Emerging Classical Economics and Super-Marginal Analysis (Revised Edition)

Author: Yang Xiaokai
Publisher:
Publish Date: 2003-05-01
Features: Emerging Classical Economics can spread faster in China than in other places. This is partly because everyone knows that the gaps left by Marxist economics can be filled by neoclassical marginal analysis. Additionally, the founders of Emerging Classical Economics and Supremarginal Analysis are predominantly Chinese and Chinese descent, making it easier to spread in China. This book is a systematic introduction to Emerging Classical Economics and Supremarginal Analysis without mathematical calculations, using diagrams and intuitive descriptions. – Recommended by Beijing Youth Weekly
As mentioned in the previous chapter, "The Scientific Method of Economics," economic analysis must not only examine the self-interested decisions of individual decision-makers but also study the conflicts and interactions between the self-interested behaviors of numerous decision-makers. The outcome of these interactions is what economists refer to as equilibrium. Equilibrium refers to the result of self-interested behaviors interacting, where individuals are compelled to accept or no one is willing to unilaterally change it. Although it is often related to the equality of supply and demand, it is not limited to such cases. Equilibrium can also occur when supply and demand are unequal or when there is a shortage, as well as unemployment. Equilibrium is not necessarily static; Emerging Classical Economics includes many dynamic equilibrium models.
Supremarginal Analysis in Emerging Classical Economics compares the local maxima of corner solutions to derive the overall optimal solution. Therefore, Supremarginal Analysis includes both corner equilibrium and general equilibrium. The difference between the equilibrium concept of Emerging Classical Economics and that of Neoclassical Economics lies in the fact that each equilibrium in Emerging Classical Economics is based on a corner solution, and the general equilibrium is one of the many corner equilibria (or local equilibria). Each corner equilibrium solves the resource allocation problem given a certain level of division of labor, while the general equilibrium determines the level and structure of division of labor. Since the general equilibrium in Neoclassical Economics only addresses resource allocation and cannot endogenously determine the level of division of labor, each corner equilibrium in Emerging Classical Economics is equivalent to a general equilibrium in Neoclassical Economics. Thus, the general equilibrium analysis in Emerging Classical Economics has much higher explanatory power than the equilibrium in Neoclassical Economics.
Next, we will analyze the self-interested behavior in the market and its interactions and consequences. For this purpose, we need to first define the concept of organizational structure (or market structure). Organizational structure refers to the combination of corner solutions. The three decision-making models mentioned earlier can be combined to form two organizational structures: one of self-sufficiency and one of division of labor.
In the first self-sufficient organizational structure, there are no markets, no prices, and no interactions between people—everyone "picks up their own snow in front of their door and leaves others' frost on the roof." The second is an organizational structure with division of labor, consisting of many people who specialize in producing food and buying clothes, as well as those who specialize in producing clothes and buying food. In this organizational structure (market structure), there are two markets—one for trading food and another for trading clothes. Each organizational structure has a corner equilibrium, and each corner equilibrium represents a set of relative prices of tradable goods (if any) and the number of people choosing the relevant models. These relative prices and the number of people satisfy the following conditions: each person can freely choose their profession (freely choose among the models) to maximize utility. The free choice process of everyone ensures that the market demand for each tradable good equals the market supply, and the prices are determined by the free choice and the equality of supply and demand. For example, a person who produces food can freely switch to specializing in producing clothes if the price of clothes is very high. Therefore, the corner solution in a self-sufficient organizational structure represents the corner equilibrium of this structure, where the corner solution is the optimal compromise formed by each person based on the fluctuation of the utility of food and clothes. This equilibrium determines how much