Table Of ContentCONTRIBUTONS
TO
ECONOMIC ANALYSIS
215
Honorary Editor:
J. TINBERGEN
Editors:
D. W. JORGENSON
J. -J. LAFFONT
NORTH-HOLLAND
AMSTRRnAM .LONDON · NEW YORK · TOKYO
S P E C I A L I Z A T I ON A ND
E C O N O M IC O R G A N I Z A T I ON
A New Classical Microeconomic Framework
Xiaokai YANG
Yew-Kwang NG
Department of Economics
Monash University
Clayton, Victoria, Australia
1993
NORTH-HOLLAND
AMSTERDAM · LONDON · NEW YORK · TOKYO
ELSEVIER SCIENCE PUBLISHERS B.V.
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DDTvm^n TM THF MFTHFRT ANDS
INTRODUCTION TO THE SERIES
This series consists of a number of hitherto unpublished studies, which are intro
duced by the editors in the belief that they represent fresh contributions to economic
science.
The term "economic analysis" as used in the title of the series has been adopted
because it covers both the activities of the theoretical economist and the research
worker.
Although the analytical methods used by the various contributors are not the same,
they are nevertheless conditioned by the common origin of their studies, namely
theoretical problems encountered in practical research. Since for this reason, busi
ness cycle research and national accounting, research work on behalf of economic
policy, and problems of planning are the main sources of the subjects dealt with, they
necessarily determine the manner of approach adopted by the authors. Their
methods tend to be "practical" in the sense of not being too far remote from appli
cation to actual economic conditions. In additon they are quantitative.
It is the hope of the editors that the publication of these studies will help to stimulate
the exchange of scientific information and to reinforce intemational cooperation in
the field of economics.
The Editors
To Xiaojuan, Xiaoxi, James and
Siang, Aline, Eve
vil
Preface
As the subtitle indicates, this book attempts to develop a new classical
microeconomic framework. From the titles of individual parts, chapters,
and sections in the table of contents, it can be seen that this is a new
unifying analytical framework that covers topics concerning intemational
trade, development economics, growth theory, transaction costs economics,
comparative economics, management economics, urban economics,
industrial organization, and macroeconomics. Hence, this book can be
used as a textbook for a graduate course in microeconomics as well as a
supplementary text for courses in all these fields.
In this book the new classical microeconomic framework is used to
bring the analysis of economies of speciahzation, the division of labor, and
the structure of economic organization into the central place of economics.
The important issues had been largely ignored by economists due to the
dichotomy between pure consumers and pure producers in neoclassical
economics. By dismantling this dichotomy and introducing economies of
specialization and transaction costs but retaining the methodology of
individual optimization and market equilibrium, we show that the
endogenous evolution of the division of labor based on a tradeoff between
economies of specialization and transaction costs may explain the
emergence of the firm, the emergence of regional and international trade,
the increases in productivity, in trade dependence, in the level of
specialization, in the number of final and intermediate goods, in the
number of layers of a hierarchical structure of transactions and cities, in
the degree of production concentration, in the degree of market
integration, and in the degree of production roundaboutness, and the
emergence of professional middlemen, cities, money, unemployment, and
business cycles.
We also show that the function of the market is much more
sophisticated than generally recognized by economists. The function is not
only to efficiently allocate resources, but also to search the efficient levels
of specialization and division of labor, to discover the efficient market
structure and institutional arrangements, to find the efficient hierarchical
structure of transactions, and to determine the efficient monetary regime
and efficient pattem of the business cycle.
The names of individuals who have contributed to this ambitious
viii Preface
project are too many to mention here. We would like first to acknowledge
the invaluable contribution of Jeff Borland to this book. He has carefully
read every chapter of the book and made many extremely helpful
suggestions and comments about the substance of the models and main
concepts and about writing style. Also, he is the coauthor of several
papers of which modified versions have been included as chapters in this
volume. Chapters 4, 7,12, 16, and 17 are derived from Yang and Borland
[1992c], Yang and Borland [1991a], Yang and Borland [1992d], Yang and
Borland [1992a], and Yang and Borland [1992b], respectively. Thanks also
to Ian Ward who had gone throughout the whole book and made helpful
suggestions. We are grateful to Heling Shi, Ian Wills, Jianguo Wang, and
Geoff Hogbin for their permission to include the modified versions of
several papers coauthored by them in this volume. Chapters 8 and 13 are
the variants of the two papers coauthored by Heling (see Yang and Shi
[1992] and Shi and Yang [1992], respectively). Chapter 11 is a modified
version of a paper coauthored by Ian (see Yang and Wills [1990]).
Chapter 19 is a modified version of a paper coauthored by Jianguo and Ian
(see Yang, Wang, and Wills [1992]). Chapter 14 is a modified version of
a paper coauthored by Geoff (see Yang and Hogbin [1990]).
The following sources are gratefully acknowledged
Chapter 6: reprinted, with revisions, by permission from Joumal of
Development Economics, Vol 34, 1990, pp. 199-222. Copyright © 1990
North-Holland PubUshing Company.
Chapter 7: reprinted, with revisions, by permission from Joumal of Political
Economy, Vol 99, 1991, pp. 462-480. Copyright © 1991 The University of
Chicago.
