Can the market stimulate the productivity-enhancing evolution of industry organization? Such was the basic proposition of Stigler (1951) echoing the famous proposition of Adam Smith (1776). The purpose of this paper is to explore this issue, using as a counter-example the case of the rise and fall of the Okayama farm-engine producing industrial district in Japan. This was a case in the early postwar period where market expansion was rapid, and a number of independent producers with wide-ranging and expanding competencies responded to the growing market-but in such a way that vertical disintegration was limited. The competitive regime that took root in Okayama proved to be an impediment when mass production producers elsewhere in Japan entered the market, and the Okayama industrial district was swept away-despite doing everything that would be expected in a flexible specialization setting.
The proposition that the division of labor is the main cause of productivity growth is as old as economics itself. It has also been argued that as a market grows, a vertically disintegrated industry organization evolves, which enhances productivity. This notion stems from the famous proposition of Adam Smith that the division of labor is limited by the extent of a market. The history of the computer industry illustrates this proposition quite well, as vertical disintegration has emerged as the computer market has grown. The Okayama case engages with the second proposition, namely that as a market grows, a vertically disintegrated industry organization evolves, which enhances productivity. Can market growth alone induce the disintegration of industry organization? Can a market select a particular, disintegrated form of industry organization? If the answer to these questions is "no", then the development of industry through disintegration should not be understood as simply the consequence of market competition. Instead, non-market coordination among firms or policy interventions would be necessary.
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