Posted tagged ‘Exchange’

Specialization And The Division of Labor

October 6, 2015

The video below shows what an individual would have to go through to make a chicken sandwich if there was no division of labor and exchange. This represents a primitive life style that many of us alive today don’t understand because we were born at a time in history that has seeming abundance. But our current standard of living has existed for only a short period of time when you consider the recorded history of the world. The division of labor, specialization, trade, capital formation and accumulation, a medium of exchange {money}, are examples of market phenomena that spontaneously evolved over time. None of these were results of a centrally planned economy. We take these things for granted. In fact we fight against these things at every turn when we vote for more government intervention into the free market, not realizing that government interventions are hampering these very institutions that created our prosperity in the first place.

I liked this video because this is really I Pencil shown from a different perspective. Entrepreneurs specialize in producing the specific goods that go into making a chicken sandwich. Because of specialization and economics of scale, what is needed to produce a chicken sandwich can be purchased from a grocery store at a low price, stored in your kitchen, and used at your convenience. So instead of spending $1500 and six months producing a chicken sandwich, you can make it when you want to at a low price.

Here is I Pencil as explained by Milton Friedman in his Free To Choose series from the early 80’s.

Here is an article titled ‘The Firm And The Division Of Labor‘ by Per Bylund that goes into more detail about the division of labor. Here are some excerpts.

“Ludwig von Mises emphasized the division of labor as social cooperation and argued that every civilized society is based on the prosperity as well as the mutual dependence caused by the division of labor.

“Eugen von Böhm-Bawerk showed how society, at least the parts that choose division of labor instead of barbarism, consistently develop more roundabout and productive production processes that consist of ever more stages and involve (are dependent on) more people. The roundaboutness or “length” of a production process denotes the number of tasks it includes, where each task is continuously more narrowly defined. The alternative to the division of labor is that the baker has a small field out back where he grows and harvests his wheat, has a mill where he grinds it into flour, and a self-built oven to bake the bread. A longer or more indirect production method, which Böhm-Bawerk talks about, amounts to a farmer specializing in the production of wheat, a miller to grind the wheat, and a baker to produce the dough and bake bread in an oven made by someone specializing in oven making.

“Everybody involved in the production of bread (or any other product or service) — directly or indirectly — is dependent on consumers’ valuation of it. If it cannot be produced cheaply enough, nobody in the chain of productive tasks can sell their intermediate products. The whole economy aims to do this single thing: to produce goods that satisfy the needs and wants of consumers.”

Related ArticleWe’re All Born In The Middle Of The Story, at

Is The Economy; Growing, Shrinking, Or Exactly Where It Should Be?

August 26, 2014

Is the economy growing, or shrinking? Looking for answers to this question by listening to political rhetoric won’t help you find the answer. Politicians will always state the opposite of what their opponents assert about the economy, and will propagandize economic data in an attempt to prove these assertions. Like a pawn on a chess board, the economy will be sacrificed at the expense of winning a  political power game. Politicians preface comments about the economy by stating; “economists say” or “economists agree”, in order to prove their political position related to the economy.


These “economic experts”, cited by politicians, either work for the Fed, the Congressional Budget Office, the R and D parties, think tanks, or write op-eds for the NY Times. These “experts” are always talking in terms of an economy improving, growing, or healthy, on the one hand or getting worse, shrinking, or weak on the other. We should be weary about these “experts” pronouncements, because the question isn’t, is the economy growing or shrinking, the real question is, how can anyone have enough knowledge to know where the economy should be at any particular moment?


The simple answer to the question, where should the economy be, is very simple: exactly where it is. To understand this we first have to know what an economy is. An economy is what results when each individual makes decisions on what to produce, consume, save, or exchange. The economy is never stationary it is constantly changing, because what each individual values related to production, consumption, saving, and exchange, is constantly changing. Economic forces are constantly in play adjusting the economy to these new changes based on what individuals value. The economy can never be measured at one particular point in time. The economic data that the experts look at is essentially an inaccurate report about what has happened in the past. This economic data is the placing of a numerical total on individual economic activity, but it says nothing about the individual activity. It’s like trying to understand a three-dimensional world by only using  length and width. How can you know what a sphere is, if the only thing you understand is a circle? Think if you had to make decisions about the D-Day invasion if all you received was information on its progress every ten hours. You would make very different decisions than if you knew in real-time what was happening. Now think if you had to make decisions about D-Day with inaccurate information that is transmitted every ten hours. Your chances of making a good decision are nearly impossible. Trying to make decisions about the economy is much more difficult because there are many more constantly changing  variables.


All these “experts”, whether they’re liberal or conservative, or whether they’re for central planning or free markets, think their particular policies can produce a growing economy. These “experts” aren’t just arrogant enough to think they know best how much the economy should be growing or contracting, they also think their policies can make it happen. They think that the decisions of hundreds of millions of people on what to produce, consume, save, and exchange, should be ignored and replaced by their decisions on what they value. Does more knowledge exist about what should be produced, consumed, saved, and exchanged in the millions of decisions made daily by millions of individuals, or does more knowledge exist in the decisions made by “experts” after they analyze false ex post facto data about these millions of decisions?


In a free market economy the economy is at any moment exactly where it should be. Whether it is growing of shrinking doesn’t matter because it reflects what millions of people value based on every decision they make. When “experts” intervene in the economy through regulations, taxes, electronically printed counterfeit money, etc, these interventions are factored into the process individuals use to decide what to produce, consume, save and exchange. Even with all of these interventions the economy is exactly where it should be at any given moment. It should be no surprise that interventionist policies, by politicians and bureaucrats, can’t produce the outcomes these planners had hoped for, they were doomed from the start. Not only because the knowledge they receive is useless, it is also late. But instead of repealing their policies, central planners try to fix the outcome brought about by their previous interventions, by proscribing new interventions. They are trying to cure the symptom instead of the problem.

The only way these interventions have a chance of working is if they were made by a totalitarian regime. But even in a totalitarian regime, individuals still have a choice on what they will produce, consume, save, and exchange. Even though the Soviet Union had all of the power to enforce its edicts, they couldn’t make central planning work. The Soviet Union’s economy, at any given time, was exactly where it should have been, even at the point when it collapsed. So don’t vote for politicians who want to steer the decisions of individuals. Allow individuals the freedom to make unhampered decisions about what they produce, consume, save, and exchange, even if you don’t like the outcome of these decisions. The result will be the optimum amount of satisfied individuals that can possibly be achieved in a world ruled by scarcity and subjective value.

Related ArticleCentral Planners Don’t See The Consequences Of Their Actions. Or Do They? at

Related  ArticleA Look Over The Horizon At What Lies Ahead If We Continue Down The Central Planning Road. at

Related ArticleSpontaneous Order Utilizes More Knowledge Than Central Planning Could Ever Hope To Utilize, at

Related ArticleSpontaneous Order = Free Market Economy, at