Showing papers in "Journal of Political Economy in 1961"

The Economics of Information

Abstract: The identification of sellers and the discovery of their prices is given as an example of the role of the search for information in economic life.

The Lag in Effect of Monetary Policy

Abstract: FOR some years now, I have been engaged in extensive empirical studies of the relation between the stock of money and economic activity. Though a full report on this work is not yet in print, and will not be for some time, I have had occasion to summarize some of the results in a paper submitted to the Joint Economic Committee, in subsequent testimony before that committee, and in a series of lectures on monetary policy.2 These necessarily condensed and preliminary statements of results without the full evidence underlying them have apparently given some readers a misleading impression of the exact content of the findings and of the kind and strength of the empirical evidence underlying them. I therefore welcome the opportunity offered by J. M. Culbertson's recent thoughtful criticism of my views in this Journal to clarify some of these issues.3 The central empirical finding in dispute is my conclusion that monetary actions affect economic conditions only after a lag that is both long and variable. Culbertson infers that the major evidence leading me to this conclusion is the 1 I am indebted to J. M. Clark, Harry G. Johnson, David Meiselman, Harry V. Roberts, Anna J. Schwartz, and members of the Money and Banking Workshop of the University of Chicago for helpful criticisms of an earlier draft of this note.

The Valuation of Human Capital

Abstract: T HE market mechanism places a value on those assets to which title can be transferred, and thus the market does evaluate land and capital goods in our economy. The market also provides rental values (wage rates) for labor but not capitalized values, and these are frequently essential for rational decision-making.2 It would be useful if we could develop a substitute for the market evaluation of labor resources. This involves establishing a conceptual framework for estimating the value of assets in the form of human capital. Utilizing such a framework, quantitative estimates of capital values of people as productive assets, as a function of their sex and age, can be made. The objectives of this paper are to point up the usefulness of the concept of human-capital value, and then to develop the methods, discuss some of the difficulties, and finally to present the results of actual calculations of capitalized values of (male) human assets for the year 1950. In addition, some implications of the results for decisions on resource allocation will be considered. Estimates of the value of human capital to society are potentially useful for a variety of purposes. Rational population and immigration policies would involve consideration of the productive value of additional people. Assessment of public health, highway construction, and floodcontrol policies would be enhanced by knowledge of the value of the human capital preserved through such expenditures. One of the benefits of these public projects is in the form of reduced mortality-that is, reduced losses of human capital-from diseases, highway accidents, and floods.3 Estimates of humanl I am grateful to Herbert Fraser, W. Lee Hansen, Charles Meyerding, Stephen L. McDonald, and Harry G. Johnson for helpful comments on earlier versions of this paper. The Graduate School of Arts and Sciences of Washington University provided financial assistance, and the University of Pennsylvania Press extended permission to present some data from my forthcoming book, Economics of Public Health. I should like to thank them all.

Land Values and the Measurement of Highway Benefits

Abstract: -3 HHE work of several writers appears largely to have succeeded in mak..Ling disreputable the once fashionable practice of crediting public investment activities in the development of water resources, in particular, with substantial "secondary" or "indirect" benefits.2 Secondary benefits in one guise or another still appear to be much in style, however, in dealing with the benefits of investments in highways and other transportation facilities. Among the benefits of highway investment to which reference is commonly made are those presumed to accrue to property owners. More specifically, many studies have demonstrated that land values tend to increase sometimes dramatically-in the vicinity of newly improved highways.3 Since these increases are independent of the extent to which the affected property owners use the highway facilities involved, such gains are quite properly labeled "non-user benefits." They are, furthermore, commonly regarded as benefits over and above those that accrue to highway users. That is to say, they are regarded as benefits that must in some way be added to those arising directly from highway use if total highway benefits are to be estimated accurately. Although widely accepted (particularly among highway planners), this final conclusion is, as it happens, fallacious. That property values increase in the vicinity of highway improvements does reflect the existence of highway benefits. Careful analysis of highwayland value relationships can yield valuable information on the magnitude of these benefits. Increases in land value are not in themselves net highway benefits, however. Rather, they reflect an actual or potential transfer of benefits derived from highways from one population group to another. Furthermore, the fact that land values generally do increase in the vicinity of highway improvements by no means guarantees that a net effect of these improvements is to increase land values as a whole. The primary goal of this paper is to demonstrate these assertions by exploring the relationship between land values on the one hand and transportation costs and reductions in them on the other. More specifically, Section I demonstrates the effects of certain types of transporta1 I am indebted to Robert Clower, William Garrison, William Pendleton, and Stephen Sobotka for much helpful advice. Richard Morrill undertook one of the preliminary analyses underlying the material reported in Section II, while Harold Williamson, Jr., directed most of the statistical work entailed in this section. The work reported here was undertaken as part of a larger study of the nature and measurement of highway benefits carried out with the support of the Bureau of Public Roads. My views do not necessarily reflect those of the Bureau, however.

