14. Cooperation: How a Free Market Benefits Everyone

0:0014. Cooperation. How a Free Market Benefits Everyone. June 27, 2008. The following attempts to explain the most important idea in the history of social analysis, the notion, actually it's a description of reality that is all around us but rarely noticed, has been around for centuries. It was first observed by ancients. It was first described with rigor by late medieval monks working in Spain. It was given scientific precision in the Classical period. It is the basis of advances in social theory in the twentieth century. In fact, it is an essential part of the case for freedom. It was the basis I speak of the division of labor, also known as the law of comparative advantage or the Law of Comparative Cost, and also known as the Law of Association. Call it what you will.

1:24It is probably the single greatest contribution that economics has made to human understanding. This law, a law like gravity, not a law like this speed limit, is a description of why people cooperate and the ubiquity of the conditions that lead to this cooperation. If you can can take a few minutes to learn it. You will understand how it is that society functions and grows wealthy even without a visible hand directing its path. You will also see how the criticism that the market economy leads to the strong dominating the weak is actually a sham. This law shows how it is that people can gain, materially and in every other way, by working together rather than working in isolation. They don't just gain the sense In the sense of satisfaction that comes with participation and solidarity with one's fellow man, they can actually gain in the real stuff of life, the goods and services that are available to us all.

2:24What's more, they gain more than the sum of their parts. Through cooperation and exchange, we can produce more than if we work in isolation. This applies in the simplest economic settings as well as the most complex ones. It helps to lay this out more rigorously so that you can observe the magic of the marketplace at work. I owe the following exposition to Ludwig von Mises in Human Action, Murray Rothbard in Freedom, Inequality, Primitivism and the Division of Labor, and especially Manuel Ayao's Not a Zero-Sum Game, which is available through Mises.org. Let's say you and I can both make bagels and pies. But there's a problem. You make both with incredible efficiency. In fact, you do a better job at making bagels and pies than anyone who has ever lived. You are the world-class all-time champion. Meanwhile, I'm not so hot at either. My bagels taste as good as yours, but they seem to take me ages to make.

3:32Why pies are the same way? I struggle and struggle, but try as I might, I just can't seem to crank them out the way that you can. What is likely to happen under these conditions? The intuitive answer, which you will hear in just about every sociology class in the country, is that you will make all the bagels and pies. No one else will. You will lord it over the rest of us, and have massive market power. If anyone wants either, he or she must Let's say you and I have never met. We are both making bagels and pies. Here is what happens in a 24 hour period. You make 12 bagels in 12 hours and 6 pies in the remaining 12 I, on the other hand, only managed to make six bagels in the first twelve hours and a mere two pies in the remaining twelve hours.

4:41If we both work at this pace, the total production is eighteen bagels and eight pies. In each case, the cost of what you decide to do is the thing you give up. So for you, the cost of each pie is two bagels, and, likewise, the cost of each bagel is a half of a pie. For me the opportunity cost of making a pie is three bagels, and the cost of making a bagel is a third of a pie. Just looking at this, you might observe that you have your act together, whereas I'm pretty shabby. What chance in life do I have? Well, my hope is bound up with the reality that your time and resources are scarce and you want to have ever more of each. So you begin to think about exchange. Even though I'm not very good at If you specialize in making pies, you still need some bagels. So you plan to exchange pies for bagels from me.

5:34With this thought in mind, you increase pie production and reduce bagel production. I, on the other hand, stop pie production completely and devote my time to making bagels. in mind, you increase pie production and reduce bagel production. I, on the other hand, stop pie production completely and devote myself to bagel production in hopes of fobbing them off to you. So, you now spend a mere eight hours on bagel making, in which time you produce eight bagels. In the remaining sixteen hours of your day, you are able to bake eight pies. Meanwhile, I can now devote all of my time to bagel making, and I turn out 12 bagels in 24 hours.

