It has been common knowledge at least since Adam Smith that continuous capital accumulation and rising productivity of labor, i.e. economic progress, are objectively possible only under an economic system that already possesses a sufficiently high degree of division of labor.Prof. George Reisman, whose careful analysis of the importance and requirements of a division of labor economic system to exist and flourish is unprecedented in its breadth and detail, sees the economic significance of division of labor in that it “increases efficiency with which man is able to apply his mind, his body, and his nature-given environment to production.â€ (Cf. George Reisman, Capitalism: A Treatise on Economics, p. 123)
For the purpose of present discussion, it is necessary to mention and describe some characteristic features of division of labor. To be sure, characterization alone is not sufficient for a complete understanding of it; the questions of how division of labor emerges and specifically what laws and institutions are required to maintain and to extend it constitute the real scientific problems. As it turns out, it is precisely the absolute necessity of the institutions of private ownership of the means of production, the price system, the profit motive and the freedom of competition that Mises’s calculation argument powerfully argues for. And this is what I will attempt to demonstrate in the present and future posts.
But, first, what specific elements characterize a division of labor economic system? Prof. Reisman identifies six major elements characteristic to division of labor that serve to increase the productivity of labor:
(1) “[I]t increases the amount of knowledge used in production by a multiple that corresponds to the number of distinct specializations and subspecializations of employmentâ€¦, (2) it makes it possible for geniuses to specialize in science, invention, and the organization and direction of the productive activity of othersâ€¦, (3) it enables individuals at all levels of ability to concentrate on the kind of work for which they are best suited on the basis of differences in their intellectual and bodily endowmentsâ€¦, (4) it enables the various regions of the world to concentrate on producing the crops and minerals for which they are best suited on the basis of differing conditions of climate and geologyâ€¦, (5) it increases the efficiency of the processes of learning and motion that are entailed in productionâ€¦, (6) it underlies the use of machinery in production.â€ (A careful discussion of how these characteristic elements of division of labor contribute to rising productivity of labor is provided in Prof. Reisman’s book Capitalism, pp. 123-133.)
Observe that all six elements are necessary conditions if an economic system is to achieve and maintain a high and rising productivity of labor. The more technological and business knowledge, in all its organizational variety, individuals in their totality are able to utilize in production the greater is the potential foundation for higher productivity of labor. In conjunction with the potentially inexhaustible material means that nature provides us, a high and growing amount of knowledge usable in production of goods and services is a sure receipt for a continuous improvement in the material standard of living.
In short, division of labor is a wonderfully complex thing upon which our prosperity and even the very lives are dependent. And as is the case with all wonderful things, it does not exist in vacuum nor does it come into existence by means of mere wishing. Its existence is dependent on a set of closely interrelated objective conditions. When and if these conditions are absent, for whatever reasons, or are in the process of disappearing, for whatever reasons, division of labor cannot come into existence or its continuing existence is threatened.
In modern times, the chief threat to division of labor and all the advances in wealth creation we associate with it comes from attempts to cripple and even to forcibly abolish the absolutely necessary institutional conditions without which division of labor simply cannot exist. I have already mentioned them but it is very important to emphasize them again and again. These institutions are: private ownership of the means of productive, the price system, the profit motive and freedom of competition.
In the posts that will follow I will concentrate on the relationship between these institutions and Mises’s calculation argument.