On Prof. James Buchanan's Visit to Monash University

Globalization and Economic Analysis --
On Prof. James Buchanan's Visit to Monash University

Yew-Kwang Ng

Department of Economics, Monash University,
Victoria, Australia 3800.

Professor James Buchanan visited Monash University on 4 March 02 and presented a seminar on 'The implications of the new approach to economics for views on globalization'. By the new approach, Buchanan refers to the one emphasising generalized increasing returns from the economies of specialization made possible by the division of labour. Buchanan has repeatedly mentioned that the best analysis in this area has been done by Professor Xiaokai Yang. The definitive work in this Yang-Ng framework is Specialization and Economic Organization, North-Holland 1993. This new framework uses modern mathematical economics to analyse the classical problems of specialization and economic organization and the resulting implications for trade, growth, urbanization, industrialization, etc., using inframarginal analysis to supplement the traditional marginal analysis. Thus, the new framework has been called either new classical economics or inframarginal analysis. Both at the seminar and at the lunch attended by Professor Peter Darvall (Deputy VC) and Professor Gill Palmer (Dean), Buchanan said, "In my view, the best research in economics in the world is at your University, mainly by Yang." This is really a very unequivocal and high praise and confirmation of the new analysis by a Nobel laureate. Congratulations to Xiaokai!

The group in the Department of Economics who have contributed to inframarginal analysis pioneered by Yang includes Li Ke, Siang Ng, Yew-Kwang Ng, Heling Shi, Guangzhen Sun (soon to join the Department as a Logan fellow), Bob Rice, Christis Tombazos, Russel Smyth, Ian Wills, Dingsheng Zhang, Yongsheng Zhang. In addition, past PhD students from Monash University who have worked in the area includes Wenli Cheng, Monchi Lio, Mengzhun Liu, Jianguo Wang, Mei Wen, and Yimin Zhao. Current graduate students in the area include Chih-Ning Chu, Xiujiang Peng, George Rivers, Dexing Yang. There are also economists in other parts of the world working with the new framework.

A main point made by Buchanan at the seminar is this. According to the traditional Ricardian theory of comparative advantage, international trade and globalization may make some groups in some countries worse off, though the (monetary) losses are smaller than the gains of others. According to the analysis of Adam Smith and Xiaokai Yang, international trade and globalization allows division of labour and specialization to reach higher levels, making all people in all countries better off. If economists can emphasize this Smith-Yang analysis and explain to the public, the noise against globalization may become much smaller.

I said that the real world has both economies of specialization and exogenous comparative advantage. Thus, both types of analysis are important. However, traditional trade theory emphasises too much constant returns and ignores the economies of specialization. This bias should be corrected. As to which type of gain from trade is more important in the real world, this depends on the actual situation. Yang said, according to the Ricardian theory, trade should be mainly between the advanced countries and the developing countries as they have different factor endowments. However, actually international trade is mainly between the advanced countries themselves with similar technical and endowment conditions. This shows that the gain from specialization must be more important. Buchanan agreed. I think that this provides a prima facie case but further studies are needed as the amount of trade and the gain from trade need not have a constant proportion.

(I am indebted to Xiaokai for the following paragraph.) Yang mentioned recent research by Dr. Dingsheng Zhang, which introduces exogenous comparative advantage into the model with endogenous comparative advantage. Inframarginal analysis of this kind of models can predict dual economy and the coexistence of unilateral free trade policy in the developed countries and unilateral protection tariff in the less developed countries. He drew the distinction between network effects of division of labor and economies of scale and mentioned empirical work by Dr. Yongsheng Zhang which rejects scale effect predicted by the models based on global economies of scale. Buchanan replied that he does not like the notion of network effect. For a hierarchical network, like current American hierarchical airline hub system, the whole system breaks down if one hub breaks down. The market is not like that. In a market, when a link breaks down, many local reactions will fill the gap. Yang did not have time to respond to that comment. However, he may say the following. Network effect of division of labor differs from network externality. The most important function of the price system is to utilize network effects of division of labor. There are some basic theory papers on impersonal networking decision (Sun, Yang, and Zhou, and Sun, Yang, and Yao) to establish such claims. Buchanan's point relates to the trade-off between economies of division of labor and reliability of the network which can be raised by parallel connections (peer competition) and which will be reduced by series connections of very specialized professions in upstream and downstream sectors. Even if the trade-off is efficiently balanced, the expansion of the network of division of labor (or related globalization) will increase risk of coordination failure of the network of division of labor and aggregate productivity at the same time (Lio, 1998).

One important factor behind the movement against globalization is the possibility that international trade and movement of capital and skills may be detrimental to the unskilled workers in advanced countries. For example, the importation of labour-intensive products from China into the U.S. may lower the wages of unskilled workers in the U.S, From the point of view of the advanced countries, there may be some moral justification for the anti-globalization movement as unskilled workers have lower incomes. (However, it remains likely that it is more efficient to help low income groups through the general tax/transfer policy rather than through intervention on specific issues; see my paper in the American Economic Review, 1984.) Nevertheless, from a global perspective, globalization increases global equality as it increases the incomes of the unskilled labour in developing countries who have even lower incomes. Anti-globalization may have little moral grounds.

In response to concern with coordination problem of network of division of labor, Yang mentioned recent research by Yao on sequential equilibrium model which explores the function of the market in acquiring organization information via sequential social experiments with various patterns of division of labor when price signals and individuals' decisions in choosing their patterns of specialization are interdependent.

Part of the reason for Buchanan to visit Monash University is to discuss with us the arrangement for the Workshop on Increasing Returns and Inframarginal Economics to be held in Virginia over 2-9 June 02. Yang, Ng, Heling Shi, Guangzhen Sun and others will give lectures on the new framework to graduate students from selected U.S universities. Well-known economists in the U.S. will also be invited to be discussants. The Workshop is partly funded by the National Science Foundation of the U.S. The balance will be funded by Buchanan himself. This demonstrates the strong support of Buchanan to inframarginal economics pioneered by Yang.

Inframarginal Economics Society www.inframarginal.com