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1998 | Buch

Increasing Returns and Economic Analysis

herausgegeben von: Kenneth J. Arrow, Yew-Kwang Ng, Xiaokai Yang

Verlag: Palgrave Macmillan UK

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Inhaltsverzeichnis

Frontmatter

Specialization, Organization and Growth: New Classical Economics

Frontmatter
1. Specialization and Division of Labour: A Survey
Abstract
The purpose of this chapter is to survey the literature on specialization and the division of labour in society. In the introductory section the classical literature on specialization is briefly reviewed. The neoclassical literature on specialization and new trade and growth theory based on marginal analysis will be reviewed in Section 1.2. The formal decision models that apply inframarginal analysis to endogenize individuals’ levels of specialization and the equilibrium models that apply marginal analysis to endogenize individuals’ levels of specialization will be surveyed in Section 1.3. New classical equilibrium models of specialization based on corner solutions and inframarginal analysis will be surveyed in Section 1.4.
Xiaokai Yang, Siang Ng
Comment
Abstract
Yang and Ng’s chapter 1 is very important, and I hope that it can be widely circulated among economists, its conclusions will be very informative to economists, regardless of their particular interests.
James M. Buchanan
Comment
Abstract
Yang and Ng’s chapter 1 is in part a survey work, and in part a piece of advocacy. It is a survey of the literature on specialization and the division of labour. Its purpose as a piece of advocacy is to argue that the most appropriate method for studying the origins and effects of specialization in an economy is with the Yang ‘consumer-producer’ modelling approach.
Jeff Borland
2. Specialization and the Emergence and the Value of Money
Abstract
Why did money emerge? And how is the value of money determined? These are two of the fundamental questions in monetary economics on which distinguished economists of earlier generations have provided numerous insights. Adam Smith (1976, Chapter 4) identified specialization as the driving force behind the emergence of money, and suggested that the choice of commodity-money depends on the marketability of the commodity. Menger (1923) emphasized that the emergence of money is a natural consequence of decentralized actions of self-interested individuals. Jevons (1875) suggested that ‘double coincidence of wants’ — one not only has what one’s trading partner wants but also wants what one’s trading partner has — is hard to obtain, thus in the absence of such happy coincidences, the completion of trade needs to be assisted by a medium of exchange, money. Von Mises (1924) indicated that the value of money is based on the quantity of commodities a given amount of money can exchange for and that the value of commodity-money depends on both the commodity’s use as consumption or production goods and its use as a medium of exchange.
Wenli Cheng
3. Productivity, Investment in Infrastructure and Population Size: Formalizing the Theory of Ester Boserup
Abstract
The popular hypothesis of increasing Retums in the new growth theory has an implication which has been inevitably related to population. The assumption of ‘learning by doing’, almost by definition, implies that productivity growth is an increasing function of the aggregate production activity, which in turn might be affected by the size of population. One version of the ‘human capital’ approach to growth assumes that the external effect in production depends on the total stock of human capital, which in turn leads to a positive relationship between population and technological growth. A third approach to modelling increasing Retums is to emphasize the ‘non-rivalry’ factor, normally referred to as ‘knowledge’, in the production technology. Some researchers (such as Romer, 1990) concentrate on the public accessibility of knowledge when it is used; others (such as Arrow, 1962) show that the per capita cost of creating knowledge is inversely related to the population size. In either case, a larger population size can support more publicly accessible knowledge, which is another kind of connection between technological growth and population.1
C. Y. Cyrus Chu, Yao-Chou Tsai
4. The Inframarginal Analysis of Demand and Supply and the Relationship between a Minimum Level of Consumption and the Division of Labour
Abstract
The purpose of this chapter is twofold. First, a minimum level of consumption is introduced into each person’s utility-maximization problem in order to explore the general equilibrium implication of our particular specification of the minimum consumption constraint for the analysis of demand function. There are at least two ways to specify a minimum level of consumption in a person’s utility-maximization problem. The first is to specify a fixed amount of consumption in a person’s utility function such that the contribution of consumption to utility is positive only if the consumption level is greater than that fixed amount. This is analogous to the specification of a fixed input cost in a production function. Compared to the utility function without the minimum level of consumption, this specification is equivalent to shifting the indifference curve up the right-hand side. If the original utility function is of Cobb-Douglas or log Cobb-Douglas, such a way of introducing the minimum level of consumption will generate a linear expenditure system, proposed by Stone (1954). However, a minimum level of consumption in the real world is often associated with a constraint for the utility-maximization problem instead of with the shift of the indifference curve that represents tastes. If the minimum level of consumption is specified as a constraint for the utility-maximization problem, then marginal analysis that is based on interior solutions does not work because corner solutions may take place.
