The Division of Labor, Investment, and Capital
AbstractThis paper uses a dynamic general equilibrium model based on corner solutions to formalize the classical theory of investment and capital which considers investment to be a vehicle for developing a high level of division of labor in roundabout productive activities. If it takes time for a specialist producer of tractors to learn the right method in producing commercially viable tractors, specialization in producing tractors is infeasible in the absence of investment in terms of consumption goods which are consumed by the specialist producer of tractor before he can sell tractors. If specialized learning by doing can speed up accumulation of professional knowledge so that roundabout productive machines becomes cheap, such investment for increasing the level of division of labor in roundabout productive activities will speed up economic growth. Due to the tradeoff between economies of specialized learning by doing and transaction costs, the model can be used to investigate the effects of a change in the transaction cost coefficient, which can be affected by policy, the legal system, and urbanization, on the evolution of division of labor, on real interest rates, and on saving rate.
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Bibliographic InfoPaper provided by Center for International Development at Harvard University in its series CID Working Papers with number 8.
Date of creation: Mar 1999
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Criticism of investment fundamentalism; criticism of technology fundamentalism; Smithian model of investment; Smithian growth mechanism; evolution in division of labor;
Other versions of this item:
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
- D90 - Microeconomics - - Intertemporal Choice and Growth - - - General
- O12 - Economic Development, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
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