Economics in Micro and Macro Consistency: Challenging Old Biases with New Insights

By Shengzhi Wang

This is a book that is destined to be controversial and will be a book that stands up to criticism. The ideas of economics discussed in this book are almost completely different from what one usually sees in economics, with different starting points, different perspectives, different depths, and different co

• Language: English
• Publisher: Asian Culture Press
• Release date: Mar 9, 2022
• ISBN: 9781957144177

Shengzhi Wang

作者是北京邮电大学退休教师，退休前担任该校电商研究中心副主任，其间十多年主要从事通信行业的经管研究和咨询。曾经的数十个咨询对象包括，中国三大电信运营商的总部及其省、市公司，跨国公司中的华为、朗讯、微软，咨询机构中的德国电信咨询、野村综研、中国工程院，政府部门中的工信部、国资委、北京经信委等。曾对电信运营商重组、3G与4G牌照发放等电信行业当时的顶级事务，为国家相关部委提供决策咨询，并荣获采纳，且成效卓著。作者做过农活、维修、组装、制造、工程、研发、教学、培训、领导、管理、营销、咨询等多种工作。他在几十年的各类经历中，持续认真总结思考社会、市场与学术上的各类现象、经验及其背后的深层原因。The author is now retired from the Beijing University of Posts and Telecommunications (BUPT). Before retiring, he served as the deputy director of the e-commerce research center at BUPT, during which, for more than ten years, he mainly engaged in economic management research and consulting for the telecom industry. Dozens of consulting clients include the headquarters of China's three major telecom operators and their provincial and municipal companies, Microsoft, Huawei, and Lucent among multinational corporations, Deutsche Telekom Consulting, Nomura Research Institute, Chinese Academy of Engineering among the consulting organizations, and the Ministry of Industry and Information Technology, the State-owned Assets Supervision and Administration Commission, Beijing Economic and Information Commission among the government departments, etc. He provided decision-making consultations for relevant national ministries and commissions on top-level affairs in the telecom industry then, such as telecom operator reorganization, and 3G and 4G license issuance, which were adopted with remarkable results.The author has done various jobs in farming, maintenance, assembly, manufacturing, engineering, research, development, teaching, training, leadership, management, marketing, and consulting. In his decades of various experiences, he has continued to conscientiously summarize and think about various social, market, and academic phenomena, experiences, and the deep reasons behind them.

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Economics in

Micro and Macro Consistency

— Challenging Old Biases with New Insights

Shengzhi Wang

Copyright © 2022 Shengzhi Wang

All right reserved. No part of this publication may be reproduced distributed, or transmitted in any form or by means, including photocopying, recording, or other electronic or mechanical methods, without the prior written permission of the publisher, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, write to the author, addressed Attention: Permissions Coordinator at [e-mail]

ISBN: 978-1-957144-17-7

First digital online edition March 2022

Published in the United States of America

Edited by Shengzhi Wang

Cover design by Shengzhi Wang

Asian Culture Press

444 Alaska Avenue,

Suite #AZF046,

Torrance, CA 90503

United States

I would like to dedicate this book to those who are willing to understand the market issues clearly or think deeply about the economic theory. I hope that this book can bring some inspirations to the readers. The market economy is a naturally evolving social phenomenon, involving many factors, which are invisible, unpredictable, and difficult to grasp. The study of economics requires a rigorous and thorough understanding of the economy as a whole, not just memorizing a few terms. From the time of Adam Smith until today, there have been numerous people from all over the world who have devoted themselves to the study of economics, but they have not been able to touch the essence of the economy, mainly because there have been fundamental errors in economics.

This is a book that is destined to be controversial and will be a book that stands up to criticism. The ideas of economics discussed in this book are almost completely different from what one usually sees in economics, with different starting points, different perspectives, different depths, and different conclusions. Yet the ideas here, after being discussed with such depth and clarity, are so obvious that one can hardly doubt their validity.

In this book, many new concepts have been introduced, and the book presents the following concepts:

(1) The quantity supplied of goods depends on its profits and is not a function of its prices. On the contrary,price is a function of quantity supplied, with the price rising as the quantity supplieddecreases and falling as the quantity supplied increases. This also explains the phenomenon of price counter cyclicality in the real economy, which turns out to be Marshall’s reversal of the independent and dependent variables.

