Specialization and Economic Organization (eBook)

Front Cover 1
Specialization and Economic Organization: A New Classical Microeconomic Framework 4
Copyright Page 5
Table of Contents 12
Dedication 7
Preface 8
Introduction 18
0.1. Intrinsic Relationship Between the Evolution of the Division of Labor and Other Economic Phenomena 18
0.2. The ImpHcations of the Dichotomy Between Pure Consumers and Pure Producers for Economic Analysis 20
0.3. Why Economists Shifted Their Attention From the Economic Organization Problem to the Resource Allocation Problem 21
0.4. Diversifying the Frameworks of Economic Analysis 29
Part I: Economies and Diseconomies of Specialization 36
Chapter 1. Analytical Frameworks of Economics 37
1.1. What is a Framework of Economic Analysis 37
1.2. Assessment of Quality of a Framework 40
1.3. The Framework in This Book 48
Chapter 2. Economies of Specialization and Transaction Costs 58
2.1. A System of Production for a Consumer-producer 58
2.2. Preferences for Diverse Consumption and Transaction Costs 69
2.3. Individual Decision Problems 71
2.4. Equilibrium and Its Comparative Statics 78
2.5. Welfare Implications of Equilibrium 86
2.6. The Distinctive Features of Equilibrium in our Framework 88
Chapter 3. The Pricing Mechanism and ex post Transaction Costs 90
3.1. A Bilateral Bargaining Model 90
3.2. The Endogenization of the Choice of the First Mover 99
3.3. Why the Market Emerges from the Division of Labor 105
3.4. The Bargaining Equilibrium with Unemployment 109
3.5. The Endogenization of the Principal-agent Relationship 111
Chapter 4. Economies and Diseconomies of Information Asymmetry 113
4.1. Specialization and Economies of Information Asymmetry 113
4.2. Economies of Information Asymmetry 115
4.3. Dual Functions of the Price System: Coordinating the Division of Labor and Promoting Information Asymmetry 118
4.4. The Function of the Market in Exploiting Economies of Information Asymmetry 134
Part II: Rethinking Trade Theory and Development Economics 136
Chapter 5. Why and How International Trade Emerges from Domestic Trade 138
5.1. Rethinking Trade Theory 138
5.2. Conflict Between Preferences for Diverse Consumption and Economies of Specialization 139
5.3. The Equilibrium Level of Division of Labor 141
5.4. Comparative Statics 148
5.5. Evolution of the Division of Labor Generated by Exogenous Evolution of Transaction Efficiency 155
5.6. Organizational Efficiency and the Function of the Market Discovering in the Efficient Pattern of Organization 157
5.7. Emergence of International Trade from Domestic Trade 159
5.8. Why do we need the market? 163
5.9. Unequal Income Distribution and Dual Economy 165
Appendix 5.1: Proof of Lemma 2.1 for the Model in This Chapter 166
Chapter 6. Emergence of Professional Middlemen and Urbanization 168
6.1. A Model with Trading Activities and Heterogeneous Parameters 168
6.2. Decisions on Being a Professional Middleman 170
6.3. Market Structures and Corner Equilibria 172
6.4. The Pareto Optimal Pattern of Trade and Economic Organization 177
6.5. How Does the Market Sort out the Efficient Pattern of Economic Organization? 182
6.6. Equilibrium Trade Pattern, Level of Division of Labor, and Urbanization 186
6.7. Emergence of Professional Middlemen and a Hierarchical Structure of Economic Organization and a Dual Structure Between the Urban and Rural Sectors 189
Appendix 6.1: Proof of Lemma 6.2 193
Appendix 6.2: Proof of Proposition 6.7 194
Chapter 7 . Endogenous Evolution of the Division of Labor 197
7.1. Evolution of the Division of Labor, the Accumulation of Human Capital, and Development of Endogenous Comparative Advanta 197
7.2. A Dynamic Model with Learning by Doing 199
7.3. Optimum Speed of Learning by Doing and Evolution of Endogenous Comparative Advantage 202
7.4. The Evolution of the Extent of the Market, Trade Dependence, Endogenous Comparative Advantages, and Economic Structure 215
7.5. Rethinking Development Economics and Growth Theory 217
Appendix 7.1: Proof of Lemma 2.1 for the Dynamic Model 222
Chapter 8. Concurrent Increases in Specialization and Consumption Variety 223
8.1. Why the Variety of Available Goods and Specialization Increase Concurrently 223
8.2. Tradeoffs among Economies of Specialization, Economies of Complementarity, and Transaction Costs 225
8.3. The Function of the Market in Determining the Efficient Variety of Available Consumer Goods 227
8.4. Implications of the Endogenization of Aggregate Demand 229
Part III: Rethinking Theory of the Firm and Economics of Property Rights 236
Chapter 9. Why and How Firms Emerge from the Division of Labor 237
9.1. Why is the Institution of the Firm Needed? 237
9.2. Economies of Specialization in Roundabout Production 238
9.3. The Efficient Pattern of Economic Organization 239
