Re: Markets and Diversity

[Michael Best <michaelbest@xxxxxxxxx>]

The issue of markets and diversity also evokes an old theme in the history
of economic thought that goes back at least to Adam Smith. The following
comments are not meant to detract from the themes about the effects of
corporate power on limiting product choice which are undoubtedly true (Fred
Hirsh?s The Social Limits to Growth developed some of these themes
as well). But there is related ?diversity and markets? theme that I, for
one, would not like to be ignored or left to the Chicago school?s interpretation.

This is not a comment on Rosen?s article, which I have not read, but on a divergence between the Marshallian and the Walrasian strands within the Chicago School that has broader implications. The Marshallian strand is more concerned with wealth creation than optimum allocation of resources and is firmly rooted in Smith. Wealth, for Smith, is created through a process of increasing specialization and division of labor. Specialization involves the decomposition of the commodity into an ever-greater number of constituent activities; each activity, in turn, is targeted for a refinement of skills and technique. Every increase in the extent of the market increases the number of activities that are subject to ?new improvements of art?. (?Art? is Smith?s term for technology).

Notice that the wealth creation (or economic development) reading of Smith offers a different (dynamic) adjustment process between supply and demand than the optimum allocation reading. An increase in demand, in Smith?s words:

?though in the beginning it may sometimes raise the price of goods, never fails to lower it in the long run. It encourages production, and thereby increases the competition of the producers, who, in order to undersell one another, have recourse to new divisions of labor and new improvements of art, which might never otherwise have been thought of.?

Note that the lower prices are a consequence of ?new improvements of art?. Thus technical change and increasing specialization are integral to the wealth creation process. The idea of increasing specialization and diversity of production activities is central to Marshall?s concept of the industrial district (and its internal and external dynamics) and to a concept of market in which competition is not simply about price but about product design (a central theme of Schumpeter).

Textbook economics, as we all know, abstracts from technical change and innovation as part of the market adjustment process. But any approaches to economic development that ignore the concept of diversity in the sense of increasing specialization within the production system will obscure the dynamics of technological change as a key feature in the wealth creation process. These dynamics were central to Marx?s interpretation of capitalism as historically progressive. In contrast, the Marshallian strand within the Chicago School has not developed the wealth creation reading of Smith because it is inconsistent with the policy prescriptions of ?free market perspective?.
 
 

Michael Perelman wrote:

In his presidential address to the American Economic Association,
Sherwin Rosen claimed that one of the benefits of the market is
its ability to provide diversity.  Yet in a number of areas,
diversity is shrinking.  Publishers resist printing books that
cannot sell at Barnes & Noble.  Radio stations are becoming less
diverse -- unless you include Web broadcasting.  Cable does allow
for more diversity in some respects, but not insofar as politics
is concerned.  Broadcasting Chomsky for three minutes on CNN was
a big deal.

--

Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 530-898-5321
E-Mail michael@xxxxxxxxxxxxxxxxx