(2) The unmet need for commodities usually exists only among the larger, poorer classes, so the quantity demanded for commodities in the market depends on prices. The market for goods expands immediately after the reduction in price, leading to a diminishing rate of profit, investment and new employment. This also corrects Keynes’ major misunderstanding of the cause of diminishing marginal efficiency of capital.

(3) The flow of money to the rich prevented the spread of the commoditymarket to the poor, thus leading to the recession and depression. This new theory of volatility, which perfectly explains the nature of economic crisis, for the first time, brings out the inequality between rich and poor as an obstacle to economic development, not only as a socio-political problem, and breaks the implicit premise on which Say’s law is based.

(4) The monetary savings of a society represents the inventory of enterprises in the society, and when they cannot be turned into investment or consumption, the inventory represented by the savings becomes a surplus backlog, which reveals the serious error of Hicks in the IS-LM model that makes S=I.

(5) Skilled labor hardly increases, commodity prices hardly rise, wages cannot easily fall, and investment cannot easily stop. These sticky variables cannot easily change and are the stability factors that determine economic changes. Previously, similar explanations of the New Keynesian School were inadequate, and there was no solid support base.

(6) The fundamental element that determines economic development is the quality of all workers in a society. Low quality limits the improvement of economic efficiency in every part of society, and the improvement of these qualities involves the transformation of many concepts. The transformation needs to be driven by role models. However, economics has never considered the most important factor of development.

(7) The international monetary system is still lacking a stability anchor. If the world adopts the international monetary price measure (IMPM) proposed in this book, a unit of measurement U can ensure the stability of the international foreign exchange market, but also to make up for the deficiencies of Bancor Keynes suggested back then.

(8) The international trade theory ignores the fact that exports must be a matter of profit for that party and imports must be a matter of profit for the other party. This neglect by Ricardo has led to economists not being able to understand foreign trade correctly in a comprehensive manner so far.

(9) Financial derivatives have no need to over-innovate at all, and the primary and secondary markets of securities have completed the entire mission of the financial industry.

(10) While the market brings great benefits to people, there are also inherent fatal flaws, and as the economy develops, these flaws are emerging. Their negative effects will become more and more significant.

In contrast, there is a hidden difficulty in the development of economics. The natural development of the market economy is a process of continuous superposition, a long course of development. Each generation can only see the continuous superposition of certain stages of change. People in the early years had a comprehensive view, but the market at that time was not complex enough. People in the later years saw the complexity, but there was no longer a way to restart. Today’s economy is already very complicated, and only by returning to the basics, avoiding abstraction without factual basis, grasping the contradictions and their main aspects, and having a clear hierarchical pattern, one can recognize the essence of the economy. The correct understanding of the economy depends on the degree of perspective, understanding and grasping of economic phenomena such as markets, transactions, prices, labor, distribution, commodities, money, consumption, savings and investment. Never before has economics seen markets with such clarity as it does now.

Several articles reflecting the main ideas of this book have been published in major leading Chinese economic journals.

Preface

A man has to solve many problems to live in the world, and in order to solve these, many disciplines of science have been developed, including astronomy, geography, mathematics, chemistry, science, engineering, agriculture, medicine, biology, psychology, history, military, economics, management, politics, law, society, literature, aesthetics, philosophy, and so on. In the economics, people need to solve the problems of production, exchanges, distribution, consumption and saving of various enterprises, individuals, governments, armies, groups, schools, hospitals and other aspects of society, and to solve the basic problems of survival such as food, clothing, housing and transportation in the daily life of human society.

Economic development is related to the survival and livelihood of people in a country or region. Survival is undoubtedly the primary concern of any country, region, society, family or individual. The mission of economics is to discover the laws of production, exchange, distribution, consumption and savings in society, and to solve economic problems in the market, at work and in life.

Economics should be able to explain and solve, in any region of the world, at any time, in any situation, all the problems that arise in the process of economic development. However, today’s experience shows that after centuries of development, economics seems to be getting farther and farther away from this goal.

There is no shortage of economics scholars and masters in the world. Whenever an economic difficulty is encountered, scholars give various explanations from their own angles, contradicting each other and attacking each other, making the already chaotic economy even more chaotic. When Queen Elizabeth II visited the London School of Economics in November 2008, shortly after the outbreak of the world financial crisis, she questioned why no one had seen the financial crisis coming. It was a brilliant question to ask. We have raised many generals and lost the war without figuring out by whom we were defeated.

