Economics New Classical Versus Neoclassical Frameworks

by Yang, Xiaokai

• ISBN13: 9780631220022
• ISBN10: 063122002X
• Edition: 1st
• Format: Paperback
• Copyright: 2001-03-05
• Publisher: Wiley-Blackwell

Summary

This innovative text ushers in a new way of examining basic economic issues. It teaches economics from a different standpoint, using a division-of-labor theme to eliminate the need for a dichotomy between microeconomics and macroeconomics. This text shows how resource allocation and levels of division of labor are determining factors for demand and supply. It also illustrates the ways that unemployment and business cycles are seen as features of the network of division of labor.While innovative in content, this book keeps the continuity of mainstream economics through a synthesis of existing and emerging branches of economics. It is an exceptional work that will encourage both creative and critical thinking.

Author Biography

Xiaokai Yang is Professor in the Department of Economics at Monash University and an affiliated Fellow in the Center for International Development, Harvard University. His research papers have appeared in The American Economic Review, Journal of Political Economy, and other refereed journals. He is the author of eight books, and is co-author, with Jeffrey Sachs, of Development Economics (Blackwell, 2001).

Table of Contents

List of Figures	xix
List of Tables	xxii
Preface	xxiv
Part I: The Economic Environment	1	(66)
Introduction	3	(1)
What is Economics?	3	(2)
The Analytical Framework of Economics	5	(5)
Neoclassical Economics vs. New Classical Economics	10	(5)
Structure of the Text and Suggestions for its Use	15	(8)
Key Terms and Review	19	(1)
Further Reading	19	(1)
Questions	20	(3)
Preference and the Utility Function	23	(15)
The Scientific Approach to the Study of Human Behavior	23	(1)
Preference and the Utility Function	24	(6)
The Convex Preference Relation, Quasi-concave Utility Functions, Diminishing Marginal Rates of Substitution, and Desire for Diverse Consumption	30	(4)
Ordinal vs. Cardinal Theory of Utility and Diminishing Marginal Rate of Substitution vs. Diminishing Marginal Utility	34	(4)
Key Terms and Review	35	(1)
Further Reading	36	(1)
Questions	36	(1)
Exercises	36	(2)
Production Conditions	38	(29)
The Neoclassical Framework vs. the New Classical Framework	38	(1)
The Neoclassical Production Enviroment	39	(4)
The New Classical Production Environment	43	(16)
Economies of specialization	45	(3)
Division of labor	48	(1)
Exogenous comparative advantage and economies of division of labor	48	(5)
Endogenous absolute and comparative advantages	53	(6)
Endogenous cum Exogenous Comparative Advantage	59	(8)
Key Terms and Review	61	(1)
Further Reading	62	(1)
Questions	62	(1)
Exercises	63	(4)
Part II: The Neoclassical Framework	67	(62)
Neoclassical Decision Problems	69	(25)
Budget Constraint and Dichotomy between Pure Consumers and Firms	69	(2)
A Pure Consumer's Constrained Utility Maximization Problem	71	(5)
Comparative Statics of the Pure Consumer's Utility Maximization Problem	76	(3)
A Pure Consumer's Expenditure Minimization Problem	79	(4)
Recovering the Utility Function from a Demand System	83	(1)
Revealed Preference	84	(1)
A Producer's Decision Problem in a Walrasian Regime	85	(9)
Key Terms and Review	89	(1)
Further Reading	90	(1)
Questions	90	(1)
Exercises	91	(3)
General Equilibrium the Neoclassical Framework	94	(35)
General Equilibrium in a Walrasian Model	94	(4)
Neoclassical General Equilibrium Model	98	(5)
Comparative Statics of Neoclassical General Equilibrium	103	(8)
Welfare Implications of Neoclassical General Equilibrium	111	(2)
Equilibrium in Neoclassical Game Models	113	(16)
Game models	113	(1)
Nash equilibrium	113	(3)
Subgame perfect equilibrium	116	(1)
Bayes equilibrium	117	(1)
Sequential equilibrium	118	(3)
Key Terms and Review	121	(1)
Further Reading	122	(1)
Questions	122	(1)
Exercises	123	(6)
Part III: The New Classical Framework	129	(60)
Consumer-producers' Decisions to Choose the Optimum Level and Pattern of Specialization	131	(18)
The New Classical Framework and Transaction Costs	131	(2)
