Man, Economy, and State with Power and Market by Murray N. Rothbard

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2

DIRECT EXCHANGE

 

1. Types of Interpersonal Action: Violence

The analysis in chapter 1 was based on the logical implications of the assumption of action, and its results hold true for all human action. The application of these principles was confined, however, to “Crusoe economics,” where the actions of isolated individuals are considered by themselves. In these situations, there are no interactions between persons. Thus, the analysis could easily and directly be applied to n number of isolated Crusoes on n islands or other isolated areas. The next task is to apply and extend the analysis to consider interactions between individual human beings.

      Let us suppose that Crusoe eventually finds that another individual, say Jackson, has also been living an isolated existence at the other end of the island. What types of interaction may now take place between them? One type of action is violence. Thus, Crusoe may entertain a vigorous hatred toward Jackson and decide to murder or otherwise injure him. In that case, Crusoe would gain his end—murder of Jackson—by committing violence. Or Crusoe may decide that he would like to expropriate Jackson’s house and collection of furs and murder Jackson as a means to that end. In either case, the result is that Crusoe gains in satisfaction at the expense of Jackson, who, to say the least, suffers great psychic loss. Fundamentally similar is action based on a threat of violence, or intimidation. Thus, Crusoe may hold up Jackson at the point of a knife and rob him of his accumulated furs and provisions. Both examples are cases of violent action and involve gain for one at the expense of another.

      The following factors, singly or in combination, might work to induce Crusoe (or Jackson) to refrain from any violent action against the other:

      (1) He may feel that the use of violence against any other hu­man being is immoral, i.e., that refraining from violence against another person is an end in itself, whose rank in his value scale is higher than that of any advantages in the form of capital or consumers’ goods that he might gain from such action.

      (2) He may decide that instituting violent action might well establish an unwelcome precedent, causing the other person to take up arms against him, so that he may end by being the victim instead of the victor. If he begins a type of action where one must gain at the expense of another, then he must face the fact that he might turn out to be the loser as a result of the action.

      (3) Even if he feels that his violent action eventually will result in victory over the other, he may conclude that the “costs of the war” would exceed his net gain from the victory. Thus, the dis­utility of time and labor-energy spent in fighting the war (war may be defined as violent action used by two or more opponents), in accumulating weapons for the war (capital goods for war uses), etc., might, in prospect, outweigh the spoils of conquest.

      (4) Even if Crusoe feels reasonably certain of victory and be­lieves that the costs of fighting will be far less than the utility of his spoils of victory, this short-run gain may well be outweighed in his decision by long-run losses. Thus, his conquest of Jackson’s furs and house may add to his satisfaction for a while after the “period of production” (= preparing for the war + the length of time of the war itself), but, after a time, his house will decay and his furs will become worthless. He may then conclude that, by his murder of Jackson, he has lost permanently many services which Jackson’s continued existence might have furnished. This might be companionship or other types of consumers’ or capital goods. How Jackson might have served Crusoe without resort to violence will be indicated below, but, at any rate, Crusoe may be detained from using violence by estimating the disutility of the long-run consequences more highly than the utility of the expected short-run gains. On the other hand, his time preference may be so high as to cause his short-run gains to override the long-run losses in his decision.

      It is possible that Crusoe may institute violent action without taking into consideration the costs of the war or the long-run consequences, in which case his actions will turn out to be er­roneous, i.e., the means he used were not the appropriate ones to maximize his psychic revenue.

      Instead of murdering his opponent, Crusoe might find it more useful to enslave him, and, under continual threat of violence, to force Jackson to agree to expend his labor for the satisfaction of Crusoe’s wants rather than his own.[1] Under slavery, the master treats the slaves as he does his livestock, horses, and other animals, using them as factors of production to gratify his wants, and feeding, housing them, etc., just enough to enable them to con­tinue in the master’s service. It is true that the slave agrees to this arrangement, but this agreement is the result of a choice be­tween working for the master and injury through violence. Labor under these conditions is qualitatively different from labor not under the threat of violence, and may be called compulsory labor as compared to free labor or voluntary labor. If Jackson agrees to continue working as a slave under Crusoe’s dictates, it does not mean that Jackson is an enthusiastic advocate of his own slavery. It simply means that Jackson does not believe that revolt against his master will better his condition, because of the costs of the revolt in terms of possible violence inflicted on him, the labor of preparing and fighting, etc.

