 Okay, our first lecture this afternoon is going to be given by Dr. Guido Hulsman, Guido is a professor of economics at the University of Angers in France, the author of The Last Night of Liberalism, and his lecture this afternoon is on the division of labor and social change. Guido? What I will do in my lecture is to introduce two concepts that are fundamental to understand one of the basic questions of economic analysis, of economic policy also, which is the question of economic growth. What are the causes of economic growth? The famous debate, the famous revolution in economic thinking initiated by Adam Smith at the end of the 18th century was a revolt against the prevailing doctrine at the time that the spending of money, in particular the spending of money on consumer goods, constituted the origin and the main driving engine of wealth and of economic progress. So Adam Smith rejected the prevailing doctrine at the time, which is, you might guess also again the prevailing doctrine of our time today, namely that in order to promote economic growth and even to keep the economy going you have to spend a lot of money and prevent in any way the spending of the clients, so Adam Smith rejected this and proposed a completely different vision of the two causes of economic growth and the two causes of economic growth according to Adam Smith were the division of labor and parsimony or in other words savings. So our lecture today deals with these two concepts, the division of labor and savings because Austrian economics which appeared about 100 years after Adam Smith did not push beside these concepts, this conception of the two causes of the wealth of nations but developed them and what the Austrian economists did was not to substitute a completely new way of thinking at the place of classical economists rather it carried on the revolution initiated by Adam Smith and enriched his body of thinking by eliminating certain errors that went ahead with the valid notions that Adam Smith had introduced in particular as far as value theory is concerned and price theory is concerned. So you had already one or two lectures this morning on these subjects so we're not turning to the valid core of classical economists or classical economics which was then carried on by Austrian economists. So let's start with a few definitions, the first definition is production, production is the conscious transformation of nature, production is the origin of course of economic growth and of the wealth from which we benefit because if human beings just to be happy with the things that they found spontaneously in nature with the apples that grow spontaneously there and the honey that the bees spontaneously produce in their trees and so on we wouldn't get very far. So the way to greater wealth, to well-being, to material well-being is through production. Production is therefore in the conscious transformation of nature, conscious transformation that is there's always an element of choice involved, there's always human choice, there's always the notion of subjective value because of course we try not to transform nature in a random manner but in a way such that the new state of affairs that results as a consequence of our choice, as a consequence of our intervention is preferred to the state of nature that would have preferred, would have prevailed if we had done nothing. So production is always steered by subjective value and always results from human choice. The second concept that we need to introduce is labor, labor is production through human action. Not all production processes involve human action constantly, there's always some human action involved but not constantly. Think for example of wine production, so at the harvest time and so on you harvest the grapes and then you transform them through various techniques and so on, you finally bottle the wine in wine bottles and then you store them for a while or sometimes also in barrels. You keep them in barrels for what about eight months, nine months, sometimes even longer than this three years and eventually you bottle them and then also you keep the bottles on store because the wine is one of those things that get better with the time. As economists also they sometimes tend to get better with time because errors are eradicated. So in this case then the production process itself is being carried on but there's no more human labor involved, but there is human labor at the beginning and there is constant decision making, it's the conscious transformation of nature because of course the owner of the wine bottles could interrupt this maturing process at any point of time and he could go there and for example sell the bottle or throw a party and then drink the bottles and so on. So it's always a choice to continue this production process. So in the case of labor the production process is carried on through human action and of course we need to make two remarks, one is that we need not to confuse this general concept of labor with a more narrow concept that we very often find in economic analysis by which we mean then paid assistance. If we hire somebody to do manual work for us but also intellectual work then it's a different notion of labor. It's also labor involved but it's a more narrow notion, it's a paid assistant. You hire a CEO for your company, he is a paid assistant, he's providing labor services. But here what we are doing now in our lecture is to understand labor in a larger sense so that also the entrepreneur who is not a paid assistant of himself, he is not a paid assistant of the consumers, he is an independent producer, he is providing labor services to consumers and to his customers but not in this narrow sense of a paid assistant. And then of course we keep in mind that production as I've already said always involves at least some labor. The third definition then is the division of labor and you can read it here so the division of labor occurs when several persons associate in such a way that each one of them specializes in one type of activity, each associate then produces economic goods in excess of his personal needs and sometimes he or she produces something that he or she doesn't need at all. For example if you are engaged in the production let's say of these remote controls you might not have a personal need for them at all and so you're producing them so all of your production is