Monchi Lio
5. Economies of Specialization and Trade
Abstract
The idea that trade fosters growth dates back to Adam Smith. The central role of specialization and division of labour, and their implications for productivity growth was emphasized by Adam Smith (1776). He analysed the gains from specialization through division of labour even if all individuals are ex ante identical. The resulting concept is now referred to as ‘endogenous comparative advantage’. Emphasizing exogenous comparative advantage, David Ricardo (1817) pursued an alternative line of studies of specialization and division of labour. The neoclassical trade theory based on Ricardo’s concept of exogenous comparative advantage explains patterns of specialization and division of labour between countries. It focuses on the models with constant Retums to scale which cannot explain international trade from individuals’ decisions of their level and patterns of specialization.
Siang Ng
6. Centralized Hierarchy within a Firm and Decentralized Hierarchy in the Market
Abstract
The purpose of this chapter is twofold. First, we develop a general equilibrium model based on corner solutions to simultaneously endogenize four aspects of the division of labour: individuals’ level of specialization, the length of the roundabout production chain, the number of goods in each link of the chain and the development of the institution of the firm. Second, the equilibrium model is used to endogenize the dividing line between the hierarchical structure of division of labour within the firm and the hierarchical structure of the network of transactions in the market.
Heling Shi, Xiaokai Yang
7. An Analytical Framework of Consumer-Producers, Economies of Specialization and Transaction Costs
Abstract
Samuelson (1967) and Alfred Marshall (1920) consider the essence of economics as the analysis of demand and supply. However, there are two research lines of demand and supply. (1) is Marshall’s line: demand and supply are determined by the tradeoff between quantities of different goods consumed in raising utility and the tradeoff between quantities of different factors in raising output. Relative demand in equilibrium is determined by relative taste, relative technology and relative endowments. Aggregate demand is not the focus of the analysis and is given by the dichotomy between pure consumers and pure producers. In other words, resource allocation is the focus in neoclassical economic theory. Most resource allocation problems are solved in mathematical programming models. (2) is Allyn Young’s line: demand and supply are two sides of the level of division of labour (or its reciprocal the degree of self-sufficiency). The level of specialization and division of labour determines the extent of the market and aggregate demand and supply (Young, 1928, p. 539). Hence, we cannot understand what are demand and supply if we do not know the mechanism that determines individuals’ level of specialization and the level of division of labour for a society as a whole.
Mei Wen
8. An Extended Ethier Model with the Tradeoff between Economies of Scale and Transaction Costs
Abstract
The Dixit-Stiglitz model (1977, hereafter D-S model) formalizes a tradeoff between economies of scale and consumption diversity. Since an increase in the size of an economy in the D-S model enlarges agents’ scope for trading off economies of scale for consumption diversity, per capita real income, the number of goods and productivity increase with the size of an economy if there is a fixed cost in production.1 This implies that international trade will increase per capita real income and productivity because the size of the pooling economy in the integrated world market is larger than that of any individual country. Ethier (1982) formalizes a tradeoff between economies of scale and economies of complementarity between different producer goods by introducing producer goods and the CES production function into the D-S model. An increase in the size of an economy (or opening up of international trade) in Ethier’s model will enlarge agents’ scope for trading off economies of scale against economies of complementarity and therefore raise per capita real income, the number of producer goods and productivity. Many pieces of work use this basic idea to explore the implications of the tradeoff for growth theory (see, for instance, Romer, 1986, and Grossman and Helpman, 1990); for trade theory (see, for instance, Krugman, 1979, 1980); and for macroeconomics (see, for instance, Blanchard and Kiyotaki, 1987, and Rotemberg, 1987).
Kar-yiu Wong, Xiaokai Yang
9. Policy Analysis in a Dynamic Model with Endogenous Specialization
Abstract
In recent years, there has been growing interest in studying the relationship between specialization and economic progress. This line of research, as exemplified in the pioneering work of Yang and Ng (1993), is a revival and formal extension of Adam Smith’s (1776) and Allyn Young’s (1928) proposition that increases in the division of labour will create economic growth. These studies develop a microeconomic framework that brings the analysis of economies of specialization, the division of labour and the structure of economic organization into the conventional general equilibrium paradigm. By integrating the consumption and production decisions, these models show that the endogenous evolution of the division of labour based on a tradeoff between economies of specialization and transaction costs may help explain a wide range of economic issues, from microeconomic, monetary to macroeconomic ones.
Junxi Zhang