      The argument that the slave might be an enthusiastic sup­porter of the system because of the food, etc., provided by his master ignores the fact that, in that case, violence and the threat of violence by the master would not be necessary. Jackson would simply voluntarily place himself in Crusoe’s service, and this arrangement would not be slavery, but another type considered in the next section.[2][3] It is clear that the slave is always worse off than he would be without the threat of violence by the mas­ter, and therefore, that the master always gains at the expense of the slave.

      The interpersonal relation under slavery is known as hege­monic.[4] The relationship is one of command and obedience, the commands being enforced by threats of violence. The master uses the slaves as instruments, as factors of production, for grati­fying his wants. Thus, slavery, or hegemony, is defined as a system in which one must labor under the orders of another under the threat of violence. Under hegemony, the man who does the obey­ing—the “slave,” “serf,” “ward,” or “subject”—makes only one choice among two alternatives: (1) to subject himself to the mas­ter or “dictator”; or (2) to revolt against the regime of violence by use of his own violence or by refusing to obey orders. If he chooses the first course, he submits himself to the hegemonic ruler, and all the other decisions and actions are made by that ruler. The subject chooses once in choosing to obey the ruler; the other choices are made by the ruler. The subject acts as a passive factor of production for use by the master. After that one act of (continual) choice made by the slave, he engages in co­erced or compulsory labor, and the dictator alone is free to choose and act.

      Violent action may result in the following developments: (a) inconclusive fighting, with neither opponent the victor, in which case the war may continue intermittently for a long period of time, or violent action may cease and peace be established (the absence of war); (b) the victor may kill the victim, in which case there is no further interpersonal action between the two; (c) the victor may simply rob the victim and leave, to return to isolation, or perhaps with intermittent violent forays; or (d) the victor may establish a continuing hegemonic tyranny over the victim by threats of violence.

      In course (a), the violent action has proved abortive and er­roneous; in (b), there is no further interpersonal interaction; in (c), there is an alternation between robbery and isolation; and in (d), a continuing hegemonic bond is established.

      Of these results, only in (d) has a continuing pattern of inter­personal relationship been constituted. These relations are com­pulsory, involving the following coerced “exchanges”: the slaves are treated as factors of production in exchange for food and other provisions; the masters acquire factors of production in exchange for supplying the provisions. Any continuing pattern of interpersonal exchanges is called a society, and it is clear that a society has been established only in case (d).[5] In the case of Crusoe’s enslavement of Jackson, the society established is a totally hegemonic one.

      The term “society,” then, denotes a pattern of interpersonal exchanges among human beings. It is obviously absurd to treat “society” as “real,” with some independent force of its own. There is no reality to society apart from the individuals who compose it and whose actions determine the type of social pattern that will be established.

      We have seen in chapter 1 that all action is an exchange, and  we may now divide exchanges into two categories. One is autistic exchange. Autistic exchange consists of any exchange that does not involve some form of interpersonal exchange of services. Thus, all of isolated Crusoe’s exchanges were autistic. On the other hand, the case of slavery did involve interpersonal exchange, in which each gives up some goods in order to acquire other goods from the other. In this form of compulsory exchange, however, only the ruler benefits from the exchange, since he is the only one who makes it of his own free choice. Since he must impose the threat of violence in order to induce the subject to make the exchange, it is clear that the latter loses by the exchange. The master uses the subject as a factor of production for his own profit at the latter’s expense, and this hegemonic relationship may be called exploitation. Under hegemonic exchange, the ruler exploits the subject for the ruler’s benefit.[6]

2. Types of Interpersonal Action: Voluntary Exchange and the Contractual Society[7]

      From this point on, we shall develop an analysis of the work­ings of a society based purely on voluntary action, entirely un­hampered by violence or threats of violence. We shall examine interpersonal actions that are purely voluntary, and have no trace of hegemonic relations. Then, after working out the laws of the unhampered market, we shall trace the nature and results of hegemonic relations—of actions based on violence or the threat of violence. We shall note the various effects of violent interfer­ence with voluntary actions and shall consider the consequences of approaches to a regime of total hegemony, of pure slavery or subjection. At present, we shall confine our discussion to an analysis of actions unhampered by the existence of violence of man against man.

