The Division of Labor

0:00And it's true, if I can follow the reverse psychology of Mark Thornton, I can say that, you know, there are a lot of YouTube videos of me singing karaoke, but most of them take place in a bar. There's a lot of alcohol and, you know, scantily clad women. So do not Google Bob Murphy karaoke videos. Okay, I just want to make that clear. Another thing about that textbook that Doug was holding up there, The Lessons for the Young Economist, this is true. This isn't, I'm not making this part up. This Part Up. Last week I was giving a talk to a boarding school, Delphian School, out in Oregon. And these are high school kids that their parents from all over the world centered this school. It's a very prestigious school. And the headmaster there was friends with the Austrian tradition. He's into that and he had our book there, that particular book and gave it to the high school kids to read. And one of the students did come up

0:52to me afterwards and I had given a talk and he just said, I just want you to know that That book blew my mind. So, again, the same spirit. I'm not recommending that you read it because I wouldn't want your minds to get blown, but it is down there. Well, I'm supposed to talk about the division of labor, and this is a very fundamental concept. And, of course, in that book, Lessons for the Economist, I expand on this in greater length. So let me just give you a flavor of that in the short time I have with you today. It's something that, as Mark was alluding to, in economics, things are either so simple that people just take them for granted and then it doesn't really hit them of the significance of it, or other things can be very complex and for some reason it's hard for anyone but economists to understand the concepts behind them.

1:39That's sort of the case with the division of labor, which I'll explain to you and then maybe if we have time at the end I'll explain the applications of this concept to international trade. You can see that as the talk goes on here, I think the stuff in the beginning I'm going to tell you, it's going to be such common sense, you're going to say, okay, okay, you're going to be waiting for, you know, where's the challenging part, you know, why do you need to get a PhD in economics, this is all common sense, but yet by the end, we're talking about free trade, I mean, that's something that the average person does not believe that it's good for a country to just have goods from around the world coming in at low prices, right, most people think, oh no, that will destroy our economy, that will throw people out of work, we need to protect our workers from this, you know,

2:50So, as far as the division of labor, let's just start out in the beginning and just get the basics of it. What that phrase means, the division of labor, it's talking about the fact that in a modern economy, what we do is we divide the labor up. That's where the term comes from. So, some people do these tasks, other people over here do these tasks. So, you take the the total amount of things that need to be done and you sort of assign them to different people as it were. I mean, there's not some person actually doing the assigning, but you get the idea that the labor, the tasks to be performed are divided up. So that's what the term division of labor, that's what it means.

3:35And so I think the easiest way to see the benefits of doing it that way is to imagine that we didn't do that. to imagine that everybody does everything on his own. So that, for example, everybody grows his own food. So imagine if during the course of the day, everything that you ate, you had to personally prepare. And I don't just mean that you went and you were the one who opened the fridge and got out the ham, and then you got the bread, and you made your sandwich, and you cut it yourself, and you thought, wow, that's a job well done. I'm glad that I'm self-sufficient. I'm saying, no, if you wanted a ham sandwich, And then you had to raise a pig, right? I mean, can you imagine that? Or if you wanted to have a hamburger, then, you know, that you would be responsible for raising the cattle in order to do that, okay? If you think about that, there are probably a lot more vegetarians

4:24walking around, right? If you had to go through all that. Another example, I mean, imagine if every article of clothing that you wore, you had to personally make yourself, right? That that would be probably a lot more nudist walking around, right? I mean, I have trouble

5:10I think I have appendicitis. Somebody go get me a knife. I'm going to have to operate on myself. I mean, that would be crazy. You would die. And it's not even just that you can't operate on yourself. If your buddy was there saying, yeah, I think you've got appendicitis. I'm going to get a knife. You'd say, no, no. I feel much better now. Thank you. Thank you. That's okay. So what's the common element running through all this stuff? You can see that it's people are better at certain tasks than others. That's not the way we run things. We don't all do everything that we use during the day. We allow other people to do it. So instead of having everybody grow his own food, what do we do instead of that? We have a particular group of people that they grow all the food, basically, and we call them farmers. That's what they do. Instead of, you know, everyone cleaning his own teeth every time,