9.4. The Institution of the Firm and the Structure of Residual Rights 241
9.5. Economies of Specialization, Economies of Division of Labor, and Economies of the Firm 246
9.6. Does the Structure of Residual Rights Make a Difference? 251
Chapter 10. Function of the Market in Searching for Efficient Contractual Arrangements 257
10.1. Formalizing the Economics of Property Rights 257
10.2. A Tradeoff Between Economies of Specialization and Coordination Rehability 259
10.3. Concurrent Increases in Productivity, the Level of Division of Labor, and a Risk of Coordination Failure 270
10.4. The Invisible Hand and "Market Failure" 275
Chapter 11. The Extent of the Market and Rights Specified in a Contract vs. Rights to Contracting 280
11.1. Two Functions of the Market: Executing Exchanges and Keeping Pressure on the Incumbent Trader Partners 280
11.2. A Tradeoff Between Economies of Specialization and Coordination Reliabihty 282
11.3. Efficient Vagueness of Property Rights and Market Size 287
11.4. Possible Extensions and Applications 297
Part IV: Specialization and Hierarchical Structures of the Division of Labor 300
Chapter 12. Emergence of New Producer Goods and Related New Technology 302
12.1. A Tradeoff Between Economies of Specialization and Economies of Complementarity 303
12.2. The Efficient Number of Producer Goods and Level of Specialization 304
12.3. Concurrent Changes in the Level of Division of Labor, Productivity, and Input Diversity 310
12.4. Changes in Economic Structure 313
Appendix 12.1: Proof of Lemma 12.1 316
Chapter 13. Economies of Roundaboutness and Industrialization 318
13.1. The Division of Labor and Roundabout Production 318
13.2. A Model with a Variable Hierarchical Structure of Goods 320
13.3. Corner Equilibria in Ten Market Structures 323
13.4. Concurrent Evolution of Specialization and Roundaboutness 330
13.5. Concurrent Evolution of Specialization, Roundaboutness, and Firms and Disappearance of Traditional Goods 334
Appendix 13.1: The Structure with Goods z, y, v, x, and w 340
Appendix 13.2: The Structures without Good y 340
Chapter 14. Efficient Hierarchy and the Division of Labor 342
14.1. Why Can a Hierarchy Improve Efficiency? 342
14.2. A Centralized Hierarchy and the Division of Labor 344
14.3. A Decentralized Hierarchy and the Division of Labor 348
14.4. Evolution of the Hierarchical Structure of the Market 361
Part V: Complicated Dynamic Mechanisms Generating Endogenous Evohttion of the Division of Labor 366
Chapter 15. Entrepreneurship, Investment, and Experiments with Economic Organizations 367
15.1. The Efficient Pattern of the Division of Labor in a Walrasian Regime 368
15.2. Costs in Acquiring Information about the Efficient Pattern of the Division of Labor 369
15.3. Information Costs and Endogenous Evolution of the Division of Labor 373
15.4. Information Asymmetry, Entrepreneurship, and Investment 383
15.5. Investment and the Function of the Price System in Coordinating Experiments with Patterns of the Division of Labor 388
Appendix 15.1: Solution of the Dynamic Programming Problem 390
Chapter 16. Concurrently Endogenous Evolution of Specialization, Firms, and Product Diversity 393
16.1. A Dynamic Equilibrium Model with Learning by Doing and an Endogenous Number of Producer Goods 394
16.2. Dynamic Equilibrium Level of Specialization and Input Variety 397
16.3. Concurrent Evolution of Specialization, Variety of Producer Goods, and the Institution of the Firm 407
Appendix 16.1: Proof of Lemma 16.1 412
Appendix 16.2: Proof of Proposition 16.1 413
Appendix 16.3: Proof of Proposition 16.2 416
Part VI: Empirical Evidence and Rethinking Macroeconomics 418
Chapter 17. Why and How Money Emerges from the Division of Labor 420
17.1. Why Is Money Needed? 420
17.2. A Model Endogenizing the Monetary Regime 423
17.3. Efficient Level of Division of Labor and Monetary Regime 425
17.4. ImpHcations of the Institution of the Firm for Monetary Regime 434
Appendbc 17.1: Proof of Lemm a 17.1 437
Chapter 18. The Division of Labor, Business Cycles, and Unemployment 440
18.1. Market Failure or Market Miracle? 440
18.2. The Relationship Between the Business Cycle and the Division of Labor 443
18.3. Cyclical vs. non-cychcal Corner Equilibria 445
18.4. General Price Level, Business Cycles, and Unemployment Rate 457
18.5. Emergence of Firms and Fiat Money from the Division of Labor 461
Chapter 19. Testing the Theories in this Volume against Empirical Observations 463
19.1. Difficulties in Testing the Theories in this Volume 463
19.2. The Model and Underlying Theory 467
19.3. Measuring the Level of Division of Labor 470
19.4. Quantifying Efficiency in Specifying and Enforcing Property Rights 472
19.5. The Main Results 497
19.6 More Empirical Studies 498
Epilogue 500
References 511
Index 522