      The major form of voluntary interaction is voluntary inter­personal exchange. A gives up a good to B in exchange for a good that B gives up to A. The essence of the exchange is that both people make it because they expect that it will benefit them; otherwise they would not have agreed to the exchange. A necessary condition for an exchange to take place is that the two goods have reverse valuations on the respective value scales of the two parties to the exchange. Thus, suppose A and B are the two ex­changers, and A gives B good X in exchange for good Y. In order for this exchange to take place, the following must have been their value scales before making the exchange:

A                                         B

1—(Good Y)                         1—(Good X)
2—Good X                           2—Good Y

(Parentheses around the good indicate that the party does not have it in his stock; absence of parentheses indicates that he has.) A possesses good X, and B possesses good Y, and each evaluates the good of the other more highly than his own. After the exchange is made, both A and B have shifted to a higher position on their respective value scales.

     Thus, the conditions for an exchange to take place are that the goods are valued in reverse order by the two parties and that each of the parties knows of the existence of the other and the goods that he possesses. Without knowledge of the other person’s assets, no exchange of these assets could take place.

      It is clear that the things that must be exchanged are goods, which will be useful to the receiving party. The goods may be present or future goods (or claims to future goods, which may be considered as equivalent to future goods), they may be capital goods or consumers’ goods, labor or nature-given factors. At any rate, the objects of an exchange must be scarce means to human ends, since, if they were available in abundance for all, they would be general conditions of human welfare and not objects of human action. If something were a general condition of human welfare, there would be no need to give something up to acquire it, and it would not become the object of exchange.

      If the goods in question are unique goods with a supply of one unit, then the problem of when exchanges will or will not be made is a simple one. If A has a vase and B a typewriter, if each knows of the other’s asset, and if A values the typewriter more highly, and B values the vase more highly, there will be an ex­change. If, on the other hand, either A or B values whatever he has more highly than what the other has, then an exchange will not take place. Similarly, an exchange will not take place if either party has no knowledge that the other party has a vase or a type­writer.

      On the other hand, if the goods are available in supplies of homogeneous units, the problem becomes more complex. Here, in determining how far exchanges of the two goods will go, the law of marginal utility becomes the decisive factor.[8] If Jones and Smith have certain quantities of units of goods X and Y in their possession, then in order for Jones to trade one unit of X for one unit of Y, the following conditions have to be met: To Jones, the marginal utility of the added unit of Y must be greater than the marginal utility of the unit of X given up; and to Smith, the marginal utility of the added unit of X must be greater than the marginal utility of the unit of Y given up. Thus:

(The marginal utilities of the goods to Jones and to Smith are, of course, not comparable, since they cannot be measured, and the two value scales cannot be reduced to one measure or scale.)

      However, as Jones continues to exchange with Smith units of X for units of Y, the marginal utility of X to Jones increases, because of the law of marginal utility. Furthermore, the marginal utility of the added unit of Y continues to decrease as Jones’ stock of Y increases, because of the operation of this law. Eventually, therefore, Jones will reach a point where, in any further exchange of X for Y, the marginal utility of X will be greater than the marginal utility of the added unit of Y, so that he will make no further exchange. Furthermore, Smith is in a similar position. As he continues to exchange Y for X, for him the marginal utility of Y increases, and the marginal utility of the added unit of X decreases, with the operation of the law of marginal utility. He too will eventually reach a point where a further exchange will lower rather than raise his position on his value scale, so that he will decline to make any further exchange. Since it takes two to make a bargain, Jones and Smith will exchange units of X for units of Y until one of them reaches a point beyond which further exchange will lead to loss rather than profit.

