Download The Evolution Routines of Labor Division in New Classical Economics

The Evolution Routines of Labor Division in New Classical Economics
and Recent Developments in International Logistics
Yang Sangen, Ge Weina
College of Economics and Trade, Hunan University, P.R.China, 410079
Hunan Provincial Laboratory of Logistics Information and Simulation Technology
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Abstract Based on new classical economics framework, this paper analyzes the evolution routines of
labor division in logistics, the formation mechanism of modern logistics, and the relationship between
the fourth party logistics (FLP) and international logistics. In order to help companies find the cut-in
point, and put forward policy suggestions of modern logistics development in China.
Key words: neoclassical economics the third party logistics (TPL)
the fourth party logistics (FPL)
international logistics
1 Introduction
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After 1990s, the capital flows in global scales which extends the effect of market mechanism from
domestic market to international market. And the structural adjustment and industrial transfer is raised
on a large scale all over the world. In order to make full use of international division of labors,
multinational corporations (MNCs) break traditional boundaries among nations and industries, turning
deeply toward the product value chain level. Moreover, they integrate the companies and business which
process outstanding comparative advantages in developing countries, into their own production
operation and service system. More and more MNCs try to slice up the value chain, and tend to invest in
countries that have lower cost and bigger potentials, when they establish the global development
strategy. MNCs move the manufacturing process to much lower cost places. In most cases, part
manufacturing processes is arranged in lower cost central regions, and the end assembly line is posted
closely to the consumption market with higher cost. All these effort is to form a close link logistic
network system between higher cost consumption market and lower cost manufacturing. e.g. Both GE
and Toyota have assembling line in Europe, but most of their part manufacturing are in Asia. Nowadays,
International division of labor has changed from inter-industry specialization in different countries to
intra-industry specialization and intra-product specialization deeply. The “invisible hand” of market
optimizes resource allocation and reduces resource waste in larger scope. Each company has the
opportunity to exploit market, and the global manufacturing, purchase and sale, have broken the
boundaries among regions and countries. Self-sufficient manufacturing and operation in one country,
and large /small and all-inclusive management modes, are gradually replaced by international/
specialized division of labor. The focus of social economy changes to how companies could have their
product access to consumption field or the next manufacturing process at the fastest speed and lowest
cost. The demand of global logistics has brought about rapid development and continuous upgrading
in modern logistics. The mark of modern logistics formulations- TPL is generally accepted not long after,
but a new concept of logistics- FPL attracts our attention again. At present, the study on TPL is at the
starting line. Some scholars have presented that Chinese logistics should achieve great-leap-forward
development, by the means of active development of FPL and its drive on TPL, achieving higher level
of labor division based on specialization directly. Liu Cheng Kun, Wang Shu Ying are the typical ones.
Because FPL is an exotic concept, in addition to fuzzy understanding in academia, many companies
which have engaged in or prepare to open the business of logistics confused. To establish the system
of logistic theory, fundamental things need to be done. And theoretical workers shoulder heavy
responsibilities (Zhou Qi Lei, 2000). Logistics is a new interdisciplinary subject generated from the
integration of economics, management, engineering, and science. The study of its economic attributes is
not enough, and problems and predicaments also exist in practice (Liu Yan Ping, Wang Shu Ying, 2003).
Based on new classical economics framework, this paper analyzes the evolution routines of labor
division in logistics, the formation mechanism of the modern logistics, and the relationship between FPL
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and international logistics, in order to help companies find the cut-in point, and puts forward policy
suggestions of the modern logistics development in China.
2 Modern logistics results from the evolution of labor division in socialization
and internationalization
2.1 A review on the classical, neoclassical and new classical economics
The economics became knowledge of system, after Adam Smith’s “Wealth of Nations” was
published. Classical economists that took Smith as representatives focused on the reduction degree of
scarcity on resources. Smith emphasized that the labor division and specialization development was the
fountainhead that the economy grew from, and this was an economic organizational problem.
In 1890, Alfred Marshall’s “Principles of Economics” was published, which symbolized the
formation of neoclassical economics. It paid attention to the disposition price theory under the degree of
scarcity on resources, emphasizing the effect of scale economy mainly in supply and demand analysis
which was based on marginal analysis. With proficiency in mathematics tool processing, as a result, it
became main current of economics after Smith. However, he can't resolve problems about the reduction
degree of scarcity on resources. Because he can’t turn the problems of division of labor and the
specialization into mathematics. Only internal solutions could be solved but not corner solutions.
