming back to is this: people are mainly exchanging specialized knowledge. Sellers of goods and services profit most by selling the output of their highly specialized knowledge, which includes skills. They make most of their income from the sale of their specialized knowledge, not from the sale of the raw materials that may go into producing a product.
Each of the exchanging parties believes that he can put the highly specialized services of the other person to profitable use in his own enterprise. Each of them has specialized information, including knowledge of specialized markets. Each of them sees opportunities for greater profit by employing the knowledge possessed by the other person. The other person doesn’t see these opportunities. So, each offers to make an exchange. If what each of them is offering to the other person is more valuable to the other person than it is to him, then each of them benefits by becoming owners or at least renters of the other person’s knowledge and skills. Neither of them has the opportunity or the time to find out about all of the opportunities available to the other person. Each of them enjoys the economic benefits available from this crucial barrier to entry: specialized knowledge of his own market niche. Neither of them greatly fears the competition of the other in his own field. So, they can cooperate at low risk of loss.
The exchange takes place because each of them values what the other possesses more than the other person values it. Each thinks: “I want what he owns. He wants what I own.” Each of them profits by exchanging ownership of what he owns. Let us apply this analysis to ourselves. This means that achieving greater efficiency in production would not be worth the effort if we were the only consumers of our own output. Individually, we would cease to be very productive. We would stop specializing. We would stop concentrating our efforts on lowering the cost of whatever it is that we produce. We would have to learn so much about all the other things that we consume, which are things we do not know how to produce, that we could not concentrate on producing the things that we produce really well. Our income would drop. Why? Because our productivity would drop. Furthermore, everybody in our society would be experiencing the same kind of reduction of productivity and therefore the same kind of reduction of income.
In a face-to-face barter exchange, each of the parties had better be something of a salesman. Each of them has to persuade the other of the mutual benefits of the exchange. One of them goes into detail about the benefits that the other person can obtain by owning what he is selling. The other one is making the same kind of sales pitch. But there is a problem. It is rare that two people who own two different items happen to come across each other. It is also uncommon for each of them to be a good salesman. So, each of them prefers to sell whatever he owns for money. Each of them sells only to people who really want to buy what he is selling. In this way, each of them maximizes his money income. Then each of them goes out to buy what he really wants to own. Everybody benefits, including the middlemen who make the transactions easier, meaning less expensive, more rapid, and more predictable.
Adam Smith was the great defender of free trade. He understood that free trade is basic to the wealth of nations. He argued against the mercantilists’ arguments in favor of government-managed trade as the basis of the wealth of a nation. He persuaded generations of economists. Yet his argument still fails to persuade millions of voters, who see free trade as a threat to them and their nation. They remain mercantilists.
The doctrine of free trade should be defended in terms of the biblical concep of delegated ownership. Smith defended it as contributing to the specialization of production. This was how it increases the wealth of nations. This is a technical argument, not an ethical one. This was a strategic mistake intellectually, as Tom Bethell argues in his book, The Noblest Triumph (1998). Smith should have begun with property. As he wrote, “there is very little that is directly about property in The Wealth of Nations. The few paragraphs on the subject are extraneous to Smith’s main argument” (p. 97). If Smith had begun with ownership, he could have developed the case for free trade as an extension of the right of exchange. The logic of free trade is the logic of exchange: the right to sell what you own. The fact that there is an invisible judicial line separating a jurisdiction—city, state, province or nation—in no way affects the morality of exchange or the economics of exchange in peacetime. Only when nations are at war does an invisible judicial line have economic relevance: trading with the enemy. Then there is supposed to be no trade. So, there is no ethical or economic case for protectionism. Trade must be free in peacetime.
During the Israelites’ decades of wilderness wandering, God forbade them from looting the nation of Esau. They were to purchase water, not steal it (Deuteronomy 2:4–6). They had money: the spoils of Egypt, which had compensated them for their years as kidnapped slaves. They were to rely on exchange, not force. This law pressured them to develop the skills of foreign trade. They were to gain the reputation of peace-loving people who traded to gain wealth. I have developed this theme in Chapter 6 of my commentary on Deuteronomy.
