Macroeconomic Instability and Coordination

Macroeconomic Instability and Coordination

Selected Essays of Axel Leijonhufvud

Economists of the Twentieth Century series

Axel Leijonhufvud

Axel Leijonhufvud has made a unique contribution to the development of macroeconomic theory. This volume draws together his insightful essays dealing with the extremes of economic instability: great depressions, high inflation and the transition from socialism to a market economy. In several of the papers, Leijonhufvud brings a neo-institutionalist perspective to the problems of coordination in economic systems.

Chapter 14: Information costs and the division of labor

Axel Leijonhufvud

Subjects: economics and finance, history of economic thought


Economic development, as opposed to ‘mere’ economic growth, is a process of system evolution toward more and more complex patterns of coordinated activities. It entails, in Adam Smith’s language, ‘increasing division of labor’. What drives economic evolution in the direction of increasing division of labor are economies of scale. If we can sustain more complex forms of cooperation, these scale economies will make us all richer. But to sustain increasingly complex economic structures requires us to maintain political and monetary stability as well as free trade – relatively free trade, at least – over large geographical areas. ‘The division of labor depends on the extent of the market.’ Product innovations create new markets, and an almost infinite variety of cost-reducing process innovations extend the markets for particular commodities. For the entire system of interrelated markets, the lowering of transportation costs, extending markets over space, has historically been the main technical force tending to increase the division of labor. It is reasonable to believe that the costs of processing, transmitting and storing information have by now taken over the role in economic development that transportation costs played for so long. ECONOMIC DEVELOPMENT AS THE INCREASING COMPLEXITY OF ECONOMIC SYSTEMS1 Complexity, in ordinary discourse, is a vague notion. We have all heard complaints of the type ‘modern life is so complicated’ accompanied by contrasts drawn to a supposedly ‘simpler’ past. Often, it really isn’t clear whether this kind of statement has any content at all; if one tries to give it content, one...

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