5:58you know, or pulling a cavity or, you know, dealing with a cavity every time you have a dental issue, We don't do that. Instead, there's a small group of people, a small subset of the population, that that's all they do all day, day in and day out, is clean people's teeth and deal with cavities and so forth, and we call them dentists. Or maybe another example of instead of everyone lying half the time during the day, we have one group of people and they lie all the time. We call them politicians, right? So, you see the pattern there. Now, what specifically is going on? What's the big picture? We sort of have this common sense intuitive understanding that the system that I described where we divide up the labor, that's clearly superior to the system where each person grows his own food, makes his own clothes, builds his own car from scratch and so forth.

6:54Because it's like Mark Thornton was saying with the issue of the pencil, depending on how far you want to put it, I mean, you can push it, you can see that it would be absurd if you really tried to carry self-sufficiency through to its logical conclusion. Because some of you might be thinking, and I know some of you probably are able to design your own clothes. I mean, I've known some fashionable people in my day and they say, hey, where did you get that blouse? And they'll say, oh, I made it. And they're not even making a joke. They literally made the blouse. But even there, it's not that they truly harvested the cotton and so forth that went into it. Right, they went to some fabric store or whatever, I don't even know how to describe because I don't know how you even begin to make a blouse, but they're the ones, they went out to other experts and got those raw materials from those people, they certainly didn't build the sewing machine from scratch, when someone says, oh I made this blouse, they mean I did a lot more than most people do in terms of getting a blouse, but they still relied quite heavily on the professional efforts of thousands of other people when you tally it all up.

7:57So why is it specifically that that system of dividing the labor up, why is that better? It's because specifically what happens is it increases what's called the productivity of labor. So meaning, loosely speaking, for every hour that someone's doing a task, they produce more stuff. And the higher that amount of stuff that you produce is, the more productive your labor is. So if you just think about it, if we have everybody on the planet is engaged in activities where they have much higher productivity, well then across the globe there's just that much more stuff that's made, and then that means there's more stuff per person to go around. So something that's inextricably linked with the division of labor, of course, is the need to trade.

8:47It wouldn't actually help us any if all the farmers grew all the food, and then all the tailors made all the clothes, and then all the dentists over here had all the equipment ready to start pulling teeth, but then they didn't trade with each other. Then that would be ridiculous. You'd have a bunch of guys with a bunch of food and no clothes, and a bunch of guys with a bunch of clothes and no food, and guys that were ready to deal with cavities and they'd be starving and naked. The Division of Labor only works if you trade with each other, so that people stockpile stuff, they make a lot more. In other words, a modern farm, or even back in the day, an ancient farm, people grew more food on the farm than the family itself needed.

9:36And then they took the surplus and they went and they traded it with somebody else. Maybe they went to town and then they took extra eggs and chickens and maybe took a bunch of milk or whatever and then traded it with the people in the town because the people in the town could make certain things that it just didn't make sense to try to make on the farm. So that's the idea. So people under the modern division of labor, they specialize in, they focus on the things in which they're really good, which they have a relative advantage, The Theory of Money and Credit

10:35of how society is organized, if that's the way you want to describe it, that the institution of private property, having market prices, signal to people where there are shortages of things, so like if there's not enough food in one area, the price of food goes way up. So everybody around the world who has a bunch of extra food, they ship it over there, not because they want to alleviate hunger necessarily, but because they're interested in money. And that's the way the market sort of regulates itself. I'm just trying to give you the underground foundation or the background context of how it is specifically that physically we can have such a high standard of living. A large part of it, again, is due to this idea of the division of labor which raises the productivity of labor. Everyone is producing more stuff per hour and that's why there's more stuff to go around.