Economies of Scale and Monopolistic Competition

Frontmatter
10. Increasing Retums, Constant Retums and Micro-Macro Economics
Abstract
I should first like to congratulate the organizers of this excellent Conference and express my appreciation of the project to honour my old friend Kenneth Arrow. I was flattered to be invited, as I have not published anything on the subject of increasing Retums and specialization, although I have published on economies of scale and imperfect competition.
Robin Marris
11. Non-Neutrality of Money Under Non-Perfect Competition: Why Do Economists Fail to See the Possibility?
Abstract
The importance of increasing Retums and product differentiation (including locality) make non-perfect competition ubiquitous in the real world. Thus, economists should allow for non-perfect competition not just in the specific field of industrial organization but also in other areas such as macroeconomics. More than a decade ago, I showed that the introduction of non-perfect competition (subsuming monopolistic competition, oligopoly and monopoly; in fact whenever the firm perceives the demand curve for its product as downward sloping) alone in a standard macroeconomic model with profit-maximization, no time lags, no menu costs or any other transaction costs or frictions, could break the classical dichotomy between the real and the monetary sectors and make money possibly non-neutral (Ng, 1977, 1980, 1982, 1986, 1992). My 1980 Economic Journal paper is regarded by Marris (1991, p. 215) as one ‘which effectively started the modern movement’ in providing an imperfect competition foundation of macroeconomics (see also chapter 10 in this volume). However, in the subsequent mushrooming literature, economists virtually ignored this possible non-neutrality of money under imperfect competition. Thus, as late as 1994, Dixon and Rankin, in their survey of imperfect competition and macroeconomics, conclude that ‘Imperfect competition by itself does not create monetary non-neutrality … It is the combination of imperfect competition with some other distortion which generates the potential for real effects’ (p. 178).
Yew-Kwang Ng
Comment
Abstract
I like this paper very much. Why? Because I completely agree with it!
Robin Marris
12. A Dynamic Model of Monopolistic Competition with Trade Externalities and Fiscal Policy
Abstract
Two strands of thought have recently emerged in the ‘New Keynesian’ literature. The first is concerned with demand spillovers (externalities) and imperfect competition. Static models in this literature include Ng (1980, 1982), Hart (1982), Weitzman (1982), Heller (1986), Blanchard and Kiyotaki (1987), Roberts (1988), Cooper and John (1988) among others. The other strand concerns externalities arising from joint production, an example are the matching externalities in the goods and labour markets. These models are found in Diamond (1982), Howitt (1985), Drazen (1986), Howitt and McAfee (1986), Cooper and John (1988) among others. These externalities are also called ‘strategic complementarities’, the existence of which gives rise to Pareto-rankable multiple equilibria, Keynesian features and policy implications.
Kee Nam Cheung
Comment
Abstract
Following the motivation expressed in the Introduction Cheung sets out what he plans to do in Chapter 12. First, he combines two sources of demand and supply externalities in the market into a dynamic model and then ranks all potential equilibria. Secondly, he supports Ng’s negative multiplier in a balanced budget setting, which was once questioned by Mankiw (1988) and Startz (1989). Hence it is not hard to understand his intention to make a distinction between the New Keynesian and the Keynesian models by demonstrating the effectiveness of fiscal policy. My comments arise from such a distinction as well as modelling a wage tax to pay for redistribution benefit.
Chun-Sin Hwang
13. Industrialization Policy and the ‘Big Push’
Abstract
The recent theoretical literature on industrialization has formalized the long-standing idea that development traps are the result of a failure of economic organization rather than a lack of resources or other technological constraints. The so-called ‘big push’ models of industrialization have shown how, in the presence of increasing Retums, many equilibria are possible with some Pareto dominating others. Such a view not only provides an explanation for the coexistence of industrialized and non-industrialized economies, but also a rationale for government intervention to coordinate investment in a ‘big push’ towards industrialization (Murphy et al., 1989, p. 1024). Moreover, unlike competing theories, these models emphasize the temporary nature of any policy.1 Thus, industrialization policy involves facilitating an adjustment from one equilibrium to another rather than any change in the nature of the set of equilibria per se.