Chapter 8: reprinted, with revisions, by permission from American
Economic Review, Vol 82, 1992, pp. 392-398. Copyright © 1992 The
American Economic Association.
Chapter 10: reprinted, with revisions, by permission from Joumal of
Comparative Economics, Vol 14, 1990, pp. 177-198. Copyright © 1990
Academic Press, Inc.
Chapter 14: reprinted, with revisions, by permission from China Economic
Review, Vol 1, 1990, pp. 125-140. Copyright © 1990 JAI Press, Inc.
Chapter 19: reprinted, with revisions, by permission from China Economic
Review, Vol 3, 1992, pp. 1-37. Copyright © 1992 JAI Press, Inc.
Preface ix
We are greatly indebted to Gene Grossman, Edwin Mills, Barry
Nalebuff, Sherwin Rosen, Whitney Newey, T. N. Srinivasan, Raaj Sah,
Lloyd Reynolds, Joseph Stiglitz, Steven Cheung, Wilfred Ethier, Alan Siu,
W. C. Suen, Yoram Barzel, Gustav Ranis, Wilham Baumol, Gregory Chow,
Hugo Sonneschein, Avinish Dixit, Dahai Yu, Lin Zhou, Jianpin Mei, Linda
Goldberg, Jim Levinsohn, Daniel Vincent, John Freebairn, Dietrich
Fausten, Robert Rice, Richard Snape, James Schmitz, Jr., and Richard
Arnott for their invaluable comments and criticism on the research papers
which led to this book. Special appreciation to Ehzabeth Kwok for her
excellent secretarial support for this project.
Gratitude also to the anonymous referees of Joumal of Political
Economy, American Economic Review, Intemational Economic Review,
Econometrica, Review of Economic Studies, Joumal of Development
Economics, Joumal of Comparative Economics, Joumal of Behaviour and
Economic Organization, European Economic Review, Oxford Economic
Papers, Económica, Economic Joumal, and China Economic Review for
their helpful comments on our research papers. Many of the comments
are incorporated in the revised versions of the papers which are included
as chapters in this volume. Special appreciation is due to Jean Waelbroeck
and an anonymous referee of the series Contributions to Economic Analysis
for their comments on the manuscript and their encouragement for this
project.
We have benefited immensely from comments on our research
papers which have been developed into the chapters in this volume from
the participants of seminars at Yale University, Princeton University,
University of Pennsylvania, University of Chicago, University of California
at Berkeley, Australian National University, University of Hong Kong,
Chinese University of Hong Kong, University of Melbourne, Monash
University, University of Adelaide, University of New South Wales, and at
the 1992 American Economic Association Meeting and other academic
conferences. Our gratitude also goes to Department of Economics of the
University of Chicago, the Yale Economic Growth Center, and the
International Economics Research Center at University of Pennsylvania for
their support for our research.
The financial support for this project and related research from the
Ford Foundation, the Open Society Fund, Princeton University, the
Australian Research Council, Monash Research Funds, the Faculty of
Economics Commerce and Management of Monash University, and the
University of Hong Kong are gratefully acknowledged.
Of course, any remaining errors in this book are solely our own
responsibility.
The second author wishes to emphasize that the anti-alphabetical
χ Preface
ordering of the two authors justly reflects the major contribution of the
first author.
Xiaokai Yang and Yew-Kwang Ng
October, 1992.
1
Introduction
An important distinction between humankind and animals is a much more
sophisticated organization in a human society than in any animal society.
As Adam Smith [1776] emphasized, a distinctive feature of the
organization of a human society is the division of labor. It is easy to find
organization in many animal societies. However, organizations that exist
in animal societies generally are characterized by "simple cooperation"
without the division of labor.^ Only a few of these animal societies, such
as an ant society and a bee society, have the simplest division of labor.
The division of labor in a human society is characterized not only by its
complexity compared to an animal society, but also by an evolutionary
process from the simple to the complex division of labor. In this volume
we define economic organization by the following concepts. The level of
specialization for individuals and the level of division of labor for society
(which are defined in Chapters 2 and 5); numbers of consumer and
producer goods (which are endogenized in Chapters 8, 12, 16); degree of
production roundaboutness (which is endogenized in Chapter 13); market
structure in organizing transactions, internal organization within a firm,
and the structure of residual rights (defined in Chapter 9); number of
layers of the hierarchy of transactions (endogenized in Chapter 14);
monetary regime (endogenized in Chapter 17); and cycUcal pattern of
economic growth (endogenized in Chapter 18). As you read this book, the
economic mechanism that drives the evolutionary process from the simple
to the complex division of labor will be deciphered.
0.1. Intrinsic Relationship Between the Evolution of the Division of
Labor and Other Economic Phenomena
More interesting than the evolutionary process per se is the concurrence
of progress of productivity and the evolution of the division of labor.
^ Karl Marx [1933, Vol. 1, p. 368] drew a distinction between "simple cooperation"
without the division of labor and cooperation based on the division of labor. Emile
Dürkheim [1933, p. 131] took the distinction to be one between mechanical
solidarity based on likeness and organic solidarity due to the division of labor.