11:25It's really interesting, as you get older, you'll find that a very easy way to break the ice, you meet somebody new, is just to ask them what they do. So, the joke is if you're in college and you meet somebody, what do you do? You say, hey, what's your major? You guys at the high school, most of you are at the high school level, I don't know exactly what you even talk about at that age. I guess, you know, are your parents obnoxious? Yeah, mine too. Okay, so maybe that's it. College level, you ask people, what's your major, but then once you get out into the real world, as they say, and you meet people, that's a very common thing to do, because for one thing, it's everybody, or most people, they have to do something, I actually sort of stepped in it a few weeks ago, I was talking to somebody, and my buddy and I, we were complaining about like, oh yeah, I got to travel all this much, and I was thinking, I got this big trip coming up, and I had no time, and he was complaining about all his clients, because he's like a computer

12:21Security Guy, and then this third guy that was this guy's friend that he brought and I just met 10 minutes previously. I said, oh, so what do you do? And he was like, well, I've been employed for 18 months. I was like, oh, sorry, check, please. Right. So that was a little bit awkward. But in general, assuming you don't suspect that the person is unemployed and you don't want to embarrass them, he asked somebody, what is it that you do? And they can go on and on because unless you're in the exact same occupation, they know things about that line of work that you have no clue about. For those of you who have actually been out in the workforce, you probably know this. Besides being an economist, and I won't bore you with all the ins and outs of being an economist, but when I was in high school, I worked at a grocery store in the dairy department. And you think, okay, well, that's a pretty simple job.

13:06And yeah, there was nothing really complex about it, but you just learn certain things. For example, the rotation of the milk, that they had the expiration dates, and so we would do it.

13:46in the Dairy Department, you would know when you go to buy milk, you don't grab the first thing, you look way back and you can find one that's got, you know, much better dates. There's a little tip for you. So people watching the streaming, not only are there lots of girls here, but you can learn tips on how to buy milk. So really, I think the next time one of these conferences comes up, you really should come to the Institute. So I was talking to this guy, this trip in Oregon, and he, what did he do? He actually came up, he actually said this to me. He said, well, yeah, if you need to process two million pounds of potatoes a day, I'm your guy. If you think about it, that's a very odd thing to say. Not too many people walk around saying, if you need to process two million pounds of potatoes per day, I'm your guy. And yet, there are some people that need to do that.

14:30And who do they call? This guy that I was talking to two weeks ago in Oregon, right? And specifically say, well, who the heck would need that? It was McDonald's, for example. They make a bunch of French fries every day, obviously. I've never worked in McDonald's, so I don't know exactly, but I'm assuming they get like big frozen bags of French fries and they take them and put them in the fryer. And so this guy that I was talking to, he is the consultant for a food processing company. So he doesn't work for McDonaldivid, he works for the companies that work for McDonald's. So again, you think through, you go to McDonald's, you order something, you get your fries, you don't even think about where does this come from. The Theory of Money and Credit

15:37In order to come and look at the factory and order the equipment for these people and design the machinery to allow for the most efficient and cost-effective way of taking these potatoes and turning them into frozen bags of french fries that they would then sell off to McDonald's, for example. And so I'm just curious, do any of you know the way, because he said to me, how do you think we get the skins off the potatoes, and I said I imagine you hire hundreds of six-year-olds with really sharp nails and they just peel it off. And apparently that's illegal in this country, so that's not the way they do it. Does anybody know how at a modern plant they get the skins off potatoes? What's that? Scrub? I think that's... you mean with a hand or you mean with chemicals? Okay, with chemicals, you're right. So apparently that's the way they used to do it.

