The complex ramifications of the division of labor—horizontal as well as vertical—lead us to consider how the various operations occurring under the division of labor are coordinated with one another. There are alternative methods of achieving such coordination, each of which leads to a different form of the division of labor. Consider, for instance, the internal organization of a factory. The management of the factory divides the process of production into various partial operations and assigns these operations to the appropriate workers. Management then sees to the coordination of the whole by means of continuous instructions. This is what we may call the industrial division of labor.
Now division of labor exists not only in the interior of this factory, but also between this factory and other factories, between one artisan and another, between a farmer and a physician. We see at once that this kind of division of labor differs sharply from the first. The different operations are here independent and are not submitted to the control of a central authority charged with the coordination of the actions of each individual segment of the total economic system with all the others. We have already seen that it is the process of exchange (the market mechanism) which assumes the task of coordinating the activities of these independent units. We may speak, in this case, of a social division of labor.
In our contemporary economic system, the two kinds of division of labor coexist: the industrial division of labor within a plant, a factory, etc., and the social division of labor among the different independent plants and factories. Notwithstanding, it is precisely this social division of labor which distinguishes our economic system from a wholly socialist system. For in the latter system, the industrial division of labor prevails throughout the entire economy, displacing the social division of labor. This characteristic feature of socialism is at the same time a clue to one of its principal weaknesses. It is well known that certain enterprises have attained such excessive size that the managements of these enterprises are no longer able to control and coordinate their operations with efficiency. And many a giant concern has been ruined for not having observed the limitations of size which the requirements of efficiency impose. Imagine the result should the whole economy of a country be transformed into a single huge enterprise!
The concept of the social division of labor embraces most of the essential features of our economic system. It connotes not only the independence of the producer, but also the whole series of rights and liberties associated with such independence: private ownership of the means of production, right of inheritance, freedom of contract, freedom to choose one’s occupation, and many others.2 To think in terms of the social division of labor is to assume that exchange dominates economic life, not the direct exchange of one good for another, but the indirect exchange of a good for money (sale) and of money for a good (purchase). Money, in short, is the indispensable lubricant of a developed exchange economy; and by the same token it is essential to a system founded upon an extensive social division of labor. It is useful to inquire into the reasons why this is so.
Any school boy who has ever swapped stamps with his friends knows that an exchange can take place without money. But he will remember equally well that these primitive exchanges did not take place without some difficulty. He will recall that an exchange of postage stamps could take place only if just the duplicates he possessed were lacking to his friend and vice versa, and if the value of the exchanged duplicates was approximately the same. These conditions lacking, the limit of barter (exchange in kind) was reached. The youthful collector was then obliged to do business with a stamp dealer, whose existence is predicated upon the imperfection of exchanges in kind.
By way of further illustration, consider the plight of a butcher who wishes to exchange meat for a chair. Assume that through some ill luck the local carpenter is a vegetarian, and that he wants bread instead of meat for his chair. If we imagine this situation as arising in some period before the invention of money, it is clear that the butcher will be forced to go to the baker and to exchange his meat for bread. Suppose further that at this moment the baker does not require meat but a pair of shoes. Even were we to put a stop at this point to our butcher’s travails, this simple example shows that the butcher will be required first to exchange his meat for shoes, then the shoes for bread, and finally the bread for the chair which he originally wanted. He would be required in effect to make an extended detour in order to arrive at his goal. The longer this detour and the longer the associated chain of exchanges, the more difficult does the process of moneyless exchange become until it ends by being completely impossible. During the severe housing shortage which existed in Germany in the inter-war period, there were few persons who were not compelled to participate in a so-called “housing exchange ring”—a chain of exchanges of rent-controlled dwellings which frequently extended throughout all Germany. For the system to succeed, it was necessary that no link in the chain of exchanges be missing, and that the individual who wished to move from Breslau to Hamburg be not seized at the last moment with an attack of appendicitis. The participants in these transactions could never thereafter conquer their instinctive repulsion for the word “exchange,” nor could they find enough words of praise for the invention of money which, as a medium of exchange and as a common denominator of the values of all goods, does away at one stroke with the difficulties of exchange in kind. This is, of course, not the only service rendered by money, but it is the earliest and the most important. Money emerges in consequences as an indispensable element in our economic system, one which is inseparable from all economic processes and which gives rise to many special problems. A full discussion of money and of monetary problems is reserved for the next chapter. Our chief concern at this point is to make clear the role of money in the social division of labor.
From my childhood, I recall a strange contract which my father, a country doctor, had concluded with the village barber. Both had agreed not to send bills to each other but instead to pay in kind what one owed to the other. In today’s international trade, this would be called a clearing agreement. After some time, a prolonged illness of the barber resulted in my father having an excess of credit (clearing surplus). This credit was used up by compelling us children to have our hair cut rather oftener than we liked. The moral of the story is simple: the elimination of money had provoked a disequilibrium of supply and demand. The process of exchange, which if effected by means of money would have extended over many intermediate links, was now reduced to two links only. And this “short-circuiting” of the exchange process entailed a shifting of accustomed expenditures which upset the private mechanism of choice and of limitation of demand. “Multilateral trade,” as it is called in international economics, had in our case become “bilateral,” with results which corresponded in small to the results of international clearing agreements.3 A multilateral exchange without money is a technical impossibility; a moneyless bilateral exchange is possible, but it is uneconomic in the highest degree. The exceedingly complex exchange transactions of the present day (which depend upon money as intermediary) yield us, precisely in virtue of their multilateral character, the priceless advantages of a rational system for achieving both national and international equilibrium. To the extent that it represents genuine economic integration, the world economy presupposes the existence of multilateralism. But multilateralism requires, in turn, that the international circulation of the different national monies (convertibility) be not hindered by the prohibition of convertibility (exchange control).
But rendering multilateral exchange possible is not the only service money provides. As the common denominator of all goods, it is an objective unit of measurement applicable to everything which enters the market. It makes similar, things which are different; and it solves the problem, otherwise insoluble, of adding together apples and pears. Thanks to the continuous exchange of goods against money and to the social division of labor upon which such exchange is contingent, prices are formed without which there can be no rational economic calculation. If we pass the whole of economic history in review and sift the experiences of every age and of every locale, we shall find that no economy, however rudimentary, has been able to function without calculation in prices and money. Year in and year out proposals are made for replacing calculation in money by some other “natural economic” calculation (for example, in the form of hours of work or in units of physical energy). All such schemes must be viewed by the economist as the mathematician views “solutions” to the problem of squaring the circle, or as the Patent Department views designs for the construction of a perpetual motion machine, namely, with a shrug of the shoulders and regret for such vain employment of effort.
To resist the logic of the indispensability of money is simply to indicate that one has not yet understood that things economic have quite a different dimension than things physical, technical, and physiological, and that in economics we are not concerned with volumes or weights or horsepower, but with subjective estimates of value which assume an objective and measurable form only in an act of exchange accomplished with money.
This is a fact to keep clearly in mind in judging the performance of a Communist system. Where this performance is measured in terms of the increase in production of one or the other commodity, it is unscientific to conclude from the addition of such numbers that the Communist economic system’s accomplishments for the welfare of the masses can be even distantly compared with those of the non-Communist (market) systems. The point at issue is not the physical, but the economic productivity of a system. This can be measured only by means of real prices, and these are by definition excluded in a Communist system. Moreover, increases in genuine economic productivity can only be promoted within a system of genuine prices (market economy) formed according to the processes which are peculiar to the free society.