Configurations and Corner Solutions in the New Classical Framework	133	(3)
The Optimum Resource Allocation for a Given Level and Pattern of Specialization	136	(5)
The Optimum Level and Pattern of Specialization	141	(2)
Inframarginal analysis of demand and supply	141	(2)
Inframarginal and marginal comparative statics of decisions	143	(1)
Neoclassical and New Classical Laws of Supply and Elasticity of Substitution	143	(6)
Key Terms and Review	145	(1)
Further Reading	146	(1)
Questions	146	(2)
Exercises	148	(1)
New Classical General Equilibrium and Its Welfare Implications	149	(22)
Neoclassical vs. New Classical General Equilibrium	149	(2)
How Does the Market Coordinate the Division of Labor and Utilize Network Effects?	151	(7)
Struture, corner equilibrium, and resource allocation for a given structure of division of labor	152	(4)
General equilibrium level and structure of division of labor - How does the market coordinate division of labor to utilize network effects?	156	(2)
Inframarginal Comparative Statics of New Classical General Equilibrium	158	(5)
Inframarginal vs. marginal comparative statics of new classical general equilibrium	158	(3)
Comparative statics of decisions vs. comparative statics of equilibrium	161	(1)
The inappropriateness of marginal cost pricing and the difference between neoclassical and new classical general equilibrium	162	(1)
Effieiency of the Invisible Hand	163	(8)
The first welfare theorem in the new classical framework	163	(2)
Economic development and disparity between the Pareto optimum and the PPF	165	(1)
Interdependence and conflict between efficient resource allocation and efficient organization	165	(2)
Key Terms and Review	167	(1)
Further Reading	168	(1)
Questions	168	(1)
Exercises	169	(2)
Trade Pattern and Professional Middlemen	171	(18)
Why Can Professional Middleman Make Money? What Are the Determinants of Business Success?	171	(1)
A Model with Trading Activities and Heterogeneous Parameters	172	(1)
The Decision to be a Professional Middleman	173	(2)
Market Structures and Corner Equilibria	175	(4)
Basic vs. nonbasic structures	175	(2)
Definitions of corner and general equilibria	177	(2)
The Equilibrium Size of the Network of Division of Labor	179	(2)
Emergence of Professional Middlemen and a Hierarchical Structure of Economic Organization	181	(1)
Determinants of Trade Pattern and Successful Business	182	(7)
Key Terms and Review	185	(1)
Further Reading	185	(1)
Questions	185	(3)
Exercises	188	(1)
Part IV: The Institution of the Firm and Pricing Through Bargaining and Contracting	189	(68)
The Labor Market and the Institution of the Firm	191	(25)
What is the Institution of the Firm	191	(2)
Is It Fair to have an Asymmetric Relationship between Boss and Employees? - The Story behind the Model	193	(3)
Emergence of the Firm from the Division of Labor	196	(10)
Economies of roundabout production	196	(1)
The corner equilibria in four structures	197	(5)
The general equilibrium structure of transactions and residual rights	202	(4)
The Distinction between ex ante and ex post Production Functions and the New Classical Analysis of Demand and Supply	206	(1)
Economies of Division of Labor and the Firm, and the Coase Theorem	207	(9)
Key Terms and Review	210	(1)
Further Reading	210	(1)
Questions	211	(2)
Exercises	213	(3)
Pricing Mechanisms Based on Bargaining	216	(18)
Bargaining Games, Strategic Behavior, Opportunistic Behavior	216	(1)
Nash Bargaining Games	217	(4)
Endogenous Transaction Costs caused by Information Asymmetry	221	(2)
Alternating-offer Bargaining Games	223	(2)
Dynamic Bargaining Games and the Division of Labor	225	(2)
How Does Competition for a Greater Share of Gains from the Division of Labor Generate Endogenous Transaction Costs?	227	(3)
How Can Endogenous Transaction Costs be Eliminated by Consideration of Reputation?	230	(4)
Key Terms and Review	231	(1)
Further Reading	231	(1)
Questions	232	(1)
Exercises	233	(1)
Endogenous Transaction Costs and Theory of Contract, Ownership, and Residual Rights	234	(23)
Endogenous Transaction Costs and Moral Hazard	234	(2)