Joshua Gans
Comment
Abstract
Joshua Gans has contributed a careful analysis of an obviously important policy issue. It revives and formalizes an old (and still unsettled) question concerning development policy. In particular, should industrialization policy focus narrowly on a few key sectors (i.e., the ‘unbalanced’ approach) or broadly on many sectors (the ‘balanced’ approach)?
Philip A. Trostel
14. Economies of Scale and Imperfect Competition in an Applied General Equilibrium Model of the Australian Economy
Abstract
In a pioneering paper, Harris (1984) emphasized the importance of imperfect competition and economies of scale in understanding the effects of trade liberalization on the Canadian economy within an applied general equilibrium framework. He argued that a general equilibrium analysis which incorporates scale economies and imperfect competition yields significantly different results from one that does not. Thus, his estimated static long-run gains to Canada of trade liberalization were in the range of 8–12% of GNP: considerably larger than those suggested by conventional estimates which assume perfect competition.
Kaludura Abayasiri-Silva, Mark Horridge
Comment
Abstract
In simulating the long-run effects of changes in protection, Abayasiri-Silva and Horridge (hereafter A-S and H) reach a striking conclusion: ‘AGE models which assume CRTS and perfect competition [PC] also treat some types of IRTS and imperfect competition [IPC] quite accurately’. This result can be understood via Figure 14.7, whose axes indicate the number of firms (N) in an industry and the average markup (R) defined by
where P is product price and M is variable cost per unit of output.
Peter B. Dixon
15. Variety, Spillovers and Market Structure in a Model of Endogenous Technological Change
Abstract
Growth theorists have produced a number of interesting models investigating the idea that technological progress, the engine of growth in income per capita, is endogenous to the economic system and driven by market forces. These models are radically different from the traditional theory of economic growth based on capital accumulation and emphasize the incentives for profit-seeking agents to undertake R&D aimed at developing new products and processes, or incrementally improving old ones. In particular, infinitely lived and perfectly enforceable patents generate local monopolies by assigning to the innovator the exclusive right to manufacture and sell the new good.1 The emphasis on the non-rivalry of knowledge and the patent law makes clear that imperfect markets and monopoly power are necessary for profit-seeking agents to undertake R&D and innovation. However, these models focus exclusively on monopolistic competition to describe market structure and firms’ behaviour. In addition, the emphasis on the patent market and free entry in R&D neglects the fact that most innovations are carried out by established producers. As a consequence, these models neglect the central role of the oligopolistic corporation and its in-house integration of manufacturing and R&D. Thus, the theory does not address those components of the market structure, like concentration, firm size and market rivalry, emphasized by Schumpeter (1942) as key determinants of the R&D activity of profit-seeking firms.
Pietro F. Peretto
16. Pursuit of Relative Conspicuous Consumption in Monopolistic Competition
Abstract
Veblen (1899) first called our attention to the central role of demonstration effects and conspicuous consumption in shaping consumers’ behaviour.
Jianguo Wang, Yew-Kwang Ng
17. Economic Fluctuations and Non-Neutrality of Money Based upon Imperfect Competition
Abstract
In his early paper, Ng (1980) showed that the introduction of imperfect competition along in a standard macroeconomic model with profit maximization, no time lags, no transaction costs and/or friction could break the classical dichotomy between the real and the monetary sectors and make money possibly non-neutral. However, most of the literature in macroeconomics unfortunately misses this possibility of non-neutrality of money under imperfect competition and believes that
Imperfect competition by itself does not create monetary non-neutrality … It is the combination of imperfect competition with some other distortion which generates the potential for real effect. (Dixon and Rankin, 1994, p. 178)
Xiangkang Yin