excess in excess of your personal needs. And this of course then in order to share or exchange, exchange of course in a market economy that's the main phenomenon that we are interested in but it can also be shared given as a gift and so on. With the other associates for example with family members I don't sell my services to my wife but it's not yet and still we're engaging in the division of labor and so we share our excess production when I'm all alone and so I do the dishwashing and so I do also wash her dish, we get along. Okay so why does this, oh wait I need to go back because I have two remarks here the division of labor can result from one plan for all associates so this is in particular the case of central planning on an aggregate point of view in the national point of view and it can also result from the mutual adjustment of individual plans and this is the main phenomenon of the market economy this is actually the the type of the division of labor that we are mainly interested in but I will not deal with this in detail in my lecture will just lead you up to this point and then my successors will develop this point in more detail. Okay so here's our lecture outline then we'll first talk about the benefits of the division of labor by considering a few numerical examples and then turn to the main cause of the division of labor which is savings okay I already mentioned that Adam Smith identified savings and the division of labor as the two main causes of economic growth and his name is in particular associated with the division of labor so if you ask any student that heard what had actually any economics instruction at all or maybe just read one or two articles on the history of economic thought you would associate the name of Adam Smith with the theory of the division of labor and in fact there is one very famous chapter in the first book of Adam Smith's book the wealth of nations which deals with the division of labor and which has this title the division of labor what is less well-known but which you should know and which you should remember is that Adam Smith accords a much greater attention to parsimony into savings so he has one chapter in the first book on the division of labor he devotes an entire book so the five parts of the wealth of nations are called books for a book one two five the second book is entirely devoted to the analysis of the impact of savings it's a book on stocks plain saving at the time so already from the point of view of Adam Smith savings were really the driving engine of the market economy and of economic progress and it is as I will show to you indeed the main cause of an increase of the division of labor if we want to increase the division of labor if we want to increase the benefits that result there from we have to increase savings and then finally I'll conclude with some observations on the problem of coordination that is the problem of how we concretely organized the division of labor okay so we start with the benefits of the division of labor and consider the first case the case of absolute advantages so take your point of view so you see I have three lines actually settings here so we have here a set of numbers that reflect the situation the initial situation before the division of labor occurs and then those two sets of numbers that reflect the situation after the division of labor occurs so we have fear to associates Peter and Paul and they have a physical productivity in terms of the production of two goods rabbits are and plumps P and so it's P plumps are rabbits okay again I underline here physical productivity because in economic analysis we also did distinguish monetary productivity profitability and so on is a type of productivity and so we always need to carefully distinguish these different notions of productivity often in economic analysis a very widespread source of error that people smoothly shift from one meaning of productivity or another they start off talking about physical productivity and then they get to profitability and so on it's not the same thing so we need to keep this apart so Peter can as we see here he can produce two rabbits per hour that is what does it mean he can produce two rabbits for all he can hunt down two rabbits per hour and down and then whatever kill them or put them in a cage and you can leave this open however is however his wife likes them or however Peter Paul likes them right and he plugs 500 plumps per hour so it's a decent existence as a hunter-gatherer and Paul is also a hunter-gatherer right so they have exactly the same preferences for consumption so Paul also eats rabbits and he eats plumps and he's therefore also engaged in rabbit hut but you see he is less productive than Peter in hunting he only hunts down one rabbit per hour but on the other hand he is more productive in plum picking so we have here a case of absolute advantages right Peter is absolutely the better rabbit producer and Paul is absolutely the better plum producer so maybe there was a situation before the real engaged in the division of labor in which each of them devoted two times five hours to the production of each of these goods so Peter spent ten hours on excuse me five hours on hunting rabbits so five hours times two rabbits equals ten rabbits and Paul spends five hours on hunting he hunts down five rabbits and in another five hours Peter picks two thousand five hundred plumps and Paul five thousand plumps so we have an aggregate production of 15 rabbits and seven seven thousand five hundred plumps before the division of labor now the two of them engage in the division of labor and we can leave it out here the reasons for which they stumble upon the fact that it might be useful to develop a division of labor and maybe they come to talk to one another or they observe one another and so on so one of them might initiate the process and they finally agree to divide labor amongst them Peter says okay I will just go hunting I will no longer spend five hours but ten hours on hunting and Paul will do the same thing for plum picking and as a consequence then Peter hunts down 20 rabbits and Paul ten thousand plumps so as a consequence then our aggregate product is 20 rabbits and ten thousand plumps and this is of course the crucial figure which we can compare with these figures here so we see that there are more rabbits hunted down and more plums picked which