Neoclssical Principal-Agent Models	236	(4)
A New Classical General Equilibrium Principal-Agent Model	240	(5)
The Trade-off between Endogenous Transaction Costs caused by Moral Hazard and Monitoring Cost	245	(2)
The Grossman-Hart-Moore Model of Optimal Ownership Structure	247	(4)
Noncredible Commitment and Soft Budget Constraint	251	(6)
Key Terms and Review	252	(1)
References	253	(1)
Questions	253	(1)
Exercises	254	(3)
Part V: Trade Theory and More General New Classical Models	257	(98)
The Emergence of International Trade from Domestic Trade and Emergence of New Products	259	(35)
Endogenous Trade Theory and Endogenous Number of Consumer Goods	259	(3)
A New Classical Trade Model with Fixed Learning Costs	262	(1)
How are Demand and Supply Functions Determined by Individuals' Levels of Specialization?	262	(4)
Inframarginal Comparative Statics of Optimum Decisions	266	(1)
How is the Level of Division of Labor in Society Determined in the Market?	267	(3)
Inframarginal Comparative Statics of General Equilibrium and Many Concurrent Economic Phenomena	270	(4)
Emergence of International Trade from Domestic Trade	274	(1)
Co-movement of Division of Labor and Consumption Variety	275	(3)
Trade-off between Economies of Specialization and Coordination Costs	278	(2)
A Neoclassical Model Endogenizing the Number of Consumption Goods on the Basis of the Trade-off between Economies of Scale and Consumption Variety	280	(5)
An Extended Murphy-Shleifer-Vishny Model with Compatibility between Economies of Scale and Competitive Markets	285	(9)
Key Terms and Review	288	(1)
Further Reading	289	(1)
Questions	289	(3)
Exercises	292	(2)
Exogenous Comparative Advantages in Technology and Endowment, Division of Labor, and Trade	294	(32)
Endogenous vs. Exogenous Comparative Advantage	294	(2)
A Ricardian Model with Exogenous Comparative Technological Advantage and Transaction Costs	296	(5)
Analysis of Decisions vs. Analysis of Equilibrium	301	(4)
Economic Development and Trade Policy	305	(7)
Comparative Endowment Advantage and Trading Efficieny	312	(14)
Key Terms and Review	320	(1)
Further Reading	320	(1)
Questions	321	(3)
Exercises	324	(2)
More General New Classical Models	326	(29)
The Theoretical Foundation of New Classical Economics	326	(2)
A General New Classical Model with ex ante Different Consumer-producers	328	(2)
The Existence of a Competitive Equilibrium	330	(5)
An Equilibrium Organism and the Efficiency of the Invisible Hand in Coordinating Division of Labor	335	(2)
A New Classical Model with both Endogenous and Exogenous Comparative Advantages	337	(3)
Trade Pattern and Income Distribution	340	(15)
Key Terms and Review	346	(1)
Further Reading	347	(1)
Questions	347	(3)
Exercises	350	(5)
Part VI: Urbanization, Population, and the Trade-Off Between Working and Leisure	355	(46)
Urbanization, the Dual Structure between Urban and Rural Areas, and the Division of Labor	357	(28)
Why and How Cities Emerge from the Division of Labor	357	(2)
The emergence of Cities and of the Dual Structure between Urban and Rural Areas	359	(4)
Why Geographical Concentration of Transactions Can Improve Transaction Efficiency	363	(6)
Simultaneous Endogenization of Level of Division of Labor, Location Pattern of Residences, Geographical Pattern of Transactions, and Land Prices	369	(10)
The Fujita-Krugman Model of Urbanization	379	(6)
Key Terms and Review	382	(1)
Further Reading	382	(1)
Questions	383	(1)
Exercises	384	(1)
The Trade-off between Working and Leisure, and the Effects of Resource Scarcity and Population Size on the Division of Labor	385	(16)
Why Can Division of Labor Enlarge the Scope for the Efficient Trade-off between Working and Leisure?	385	(3)
Why Leisure Time and Per Capita Consumption of Goods Increase as Division of Labor Develops	388	(3)
Why Can a Resource Shortage Crisis Promote Evolution in Division of Labor and Productivity?	391	(3)
Implications of High Population Density for Evolution in Division of Labor through Its Effect on the Per Capita Investment Cost of Infrastructure	394	(7)
Key Terms and Review	398	(1)
Further Reading	398	(1)
Questions	398	(1)
Exercises	399	(2)