16:26That's like the second most recent way they do it, that they would put chemicals on it. So my idea of having the kid with the nails is like so ancient that they don't do that at all. It used to be, yeah, that they would use chemicals and coat them and then that would sort of like burn away the skin and that's the way they would do it. But he said now the most cutting-edge technique is they have these big drums that rotate. They fill them up with the potatoes. They started spinning. They increased the pressure in there to something like 10 times atmospheric pressure. I don't remember how much it was. And then they superheat it and then they quickly suck the pressure away And then the moisture that's inside the potato, like in between the potato and the skin, expands and it blows the skins off the potatoes. Right? And that's how they do it.

17:12And so there was another economist there, some of you may know Richard Ebeling, and he was very concerned. And I said, are any potatoes injured in this process? We were worried about potato cruelty. I don't know if in good conscience I can eat French fries anymore. Okay, so you think that it's done, no, this guy was talking about 25 minutes about how we make french fries and you think, well, man, that would be, but it was, it was fascinating, so then, I won't give you the full version, don't worry, so it's coming through and then they, of course, they have like all these, you know, criss-crossing blades that the potatoes shoot through to turn them into fries, so now they're on the conveyor belt zooming down and he's explaining, I mean, this is fast, it's not like a, I mean, these things are flying through, and so now you got a conveyor belt coming with all these things that are cut looking like french fries,

17:59McDonald's is really driving the industry because McDonald's is really particular about the sorts of fries you get. I mean, they're terrible for you, but they look really pretty, right? That's the idea. So they're coming down. So what do they do? He said they used to have human beings that would just sit there, you know, lining each side of the conveyor belt, just looking for rejects and they would grab them and, you know, put them into a separate pile. And so you say, well, what's wrong? Well, They have green spots on them. They're actually fine. They're edible. It's not mold. It's just like the way the potato grew, but it looks gross, and you obviously, if you bought a thing of fries at McDonald's and some of them were green, you might think that was weird. So they do that. And there's other things too, like some of the skin sometimes doesn't completely get blown off, and so they've got to grab those.

18:49The problem there was, it was just inefficient. It's a very monotonous job, obviously, to have workers sitting there looking at French fries all day, so that they would miss some. So what would happen is guys at the other end, where they would go into the bags, they would have the quality control people down there as another checkpoint, and they would see, wait a minute, you guys, you're letting too many green fries through, or whatever. But again, these aren't people with PhDs and the other who are sitting there looking at the stuff go by, And so they don't care too much, you know, they're joking around with each other. So he said that was a very inefficient way to do it, so now they've completely automated it. They have cameras set up at all different angles, and he explained that it has to be at different angles because, like, if you just had a camera overhead, you'd only see the green stuff that's, like, right on top.

19:34You would miss the stuff at the tips and so forth, and so you have to have the cameras all over. And this is the neatest part. So it's as if the story isn't compelling enough, it gets even better. So as it's coming through, the cameras, like, you know, see, uh-oh, defective fry, defective fry, defective fry, and the computer knows where they are, on the belt, and then calculates. So it goes down here, let's say, and then there's a part, so the conveyor belt's, you know, going like this, so the fries are shooting off, and then there's like another thing that catches it, and right here, there's a stream of air jets, like, so there's ten little holes, and so as the fries are, I'm not making this up, I thought he was kidding, and he showed

21:12The complete different process. They used to use chemicals to get the thing off and now it's cheaper or more effective because part of the reason they blow the skins off is they lose less of the potato with the cost of chemicals that would apparently eat into, you know, some of the outer potato and so they would lose some. So this way they retain the most potato meat. I don't know if you call it potato meat. I don't know what you call it. But you see the idea. So it's in terms of how cheaply can they mass produce bags of French fries that are acceptable quality for McDonald's, they can lower the cost by spending tons of money up front. I mean, these are million dollar operations to get all this equipment to have the cameras and the computer processing and the air jets and everything. I mean, that's just to get that thing up and running. You can imagine that's a very complicated thing and that's what this guy's whole business was. He was just a consultant for these few

22:03companies because obviously there's not many companies that need to produce 2 million pounds