In 1980s, some economists represented by Rosen, Becker, Yang, Boland, and Ng, turned the
splendid thought of labor division and specialization of classical economics into decision-making and
equilibrium model, by the application of infra-marginal analysis. Reactivating classical economic by
utilizing infra-marginal analysis, that is so-called new classical economics. The non-classical
mathematics programming which was developed in 1950s, had created an effective analytic tool for
processing corner solutions. Infra-marginal analysis carries on total benefit-cost analysis to every corner
solution and interior solution, in addition to marginal analysis. When all the decisions are only made
within the boundary value, the optimal solution is the internal solution. And it merely solves problems of
resource allocation when the structure of labor division was known. However, when some decisions are
in their maximum or minimum value, the corner solution becomes the optimal solution which decides
the pattern of specialization level (the economic organizational structure). The general equilibrium deals
with structures of labor division and economic growth. As an outcome of parameter variation,
discontinuous jumps of the general equilibrium between different corners will drive economic growth.
Analytical framework of Smith-Coase based on new classical economics thinks that the institution
reduces transaction-cost largely, promotes the evolution of labor division, causes the economy to transit
gradually from the primitive self-sufficient condition to the interdependent complex and specialized
network of labor division, thus enables everybody to obtain the benefit from specialization, and has
created the condition for the emergence of many economic organizations.
New classical economics abandons the concept of scale economy and adopts the concept of
specialized-economy. We dare not agree with it at this point. Specialized-economy is corresponded to
large /small and all-inclusive diseconomy. Admittedly, a large /small and all-inclusive company has
difficult in yielding scale economy, but the scale economy really exists under certain conditions that is
specialized-economy, therefore scale economy is also generated. If labor division and
specialized-economy as well as a broad market existed, it is possible to appear internal scale economy of
companies. Dixit and Stiglitz formalized the increasing return to scales and the incomplete competitive
market structure, in their classical paper “Monopolistic Competition and Optimum Product Diversity” in
1977. It is said that the scale economy is established on the basis of specialized labor division essentially.
Among these, the limitation of scale economy is the market scope (needs of diversification) mainly,
which is the reason that some old-brand capitalism nations always don’t hesitate to exploit the
international market by force, but not the problem of internal production of companies.
2.2 The evolution routines of labor division in logistics and generation mechanism of modern
logistics- an analytical framework
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D
The whole logistics outsourcing
( complete labor division of logistics)
FPL
C
Parts of logistics outsourcing
( partial labor division of logistics )
Y
TPL
B
Internal labor division exists
self-sufficient logistics
（
）
A
Dispersed internal logistics
X
Fig 1: The evolution routines of traditional logistics towards modern logistics
X: the times;
Y: the level of labor division in logistics
Structure A: Dispersed internal logistics of companies
In the times of planned economy, there is the policy on state monopoly for purchase and marketing.
All the purchase and sale of companies is achieved by the state appropriation plan completely, and
external logistics is also finished by the state plan. Internal logistics appears dispersed in this station,
which makes warehousing and transports scatter at many links such as production and management, and
they complete their activities independently. This is a special feature of companies before the reform and
open policy of China.
Structure B Internal labor division exists in companies, resulting in self-sufficient logistics
In early economic transformation period, the state appropriation plan was cancelled. Companies
faced the market directly, therefore much external logistics was undertaken by companies themselves. In
pursuit of maximum of profit, reducing their cost, and enhancing the output and quality continuously,
they must improve the internal efficiency. So they turned to change the internal structure of labor
division, through carrying on some experiments in the interior, integrating the functions of warehouse,
transports, transportation, purchase, marketing, etc ,which were regarded as dispersed assistant links but
correlated closely actually, and established an new internal labor division, in order to realize the
increasing return to scales. They had discovered the benefit of labor division in raising the rate of
production. However, because the social division of labor had not formed a network effect, the market
mechanism function was weak or even distort, and the transaction cost was too high, logistics of
companies still lied in the self-sufficient condition.
Structure C
Parts of logistics outsourcing, labor division comes into being partially
After 1990s, China had already pasted the period of short economy, the directions of market
changed to buyer's market from seller’s market. At the same time, the competition became intense and
the life cycle of products was reduced, and companies fought for the market share to expand their
market scope, searching their existing space. Then it seemed to be particularly important to deliver
products quickly and safely with lower expenses. This is just the total mission of modern logistics.
Along with the perfect of market mechanism, the system innovation improved the transaction efficiency,
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reduced the transaction cost, and deepened the social division of labor further. Finally, the specialized
company of TPL emerged in scale management, which had specialized management professionals in
production operation. They can deliver the products to consumption market quickly and safely with
lower expenses. But the efficiency of product (service) market started to be higher than that of labor
market, therefore companies gave up their traditional mind, trying to separate logistics from the interior
of organizational boundaries. Logistic service outsourcing simplified the complexity of internal
management, and raised the production rate of contractor, which was benefit in the formation of network
effect of labor division.