     Thus, suppose that Jones begins with a position where his assets (stock of goods) consist of a supply of five horses and zero cows, while Smith begins with assets of five cows and zero horses. How much, if any, exchanges of one cow for one horse will be effected is reflected in the value scales of the two people. Thus, suppose that Jones’ value diagram is as shown in Figure 5. The dots represent the value of the marginal utility of each additional cow, as Jones makes exchanges of one horse for one cow. The crosses represent the increasing marginal utility of each horse given up as Jones makes exchanges. Jones will stop trading after the third exchange, when his assets consist of two horses and three cows, since a further such exchange will make him worse off.

     On the other hand, suppose that Smith’s value diagram appears as in Figure 6. The dots represent the marginal utility to Smith of each additional horse, while the crosses represent the marginal utility of each cow given up. Smith will stop trading after two exchanges, and therefore Jones will have to stop after two ex­changes also. They will end with Jones having a stock of three horses and two cows, and Smith with a stock of three cows and two horses.

     It is almost impossible to overestimate the importance of ex­change in a developed economic system. Interpersonal exchanges have an enormous influence on productive activities. Their exist­ence means that goods and units of goods have not only direct use-value for the producer, but also exchange-value. In other words, goods may now be exchanged for other goods of greater usefulness to the actor. A man will exchange a unit of a good so long as the goods that it can command in exchange have greater value to him than the value it had in direct use, i.e., so long as its exchange-value is greater than its direct use-value. In the example above, the first two horses that Jones exchanged and the first two cows surrendered by Smith had a greater exchange value than direct use-value to their owners. On the other hand, from then on, their respective assets had greater use-value to their owners than exchange-value.[9]

     The existence and possibilities of exchange open up for pro­ducers the avenue of producing for a “market” rather than for themselves. Instead of attempting to maximize his product in isolation by producing goods solely for his own use, each person can now produce goods in anticipation of their exchange-value, and exchange these goods for others that are more valuable to him. It is evident that since this opens a new avenue for the utility of goods, it becomes possible for each person to increase his productivity. Through praxeology, therefore, we know that only gains can come to every participant in exchange and that each must benefit by the transaction; otherwise he would not engage in it. Empirically we know that the exchange economy has made possible an enormous increase in productivity and satisfactions for all the participants.

     Thus, any person can produce goods either for his own direct use or for purposes of exchange with others for goods that he desires. In the former case, he is the consumer of his own product; in the latter case, he produces in the service of other consumers, i.e., he “produces for a market.” In either case, it is clear that, on the unhampered “market,” it is the consumers who dictate the course of production.

     At any time, a good or a unit of a good may have for its pos­sessor either direct use-value or exchange-value or a mixture of both, and whichever is the greater is the determinant of his action. Examples of goods with only direct use-value to their owner are those in an isolated economy or such goods as eye­glasses ground to an individual prescription. On the other hand, producers of such eyeglasses or of surgical instruments find no direct use-value in these products, but only exchange-value. Many goods, as in the foregoing example of exchange, have both direct and exchange-value for their owners. For the latter goods, chang­ing conditions may cause direct use-value to replace exchange-­value in the actor’s hierarchy of values, or vice versa. Thus, if a person with a stock of wine happens to lose his taste for wine, the previous greater use-value that wine had for him will change, and the wine’s exchange-value will take precedence over its use-­value, which has now become almost nil. Similarly, a grown per­son may exchange the toys that he had used as a child, now that their use-value has greatly declined.

     On the other hand, the exchange-value of goods may decline, causing their possessors to use them directly rather than exchange them. Thus, a milliner might make a hat for purposes of ex­change, but some minor defect might cause its expected exchange­ value to dwindle, so that the milliner decides to wear the hat herself.

     One of the most important factors causing a change in the relationship between direct use-value and exchange-value is an increase in the number of units of a supply available. From the law of marginal utility we know that an increase in the supply of a good available decreases the marginal utility of the supply for direct use. Therefore, the more units of supply are available, the more likely will the exchange-value of the marginal unit be greater than its value in direct use, and the more likely will its owner be to exchange it. The more horses that Jones had in his stock, and the more cows Smith had, the more eager would they be to exchange them. Conversely, a decrease in supply will in­crease the likelihood that direct use-value will predominate.