22:37Okay, so you can see the advantages of the division of labor. Now, what is it, so we can see that, we understand it, okay, but what specifically is it that drives this higher productivity? Well, there are a few things. Let me just talk about a few of them for you. So one is that just the issue of setup time and moving around. So I can just explain that with a few examples. So just imagine it's after dinner And you've got two siblings, let's say, and your parents say, OK, we made the dinner, and now you guys clean up the dishes. So that's what your job is, you and your two siblings. It's your job to clean up all the dishes. Now, one way you could do it is each person could grab a dish off the table, walk over to the garbage can, scrape it off, then go to the sink, rinse it off, clean it, and then go over to the towel and dry it and then put it away.

23:30And each person could sort of walk around the kitchen doing that. But that's not usually the way you do it, right? If you and a group of people have to clean up the kitchen or, you know, clean the dinner table and put all the dishes away, that's... I've almost... I don't think I've ever in my life seen people do it that way. Instead, the way they do it is they divide up the labor. They have a division of labor, right? One person, it takes the dirty plates maybe over to the garbage can and scrapes them off and then starts piling them up still dirty on the kitchen sink. Another person is sitting... standing there at the sink the full time that this is going on. with the water going cleaning them and then handing it off to the third person who doesn't is in charge of dragging and putting away okay so if you just think through it well why is that why is it that that's naturally the way we all go

24:17about clearing the dinner table it's because if you did it the first way I described you'd be bumping into each other and it's you would spend a lot of your time just walking around the kitchen or especially if it's in the other room you'd be spending a lot of time walking back and forth and so this This way you sort of concentrate your efforts on the cleaning rather than moving around. And so there's a similar type of thing that happens in the broader economy, that part of the reason it makes more sense for some group of people to just focus on growing food and other people to focus on fixing cars for example, is just it's a lot, there's a lot less movement involved, that if there's like a mechanic there and he's got all his tools to change your brakes or whatever he's doing, it's a lot easier just for people to bring the cars in and he just is there, you know, he doesn't have to keep setting up or each person would have to go out in their garage and set up all the tools and, you know, lift the car up and so forth. It's easier if it's all in one spot. You can just boom, boom, boom, bang it out. So that's one thing. Another issue is that some tasks, just by their very nature, as you, if you want to magnify them,

25:29By the results, you don't have to increase the inputs proportionally, alright? And so, simple, everyday example, if somebody wants coffee, someone's like, okay, I'm going to go make a pot of coffee. Where they usually sit is, hey, anyone else want coffee, because I'm going to make some. Now if you think about it, why do people typically do that? One part is just because you're being social and you've got people over your house, it would be pretty rude to say, well, I'm going to have some coffee, you know, and you just sit there drinking and looking at everyone, that would be pretty rude. The difference between making one cup of coffee versus four is almost nothing. It doesn't take you four times as much effort to make four times as much coffee. So if someone's going to go to the trouble of plugging the thing in, filling up the carafe or whatever, pouring it in and loading the coffee maker, whether you make one cup or four doesn't really matter that much.

26:52The Theory of Money and Credit

27:22So that's another reason just showing you the division of labor, why that makes sense. It's because it's more productive that way. So those two reasons I've talked about, I haven't really focused on differences between people. I've just given you, again, saving the walking around time and the fact that certain tasks are what's called economies of scale, that when you double the inputs you get more than double the output. around time and the fact that certain tasks are what's called economies of scale, that when you double the inputs you get more than double the output. Those things don't really have to do per se with the differences between people, but the last two reasons I'll give you do have to do with that. So one thing is that people just have natural aptitudes, that some people just genetically are better at certain sorts of tasks. And it might not It could not even just be genetics, it could also just be the accident of where they are in the world.