is the crucial thing so the division of labor is as we say physically productive the vision of labor is a cause of additional wealth which would not exist in the absence of the division of labor okay so the vision of labor is a true cause of the wealth of this community and eventually also of true cause of the wealth of a nation there's more around we don't go into analyzing the mechanisms according to which they can divide this additional product right so there's five additional rabbits available in two thousand five hundred plums that are available on top they might divide this according to any contract that they set up this mutually agreeable for both of them right or find some other may for example they might throw dices or ask her whatever their favorite girlfriend or something and she will divide it amongst them various things are imaginable okay and you see here so I added another line another line of circumstances to take account of the following fact thanks to the division of labor thanks to the specialization involved in pursuing certain activities exclusively the producers get more become more productive so the physical productivity that we defined initially is not a natural constant it is some it's the dependent variable that depends on the amount of time that we invest in inquiring knowledge and dexterity relative to this activity and of course as they now engage in the division of labor Peter thereby will become even more efficient as a hunter and less efficient as a plum picker right so you see here he now after a while is able to hunt down three rabbits power so his productivity in hunting increases and his productivity in plum picking diminishes and because he loses the habit you to do this and the inverse thing holds true for Paul so Paul eventually is not able to hunt down a single rabbit power so whereas his plum picking ability increases and the consequence is this this that eventually once the new productivity plays out the total the aggregate product will further increase and so the division of labor is therefore beneficial as a true cause of of wealth on two accounts in the short run or we might say immediately by the simple fact of exploiting differences in the productivity and then second because it reinforces the initial differences between the producers that existed and that gave occasion to this division of labor okay now let's consider a more difficult case but also a more interesting case this is the case of relative advantage comparative advantages also caught the cause the case of the Superman the super producer right before each of the producers each of the associates at one field in which he was superior to the other in the case of comparative advantages one producer is superior to the other guy in all respects he's the Superman the other guy is the whatever the low life or so one is the parent the other is the child one is the German the other is the French this doesn't hold true in government negotiations right when Mr. Sarkozy meets Madame Berkel it's it's not the same thing right it's not the same thing okay so we see here that Paul is the Superman also to my students in France always say one is China the other is France right this huge guy can do everything that we cannot do and on all the things that we can do they can do much better and so yes we'll smash all of us how can we possibly resist this monster and so Paul here's this monster with seven heads and ten arms and Peter or Pierre is the small French guy and so he's less efficient everywhere as physical productivity is lower so before the vision of labor well so that was the aggregate output and how comes the following and the insight that the division of labor between the two is possible is an insight that came with the classical economists not with Adam Smith but with an English economist by the name of David Ricardo most of you have probably heard his name and those who of you will study economics of course you know the theory of comparative advantage but it was truly an enormous breakthrough because before Ricardo nobody sensed how such a division of labor might be possible there were very strong political implications right if one guy was a Superman right the government of the prince typically right much stronger much stronger households than everybody else and what could the others typically give to him how could they possibly recompense his services and was not really any economic thing that they could give him because he could do everything better well okay then graciously he delivered his protection services anyway in exchange he asked for obedience okay it's a very common kind of deal proposed by governments we also find it now a time right and Ricardo completely overthrew the conception that economists and also wider population henceforth had of the relationship between superiors and inferiors because Ricardo demonstrated that both parties still have an interest in cooperation in a division of labor in mutual association it's not only the weaker party that benefits it's also the stronger party that derives material benefits from such a division of labor so that's what we see here right in the first case a division of labor in such a case can typically arrange in the fact that the weaker part entirely specializes on that activity where he's relatively better that is he's he's still absolutely worse but he's not quite as bad in in hunting as he is in plum picking so we see in plum picking Paul is four times as productive as Peter but in hunting only two times as productive so Peter then will spend all of his time there where he has a comparative advantage where he's not quite as bad right as as elsewhere and so he hunts 10 hours and he produces 20 minutes no plum picking and Paul he subdivides his time otherwise before it was two times five hours so now he can reduce his hunting time when he goes to four hours but excuse me he goes to he goes to three hours right and spend seven hours on plum picking and seven hours times two thousand gives us 14,000 and three hours times four rabbits gives us 12 rabbits so these are the new production figures and we see that the aggregate product is again larger than the previous aggregate product so that's the demonstration there's no other demonstration I can do the same thing with equations and so on but it's the same result right the the aggregate product is higher as a