     The network of voluntary interpersonal exchanges forms a so­ciety; it also forms a pattern of interrelations known as the market. A society formed solely by the market has an unham­pered market, or a free market, a market not burdened by the interference of violent action. A society based on voluntary exchanges is called a contractual society. In contrast to the hege­monic society based on the rule of violence, the contractual type of society is based on freely entered contractual relations between individuals. Agreements by individuals to make exchanges are called contracts, and a society based on voluntary contractual agreements is a contractual society. It is the society of the un­hampered market.

     In a contractual society, each individual benefits by the ex­change-contract that he makes. Each individual is an actor free to make his own decisions at every step of the way. Thus, the relations among people in an unhampered market are “symmet­rical”; there is equality in the sense that each person has equal power to make his own exchange-decisions. This is in contrast to a hegemonic relationship, where power is asymmetrical—where the dictator makes all the decisions for his subjects except the one decision to obey, as it were, at bayonet point.

     Thus, the distinguishing features of the contractual society, of the unhampered market, are self-responsibility, freedom from violence, full power to make one’s own decisions (except the decision to institute violence against another), and benefits for all participating individuals. The distinguishing features of a hegemonic society are the rule of violence, the surrender of the power to make one’s own decisions to a dictator, and exploitation of subjects for the benefit of the masters. It will be seen below that existing societies may be totally hegemonic, totally contractual, or various mixtures of different degrees of the two, and the nature and consequences of these various “mixed economies” and totally hegemonic societies will be analyzed.

     Before we examine the exchange process further, it must be con­sidered that, in order for a person to exchange anything, he must first possess it, or own it. He gives up the ownership of good X in order to obtain the ownership of good Y. Ownership by one or more owners implies exclusive control and use of the goods owned, and the goods owned are known as property. Freedom from violence implies that no one may seize the property of an­other by means of violence or the threat of violence and that each person’s property is safe, or “secure,” from such aggression.

     What goods become property? Obviously, only scarce means are property. General conditions of welfare, since they are abundant to all, are not the objects of any action, and therefore cannot be owned or become property. On the free market, it is nonsense to say that someone “owns” the air. Only if a good is scarce is it necessary for anyone to obtain it, or ownership of it, for his use. The only way that a man could assume ownership of the air is to use violence to enforce this claim. Such action could not occur on the unhampered market.

     On the free, unhampered market, a man can acquire property in scarce goods as follows: (1) In the first place, each man has ownership over his own self, over his will and actions, and the manner in which he will exert his own labor. (2) He acquires scarce nature-given factors either by appropriating hitherto un­used factors for his own use or by receiving them as a gift from someone else, who in the last analysis must have appropriated them as hitherto unused factors.[10] (3) He acquires capital goods or consumers’ goods either by mixing his own labor with nature­-given factors to produce them or by receiving them as a gift from someone else. As in the previous case, gifts must eventually re­solve themselves into some actor’s production of the goods by the use of his own labor. Clearly, it will be nature-given factors, cap­ital goods, and durable consumers’ goods that are likely to be handed down through gifts, since nondurable consumers’ goods will probably be quickly consumed. (4) He may exchange any type of factor (labor service, nature-given factor, capital good, consumers’ good) for any type of factor. It is clear that gifts and exchanges as a source of property must eventually be resolved into: self-ownership, appropriation of unused nature-given fac­tors, and production of capital and consumers’ goods, as the ulti­mate sources of acquiring property in a free economic system. In order for the giving or exchanging of goods to take place, they must first be obtained by individual actors in one of these ways. The logical sequence of events is therefore: A man owns himself; he appropriates unused nature-given factors for his own­ership; he uses these factors to produce capital goods and con­sumers’ goods which become his own; he uses up the consumers’ goods and/or gives them and the capital goods away to others; he exchanges some of these goods for other goods that had come to be owned in the same way by others.[11][12] These are the meth­ods of acquiring goods that obtain on the free market, and they include all but the method of violent or other invasive expropri­ation of the property of others.[13]