The market is a set of social exchange mechanisms established spontaneously and gradually evolved over thousands of years. The market has no holistic goal, nor does it know what the result is. Through visible, and invisible, forces, the market brings economic progress to the whole society while each person struggles for oneself. In the market, buyers and sellers voluntarily reach a deal that satisfies the requirements of both parties, and as a result, it drives a large-scale development of specialized divisions of labor and a significant increase in production efficiency. Therefore, the market is said to be efficient. Economics is the study of the laws of a market economy. Economics should be clear about what the driving force of economic operation is, what the process of economic operation is, what the problem of economic operation is, and what the law of economic operation is.

There are various definitions of economics, but it is generally agreed that economics is a modern and independent discipline that studies how a society uses scarce resources to produce valuable goods and services, as well as to distribute them among people. This is a highly abstract definition that covers a very wide range of topics. However, economics so far has highlighted the efficient allocation of scarce resources but has paid insufficient attention to distribution. Yet, it is precisely the distribution that has become an increasingly important constraint in economic development.

Economic and social developments have always been integrated and inseparable from each other. Today’s economics almost completely ignores the state of society and analyzes only the economic phenomenon alone. This separates the relationship between economy and society and is detached from the objective reality. The essence of economic development itself is the development of people’s thinking and understanding, that is, the development of society. This detachment of economics is one of the most important reasons why it cannot explain the current state of the economy. Economics is the way it is because the study of it is seriously driven and limited by the interests of some social classes.

In recent decades, economics has been incorporated into the category of science. As a result of the scientificization of economics, the scientists who study it have been artificially divided into different sub-disciplines. As a result, economics has been turned into a number of sub-disciplines, which are in a state of discrete rejection of each other, and it is not surprising that we only see the parts but not the whole picture.

Economic phenomena were originally the result of the interaction of various factors under many complex conditions. But today’s economics has been artificially divided into many fragmented fields. Each school of thought only emphasizes its own part of the theory to explain economic phenomena. Rarely can anyone consider the economic problems in a comprehensive manner. Today, economics is divided into macroeconomics, microeconomics, international economics, institutional economics, financial economics, econometrics, mathematical economics, game theory, and so on. Macroeconomics is divided into the new Keynesian school, the supply school, the monetary school, the growth school, the employment school, the welfare school, and so on, and the finer the division is, the more it varies.

There is a Chinese parable called The Blind Men Touching the Elephant, which tells about several blind men touching the elephant together. The blind man who touched the elephant’s tusk said the elephant was like a radish. The blind man who touched the elephant’s ear said the elephant was like a dustpan. The blind man who touched the elephant’s head said the elephant was like a stone. The blind man who touched the elephant’s trunk said the elephant was like a pestle and mortar. The blind man who touched the elephant’s foot said the elephant was like a pounding mortar. The blind man who touched the elephant’s back said the elephant was like a seat cushion. The blind man who touched the elephant’s stomach said the elephant was like a clay pot. The blind man who touched the elephant’s tail said that the elephant was like a rope. Nowadays, there are many schools of thought in economics, and those who cannot grasp economic problems as a whole are like those blind men feeling an elephant, who know only some economic concepts. Even if this understanding is very profound, they cannot make a complete judgment on the whole picture.

For example, when a person gets sick, the symptoms are not always due to the same cause. Just like a cough, some patients have it because of a bacterial infection and some have it because of a viral infection. The same tummy ache can be caused by a variety of reasons; overeating, food poisoning, appendicitis, or heart disease. Different drugs are used for different diseases.

The economic problem is a global crisis. The same phenomenon is likely to be due to different reasons that cannot be generalized. There is a need for specific analysis of particular questions. For example, price increase can be caused by excessive currency issuance, exhaustion of raw materials, reduced production caused by natural disasters, foreign currency appreciation, the increase in the price of international commodities, or hoarding, and some price increases can be caused by a combination of reasons.

For a system as holistic as the economy, relying too much on a partial science is a very dangerous thing. Some seemingly scientific local theories actually have no basis in the whole picture, and the more scientific such theories are, the further they stray from the facts. A famous American super hedge fund, Long Term Capital Management (LTCM), established in 1994, under the guidance of two Nobel Prize winning economists, guided by famous mathematicians to build the most complex mathematical model of risk hedging in the world at that time, using the world’s most advanced computer and network facilities for scientific manipulation of financial transactions in the capital markets. When they were hit by the Russian financial crisis in 1998, they lost everything and came close to dragging down the entire financial system.