consequence of the division of labor so again also in the case of one completely superior producer the division of labor produces aggregate benefits for all associates for all parties concerned and these aggregate benefits are reinforced through the same mechanisms that we mentioned already before right through the division of labor the differences are increased or in this case here Peter loses some of his competitive disadvantage right so he his productivity in hunting increases he's still inferior to Paul Paul can hunt down four rabbits per hour but Peter Peter only three but his productivity has increased from two to three and Paul becomes a more even more efficient producer of plums before he picked 2,000 now 2,500 pumps power okay last case that we have to consider is the case in which there are no natural differences a natural equality between the associates so we have here a case in which Peter and Paul are sort of say clones and maybe one eye the one one egg twins or something like this how you call this it's not one egg identical twins coming out of one egg yeah right so that they're really clones maybe the result of some preceding government intervention Darth Vader coming to the country right his cloning his army and so on so if Peter and Paul I mean why give names to clones and so on well it was a fancy of his wife and so on so he named this clone Peter and the other Paul and one got a whatever black mark they were red one so you could distinguish them and they were completely equal at the beginning right so and then we see that if they engage in the division of labor then actually the aggregate production does not increase so the division of labor at least in the short time in the immediate run does not produce is not wealth producing from which we can derive a very important conclusion namely that the division of labor is worthwhile only if there are differences between the associates if they're perfectly equal there cannot be a beneficial division of labor it's impossible fortunately in this case such differences developed and they develop thanks to specialization right so Peter who is now engaged in hunting he becomes a better hunter because he specializes in this activity and and Paul who specializes in the production of plums becomes a more efficient picker of plums and so eventually their division of labor will become worthwhile and it becomes worthwhile only precisely because the division of labor reinforces natural differences or creates differences where no natural differences existed so again the result is validated right the division of labor produces beneficial outcomes for different human beings not for clones okay so let's summarize these results in two steps the benefits of the division of labor the division of labor entails material advantages for all associates because it helps to exploit differences in physical productivity through specialization and this entails a higher aggregate physical production as we have seen so there are more consumer goods to be produced more leisure and more capital accumulation so this point we have not done as we have seen there are more consumer goods right but of course this this is an inference here the division of labor tends to produce more leisure because rather than producing more plums and more rabbits Peter and Paul could also have decided to reduce their work time right before they were working 10 hours a day now they could produce the same amount as before maybe in nine hours so they gain an extra hour that they can spend sitting on the on the grass singing with the birds and so on right so they have more leisure right only because the physical productivity has increased it's also possible to increase in greater capital accumulation that's the point that we will see in a in a few minutes in more detail right if they have created a greater amount of consumer goods they can engage in capital accumulation and again we have to keep in mind that we are reasoning now in terms of physical production we need to distinguish this from the value of the physical product and from the monetary revenue that is associated with it right in my lecture we are focusing entirely on point a point b is taking as a given because we considering considering only cases in which people engage in the division of labor that they consider to be worthwhile and the division of labor is more physically productive in all cases for example we could organize with all people in this lecture we could organize the production of paper planes okay there are a lot of people who are sitting here hundred hundred people on source we can subdivide the different steps of plane production we can produce very complicated planes that have certain flying abilities and so on right so by engaging in the division of labor we can produce more and better planes then we could if each of them produce a spend our time the production on paper planes on our cells okay the other question is is this worthwhile why don't we sit here and produce paper planes but rather sit here and go through a lecture on the division of labor in social order well because we consider this to be more important so it's not because things are physically certain activities are more physically productive than others with that we choose to pursue them the division of labor is always produces always a higher physical outcome does not mean that we engage in it it must we must value the outcome outcome must be more important than what we would have done otherwise okay so we need to distinguish these two things and in a market economy the question of value is intermediated through monetary revenue right as we have as we will see in some more detail in a market economy the subjective values of consumers translate into monetary revenue for companies and therefore companies tend to produce those things that are most valuable for consumers and companies do not produce paper planes but other things that consumers actually cherish okay second point a specialization as we have seen reinforces natural differences and creates man-made that is cultural differences between the associates and this results from the increased dexterity and developed specialized knowledge so there is not only a division the division of labor not only involves a division of the of activities of gestures and so on things that we do with our body and so on but also the kind of