The case for free trade is the case for economic liberty. It is based on the right of every owner to exchange whatever he owns for something else he would rather own. He is allowed to specialize. To raise the question of the wealth of a nation as resting on something other than the right of exchange is a conceptual error. It raises doubts about the wealth of individuals as serving as the basis for the wealth of whatever political jurisdiction they reside in: city, state, province, or nation. It calls into question the free market’s principle of the correspondence between individual prosperity and corporate prosperity. This free market principle is derived, not from comparative statistical analyses of nations, but rather from the biblical principle that the individual possesses a moral and legal right to do with his property as he sees fit, including transferring its ownership to someone else, on whatever terms he chooses, no matter where the other person lives. The case for free trade across borders is identical to the case for free trade across the street.
Economists refer to a phenomenon they call marginal utility. It is the subjective value we impute to the unit of something we are thinking about buying. We compare this expected value with the value of the identical unit that we already possess. The value to us of the last item that we bought or produced for ourselves is worth more to us than the value of the next identical item that we might buy or produce for ourselves. This means that the more units that we have in inventory, the less value we subjectively impute to the next one. “Enough is enough!” So, we go looking for someone who will impute high value to the next item that we produce. It would be even nicer if we could find someone to buy our entire inventory at the listed retail price.
Meanwhile, prospective buyers of whatever we produce to sell are doing the same thing with whatever it is that they produce. Here is the law of efficiency. The better that we are at producing something, the more items that we can produce for a given outlay of money, time, and other economic resources. However, as we learn from the law of marginal utility, the more of them that we produce, the less valuable they will be to us for direct consumption or use. Their marginal utility will keep getting lower for us. We are already overloaded with them. We have warehouses full of them. The only reason why we keep producing them is this: we hope that a few people out there will impute high subjective value to them, and will therefore give us money in exchange for them.
A pin maker is not interested in using any of the pins he produces. I don’t care if he is a pin maker on a factory floor or a pin maker in an isolated shop. He has more than enough pins to last him a lifetime. But he does not have more than enough money to last him a lifetime. So, he (or his employer) goes shopping for a buyer of his pins. The pin buyer is doing the same with whatever it is that he produces.
Our highly specialized knowledge as producers is of little value to us if all that we can do with our knowledge is produce goods and services for ourselves. Admittedly, this may not be true of a hobby fanatic. If somebody enjoys doing something for the pleasure of doing it, he may continue to do it. He may seek greater knowledge about how to do it. His production is really consumption. He may not suffer from decreasing marginal utility in his hobby as a whole because he keeps finding new aspects of his hobby that he wants to learn about. So, other things do not remain constant over time. With respect to knowledge in any category or niche, there is always more to learn. Some of this knowledge may be valuable. Or maybe it is fun to learn for its own sake. So, we keep studying.
Therefore, when I speak of our motivation for gaining ever-more specialized knowledge, I am speaking of increasing our opportunities for increasing our income by greater cooperation through exchange. We continue to accumulate greater knowledge. We pay money to get greater knowledge. We keep reading books in our field. We visit websites. We do whatever we can to become more knowledgeable about whatever it is that we sell. But we would not do this if there were no market for the output of whatever our knowledge has enabled us to produce.
This is why anything that threatens the auction process that we call the free market is a threat to our wealth. This is because it is a threat to our productivity. This is because any reduction in the number of potential opportunities to sell the output of our specialized knowledge reduces the value of our specialized knowledge. If I know how to do something that is uniquely valuable to others, but the market has been closed or severely reduced by some government regulation, the market value of my knowledge is reduced. I now have less incentive to cooperate with other people. They have less incentive to cooperate with me. All of the people who might otherwise have entered into exchanges suffer a reduction in their wealth. The economic value of most of the things that people own falls because their personal wealth falls. Therefore, they impute less value to all of those specialized things they own that are now worth less because of a reduction in the division of labor. Their wealth falls because the market value of the output of their specialized knowledge falls.