Structure D: The whole logistics outsourcing, the labor division of logistics is complete
Along with China joining the WTO, the ratio of dependence on foreign trade (open degree) is
increasing continuously. In order make full use of domestic and foreign market, we pay much more
attention to the safety, timeliness, and lowering cost of international logistics. With the improvement of
efficiency of trade, the network effect of labor division is convex now. TPL companies are maturing
gradually, and the efficiency of product (service) market starts to be higher than that of labor market,
which provides beneficial condition for the whole logistics outsourcing. However, TPL should also turn
to the way of specialized labor division. A company could not provide all the services, nor deliver goods
all over the world by itself. So the International TPL companies don’t understand how to provide local
service, or local TPL companies whose business were mainly in domestic marker, don’t succeed while
taking a risk to entering international logistics market.
International logistics is the internationalized extension of logistic activities and constitution. The
state-to-state trades are achieved by international logistics finally. From the view of the whole supply
chain performance, Zhou Qi-lei (2004) studied logistics cost, divided it into the variable cost and
holding cost, but neglected the time cost. From the conceptive view, the author thought that the logistics
cost of international trade should at least include the customs cost (such as tariff and insurance etc.) and
time cost (out of stock cost and the depreciation of perishable products), in addition to the conventional
variable cost (shipping cost and transport cost) and holding cost (the rental cost and waiting cost). The
port is an important node in modern logistics service chain, and is the core of developing international
logistics. Overseas experience indicated that, the most important thing of international logistics
development is the organization and coordination of nodes. The logistics management needs to
strengthen the transportation chain, in order to link up and match with each link, raise the efficiency of
transport continuously, and lower the total logistics cost. Logistics cost is under the influence of distance,
ship type, port and cargo kinds etc. Large-scale devotion can decline cost effectively, but it is influenced
directly by the trade scale of the service object. And FPL can combine the trade of different service
objects at different scales, provide the international logistics service with higher effect, cooperate with
global customers, participate in the global supply chain management, adopt multimodal transport, and
carry out "door to door" transport in the global scope; Using the real-time information technology
related with the EDI of the customs, the customer etc, global position system (GPS), inventory
management and other information technologies, FPL achieves the target of safety fast and lower cost.
Therefore, FPL emerges as a result of deepens of labor division. Companies can outsource the whole
business of logistics to FPL with a package, which will reduce the cost of bargaining with numerous
TPL companies, and acquire more advantages of specialized labor division.
The above analysis shows that, because of system innovation and the improved trade condition,
logistics will jump from the structure B to D, which will promote economic growth, and form the
network effect of labor division, promoting the formation of the modern logistics. Therefore, it is better
to say that the increase of the transaction efficiency rather than that the labor division and the
specialization, is the driving force of economic development.
、 、
3 TPL and FPL
Although massive TPL have practiced in developed countries, there is not a unified definition. In
2001, the “Logistics terms” was published in GB. It defines TPL as “the service pattern of companies
which provide logistics business apart from the supplier-side and demand-side”. Obviously, TPL refers
to the service provided by dealers in logistic channels. The dealers provide total or partial logistic
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service to its client in the form of contract, before the deadline. The supplier of TPL is the kind of
companies that offers external CRM (customer relationship management), controls, and provides
logistic service and operation. Besides, they are just the third party, which do not find their place in the
supply chain, but they actually serve in the supply chain by the way of offering a set of logistics
activities.
The concept of FPL was proposes by Andersen Consulting at first. This company has even
registered the trademark of FPL, and defined it as “A FPL provider is a supply chain integrator
that assembles
and manages the resources, capabilities, and technologies of its own organization with those of complem
entary service
providers to deliver a comprehensive supply chain solution”. From the view of concept, FPL is the
leadership of suppliers with logistic service. It not only controls and manages a certain logistic service,
but also provides solutions of total logistic process, and integrates the process by E-business. In fact, it is
a kind of virtual logistics, which integrates social resources, and offers unique and wide range of logistic
service, depending on the most outstanding suppliers of TPL, techniques, and management consults and
other value added service of the industry. But any TPL could not serve the above all independently.
From the review of specialized economy, TPL should not be large /small and all-inclusive. It needs
to focus on its core business. The shortage of whole logistics outsourcing brings about service vacuum.
The companies have to massive contracts with TPL, if it wants to outsource its whole logistic business.
This will result in lots of cost in searching and bargaining, more over, the contracts are intensive and
impossibly perfect. The credit of TPL has not reached to the degree that makes the public satisfied.