A large number of financial derivatives have been the products of technological innovation in the financial industry in recent years. The subprime mortgages in the United States, which led to the global financial crisis in 2008, should be attributed to the financial derivatives developed on the basis of scientific research. Today’s globalized markets operate on a global scale, with all regions, all industries, and all kinds of people involved. For economic research, local science is only meaningful if the overall premise is correct.

Economics reflects the laws of the market economy, which has become more and more complex over the last few hundred years, with many factors superimposed on each other, making it difficult for people to understand clearly. The market gradually developed from simple to complex. It is the superposition of many stages and contents of development, which requires a hierarchy to observe the operation of the complex market, in order to have a thorough look at what is going on.

From its earliest days, economics has been looking at the market as a whole. From Adam Smith, Say to Walras, they all looked at the market as a whole, and they profoundly revealed the laws of the market at its lowest level. Yet it is also because they looked at the complexity of the market as a whole, and because in those early days it could only be that the degree of abstraction was too high, too neglected, and too distant from the facts. Because of that, their theory for the actual economic operation also naturally does not have strong practical guidance significance.

Most modern economists only focus on money, interest rates, employment, forecasts, technology and other individual economic factors. These single factors are not sufficient to reflect overall economic operation. Some of them focus on demand, some on supply, some exaggerate the role of market prices, which ultimately do not reflect the whole picture of the market economy. A more serious issue is that the vast majority of modern economists who study economic theory are university professors. With almost all of them coming from the path of doctoral training from college to college, they basically have no way to understand small and large enterprises, business owners, sales department, supply department, production department and human resources department of businesses. Nor even a way to understand workers and consumers, which has resulted in the economists’ ignorance of the foundations of economic reality.

Chinese economists are now busy writing Chinese economics. But what is currently called Chinese economics is essentially using flawed Western economics to explain the economic phenomena that have occurred in China, rather than using the economics that arose in China to explain the market economy around the world.

Contents

Introduction    10

CHAPTER 1The Pros and Cons of the Market    14

1.1 The Great Benefits that Market and Technology Have Brought to Mankind    14

1.2 Defects of the Market    18

1.3 The Relationship between the Market and the Government    36

CHAPTER 2The NaturalDevelopment of the Economy    42

2.1 The Operation of the Market    42

2.2 The Evolution of Money    45

CHAPTER 3A Different Perspective of the Economy    54

3.1 The Problem of Allocation is Important in Economics    54

3.2 The Difference Between Consumption and Savings    58

3.3 Stickiness in the Market Economy    63

3.4 Supply, Demand and Price    67

3.5 The Process of the Market Diffusion of Goods    72

3.6 The Other Invisible Hand    76

3.7 The Mixed Effect of Market Diffusion and the Concentration of Money    78

3.8 The Life Cycle of a Product    85

3.9 The Mutual Rising Economic Development and People’s Ideology    88

3.10 International Monetary System    90

CHAPTER 4The Economy- Explained with Economics    100

4.1 Shortcomings of Foreign Trade Theory    103

4.2 Marshall’s Theory of Supply and Demand    106

4.3 The Shortcomings of Keynesian Theory    112

4.4 Schumpeter’s Business Cycle    122

4.5 The Monetary School and Currency Flow    127

4.6 Theory of Rational Expectations    131

4.7 Problems of the Supply School    132

CHAPTER 5Reconceptualizing Economic Development    139

5.1 Two Famous International Consensuses    139

5.2 Foreign Trade, Domestic Trade and Economic Development    141

5.3 What Are China’s Advantages    145

5.4 Small Steps and Fast Alternate Development    150

5.5 Exploration of the Process of Development    160

5.6 Improvement of National Competitiveness    167

5.7 Scientific Development    179

5.8 How China Develops Scientifically    183

5.9 Limitations of Economic Development    192

CHAPTER 6Epilogue    202

Introduction

The market is a naturally occurring trading mechanism that has been in place since ancient times. First with the barter system, later with the production of goods specifically for sale, then with labor transactions, then the emergence of precious metal currencies, then paper money and, lastly, specialized financial transactions. It can be argued that the present market was formed by the gradual superposition of stages in history. The market is now very complex, and the complexity of the market makes it impossible for people to see the pulse of it so far. When looking at the economy in today’s time, it is possible to gradually sort the ins and outs of the market only if one can grasp the most important contradictions that play a dominant role in it, as well as the main aspects of the contradictions.