Information, Trade and Resources

Frontmatter
18. Innovation and Increasing Retums to Scale
Abstract
There has been a long tradition, going back to Adam Smith (1776), that technological progress is somehow intrinsically associated with increasing Retums. In more recent times, this connection has been emphasized by Young (1928), Nicholas Kaldor (1957), and, still more recently, by Arrow (1962), Shell (1966), and Romer (1990). There is, however, more than one interpretation of the relation.
Kenneth J. Arrow
19. Variable Returns to Scale and Factor Price Equalization
Abstract
In their classical expositions of the Factor Price Equalization (FPE) Theorem, Heckscher (1919), Lerner (1952), Samuelson (1948, 1949) and McKenzie (1955) provided sufficient conditions for the equality of equilibrium factor rewards in two or more countries. Those conditions invariably included the specification of perfectly competitive markets supported by convex production sets and freedom of entry. The focus on convexity continues in modern textbook presentations of the theory, suggesting a widespread belief that FPE is ‘less likely’ in a context of non-convexities. In contrast, we shall argue that if the non-convexities flow from external economies associated with changes in world-wide industry outputs then the existing theory of FPE is already sufficiently general to accommodate the non-convexities. In particular, it will be shown that, leaving aside singular cases in which the input vectors of industries are linearly dependent, the set of international factor assignments compatible with FPE is of full rank if and only if there are at least as many tradeable commodities as primary factors.
Murray C. Kemp, Masayuki Okawa, Makoto Tawada
20. The Stolper-Samuelson Theorem in Models with Economies of Scale
Abstract
The Stolper-Samuelson theorem is one of the most cited theorems in economics. On the occasion of its Fiftieth Anniversary in 1991, a Golden Jubilee volume was published, containing the original article, many well known extensions of it and another 12 new papers reflecting on aspects of the theorem (Deardorff and Stern, 1994). The continued popularity of the theorem derives from its key message: product price changes necessarily create conflict between households owning different factors. This proposition is the foundation of political economy models of tariffs and other taxes and government interventions. Such an important theorem provides a good opportunity to explore the robustness of propositions derived from a world in which there are no economies of scale when extended to models which recognize the existence of economies of scale. This chapter seeks to extend the theorem to such models.
Peter J. Lloyd, Albert G. Schweinberger
Comment
Abstract
The task of extending the Stolper-Samuelson (hereafter, S-S) message of ‘product price changes necessarily create conflict between households owning different factors’ to frameworks incorporating increasing Retums or economies of scale has previously been tackled in a series of specialized models which are not capable of being generalized and where the robustness of the results have been disappointing.
Pasquale M. Sgro
21. Variable Returns to Scale, Resources and Population
Abstract
Economics has been called the dismal science, but accounts of contemporary (endogenous) theories of growth leave the strong impression that rather than being the bearers of bad news, the authors radiate optimism.1 Issues of resource scarcities, stationary states and subsistence wages rarely get a mention.2 Instead the theories describe the potential for continually rising productivity, rising living standards and growing populations. This chapter is written as a reaction to what seems the excessive optimism of this literature. To be fair, the object of these theories is to explain the reality of observed rises in total factor productivity (TFP) and living standards. Where they seem to be overly optimistic is first in the neglect of resource issues and secondly, but associated with the first point, in the attempt to explain the facts of recent growth as an equilibrium process. On the other hand, if resource supplies are limited it would seem inevitable that explanations of rising per capita outputs should be in the form of transition processes, rather than long-run growth equilibria. Indeed, to the extent that exhaustible resources contribute to rising productivity, it would seem necessary to allow for interruptions to growth and/or periods of decline.
John D. Pitchford
Backmatter
Metadaten
Titel
Increasing Returns and Economic Analysis
herausgegeben von
Kenneth J. Arrow
Yew-Kwang Ng
Xiaokai Yang
Copyright-Jahr
1998
Verlag
Palgrave Macmillan UK
Electronic ISBN
978-1-349-26255-7
Print ISBN
978-1-349-26257-1
DOI
https://doi.org/10.1007/978-1-349-26255-7