Austrian Economics Wiki

In production, man needs to combine other factors (capital and land) with the expenditure of human energy, called labor.[1]

Labor and leisure[]

In employing his labor, man takes into account which are the most valuable ends it can serve (as he does with all other factors). But he also weighs it against another consumers’ good: leisure. Leisure, like any other good, is subject to the law of marginal utility. The more a man labors, the less leisure he can enjoy.

The labor itself may provide positive satisfaction, dissatisfaction, or it may be neutral. In cases where the labor itself provides positive satisfactions, however, these are in­tertwined with and cannot be separated from the prospect of ob­taining the final product. Deprived of the final product, man will consider his labor senseless and useless, and the labor itself will no longer bring positive satisfactions.

An activity, which is engaged in purely for its own sake is not labor but pure play, a consumer good in itself. Play is subject to the law of marginal utility as are all goods, and the time spent in play will be balanced against the utility to be de­rived from other obtainable goods.[2]

Division of Labor[]

In order to exchange, each party must have different goods in relation to their wants, and must be relatively specialized in the acquisition of different goods. This specialization by each individual may have occurred for any of following reasons: (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.

Exchange implies specialization of production, or division of la­bor. To what extent is division of labor carried on in a so­ciety depends on the extent of the market for the products. If an actor knows, that he can exchange a part of his product for other goods, he may expend all his labor on it.

The mutual benefits from exchange provide a major incentive for potential aggressors 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.[3]

Law of Association[]

Clearly, exchange is beneficial, where each party is better at producing one of the exchanged goods than the other party. If they stop producing in isolation and work on what they excel at, their total productivity for each of the products is in­creased. In addition to this, full-time specialization in a line of produc­tion is likely to improve their productivity and intensify the relative superiority of each.

What if one individual is more productive in all lines of production? In that case, it pays to specialize in that line of produc­tion in which one has the greatest relative superiority in produc­tion. The inferior producer benefits by receiving some of the products of the superior one. But the superior producer also benefits, by being free to devote himself to that product in which his productive superiority is the greatest. In one example: "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."

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. 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.

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. People may be indifferent to, or even detest, their fellow participants. It is this almost marvelous process, where 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.[3]


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