28:12So people in Saudi Arabia, it's a lot easier for them to produce barrels of crude oil than it is for people, let's say, in Tennessee. Because, obviously, it's not so much because the people over there have a genetic aptitude for harvesting oil, it's because they happen to be living on top of some huge oil deposits. In terms of dividing up the labor around the world, it makes a heck of a lot more sense to have the people in Saudi Arabia focus on oil production and have people in the United States, certain states at least, focus on other things. That's one example. Another example of the same concept would be having somebody that's going to be a coal miner, for example.

29:02You're probably not going to send a 75-pound woman down to be a coal miner, right? It's just probably that's not the right sort of job for her to do, just because it's very physically demanding. And so in that respect, there are certain people that just are much more adept at being coal miners, okay? So there's that sort of thing. Now the other reason, the last reason I'll talk about is the fact that people become better through practice and through training. And so that's a huge reason that we benefit from the division of labor, that the productivity of labor is so much higher when we divide tasks up, is that the people that you go to see now are true professionals, meaning they have gone to school for this, they have been in this industry for whatever, 20, 25 years in some cases, and so that's why they're so much better at doing that thing than you would be if you tried to do it by yourself. So that's why, again, it would be absurd if you thought you had appendicitis,

29:59to try to operate on yourself, you would go to a professional, somebody who's been to medical school and who has watched other doctors perform surgeries and who knows what he's doing or what she's doing, right? So that's the idea. So it's not so much that that person is just genetically equipped to be a doctor necessarily. I mean, they do have to have certain prerequisites. They have to have steady hands, they have to have a sharp mind, they can't be repulsed by the sight of blood, that sort of thing. But then even among the people who have a natural aptitude to become medical doctors. It also takes a lot of training. And the same thing, too, with something like professional sports, that certainly, you know, I probably could never be an NBA center no matter what I did, right? Even if from my birth, my dad was just this real, you know, nut job father and was always pushing me to become an NBA center, probably

30:50wouldn't happen, right? But even among people who do have the natural prerequisites for

31:26The reason they're in the NBA and they didn't peak in college or in high school is because they really push themselves. They are far more competitive and disciplined than the thousands, perhaps millions of other people who, when they were growing up, dreamed of being in the NBA. That's why those people are there and not the other people. It's a matter of not just your natural aptitude, but also how much you push yourself. So these are some of the reasons that we benefit from the division of labor and again the thing that holds it all together is the ability to then trade with each other because there would be no purpose to everyone specializing and mass producing stuff and then not being able to trade it with each other.

32:16And so that's why, the closing thought I'll leave you with here, that's why it's so important in terms of countries, at the national level, that they don't erect trade barriers. Because what you're doing when you put up a trade barrier, whether it's a tariff or some other sort of informal mechanism to limit the amount of goods coming in that are produced by foreigners, you're just limiting the division of labor globally. You're saying instead of us, as a country, specializing in certain things, producing more of that than we need and then trading it with other countries that are specializing, instead of doing that we want to do it all ourselves, that's the same philosophy as somebody like an eccentric father who's running a household and says to his family, you know what, I don't trust the outsiders, let's keep all the business within the family, from now on you are not allowed to deal economically with anyone outside this household. So if you want to eat food,

33:12You don't have to grow it, but your sister has to grow it. Or if you want to have someone fix your car, I don't mind if you have your brother do it, but don't you dare take it to the mechanic down the street because I don't trust those people. And we don't want to lose business. We want to provide employment for people within the household. So if an eccentric father did that, what would happen is the people in that household would be ridiculously poor compared to their neighbors. That would not be a beneficial thing to do to impose on that household. It would be crazy. So it's the same type of thing if the president says to all Americans, we can't trade with those Chinese people over there, so let's not let those goods come in. We can have Americans make that stuff. Now it's not as ridiculous because this is a much bigger household, so to speak.

33:57So we can suffer that kind of policy and not starve because there's so many people in the U.S. that we can trade with. But it's the same mentality, it's just not as exaggerated. okay so with that I think I will stop and are you going to come up and give them a little instruction okay so here's Doug French