The market consists of buyers and sellers, and is a cycle of supply, demand and price. If we consider all middle parts of the production chain as a whole, the seller of the commodity market can be simply regarded as all enterprises, and the buyer as all consumers (regardless of bosses and hired workers). The seller of the labor market can be simply regarded as all consumers and the buyer as all enterprises. Any firm has to buy the means of production (labor of upstream firms) and labor, process them, and then sell the product. Any consumer has to provide labor, earn back wages, spend money on purchasing, and form labor power again after consumption.

In any enclosed society, when the market operates, it needs to have an amount of money equal to the total price of all goods to assist in completing transactions. At the beginning of each stage of production, firms borrow enough money from the bank to buy the means of production and labor, then sell the goods, recover the money, and return it to the bank. If the bank has no interest, all firms have no profit, and all consumers have no surplus money. At the end of a cycle, the firm will be able to return all the money back to the bank. In such a cycle of production and consumption, money is only a marker that aids the cycle.

Each product of a firm must go through the entire system from purchase and processing to sale and consumption for the value it possesses to be realized. Before all the money left over from consumption is spent, there is still a stock of goods that have not yet been sold and consumed in storage. These goods have only completed the first half of the purchase and processing; the second half of the sale and consumption has not yet been completed. These stocks have become the surplus goods of society that have not been cleared. The value of these surplus goods has not been realized.

If everyone involved in the production of goods has the same needs, provides an equal amount of labor, and receives the same reward for his labor (money), then everyone can buy, in the market, the same amount of goods needed for living and receive the same degree of satisfaction.

If all goods and labor have a fair price, with no profit for the enterprise, neither for the owner nor the hired workers, the money earned by all consumers in the enterprise will be exactly equal to the total price of goods. In this way everyone who has worked to provide goods for the market can buy back goods that are equal in value to the labor they have paid. This is Say’s ideal state.

In the real market, prices are determined by the relationship between supply and demand, where value comes from shortage. Prices fall when supply exceeds demand while prices rise when demand exceeds supply. The buyer wants the price to be as low as possible, and the seller wants the price to be as high as possible. In order to reach a deal, buyers and sellers must negotiate with each other, and the transaction price is limited by the affordability of both sides.

With market economy, the rise and fall of the price of goods is an event that can be decided by individual owners. However, the increase and decrease of market supply is not an event that can be decided by a single owner, but the aggregate result of societal forces and the behavior of peers.

In the commodities market, the rise or fall of the prices is decided by the seller. The buyer only has the right to vote on the price. In the market, the seller must fully respect the buyer’s right to vote when making price decisions. If the price is set high, there will be fewer buyers. In the labor market, the rise or fall of labor wages is decided by the buyer, and the seller has only the right to vote on the price.However, the buyer must respect fully the seller’s right to vote when making wage decisions, because it is difficult to find qualified employees with low wages.

Hence, in the real market, the question arises as to whether various kinds of labor and goods can really receive the prices they deserve. If certain kinds of labor or goods are relatively scarce in the market, they will receive relatively high prices. Meanwhile, high pricing in certain goods is accompanied by low pricing in other goods. Other kinds of labor or goods that are not relatively scarce will only receive relatively low prices.

There are differences in the types of labor, from manual to mental, from simple to complex. The labor capacity required for each type, and the preparation required to obtain these capacities, are very different, so the scarcity status and the price (wage) level of each type of labor are naturally very different.

In reality, the differences in human needs are not as great as compared to the differences in the types of labor, and are relatively consistent. However, market demand is a combination of living needs and purchasing power. Whether living needs can be transformed into market demand or not turns into the question of whether working income can provide sufficient purchasing power or not. At this point, there is a great difference between the rich and the poor in the market demand as reflected by various groups of people in society.

In the real market, not only can labor gain income, but also through reinvestment of the money held in one’s hands or deposited in the bank, which can also gain profit or interest. That then makes the rich people even richer. The rich have more and more money, and in a certain structure of the social commodity system, their living needs have been met early on. So there is no need to increase them at all. Plus they are few in number, so the market demand of the rich is soon saturated. The rich have more and more money in their hands, and there is no other place available but to invest it themselves or through financial institutions.

It is well known that innovation and investment are the most important sources of wealth creation, and that no innovation is possible without investment. Among the factors that create new wealth today, the role played by investment in existing wealth is still the greatest. Investment is determined by investors, then the interests of investors must be a key factor in determining economic development, that is, there will be no investment without the interests of investors or interest expectations.

