Generalized Increasing Returns, Euler's Theorem and Competitive Equilibrium

As worked out a century ago, the neoclassical theory of distribution was analytically as well as ideologically satisfying. The simultaneous determination of input and output prices through the operation of factor and product markets seemed to close the explanatory gap left by the classical economists. Seminal contributions by Wicksteed, Wicksell, J. B. Clark, Walras, Barone, and others generated a logically rigorous explanation of the sharing of value in a competitively organized economy, at least as stylized, and served to put a quietus on Marxian claims to the effect that labor is exploited in the shortfall between product and payment. This major analytical achievement, with its profound implications for the organization of societies, was, however, attained only at considerable cost. Buying into the neoclassical theory of distribution seemed to require the abandonment of the central principle of Adam Smith?s Wealth of Nations (1776) which stressed the importance of the division of labor and its relationship to market size as a primary determinant of economic well-being. The neoclassical emplacement of a static framework for analysis?defined by fixity in the size of the resource base and in technology?left no room for direct linkage between policy action on the size of the economic nexus and the rate of growth. For any given market size, competitive organization of the economy serves to maximize value by assuring that all resources are directed to their most productive uses. But there is nothing in this idealized neoclassical model to suggest why and how market size, in itself, matters