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About this book

‘This is the second book of a two-volume set that continues Adam Smith's work, using the tools mathematical, experimental, and behavioural economists have developed since 1776. As in the first volume, markets are not the central organising principle. Instead, attention centres on social institutions and the division of labour that they enable. The book studies this via the endogenous division of labour that existing institutions help form. The first book in the series examined this problem deeply, resorting minimally to formal mathematical modelling; the second volume is where the formal modelling blossoms. General equilibrium theory meets network theory and receives a breath of fresh air, including a new viewpoint on economic inequality, the newly resurgent bane of capitalism. What I said for the first volume applies to this second volume equally: if you care to understand the economy, this book belongs to your bookshelf.’
—Dimitrios Diamantaras, Temple University, Philadelphia, USA

This textbook introduces and develops new tools to understand the recent economic crisis and how desirable economic policies can be adopted. Gilles provides new institutional concepts for wealth creation, such as network economies, which are based on the social division of labour.

This second volume introduces mathematical theories of the endogenous formation of social divisions of labour through which economic wealth is created. Gilles also investigates the causes of inequality in the social division of labour under imperfectly competitive conditions. These theories frame a comprehensive, innovative and consistent perspective on the functioning of the twenty-first century global economy, explaining many of its failings. Suitable reading for advanced undergraduate, MSc and postgraduate students in microeconomic analysis, economic theory and political economy.

Table of Contents

Frontmatter

Chapter 1. Commodities, Consumption and Production

This chapter introduces the mathematical foundations for models of economies in which economic wealth is generated through a social division of labour. We introduce the notion of an economic commodity, separating consumables that have use value from intermediary inputs in production processes. All wealth creation processes are performed through consumer-producers, a mathematical representation of a rational decision-maker, who produces as well as consumes economic commodities: consumer-producers form the building blocks of any mathematical theory of the social division of labour. We also consider two mathematical models of the fundamental property of Increasing Returns to Specialisation (IRSpec) in human productive abilities. The chapter concludes with surprising insights from decision-making by consumer-producers in (standard) economic trade environments.
Robert P. Gilles

Chapter 2. Wealth Creation in Primitive Economies

In this chapter we consider two models of primitive economies made up of consumer-producers. Under autarky, consumer-producers in a state of self-sufficiency optimises their production to satisfy their own consumptive needs. This represents a situation similar to the position of peasants in an agricultural economy. Next, we look at economies in which autarkic consumer-producers have limited interactions to form a sparse trade infrastructure. These autarkic consumer-producers are assumed to interact through binary trade relationships only, forming trade infrastructures as network configurations of such binary trade relationships. We show that in these environments trade naturally leads to individually rational and socially optimal reallocations of the generated wealth, but there does not emerge a “general” equilibrium.
Robert P. Gilles

Chapter 3. The Competitive Price Mechanism

Traditionally, economic theory investigates production, consumption and trade under market institutions founded on the Law of One Price: All commodities are traded at a unique global market price. In this chapter we show that in an economy with consumer-producers the Law of One Price implies the dichotomy between production and consumption decisions. Moreover, the Law of One Price is viable in the sense that a general market equilibrium emerges. Assuming IRSpec in productive abilities, there endogenously emerges a social division of labour that is guided by these market prices. Finally, these equilibria are socially optimal and all socially optimal social divisions of labour can be supported as general equilibria under the Law of One Price.
Robert P. Gilles

Chapter 4. Objective Specialisation: The Smithian Perspective

The previous chapter is founded on a Ricardian perspective regarding the functioning of the social division of labour as rooted in the individual productive abilities of all consumer-producers. Adam Smith introduced a more social perspective, where productive abilities are rooted in collective knowledge of production technologies that are subject to IRSpec. In this chapter, we show that, if production is conducted through a finite number of professions, the Law of One Price guides the economy to an equilibrium in which all prices reflect the labour value of the traded commodities. Here, the social division of labour adjusts to meet the demand for commodities. We consider several applications, including models of international trade, socio-economic embeddedness, and wage labour.
Robert P. Gilles

Chapter 5. Production Networks

This chapter introduces elements from network analysis to describe trade infrastructures through which the social division of labour is conducted. We consider connectivity properties and the description of how individual nodes can affect the trade flows in these networks. This leads to a theory of identification and measurement of the power of control in such trade networks. The notion of a critical node set captures these power structures in trade networks. We use these ideas and conceptions to describe production processes that are conducted in any social division of labour, leading to the notion of a production network. This chapter introduces a careful definition of these production networks and considers different topologies to represent different network-institutional production systems.
Robert P. Gilles

Chapter 6. Inequality in Network Economies

This volume concludes with a speculative chapter on the properties of general equilibria founded on the Law of One Price when production processes are represented as a production network. We show that the presence of intermediary goods in these production networks implies that there exists a multitude of such general equilibria. This allows for the comparison of such equilibria based on equality as well as extreme inequality in these production networks. In particular, the power structures that can be identified in the topology of a production network significantly affect the inequality between consumer-producers in the underlying social division of labour. This provides a framework to address the prevalent, observed inequality in our contemporary global economy.
Robert P. Gilles

Backmatter

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