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Division of Labor and Social Order

Division of Labor and Social Order. Mises University July 20-26, 2014. Crusoe’s and Friday’s Production Possibilities. Crusoe’s MPP L Friday’s MPP L C B C B 6 2 5 ½ 5 1 ½ 4 ½ 4 1 3 ¼ 3 ½ 2 ¼ Proficiency Efficiency.

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Division of Labor and Social Order

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  1. Division of Labor and Social Order Mises University July 20-26, 2014

  2. Crusoe’s and Friday’s Production Possibilities Crusoe’s MPPL Friday’s MPPL CBCB 6 2 5 ½ 5 1 ½ 4 ½ 4 1 3 ¼ 3 ½ 2 ¼ Proficiency Efficiency

  3. Crusoe and FridaySelf-sufficiency Production in Self-sufficiency Crusoe allocates 3 units of labor: 6c and 3 ½ b Friday allocates 3 units of labor: 5c 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)

  4. 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)

  5. 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

  6. 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/20c Employment can be indefinitely expanded.

  7. 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 labor Extent of saving-investing •Without S-I: limited division of labor •With S-I: indefinitely extended division of labor

  8. Overcoming Limits to the Extent of the Market Eliminate state intervention in trade •State intervention can forcibly prevent trade •State intervention can forcibly require trade Eliminate economic decision making by state officials •Entrepreneurs economize production and investment by using economic calculation •Self selection by monetary incentive on the market Choose whether or not to eliminate natural barriers

  9. 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.

  10. Crusoe’s Capital Accumulation Crusoe’s production stages to construct a net 3rd Stage – Gathers vines and twine: 7 units of labor 2nd Stage – Fashions the net: 5 units of labor 1st Stage – Fishes with the net MPPLin Fishing 5 fish – 1st unit of labor 4 fish – 2nd unit of labor 3 fish – 3rd unit of labor

  11. Crusoe’s Capital Accumulation Allocate labor to get the highest DMVP DMVP depends on MVP and Time Preference MVPL DMVPL 5 f 5 fish in 6 days and ½ hour 6 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)

  12. 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

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

  14. 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.

  15. Social Capital Accumulation Specialization in S and I as well as Production • Low TP savors; superior foresight investors Economic calculation reveals value differences • Continuously emerging value differences Indefinite extension of the division of labor •With net S-I add production processes and stages to the capital structure

  16. Standards of Living since the Birth of Christ

  17. 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.

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