Part VII: The Trade-Off Between Economies of Division of Labor and the Coordination Reliability of the Network of Division of Labor	401	(46)
The Economics of Property Rights and the Division of Labor	403	(27)
Uncertainties in Transaction and the Economics of Property Rights	403	(4)
Trade-offs among Economies of Division of Labor, Coordination Reliability, and the Benefits of Competition	407	(4)
Endogenization of Coordination Reliability in Each Transaction	411	(8)
The Yang-Wills model endogenizing risk of coordination failure for each transaction	412	(1)
The efficient extent of externalities	413	(1)
Perfect competition is inefficient	414	(1)
Risk of mass unemployment	414	(2)
The economics of property rights and the soft budget constraint	416	(3)
Substitution between Precise Enforcement of Property Rights and Competition	419	(11)
Key Terms and Review	424	(1)
Further Reading	425	(1)
Questions	425	(2)
Exercises	427	(3)
Insurance and Risk of Coordination Failure of the Network of Division of Labor	430	(17)
Uncertainty and Risk Aversion	430	(2)
A Model with Insurance and Endogenous Specialization in the Absence of Moral Hazard	432	(4)
The Division of Labor and Endogenous Transaction Costs caused by Complete Insurance	436	(11)
Key Terms and Review	444	(1)
Further Reading	444	(1)
Questions	444	(1)
Exercises	445	(2)
Part VIII: The Hierarchical Structure of Division of Labor	447	(74)
The Division of Labor in Roundabout Production and Emergence of New Machines and Related New Technology	449	(23)
New Classical vs. Neoclassical Views on the Emergence of New Producer Goods and Related New Technology	449	(2)
A Model with Endogenous Technical Progress, an Endogenous Number of Producer Goods, and Endogenous Specialization	451	(2)
The Efficient Number of Producer Goods and Level of Specialization	453	(1)
The Corner Equilibria in Nine Structures	454	(4)
Concurrent Changes in the Level of Division of Labor, Productivity, and Input Diversity	458	(1)
Ex post Production Functions, Emergence of New Machines, and Endogenous Technical Progress	459	(1)
Changes in the Economic Structure and Topological Properties of Economic Organisms	460	(2)
Evolution in the Number of Producer Goods and Economic Development	462	(10)
Key Terms and Review	467	(1)
Further Reading	468	(1)
Questions	468	(2)
Exercises	470	(2)
Industrialization and the Division of Labor in Roundabout Production	472	(21)
The Features of Industrialization	472	(4)
A General Equilibrium Model Endogenizing Production Roundaboutness	476	(1)
Corner Equilibria and the Emergence of New Industry	477	(3)
General Equilibrium and Industrialization	480	(3)
Changes in the Income Shares of the Industrial and Agricultural Sectors	483	(1)
The Number of Possible Structures of Transactions Increases More Than Proportionally as Division of Labor Evolves in Roundabout Production	484	(9)
Key Terms and Review	487	(1)
Further Reading	487	(1)
Questions	487	(4)
Exercises	491	(2)
The Hierarchical Structure of the Network of Division of Labor and Related Transactions	493	(28)
The Theory of Hierarchy	493	(3)
One-way Centralized Hierarchy	496	(2)
A Decentralized Hierarchy of Transactions and the Division of Labor	498	(4)
Configurations and Market Structures	502	(7)
The General Equilibrium and its Inframarginal Comparative Statics	509	(1)
The Network Hierarchy of Cities and Division of Labor	510	(11)
Consumer-producers, cities, and layers of a hierarchy of cities	511	(1)
Two types of transaction cost	512	(3)
The optimal number of layers in a hierarchical structure	515	(2)
Key Terms and Review	517	(1)
Further Reading	517	(1)
Questions	517	(1)
Exercises	518	(3)
Part IX: Economic Development and Economic Growth	521	(100)
Neoclassical Models of Economic Growth	523	(21)
Exogenous vs. Endogenous Growth	523	(3)
The Ramsey and AK Models	526	(7)
R&D-based Endogenous Growth Models	533	(11)
Key Terms and Review	539	(1)
Further Reading	540	(1)
Questions	540	(1)
Exercises	541	(3)
Economic Growth Generated by Endogenous Evolution in Division of Labor	544	(29)
Economies of Specialized Learning by Doing and Endogenous Evolution in Division of Labor	544	(3)
