Pure and Basic Theory

- What is inframarginal Economics?

Representative Books:

1. Adam Smith (1776), An Inquiry Into The Nature And Causes Of The Wealth Of Nations.
2. Xiaokai Yang & Yew-Kwang Ng, Specialization and Economic Organization: An New Classical Microeconomic Framework, 1993, North Holland.
3. Xiaokai Yang, Economics: New Classical Versus Neoclassical Frameworks, 2001, Blackwell Publishers.
   
   

1. Xiaokai Yang & Siang Ng, Specialization and Division of Labor: A Survey. (Pure Theory)
2. Guang-Zhen Sun, Xiaokai Yang & Shuntian Yao, Toward a Theory of Impersonal Networking Decisions and Endogenous Structure of the Division of Labor. (Pure Theory)
3. Lin Zhou, Guang-Zhen Sun & Xiaokai Yang, General Equilibria in Large Economies with Transaction Costs and Endogenous Specialization. (Pure Theory)
4. Xiaokai Yang & Shuntian Yao, Walrasian Sequential Equilibrium, Bounded Rationality, and Social Experiments. (Pure Theory, bounded rationality, entrepreneurial discovery)
5. Yew-Kwang Ng & Xiaokai Yang, Specialization, Information, and Growth: A Sequential Equilibrium Analysis.
6. Wen, Mei, "The Dichotomy between Production and Consumption Decesions and Economic Efficiency''
7. Dimitrios Diamantaras & Robert P. Gilles, "On the Microeconomics of Specialization".
8. Shuntian Yao, "Walrasian Equilibrium Computation, Network Formation, and the Wen Theorem".
9. Wen, M. (1998), "An Analytical Framework of Consumer-Producers, Economies of Specialisation and Transaction Costs," in K. Arrow, Y-K. Ng, X. Yang eds. Increasing Returns and Economic Analysis, London, Macmillan.
10. Sun, Guangzhen, Yang, Xiaokai, and Zhou, Lin (1998), "General Equilibria in Large Economies with Endogenous Structure of Division of Labor," Working Paper, Department of Economics, Monash University.
11. Sun, G., Yang, X, and Yao, S. (1999), "Theoretical Foundation of Economic Development Based on Networking Decisions in the Competitive Market", Harvard Center for International Development Working Paper No. 17
12. Sun, Guangzhen (1999), Increasing Returns, Roundabout Production and Urbanization: A General Equilibrium Analysis of the Division of Labor. Ph.D. Dissertation, Department of Economics, Monash University.
13. Li, C. and Sun, G. (1998), "A Note on the Measurement of the Extent of Division of Labor for Simple Production Economies." Discussion Paper, Department of Economics, Monash University.
    
    

Theoretical Foundation of the Literature

Three papers (Sun, Yang, and Zhou, 1998, Sun, Yang, and Yao, 1999, and Sun, 1999) have established the existence theorems, the first welfare theorem, and core and equilibrium equivalent theorem for a general class of general equilibrium models with impersonal networking decisions and endogenous structure of division of labor. The papers use weighted digraphs to describe network of division of labor and resource allocation. They show that the general increasing returns are network effects of division of labor, which may exist in the absence of economies of scale of a firm. The network effects are caused by impersonal networking decisions which are compatible with the competitive market. The most important function of the market is to coordinate individuals' impersonal networking decisions and to utilize network effects of division of labor. The papers use Hildenbrand's (1974) approach to large economies with local increasing returns to synthesize the Arrow-Debreu model of resource allocation, which focuses on interactions between prices and quantities of goods, and recent literature of strategic networking decision (Katz and Shapiro, 1986, Jackson and Wolinsky, 1996, and Duttan and Mutuswami, 1997) which focuses on networking decisions and ignores interactions between quantities, prices and networking decisions.

These papers have explored general equilibrium mechanisms that simultaneously determine interdependent quantities (non-topological properties of organisms), prices, and topological properties (such as the degrees of connectedness, market integration, and asymmetry between the core and periphery) of organisms. It is shown that when individuals are capable of conducting inframarginal analysis, the equilibrium pattern of division of labor in the market place is Pareto optimal even if there are network effects of division of labor, local increasing returns in production, and transaction costs. The results have established the proposition that the price system can carry not only all information about non-topological properties (quantities consumed and produced or resource allocation) of economic organisms, but also all information about topological properties of economic organisms. The papers have satisfactorily addressed criticisms by referees in early 1990s that network effects of division of labor and increasing returns are not compatible with competitive market. Such criticisms were main hurdles for the literature to take-off. They are completely silenced by the major pure theory research in the end of the 1990's.

Sun, Yang, and Yao (1999) is the first paper to establish the existence theorem and the first welfare theorem for a general class of general equilibrium models with endogenous structure of division of labor and ex ante identical consumer-producers. Sun, Yang, and Zhou (1998) have established the first existence theorem and the first and second welfare theorems for a general class of models with ex ante different consumer-producers. This paper allows constant returns as well as increasing returns and has used the measurement theory, while Sun, Yang, and Yao's existence theorem does not need measurement theory to prove. But in the models of these two papers there is no producer good. Sun (1999) has established the first existence theorem for a class of general models with ex ante different consumer-producers, and consumer and producer goods. He is working on the existence theorem for a class of models allowing trade in labor and institution of the firm.

Yang and Yao (2001) have developed the concept of Walrasian sequential equilibrium to formalize the notions of fundamental social and endogenous uncertainties, bounded rationality, and entrepreneurial discovery. It predicts that social sequential experiments with efficient as well as inefficient network patterns of division of labor can gradually acquire organization information for society as a whole. The experiment process is decentralized and based on individuals' bounded rationality. In this process, each individual never knows others' characteristics, although all players collectively learn abstract organization information carried by price signals gradually. This paper proves an existence theorem of equilibrium for a general class of well-closed Walrasian sequential equilibrium models and avoids the recursive paradox in the presence of individual bounded rationality. This basic theoretical research shows that information asymmetry in a Walrasian sequential equilibrium model can be much more than in any game models with incomplete information. As Aumann (1997, p. 8) points out, the game models with incomplete information and information asymmetry involve super rationality rather than bounded rationality. Yang and Yao (2001) provide a new approach to studying individuals' bounded rationality which may generate socially rational outcomes.

Another important theorem that is essential for managing applied theories in this literature is the Wen theorem (Wen, 1998) which claims that each consumer-producer never sells and buys the same goods, never produces and buys the same goods, and sells at most one good. Without this theorem, the number of possible corner solutions and the number of market structures which are combinations of corner solutions are too great to be manageable. The Wen theorem significantly reduces the number of corner solutions that constitute the set of candidates for the optimum decision. However, the Wen theorem may not hold if linear production functions with fixed learning costs are allowed. Recently, the Wen theorem is extended to the general Wen theorem (Yao, forthcoming, see also Yang, 2001, chapter 13) by Yao which claims that although selling more than two goods is possible, the optimum decision can be achieved by selling at most one good.

Li and Sun (1998) have proved several theorems on measurement of level of division of labor and economies of division of labor. They have shown that level of division of labor can be defined by spectrum of a labor allocation matrix of each and every individuals in society. Economies of division of labor need many variables to be well defined. Hence, economies of division of labor cannot be defined by economies of scale of a single firm.

Yao is working on an existence theorem for a general class of dynamic general equilibrium models with endogenous network pattern of division of labor, developed by Yang and Borland (1991), Wen (1997), and Zhang (1997).

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