ECONOMICS OF ENDOGENOUS SPECIALIZATION: INTRODUCTION

Abstract

Division of labour presents itself ubiquitously in economic activities, especially in knowledge economies of which a remarkable feature is the increasing specialization at the individual level, as well as at firm, industry, region and even economy and world levels. A central theme in classical economics, most prominently in the writings of Smith, Turgot, Marx and even in Marshall (Sun, 2005a), has been specialization and the division of labour. However, this virtually disappeared from economic analysis after the famous debate initiated by Piero Sraffa on the incompatibility between Marshall’s external economies and competitive equilibrium in the late 1930s. This was partly due to the lack of analytical frameworks that encompassed increasing returns to specialization and competitive equilibrium. However, things have changed dramatically in the last two decades. In fact, the rapidly growing literature on this subject matter, of which an up-to-date literature survey is Cheng and Yang (2004), is indicative of the point that the study of the division of labour may well, and should, be brought back to the core of the economics discipline. The central notion underlying most of the burgeoning literature is the concept of increasing returns to the division of labour, namely that the production possibility frontier (PPF) of the economy as a whole expands – and consequently the per capita income increases – with the nexus of exchanges and economic interdependence between its differing parts (for more involved elaborations, see, e.g. Buchanan and Yoon, 2000, p. 45; Sun, 2005b, pp. 16–17). Increasing returns to the division of labour are not the same thing as the concept of increasing returns to scale at the individual firm’s level that is conventionally adopted in the textbooks. Increasing returns to the division of labour are rooted in interdependence between the division of labour, which often occurs in the production sphere, and the extent of the market, which is of course associated with the process of market exchange. The so-called Smith Theorem (Stigler, 1951) that the division of labour is limited by the extent of the market is perhaps one of the best-known propositions to economics students. Less known, but no less important, however, is that the extent of the market is also dependent on the division of labour, which indeed largely determines productivity, and hence how much ‘surplus’ one can dispose of in the market exchange for other products/services. Each market participant’s choice of specialization in the exchange-nexus doesn’t just determine what and how