Although investment failure is a common phenomenon, the rise of the global economy and the growth of wealth in any case show that successful investment is the mainstream of economic development. Successful investments make the rich even richer. The invisible hand hidden in the market is what makes money flow to the rich, making the richer people richer and the poorer people poorer.

It is well known that innovation and investment are the most important wealth creators, and that no innovation is possible without investment. Among the factors that create new wealth today, the role played by investment of existing wealth is still the greatest. Investment is determined by investors. Thus the interests of investors must be a key factor in determining economic development, that is, there will be no investment without the interests of investors.

Although investment failure is a common phenomenon, the rise of the global economy and the growth of wealth show that successful investment is the mainstream of economic development. Successful investments make the rich even richer. The invisible hand hidden in the market is what makes money flow to the rich, making the rich people richer and the poor people poorer.

In normal circumstances, theoretically, the money in the hands of consumers in society (including those in banks) represents the inventory of the enterprise. Whether through consumption or investment (self or financial investment), only when all the money in people’s hands is spent, can all the business inventory of goods be cleared; otherwise, the enterprise’s commodities can only become a backlog of surplus. Under the premise of increasing savings, the production and consumption of society can only be carried out smoothly in the continuous growth of investment, which is bound to appear as a backlog of surplus goods when investment stops growing.

It is reasonable to say that the more investment in society, the stronger the productivity, the more goods produced, the standard of living of the whole society will rise. However, as money flows to the rich, limiting the purchasing power of the poor, it is difficult to turn the needs of the poor into market demand, which also limits the market expansion of goods.

With the increase of investment in society, the supply of goods is increasing. Thus, in order to increase the sales of goods, the market must be expanded for the larger population and relatively poor people. The market can only be expanded by selling goods at lower prices. Prices have fallen to a certain extent. Corporate profits are all gone. Even the flow of capital has become negative. At this time social investment must have stopped. However, the wealth of the rich may continue to grow at this time. Even if their wealth has stopped growing, they already have savings in the part not invested. Theinventoryrepresented by the savings has all turned into a backlog of surplus for the businesses. Thus, the social economy is now heading toward recession and even depression.

CHAPTER 1The Pros and Cons of the Market

In the world, almost everything has its merits and demerits. Only the scale of the merits and demerits are different. There are things that have more pros than cons, and there are things that have more cons than pros. There are things that have more pros than cons at this stage but have more cons than pros at the next stage. The market is the same. It is just a kind of exchange system naturally formed by human society. Because the existence of market exchange can promote the specialization of labor in production and significantly improve production efficiency. This, in turn, can deepen the specialization of labor, and the market further develops. Such a circle promotes the rapid development of the economy. The development of the market has brought unprecedented benefits to mankind, which is an objective fact. However, the market is not like what some people think, that there are only advantages. The market also has disadvantages, and later the disadvantages become more obvious.

1.1 The Great Benefits that Market and Technology Have Brought to Mankind

In the two hundred years since the mid-eighteenth-century Industrial Revolution in England, the world economy has undergone radical changes. It revolutionized the agricultural and pastoralist mode of production that lasted for thousands of years and dramatically improved people’s way life. The global wealth created by mankind in the last two hundred years is far greater than the sum of thousands of years before, thanks to the unprecedented increase of human productivity in recent times. The fact that human productivity has increased so much in these two hundred years stems from two things: a high degree of market-led occupational division of labor, and advances in science and technology. Both of these have contributed to the tremendous increase in productivity.

The development of market exchange and the division of labor in industrialized mass production are complementary, mutually dependent, and mutually reinforcing. Without the existence of the market, there would be no specialized division of labor. Without specialized division of labor, there is no need or way to produce a highly developed market. It is the highly efficient market system that ensures the high degree of specialization of social division of labor.

Adam Smith (1723 - 1790), in his book The Wealth of Nations published in 1776, describes a very primitive needle-making enterprise in the beginning. After dividing the entire work of needle making into 18 processes using some simple machinery, the efficiency of needle making increased by more than 4,800 times. If all industries had the same increase in efficiency, if one man could support two men including himself, this would mean that after a simple division of labor, each man could support at least 9600 men. What a huge efficiency gain!

Due to the specialized division of labor each person simply repeats a single operation. The increases in speed and quality brought by simplicity and proficiency enables labor