knowledge that we acquire so there is a division of knowledge in society we have here than a virtual circle right or potentially a virtual circle right the more we engage in the division of labor the differences are reinforced because we are more different than before we become the division of labor becomes more worthwhile so it's a stronger incentive to engage in the division of labor and so on and so on okay in the last point then this first step the division of labor is the origin of society this is a point that has long been recognized that is from the philosophers of ancient Greece for those of you who are not philosophers I still recommend that you take a look at least at the opening chapters of Plato's Republic where it goes through these considerations right Plato engaged wants to define the best possible form of social organization which he calls the Republic and German it's the state the best possible state and he starts off by analyzing the reasons for which people associate in the first place and he underlines what people are associate in the first place because they derive material benefits from it this might not be the only reason for societies to form but it's actually a very powerful reason why is it very powerful because it does not require that we feel natural sympathy to our neighbors or to our family members and so on right we might be indifferent to what our neighbor we might actually hate him because he is sort of a blonde or has a crooked eye or something like this has bad jokes so we hate him but not cooperating with him would deprive us of our goods and services that we would otherwise have to forego so we keep our mouth shut right avoid him as far as possible but then where expedient we engage in a division of labor so we form a society in spite of our initial emotional reaction toward others it's the origin of society and Ludwig von Mises has generalized this finding it says well I mean the actual analysis of the division of labor which we have carried out shows that a division of labor is possible and worthwhile under all possible circumstances in all possible cases because human beings are either either have absolute advantages or they have comparative advantage or initially they are naturally equal there are no other cases these are the three only cases that exist and in all three cases the division of labor turns out to be beneficial materially beneficial for them so human beings under all circumstances have a material incentive to associate to form society this is the law of association every human being has a material incentive to associate with other human beings because he has material gains material advantages second part of the summary we emphasize that this these beneficial effects result to the extent only that there are differences and this is very important and one political implication that follows from it is that egalitarian policies are antisocial as the exact opposite of what they are often presented and they're making people more equal therefore there will be happier in society I mean maybe very psychologically deranged persons might be more happy to live in a society of clones right might be the case but in a case such a society wouldn't go very far because there are no material benefits to be derived from it wouldn't be worthwhile to live in such an association there would be less incentives for peaceful and civil behavior less incentives to cooperate less incentives oh I've actually spliced some error yeah so it follows therefore then that natural differences to the extent that they exist now doesn't mean that we have to accept them blindly and worship them or something I mean we can work toward the elimination of natural differences for example there's something that occurs very naturally right I mentioned before the example of children and parents right parents being the superior producer children the inferior producer so you let them do relatively unimportant stuff like carrying away the trash can and things like this you will see when once you are parents that you are various ways to exploit the labor of your children scratch my back and bring me a cup of tea or whatever and these differences of course vanish in the course of time as the children grow up it's also of course a very desirable outcome so that the absolute advantages that exist first turn into comparative advantages so but the point is right from the point of view from the perspective of economic analysis natural differences are certainly not a bad thing they are actually a very useful starting point for the formation and development of human society because once they are there you don't have to discuss who does what take it again consider the case of our clones Peter and Paul exactly equal now who is doing what who should be the hunter or who should be the guy I might be a huge discussion already around this and then two weeks of conflict and whatever may am between them until they figure it out who does what once their natural differences this is settled much more quickly right so we have natural differences between men and women parents and children rich and poor personal talents geographical position etc etc all natural differences so this makes for good relationships within the household okay now let's turn to the way savings increase the benefits of the division of labor and again let's start with a few definitions savings of that part of a person's real monetary income which he or she she does not presently consume in our lecture again we're not considering the particular conditions given in modern monetary economy we are considering only the real layer of reality so we're talking about real income right so there's a part of real income which is not presently consumed these are savings in fiscal terms savings can be made in the context of a person's household or of his firm this is important the distinction that we make today in economic analysis that is not in Austrian economics but in mainstream economics always distinguish households on the one hand and firms on the other hand this distinction plays no role in Austrian economics because we are concerned about human action human action in general the distinction between a firm and a household is a fiscal distinction comes from the fact that the government taxes the population and that at some point we say well look if we just tax random we will