A New Classical Dynamic Model with Learning by Doing	547	(2)
Optimum Speed of Learning by Doing and Evolution of Endogenous Comparative Advantage	549	(11)
The function of contracts	549	(1)
An individual's dynamic decision problem	550	(1)
Dynamic equilibrium	551	(9)
Endogenous Evolution of the Extent of the Market, Trade Dependence, Endogenous Comparative Advantages, and Economic Structure	560	(3)
Empirical Evidence and Rethinking Development Economics and Endogenous Growth Theory	563	(10)
Appendix 22.1: The Relationship between the Control Theory and Calculus of Variations	568	(1)
Key Terms and Review	569	(1)
Further Reading	570	(1)
Questions	570	(1)
Exercises	571	(2)
Concurrent Endogenous Evolution in Division of Labor, in the Number of Goods, and in the Institution of the Firm	573	(22)
How Can We Simultaneously Endogenize Evolution in Division of Labor and in the Number of Producer Goods?	573	(2)
A Dynamic Equilibrium Model with Learning by Doing and an Endogenous Number of Producer Goods	575	(1)
Dynamic Equilibrium Level of Specialization and Input Variety	576	(7)
Concurrent Evolution of Specialization, Variety of Producer Goods, and the Institution of the Firm	583	(12)
Appendix 23.1: Proof of Lemma 23.1	587	(1)
Appendix 23.2: Proof of Proposition 23.1	588	(2)
Appendix 23.3: Proof of Proposition 23.2	590	(1)
Key Terms and Review	591	(1)
Further Reading	592	(1)
Questions	592	(1)
Exercises	593	(2)
Experiments with Structures of Division of Labor and Evolution in Organization Information Acquired by Society	595	(26)
How Does Organization Knowledge Acquired by Society Determine Economic Development?	595	(5)
A Static Model with an Endogenous Length of Roundabout Production Chain and an Endogenous Division of Labor	600	(2)
Interactions between Dynamic Decisions and Evolution in Organization Information	602	(4)
Walrasian Sequential Equilibrium and Concurrent Evolution in Organization Information and Division of Labor	606	(15)
Key Terms and Review	616	(1)
Further Reading	617	(1)
Questions	617	(2)
Exercises	619	(2)
Part X: Macroeconomic Phenomena and the Endogenous Size of the Network of Division of Labor	621	(78)
Investment and Saving Theory	623	(26)
Neoclassical Investment and Saving Theory	623	(3)
Neoclassical Models of Self-saving and Interpersonal Loans	626	(5)
New Classical Theory of Investment and Savings	631	(6)
The model	631	(1)
Configuration sequences and structure sequences	632	(3)
Dynamic corner equilibria in 16 structure sequences	635	(2)
Investment, Capital, and Division of Labor in Roundabout Production	637	(12)
Dynamic general equilibrium	638	(4)
Nontopological properties of economic growth and sudden decline of interest rates	642	(2)
The endogenous decision horizon and the effect of liberalization reforms on opportunities for lucrative investment	644	(1)
Key Terms and Review	645	(1)
Further Reading	645	(1)
Questions	646	(1)
Exercises	647	(2)
Money and Division of Labor	649	(16)
Neoclassical vs. New Classical Theories of Money	649	(4)
A New Classical Model of an Endogenous Monetary Regime	653	(2)
Possible Structures and Monetary Regimes	655	(10)
Key Terms and Review	662	(1)
Further Reading	662	(1)
Questions	663	(1)
Exercises	663	(2)
New Classical Theory of Business Cycles and Unemployment	665	(34)
Rethinking Macroeconomics	665	(7)
Long-run Regular Efficient Business Cycles, Cyclical Unemployment, Long-run Economic Growth, and Division of Labor in Producing Durable Goods	672	(4)
A New Classical Dynamic Equilibrium Model of Business Cycles and Unemployment	676	(2)
Cyclical vs. Noncyclical Corner Equilibria	678	(8)
Regime specification, configurations, and market structures	678	(1)
The dynamic corner equilibrium in autarky	679	(2)
Market structure C	681	(2)
Market structure P	683	(2)
Welfare and policy implications of the model	685	(1)
General Price Level, Business Cycles, and Unemployment Rate	686	(3)
Emergence of Firms and Fiat Money from the Division of Labor	689	(10)
Key Terms and Review	691	(1)
Further Reading	692	(1)
Questions	692	(2)
Exercises	694	(5)
References	699	(25)
Index	724