Market Economies with an Endogenous Social Division of Labour

We consider a general equilibrium model of a competitive market economy in which production is conducted through an endogenous social division of labour. We represent economic decision makers as “consumer‐producers”, who consume as well as produce commodities. In this approach, the emergence of a non‐trivial social division of labour is guided by Increasing Returns to Specialisation in production. Under Increasing Returns to Specialisation, we show existence of competitive equilibria, the two fundamental theorems of welfare economics, and characterise these equilibria. Markets equilibrate through the adjustment of the social division of labour; the production technologies completely determine the equilibrium prices.