just destroy our wealth so why don't you text just that part that is derived from the stock that we have accumulated of wealth of the additional income and don't tax wealth so we made the distinction or historically the distinction appeared between a household and his firm right the word firm comes from the Italian word firma which is the name it's the name that we give to a subset of all of our activities let me that subset that is supposed to gain as a revenue the other activities that don't have this objective which we call then our household that's it and if you look at your life think a little bit about this for those of you who work in a company or own a company that's really what it is I mean it's not a distinction that we find in in nature that we find in observation but that we make intellectually saying this counts as an activity belonging to the firm and this counts as an activity belonging to the household but it's all part of the same person and the same person earns income in the context of his firm activities and this income so it's it's it's it's eternal all right so the gross revenue that we obtain through the sale of our product and this gross revenue can be reinvested and typically the major part of it is reinvested in that part that is reinvested in fact the gross savings and constituted by the company and another part are then paid out to the household in the form of labor payment for labor services so wages and so on and of that part again a lot major chunk is consumed but another chunk is not consumed is saved and so the total revenue that we gain through our activities is always subdivided in consumption and saving and actually the greater part of of total revenue gained within society is used for savings the total revenue within the US in 2008 was roughly roughly speaking 30 trillion dollars okay 30 trillion dollars and out of these 30 trillion dollars some 22 24 trillion dollars were invested that is was saved and reinvested again and only a smaller part about 10 trillion dollars were actually consumed okay now our interest is to understand the impact of saving on production that is on saving and then of course the impact that savings have on the division of labor and thereby on production the first thing that we need to keep here in mind is the law of roundabout production so we have to distinguish between natural and human forces that are involved in any production process that's what we saw at the beginning and in order to produce tools machines roads cars and so on we need time we need time to build those things we need also time to transform original factors of production that is natural resources into final products so we need time to build what we call fixed capital sometimes right so tools all the tool stuff cars and so on and we need time to transform original materials resources raw materials into final products now the crucial thing is the following this is the law of roundabout production the longer the production process the more productive is human labor per hour what why is this because the longer the production process the more natural forces that is raw materials and forces of nature electricity and so on we can integrate into the production process and substitute these things for human labor case is particularly clear in the when we think of tools and if we have to carry loads without cars just with horses and so on well it's actually a pain in the neck in the back of the poor horse and so on right so it's not as fast not as efficient as then we do it with with a car but in order to have a car we need to engage into time consuming activities to bring about the car in the first place so the more time we have the more natural tools the more natural forces we can convert into tools and that then become more productive per hour worked so the longer the production process the more productive is human labor that's the law of roundabout production now a longer production process requires savings savings are needed to finance production what needs to be financed in particular is the consumption of the laborers engaged in the production process human beings are operating under the constraint of the stomach we need to eat right while we are engaged in production as consumer products do not enter the picture only at the end of the production process they enter it at the very beginning we need to have eaten otherwise we don't get very far with our production so where does this food stuff come from well from previous production that we have set aside that we have saved and now are able to invest into the production into into keeping up human beings during the time needed to produce all the intermediate products and all the tools okay so we have the law of longer roundabout production the longer the process the more productive is human labor but human labor needs to be sustained needs to be fed needs to be clothed et cetera so we need savings to sustain human labor throughout the production process and the crucial point then is that of course only human beings need to be financed because only human beings need to need to consume so consumption and finance are intimately related without the need for human beings to consume there would be no need to finance any production process whatsoever imagine for a second we were all angels I would be fine for a second right so we would never have to to consume this would be pure spirits okay then it gets absurd right because what would a pure spirit do with let's say an orange juice or or a car or something like this right but gets absurd but let's say we were because we never need to consume we have all the time in the world we take our time we produce more and more tools and so on we produce all these wonderful things that we never need but we produce ever more there is no need to finance this you don't need to take any special precautions to prepare the production process but because human beings need to consume we need to prepare their production by savings we need to make sure in advance that there is enough consumption stuff available to carry them on through the production process so this means that the more say we have savings the longer production processes are possible and the higher is the division of labor the productivity of labor per hour okay let's consider how this works with a very quick numerical example so we're considering here a