     In contrast to general conditions of welfare, which on the free market cannot be subject to appropriation as property,  scarce goods in use in production must always be under someone’s con­trol, and therefore must always be property. On the free market, the goods will be owned by those who either produced them, first put them to use, or received them in gifts. Similarly, under a system of violence and hegemonic bonds, someone or some peo­ple must superintend and direct the operations of these goods. Whoever performs these functions in effect owns these goods as property, regardless of the legal definition of ownership. This applies to persons and their services as well as to material goods. On the free market, each person is a complete owner of himself, whereas under a system of full hegemonic bonds, he is subject to the ownership of others, with the exception of the one decision not to revolt against the authority of the owner. Thus, violent or hegemonic regimes do not and cannot abolish property, which derives from the fundamentals of human action, but can only transfer it from one person or set of people (the producers or natural self-owners) to another set.

     We may now briefly sum up the various types of human action in the following table:

This and subsequent chapters are devoted to an analysis of a non­invasive society, particularly that constituted by voluntary inter­personal exchange.

3. Exchange and the Division of Labor

      In describing the conditions that must obtain for interper­sonal exchange to take place (such as reverse valuations), we im­plicitly assumed that it must be two different goods that are be­ing exchanged. If Crusoe at his end of the island produced only berries, and Jackson at his end produced only the same kind of berries, then no basis for exchange between them would occur. If Jackson produced 200 berries and Crusoe 150 berries, it would be nonsensical to assume that any exchange of berries would be made between them.[14] The only voluntary interpersonal action in relation to berries that could occur would be a gift from one to another.

      If exchangers must exchange two different goods, this implies that each party must have a different proportion of assets of goods in relation to his wants. He must have relatively specialized in the acquisition of different goods from those the other party pro­duced. This specialization by each individual may have occurred for any one of three different reasons or any combination of the three: (a) differences in suitability and yield of the nature-given factors; (b) differences in given capital and durable consumers’ goods; and (c) differences in skill and in the desirability of dif­ferent types of labor.[15] These factors, in addition to the potential exchange-value and use-value of the goods, will determine the line of production that the actor will pursue. If the production is directed toward exchange, then the exchange-value will play a major role in his decision. Thus, Crusoe may have found abun­dant crops on his side of the island. These resources, added to his greater skill in farming and the lower disutility of this oc­cupation for him because of a liking for agriculture, might cause him to take up farming, while Jackson’s greater skill in hunting and more abundant game supply induce him to specialize in hunt­ing and trapping. Exchange, a productive process for both par­ticipants, implies specialization of production, or division of la­bor.

      The extent to which division of labor is carried on in a so­ciety depends on the extent of the market for the products. The latter determines the exchange-value that the producer will be able to obtain for his goods. Thus, if Jackson knows that he will be able to exchange part of his catch of game for the grains and fruits of Crusoe, he may well expend all his labor on hunting. Then he will be able to devote all his labor-time to hunting, while Crusoe devotes his to farming, and their “surplus” stocks will be exchanged up to the limits analyzed in the previous sec­tion. On the other hand, if, for example, Crusoe has little use for meat, Jackson will not be able to exchange much meat, and he will be forced to be far more directly self-sufficient, produc­ing his own grains and fruits as well as meat.

      It is clear that, praxeologically, the very fact of exchange and the division of labor implies that it must be more productive for all concerned than isolated, autistic labor. Economic analysis alone, however, does not convey to us knowledge of the enor­mous increase in productivity that the division of labor brings to society. This is based on a further empirical insight, viz., the enormous variety in human beings and in the world around them. It is a fact that, superimposed on the basic unity of species and objects in nature, there is a great diversity. Particularly is there variety in the aforementioned factors that would give rise to spe­cialization: in the locations and types of natural resources and in the ability, skills, and tastes of human beings. In the words of Professor von Mises:

One may as well consider these two facts as one and the same fact, namely, the manifoldness of nature which makes the universe a com­plex of infinite varieties. If the earth’s surface were such that the physi­cal conditions of production were the same at every point and if one man were . . . equal to all other men . . . division of labor would not offer any advantages for acting man.[16]

      It is clear that conditions for exchange, and therefore increased productivity for the participants, will occur where each party has a superiority in productivity in regard to one of the goods ex­changed—a superiority that may be due either to better nature-­given factors or to the ability of the producer. If individuals abandon attempts to satisfy their wants in isolation, and if each devotes his working time to that specialty in which he excels, it is clear that total productivity for each of the products is in­creased. If Crusoe can produce more berries per unit of time, and Jackson can kill more game, it is clear that productivity in both lines is increased if Crusoe devotes himself wholly to the production of berries and Jackson to hunting game, after which they can exchange some of the berries for some of the game. In addition to this, full-time specialization in a line of produc­tion is likely to improve each person’s productivity in that line and intensify the relative superiority of each.

      More puzzling is the case in which one individual is superior to another in all lines of production. Suppose, for example, that Crusoe is superior to Jackson both in the production of berries and in the production of game. Are there any possibilities for exchange in this situation? Superficially, it might be answered that there are none, and that both will continue in isolation. Actually, it pays for Crusoe to specialize in that line of produc­tion in which he has the greatest relative superiority in produc­tion, and to exchange this product for the product in which Jack­son specializes. It is clear that the inferior producer benefits by receiving some of the products of the superior one. The latter benefits also, however, by being free to devote himself to that product in which his productive superiority is the greatest. Thus, if Crusoe has a great superiority in berry production and a small one in game production, it will still benefit him to devote his full working time to berry production and then exchange some berries for Jackson’s game products. In an example mentioned by Professor Boulding:

A doctor who is an excellent gardener may very well prefer to employ a hired man who as a gardener is inferior to himself, because thereby he can devote more time to his medical practice.[17]

      This important principle—that exchange may beneficially take place even when one party is superior in both lines of produc­tion—is known as the law of association, the law of comparative costs, or the law of comparative advantage.

      With all-pervasive variation offering possibilities for specializa­tion, and favorable conditions of exchange occurring even when one party is superior in both pursuits, great opportunities abound for widespread division of labor and extension of the market. As more and more people are linked together in the exchange net­work, the more “extended” is the market for each of the products, and the more will exchange-value predominate, as compared to direct use-value, in the decisions of the producer. Thus, suppose that there are five people on the desert island, and each specializes in that line of product in which he has a comparative or absolute advantage. Suppose that each one concentrates on the following products:

A . . . . . . berries
B . . . . . . game
C . . . . . . fish
D . . . . . . eggs
E . . . . . . milk

      With more people participating in the market process, the opportunities for exchange for each actor are now greatly in­creased. This is true even though each particular act of exchange takes place between just two people and involves two goods. Thus, as shown in Figure 7, the following network of exchange may take place: Exchange-value now takes a far more dominant place in the decisions of the producers. Crusoe (if A is Crusoe) now knows that if he specializes in berries, he does not now have to rely solely on Jackson to accept them, but can exchange them for the products of several other people. A sudden loss of taste for berries by Jackson will not impoverish Crusoe and deprive him of all other necessities as it would have before. Furthermore, berries will now bring to Crusoe a wider variety of products, each in far greater abundance than before, some being available now that would not have been earlier. The greater productivity and the wider market and emphasis on exchange-value obtain for all participants in the market.

      It is evident, as will be explained further in later sections on indirect exchange, that the contractual society of the market is a genuinely co-operative society. Each person specializes in the task for which he is best fitted, and each serves his fellow men in order to serve himself in exchange. Each person, by producing for ex­change, co-operates with his fellow men voluntarily and without coercion. In contrast to the hegemonic form of society, in which one person or one group of persons exploits the others, a con­tractual society leaves each person free to benefit himself in the market and as a consequence to benefit others as well. An interest­ing aspect of this praxeological truth is that this benefit to others occurs regardless of the motives of those involved in exchange. Thus, Jackson may specialize in hunting and exchange the game for other products even though he may be indifferent to, or even cordially detest, his fellow participants. Yet regardless of his mo­tives, the other participants are benefitted by his actions as an indirect but necessary consequence of his own benefit. It is this almost marvelous process, whereby a man in pursuing his own benefit also benefits others, that caused Adam Smith to exclaim that it almost seemed that an “invisible hand” was directing the proceedings.[18]