6:21Let's total up the production. Before cooperation, 18 bagels and 8 pies. After cooperation, 20 bagels and 8 pies. So, what is the gain here? Precisely two bagels. Can you believe it? Nothing else changed. There was no increase in our production potential, no increase in technology, no change in consumer demand or the weather or the linearity of history itself. All that happened is that we agreed to produce in cooperative exchange rather than isolation, and voila, two additional bagels. You think there's a trick? Go back and check the numbers and the assumptions. I'm just Let's say we now exchange the goods we make. You give me two of the pies you made in exchange for five bagels that I made. That leaves you with thirteen bagels and six pies, while I now have seven bagels and two pies. This would be reasonable, since those bagels you buy from me would have cost you five hours of production time. Try to find a good bagel for me.

7:36And what do I get if I exchange? I get two pies, which would have taken me twelve hours to make. So there is a sense in which I, by specializing, have saved two hours. And how many hours have you saved by encouraging me to make bagels? Five hours, during which time you made pies. And what is the cost of exchange in material goods for each of us? You have given up two pies. I have given up five bagels. If our time is measured in terms of goods, you have given up the time equivalent of four bagels for five bagels and thereby gained one. I have given up five bagels but gained the time equivalent of six bagels, since my pie to bagel ratio is three to one.

8:27So who gained the most? In terms of bagels, we gain the same, one. In terms of time, I have gained more. In terms of pies, you have saved more. Who is the winner? Both of us. Again, what made us gain? Cooperation and exchange. Nothing more. Now, you might say that this is absurd. No one sits around drawing I might be a wonderful musician and web programmer, but my advantage is web programming, so I leave the music production to other people, even if they do it less effectively.

9:18It's true in the business world. The boss might do an amazing job at accounting, clean-up, marketing and customer support. He or she might do these things more efficiently than anyone else, but the cost of doing one thing is another thing given up. It makes sense to depend on others so that we can all specialize. Consider the great 19th century pianist Franz Liszt. He was the best and most highly paid musician in Europe. Let's say he was also a great piano tuner. Would it make sense for him to give up practice time for a concert that would pay him $20,000 in order to tune his own piano? Not at all. He would rather pay someone $200 to do that.

10:07The opportunity cost of piano tuning for Liszt was very high, but for the tuner it was very low. They exchange, and both benefit. It is the same with doctors and nurses. The doctor The doctor might be great at prepping patients, but in doing so the doctor is giving up performing another surgery that would earn him many thousands of dollars. Note that this makes sense even if one person has an absolute advantage in every area. What matters for the real world is not absolute advantage, but comparative advantage. That is where the law of association comes into being. It is true for two people, two hundred people, two thousand people, or all people all over the world.

10:56Herein we have the case for international trade, for it changes nothing about people's mutual advantage that they reside in different lands. This is why it makes sense for both poor and rich countries to trade as noted by Bartolome Diabronaz as early as the 16th century. If it were not for these contracts, some would lack the goods that others have in abundance, and they would not be able to share the goods that they have in excess with those countries where they are scarce. Note that these gains come not from design but merely from freedom to associate, which Pope Leo XIII called a human right in his encyclical Rerum Novarum. If the state forbids its citizens to form associations, it contradicts the very principle Both the moral and practical advantages were reiterated by Pope John Paul II in Centesimus Anus.

12:04It is becoming clearer how a person's work is naturally interrelated with the work of others. More than ever, work is work with others and work for others. It is a matter of doing something for someone else. Work becomes ever more fruitful and productive to the extent that people become more knowledgeable of the productive potentialities of the earth and more profoundly cognizant of the needs of those for whom their work is done. The law was formalized by David Ricardo in England and further emphasized by economists The significance is impossible to exaggerate. It means that it is not necessary that all people of the world have the same talents in order to benefit from cooperation.

12:53In fact, it is the very diversity of the human population that makes it advantageous for them to work together and trade to their mutual benefit. What this means is that isolation and self-sufficiency lead to poverty. Cooperation and the division of labor are the path to wealth. Understand that, and you can refute libraries full of nonsense from both the left and the Right