Monitoring cost of the contract fulfillment in logistics is much larger, compared with that in visible
goods. After contracting, the existence of opportunism behavior has greatly increased in exogenous and
endogenous transaction cost. Therefore, it is necessary to reform the contracts, and FPL emerges. The
company only needs to make contracts with FPL, and then FPL reforms the business of numerous TPL
companies. The relationship between FPL and TPL companies is long-term contract alliance, which
pays attention to relationship management. For example, when a tourist travels abroad, the travel agency
will assist in the total business, including handling the passport, round-trip airplane tickets, hotel stays,
dining, and vehicles and tickets for sceneries, ect, so long as he has signed a contract with the travel
agency. Because travel agencies have long-term contracts with these related companies, moreover, there
may be some discount. The travel agency has enough credit to fulfill contracts completely, which is
benefit to customers on saving expenses and time. The problem is, because the contract of travel
agencies is imperfect, the behavior of cheating customers occurs frequently. Similarly, companies
separate its logistics for whole outsourcing, using contracts instead of the built-in command, and lose
the internal power of control. FPL companies will loss seriously, once they couldn’t fulfill the contract
completely. Therefore lowering the transaction cost, will be advantageous to the development of modern
logistics.
4 The cut-in point of logistic development in China and the policy suggestion of
developing international logistics
Developing Chinese modern logistics can’t be hurry for success. Modern logistics is the product of
socialized and internationalized labor division based on specific condition and environment. If we
advanced it by the means of “spoil things through excessive passion” and neglected these conditions, the
result could be getting half the result with twice the effort or losing more than gain. And there are still
certain limitations in the development of FPL in China. At present, TPL was born out of traditional
logistic companies, the enterprises with100% foreign investment or joint capital enterprises. Besides,
TPL is in transformation period now, which means that it is impossible for them to become international
companies that integrate logistic resources and offer “ door to door’’ service in short time. And after TPL
entering the mature period, the FPL can be really developed, based on the popularity of outsourcing of
logistics. Therefore, TPL should be developed vigorously, in order to enhance current level of logistics
in China. Moreover, this is the prerequisites of FPL. When the time is ripe, we will advance FPL
vigorously too. We may assert that, FPL would become the main mode of the international logistics, in
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the near future, which could provide better service to the global supply chain.
TPL should subdivide the market carefully, find their superiority clearly, fix their strategic position,
and focus on the core business, pursuing the scale benefit on the foundation of specialization. At present,
TPL ought to be small and medium-sized enterprises, or these that have entered the market recently,
such as “each village manufacturing one kind of product” and the small-ware market with well
specialized labor division in some regions of Zhejiang province. Usually, because logistics is not the
core business of medium-sized enterprises, they concentrate their efforts on their core ability, and don’t
have enough energy to do well in logistics, as a result, it is better to outsource the logistics to TPL. On
the other side, some large manufactures, such as Hair, which have the path dependence in logistics, may
further develop into “the leadership of suppliers with logistic service” after outsourcing their logistics.
Therefore, it is impossible for them to outsource their logistics to TPL. TPL can fix their position on
freight forwarding or processing and trade zones, which provide better service for international trade
and foreign direct investment, and build a solid foundation for international logistics service
simultaneously.
The government ought to learn the successful experience of logistics development in the history of
developed countries, thus enhances the export competitiveness of national products, stimulates or
attracts more investment as the main subject of investment or by the means of all kinds of policies , and
speeds up the planning and infrastructure construction that the modern logistics development needs,
such as railroads, highways, airports, ports, logistics centers and other public infrastructures.
We need to combine the function of E-commerce and modern logistics, establish national or even
global platform for logistic information, integrate logistic resources , raise the level of Chinese logistics
in essence, expand the management scope of logistics in time and space, serve companies to exploit
international market better, and push the increase of specialized labor division level in logistics .
The government should make full use of industrial societies, work well in logistic standardization
and normalization, increase the credit degree of logistics, improve the transaction efficiency, and reduce
the transaction cost. Moreover, the central government needs to devote their effort to break industrial
segmentation and regional blockades among local governments, creating a beneficial condition for the
optimization of resource allocation.
Currently, the logistics is still placed at the starting stage in China, and there is a certain wide gap
to developed countries. In order to narrow the gap, we should open the market and attract FDI to
domestic logistics. On one hand, taking advantage of the fund and technologies brought by FDI will
speed up the promotion of logistics. On the other hand, the advanced logistics principle, operation mode,
management norm, technique guarantee and elitists that are brought about by FDI, will promote the
comprehensive service level of logistics quickly, by the effect of overflow and learning by doing.
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