Evolutionary Dynamics of the Market Equilibrium with Division of Labor∗

Abstract: Recently, a growing literature, known as the new classical economics, attempts to resurrect the classical economic thoughts on division of labor within an analytical framework inherited from neoclassical economics. The paper inspects the feasibility of this approach and finds that the current analytical framework of the new classical economics is not able to spell out how individuals ’ decisions on specialization are coordinated and how division of labor is realized in a large and decentralized economy. Evolutionary dynamics are then introduced into the existing models. Using a simple economy for example, the paper shows that the equilibrium network of division of labor predicted by the new classical economics is supported by evolutionary stability and can be realized by the outcome of evolutionary processes, such as Replicator Dynamics. Mutation is important in the realization of division of labor since it provides an approach for the economy to escape from an initial state of autarky. The study implies that the inherent evolutionary process of the market constructs an “invisible hand”, which can spontaneously coordinate self-interested individuals’ decentralized decisions on specialization to discover an efficient order of division of labor in a large economy