cruiser economy and a static cruiser economy that is an economy before an increase of saving occurs so we have here our cruiser who lives at the border of a river and produces fish and he nourishes himself from this fish so he has fish as a consumer goods and he has another consumer goods which is leisure so let's say our our producer he fishes to fish on a day he has no tools nothing right so he fishes with his two bare hands unfortunately quite a few fish in the river so he does catch one from time to time he needs a day to catch two of them he needs to eat one of them to survive the day so the at the end of the day if you have caught two fish his revenue his real revenue is to fish needs one of them so he saves one the next day then he can eat this fish so he survives day two he doesn't need to engage in production so his revenue is zero it's just eating his wealth so to say and at the end of his day his savings are run down to zero but he had had a great day he has consumed the fish and he has consumed 10 hours of leisure he's sitting in the grass looked at the sky sung with the birds observed other animals saw a spider eating a fly catching in his net and so on yeah and he lives this existence happily they're in they are nicely just it's always the same they in they are he's a happy savage he has always some leisure one day then it occurs to him that in fact his life is quite miserable or maybe he meets Friday or Friday night and Friday night is not happy at all with this hand-to-mouth existence so she thinks there should be something more on the table than fish and maybe we couldn't need some decent clothing and in a hovel or something like this we cannot go on like this so think about what how can we improve our situation and you remember the spider that caught the the flies and yeah I could actually try to do the same thing could try to catch the fish for the net build a net myself so he goes on thinking about this for his leisure days how we will go about building a net and with raw material that he finds in the jungle and so on and then finally has a plan he has a plenty and the plan is risky of course he has never made a net in his life right so but he puts him into execution right entrepreneurship under uncertainty right and then does the following thing so we have here the following scenario saving consumption in a growing cruiser economy now it's the following plan he needs four days to construct the net so wonder what does he need to have he needs to have then savings that will allow him to go through net production so he now renounces to his leisure day so his real consumption diminishes and he consecrates the time now to fishing in order to accumulate a greater stock of fish so at the end of day four he has savings of four fish so the following four days then he can engage in the construction of a net so that's what he does right is five six seven eight right you see his fish production is zero but he construes a net until on day eight he finally has one full net and so I put here 0.25 0.5 but you cannot fish with a half net right so it's kind of superfluous right like you cannot be half pregnant or something right you cannot fish with a half net so so on on day eight then this is later this is wrong here this should be zero this should also be zero right he he eats his last fish the fish that was remaining of his savings on day at the end of day seven right he eats it on day eight but then finally he has his net and on day nine day nine the glorious day when his act of entrepreneurship turns out to have succeeded right don't go off through all the cases where it just screws up and so on but he succeeds and he catches 13 fish his wife has already dug a ground in the hole filled it with water so that you can keep all the fish and she has already plans for her husband what he will do during the next 13 years 13 days hunt down wild animals who had leather stuff right to have nice furs and so on construer how though and from time to time we return to fishing again 13 fish and there's another 13-day project and so on right so this technological progress might greatly advances this ability to consume but also to to accumulate further capital goods right become further productive okay so we see the benefits of savings right the we have a higher productivity of human labor and savings allow us to engage in longer production processes that's what we have seen I enable what Austrian economists call roundabout production but they do also something else savings allow us to reinforce the promote technological progress remember what I said to you about the origin of this idea when did he get this idea of construing a net in my narrative well on this day of leisure while he's completely absorbed concentrated on fishing he doesn't have time to think about nets it's only when he has some leisure time left that you can think about all these other things what he else he could do and that's actually one of the main preconditions of technological progress you pay guys to just think about new technologies so all persons hired by research departments in companies but also universities public private and so on they are all paid out of savings technological progress is premised on savings in private companies you have the research department results from savings out of past revenue from the company as a set aside to pay to hire people for the research department is but it's savings right and I of course I'm I'm living on forced savings because people don't like to pay taxes hand them over to me which is about the best use you can make with robbed euros right but it's the same thing so we can finance R&D R&D needs to be fine out of savings and then the second thing is savings can be R&D can be put into practice only with additional savings right just having the idea is just the first step then you also need them into practice you need to construal the machines or the tools that you have just invented so you need more savings to pay labor during the time needed to consume these things so savings promote technological progress on two accounts notice is not a separate force technological progress is virtually entirely premised on savings there's no technological progress without savings and finally so in this brings us back in a great loop to our initial subject the division of labor savings reinforce the division of labor think