Neoclassical economics
The core of classical mainstream economics represented by William Petty and Adam Smith was about the development implications of division of labour. Although classical economists did not use the term of network effects, Smith did appreciate the nature of network effects of benefits of division of labour and specialization. He argued that the division of labour is limited by the extent of the market. In terms of modern economics, this Smith theorem implies that individuals’ decisions to choose their levels of specialization are determined by the benefits of division of labour, which are dependent on the number of participants in the network of division of labour (the extent of the market). Allyn Young (1928) spelt this out in the Young theorem that not only is the division of labour dependent upon the extent of the market, but the extent of the market is also dependent on the level of division of labour. This circular causation is a common feature of network effects, just like the circular causation that the use value of a telephone set is dependent on the number of telephone sets in use, and also the number of telephone sets in use is dependent on the use value of each telephone set.
But when Alfred Marshall formalized neoclassical economics within a mathematical framework at the end of the 19th century, he assumed the dichotomy between pure consumers’ decisions and firms’ decisions to avoid the inframarginal analysis of corner solutions. Within the neoclassical framework, each pure consumer buys all goods from the market and does not choose her level of self-sufficiency or its reciprocal: the level of specialization, which determines the size of her trade network. Hence, the focus of economics shifted from the inframarginal analysis of specialization and trade networking decisions to the marginal analysis of resource allocation for a given network size. By following this neoclassical framework, neoclassical development economics departs from the then mainstream classical economics. Hence, the inframarginal analysis of networking decisions lost the central position that it occupied in the classical mainstream economics.
From : Inframarginal Versus Marginal Analysis of Networking Decisions and e-Commerce
Yew-Kwang Ng
Uncategorized | admin | 
October 20, 2009 5:44 am
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