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Evolutionary Dynamics of the Market Equilibrium with Division of Labor∗

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  • Haiou Zhou

Abstract

Recently, a growing literature, known as the new classical economics, attempts to resurrect the classical economic thoughts on division of labor within an analytical framework inherited from neoclassical economics. The paper inspects the feasibility of this approach and finds that the current analytical framework of the new classical economics is not able to spell out how individuals’ decisions on specialization are coordinated and how division of labor is realized in a large and decentralized economy. Evolutionary dynamics are then introduced into the existing models. Using a simple economy for example, the paper shows that the equilibrium network of division of labor predicted by the new classical economics is supported by evolutionary stability and can be realized by the outcome of evolutionary processes, such as Replicator Dynamics. Mutation is important in the realization of division of labor since it provides an approach for the economy to escape from an initial state of autarky. The study implies that the inherent evolutionary process of the market constructs an “invisible hand”, which can spontaneously coordinate self-interested individuals’ decentralized decisions on specialization to discover an efficient order of division of labor in a large economy.

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Bibliographic Info

Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 12-09.

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Length: 30 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:mos:moswps:2009-12

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Keywords: division of labor; evolutionarily stable strategy; replicator dynamics; mutation;

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  1. Gary S. Murphy Becker & Kevin M., 1992. "The Division of Labor, Coordination Costs, and Knowledge," University of Chicago - George G. Stigler Center for Study of Economy and State 79, Chicago - Center for Study of Economy and State.
  2. Yang, Xiaokai & Shi, He-ling, 1992. "Specialization and Product Diversity," American Economic Review, American Economic Association, vol. 82(2), pages 392-98, May.
  3. Sun, Guang-Zhen & Yang, Xiaokai & Zhou, Lin, 2004. "General equilibria in large economies with endogenous structure of division of labor," Journal of Economic Behavior & Organization, Elsevier, vol. 55(2), pages 237-256, October.
  4. Yang, Xiaokai & Ng, Yew-Kwang, 1995. "Theory of the firm and structure of residual rights," Journal of Economic Behavior & Organization, Elsevier, vol. 26(1), pages 107-128, January.
  5. Cheng, Wenli & Yang, Xiaokai, 2004. "Inframarginal analysis of division of labor: A survey," Journal of Economic Behavior & Organization, Elsevier, vol. 55(2), pages 137-174, October.
  6. Stigler, George J, 1976. "The Successes and Failures of Professor Smith," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1199-1213, December.
  7. Rosen, Sherwin, 1983. "Specialization and Human Capital," Journal of Labor Economics, University of Chicago Press, vol. 1(1), pages 43-49, January.
  8. Baumgardner, James R, 1988. "The Division of Labor, Local Markets, and Worker Organization," Journal of Political Economy, University of Chicago Press, vol. 96(3), pages 509-27, June.
  9. Friedman, Daniel, 1991. "Evolutionary Games in Economics," Econometrica, Econometric Society, vol. 59(3), pages 637-66, May.
  10. Yang, Xiaokai & Borland, Jeff, 1991. "A Microeconomic Mechanism for Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 460-82, June.
  11. Young, Allyn A., 1928. "Increasing Returns and Economic Progress," History of Economic Thought Articles, McMaster University Archive for the History of Economic Thought, vol. 38, pages 527-542.
  12. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
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