There is an aphorism in English: “Jack of all trades, master of none.” It refers to someone who is marginally more skilled than most people in several areas, but who is not sufficiently skilled to compete against a specialist in any of these fields. In a world of an increasing division of labor that results from increasing knowledge that is funded by increasing capital investment, the jack of all trades cannot earn a middle-class living. Nobody wants to purchase the services that he is qualified to deliver. A specialist in each of the fields is easily available. So, hardly anybody purchases the skills of someone who is a jack of all trades.
In an isolated community in which there are no specialists, someone who is a jack of all trades can make a decent living. He can supply services to most of the families in the region. An isolated community in which there are no specialists is a community with a low division of labor. It is therefore a poverty-stricken community. There is not enough output in this community to attract the services of specialists. These people have little money to spend on anything. They live mainly through barter.
As soon as specialists begin to arrive in the community as the community gets richer, the jack of all trades finds himself close to unemployable. He has to perform services in those remaining niches of the local economy in which a specialist has not yet arrived. Once a specialist arrives, he is soon out of business in that specialty. At that point, people in the community would like to have another specialist in each field, so that the specialists will compete against each other. This will keep prices low. (The one exception to this is the legal profession. A lawyer welcomes the arrival of another lawyer. Together, they will do quite well. Their competition will increase their net income.)
In Western civilization, there is great respect for the somewhat mythological figure known as the Renaissance man. This was an individual who was highly skilled in a number of artistic fields. The archetype of such a Renaissance man is Leonardo da Vinci. He did many things quite well. But in an economy with a high division of labor, Leonardo would have to specialize in the field in which he has a competitive advantage if he intends to make an above-average living. Nobody would pay for his not-quite-competitive output in those fields in which he is far better than the average journeyman, but not better than specialists who sell the same product or service.
Economists point out that somebody who does two things very well would be wise to concentrate on whatever he does that generates the greatest income. If he continues to devote hours to both jobs, he will receive less income per hour. He should specialize. Even if he is a more efficient producer than some other supplier in the economy, he should still specialize in whatever generates the most income. Any time that he spends producing for a market that does generate maximum monetary income is either wasting his time or else is something of a hobby.
Voluntary exchange is a means of cooperation. In a modern economy, voluntary exchange is by far the most widespread means of cooperation. Buyers and sellers do not know each other’s names. They do not spend valuable time getting to know each other. They do not worry about taking advantage of each other. They do not spend valuable time bargaining verbally about the price. Instead, a buyer goes into a store, or onto an online shopping site, to order some item. When a sale takes place, the buyer and the seller are cooperating with each other. They are also cooperating with the middlemen who made the exchange possible. This is why Jeff Bezos in 2019 was the richest man in the world, even after his divorce. (His ex-wife is now the world’s richest woman.) He is the middleman of middlemen in the world. He is the major shareholder of Amazon.
The main thing that is being exchanged in any economic transaction is information. Each party to the exchange has specialized information. Each of them is making this information available to the other at a price. This spreads the benefits associated with specialized information. Accurate information is the most valuable economic resource.
The market process is a way for buyers of goods and services to persuade people with accurate specialized information to go into production. The market process lures owners of valuable specialized information into the marketplace. It does so by means of the offer of money. The competition among all of the holders of specialized information benefits consumers who purchase the output of this information. Furthermore, the fact that many of the exchanges are made on public markets is an additional benefit to society as well as individuals. The prices of these exchanges convey important information about the conditions of supply and demand in the thousands of capital markets. With the Internet, people can shop for the best price or the best quality or the best combination of quality and price. Yet it costs them only time spent in shopping plus an Internet connection to take advantage of what is essentially free information. As the price of accessing this free information falls, more of it is demanded. This means that there will be greater cooperation. This sharing of information through the Internet is the greatest single source of economic growth in the world today. This is because accurate knowledge is the most valuable of all scarce resources. It is spreading around the world more rapidly today than at any time in the history of man. The international division of labor is progressing at a pace inconceivable half a century ago. Yet this pace will seem pathetically slow by the standards that will prevail half a century from now.
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