      Thus, in explaining the origins of society, there is no need to conjure up any mystic communion or “sense of belonging” among individuals. Individuals recognize, through the use of rea­son, the advantages of exchange resulting from the higher pro­ductivity of the division of labor, and they proceed to follow this advantageous course. In fact, it is far more likely that feelings of friendship and communion are the effects of a regime of (con­tractual) social co-operation rather than the cause. Suppose, for example, that the division of labor were not productive, or that men had failed to recognize its productivity. In that case, there would be little or no opportunity for exchange, and each man would try to obtain his goods in autistic independence. The re­sult would undoubtedly be a fierce struggle to gain possession of the scarce goods, since, in such a world, each man’s gain of useful goods would be some other man’s loss. It would be almost inevi­table for such an autistic world to be strongly marked by violence and perpetual war. Since each man could gain from his fellows only at their expense, violence would be prevalent, and it seems highly likely that feelings of mutual hostility would be dominant. As in the case of animals quarreling over bones, such a warring world could cause only hatred and hostility between man and man. Life would be a bitter “struggle for survival.” On the other hand, in a world of voluntary social co-operation through mu­tually beneficial exchanges, where one man’s gain is another man’s gain, it is obvious that great scope is provided for the develop­ment of social sympathy and human friendships. It is the peace­ful, co-operative society that creates favorable conditions for feel­ings of friendship among men.

      The mutual benefits yielded by exchange provide a major incentive (as in the case of Crusoe above) to would-be aggressors (initiators of violent action against others) to restrain their ag­gression and co-operate peacefully with their fellows. Individuals then decide that the advantages of engaging in specialization and exchange outweigh the advantages that war might bring.

      Another feature of the market society formed by the division of labor is its permanence. The wants of men are renewed for each period of time, and so they must try to obtain for themselves anew a supply of goods for each period. Crusoe wants to have a steady rate of supply of game, and Jackson would like to have a continuing supply of berries, etc. Therefore, the social relations formed by the division of labor tend to be permanent as individ­uals specialize in different tasks and continue to produce in those fields.

      There is one, less important, type of exchange that does not involve the division of labor. This is an exchange of the same types of labor for certain tasks. Thus, suppose that Crusoe, Jack­son, and Smith are trying to clear their fields of logs. If each one engaged solely in the work of clearing his own field, it would take a long period of time. However, if each put in some time in a joint effort to roll the other fellow’s logs, the productivity of the log-rolling operations would be greatly increased. Each man could finish the task in a shorter period of time. This is particu­larly true for operations such as rolling heavy logs, which each man alone could not possibly accomplish at all and which they could perform only by agreed-upon joint action. In these cases, each man gives up his own labor in someone else’s field in ex­change for receiving the labor of the others in his field, the latter being worth more to him. Such an exchange involves a combina­tion of the same type of labor, rather than a division of labor into different types, to perform tasks beyond the ready capacity of an isolated individual. This type of co-operative “log-rolling,” however, would entail merely temporary alliances based on spe­cific tasks, and, would not, as do specialization and division of labor, establish permanent exchange-ties and social relations.[19]

      The great scope of the division of labor is not restricted to situations in which each individual makes all of one particular product, as was the case above. Division of labor may entail the specializing by individuals in the different stages of production necessary to produce a particular consumers’ good. Thus, with a wider market permitting, different individuals specialize in the different stages, for example, involved in the production of the ham sandwich discussed in the previous chapter. General pro­ductivity is greatly increased as some people and some areas spe­cialize in producing iron ore, some in producing different types of machines, some in baking bread, some in packaging meat, some in retailing, etc. The essence of developed market economies con­sists in the framework of co-operative exchange emerging with such specialization.[20]