about what happened in the case of our cruzo cruzo at the beginning had a one-step production process fish production now thanks to the savings he has a two-step production process as far as fishing is concerned maybe first net making and fishing and as we have seen thanks to the greater his greater productivity he can now also engage in other activities hunting building and so on right now what does this mean it means that thanks to savings there's a greater number of activities that become possible which had not become possible before in a cruzo economy cruzo has to take care of all of these activities themselves but in a society in larger society this gives rise to a greater possibility for the division of labor there's now suddenly thanks to savings there's an additional branch of industry there rises net making before there were only fishers now there's net making and there's hunting right and hover building and so on and so on so the greater our savings the more numerous become the opportunities for division of labor a poor society in which there are no savings no capital accumulation whatever does not have a great scope for the division of labor right all people scramble in the few activities and they are relatively unproductive they cannot exploit their specific differences the greatest the division of labor that is the greater is the amount of capital that we have invested the more easy it becomes for each individual to bring into play his or her own specific comparative advantages so consequence also peace and cooperation are reinforced and I'll leave this aside okay in conclusion a few remarks on the problem of coordination right so problem of coordination requires first a definition we speak of coordination when the persons that are engaged in the division of labor find that the results are satisfactory for each of them we say that they are coordinated and of course this is a gradual concept and it brings into play again of the distinction that we made before between the production or productivity and the value of the production right think of the paper planes again it's not because we produce more planes that we are happy with the outcome right we need to value the product so if we produce our paper planes we're not happy with the outcome we're not coordinated right but if each of us finds this account we are coordinated the problem of coordination then is to put a concrete division of labor into practice this involves most notably two decisions the first one is to decide who does what who does what Peter and Paul need to divide labor amongst them who does what this might also involve the decision who decides who does what right as a political decision and the second great question is relative to the distribution of the overall result who obtains how much out of the aggregate product they are by and large only three peaceful solutions to the coordination problem I leave aside the violent solutions which are by the way not real solutions at all the first one is collective decision making on the model of the producer cooperative so all producers gather together they make a common plan divide labor amongst them and make a plan for the distribution of the product so we have coordination through the central planning of productive activities and the central planning of the distribution of revenues and then everybody submits voluntarily to the execution of this plan okay how important is this in practice well we just need to look at divorce rates to get a rough measure of the success of this model right I mean as we always say where there are two there's at least one trader right so if it's possible if it's difficult to right to to find a plan for two and how can we imagine that we can organize 10 or 100 or 1000 or 300 million as in the United States in a common plan right so it's completely ludicrous this will never work not in a voluntary setting okay second one is representative decision-making for example through a elected government or a board or for example through a guru the guru model the one guru that I picked here is Reverend Moon some of you might have heard of Reverend Moon I'll spare you the details of his very peculiar theology but it has to something to do with marriage so Jesus didn't finish the job he did because he didn't get married the Reverend Moon has volunteered he got married and he's now promoting marriage as means for the sanctification of the world and what he does and is to assemble his followers from all over the world once a year in a big stadium and they get married so as a guy from Germany gets married with a girl from Japan and a girl from France gets married with an Eskimo and so on this is a picture of these meeting right so this this is the best case that I'm able to make out of this I because right subjecting yourself voluntarily submitting to a central plan involving all of your life and so on you need to believe in this guru okay and the Reverend Moon actually has quite a few followers I think it's about a million or two they probably do almost everything that he asked of them okay but that's how far as it gets right you cannot organize you cannot even organize Switzerland on the basis of this model right and certainly Germany or France or the world economy it's impossible right so the only thing that works then is the market economy is the only model that actually works for a large number of associates so in a market economy we have private property of the means of production there's no central plan as decentralized planning which is based on economic calculation and entrepreneurial vision which is subjective to each entrepreneur have different opinions about the future take different actions to prepare for the future and the coordination here is not centrally planned but spontaneous that is it results from the mutual adjustment of individual behavior through competitive contracting I pay you more than the other guy pays you therefore you work for me you cooperate with me why am I able to pay you more well because I expect that we together produce a product that is more valued by our customers that they are ready to pay more for then for the products of our competitors okay and the revenues do not result in this case from central planning either says no distribution of revenue but the revenues result from the contracts themselves a side effect of the contract okay that was it