Flight Insurance and the Theory of Choice

Abstract: R~ECENT commercial plane disasters ~ suggest that the prohibition of iX. air-travel insurance-a clear interference with freedom of consumer choice-might be a useful measure against murder and suicide. We shall argue on quite independent grounds, however, that the purchase of air-travel insurance, widespread even among economists, implies that the Neumann-Morgenstern axioms of rational choice have been violated. So sweeping a claim is, of course, subject to various qualifications, and these will be considered. Though we focus on air-accident insurance which has been made topical by recent plane disasters, this type of insurance is only one of a broad class covering losses from a variety of particular causes. The notion that a special cause of loss, rather than just the loss itself, warrants special insurance coverage seems to attract the public's fancy. Our argument about air-accident insurance extends to other such coverage as well-polio, school accidents, ski mishaps, and double-indemnity clauses for accidental death. And, finally, we shall note that our framework for analyzing air-accident insurance offers interesting general implications for economic behavior in the face of risk.

The economy of patronage

Abstract: T HERE is a growing interest in the development of descriptive models of political competition and decision-making. This interest often reflects a dissatisfaction on the part of economists and political scientists with theories of government and public finance which view the state as a selfless, disembodied agent which maximizes a "social welfare function" or simply buys and sells essential public services. In many of these recent models, the key assumption is that government is run by coalitions (political parties) whose leaders act so as to maximize their vote. Anthony Downs, in his theoretical treatment of democracy in terms of an economic model, postulates that the party and the party leaders are motivated by the desire for the power, income, and prestige that accrue to those who gain and hold political office.' Thus, winning and retaining political office is the primary task, and for this maximizing the vote is usually essential. It is "usually" essential because in those cases where there is little popular interest in the outcome, it is often to the advantage of the party to turn out a small vote which is known to be favorable rather than a large vote which may be unpredictable. Strictly speaking, Downs' model calls for the maximization of the probability of winning office rather than votes. But in all important contested elections, maximizing the vote is essential, and it is with such elections that this paper is concerned. Downs' model accounts for a great deal of political activity, but not all. In some cases, particularly at the city or county level, a party will organize, not to defeat its opponents, but to create a "nuisance" value that can be exchanged for pay-offs. Republican politicians in Democratic cities often seek, not to maximize their vote (or even win any vote at all), but to obtain patronage jobs and favors from the Democratic politicians in exchange for not competing vigorously in the general elections. Similarly, certain political organizations have been known to accept electoral defeat rather than win with a slate of candidates that is unacceptable to the party leaders. The party may have had such candidates forced upon it by a demand for "reform" or by a split in the party itself. To win the election with undesirable candidates (for example, candidates who are likely to engage in large-scale political reforms, attempt to create their own machine, or upset established party arrangements) is to jeopardize the party leadership. (To lose with Taft would have been more acceptable, to certain Republican leaders in 1944 and 1948, than to win with Dewey.) Control of the party leadership may be valued over Pyrrhic vicI An Economic Theory of Democracy (New York: Harper & Bros., 1957). See also his later treatment, "Why the Government Budget Is Too Small in a Democracy," World Politics, XII (July, 1960), 54163. I would like to express my appreciation to Anthony Downs for his helpful comments on various drafts of this paper, as well as to Edward C. Banfield, on whose ideas I have drawn freely. I am indebted to the Social Science Research Council for financial support of the research on part of which this paper drew. Responsibilityfor the views herein is, of course, mine.

The Search for a Risk Premium

Abstract: In very recent years the search for a risk premium in the price statistics of organized commodity-futures markets has been renewed. In the statistics produced on futures markets some outstanding economists have recognized unsurpassed possibilities for empirical analysis of prices. Valuable special compilations and new survey data have been added to the already excellent regularly published information, in pursuit of estimates of the risk premium, or in more general investigations which have included estimates of the risk premium. The substantive and methodological contributions that this search has yielded mark it a clear success, but this is not because ores laden with risk premium have been discovered — indeed, the tailings from these diggings may prove richer than the findings, and in unsuspected ores.

A Disaggregated View of Technical Change

Abstract: AN EARLIER paper presented a method of apportioning historical increases in output per man-hour between increases in capital per manhour and technical change, and the conclusion was drawn that 90 per cent of the increase in average labor productivity in United States manufacturing between 1919 and 1955 was attributable to improvements in technology.2 However, it was noted that improvements in the quality of the labor force would be included in the measure of technical change. Moreover, any improvement in the efficiency of resource allocation occurring during the period being considered would also appear in the estimates. This paper represents an attempt to extend the analysis of the earlier paper by refining the catch-all technological change category to distinguish among several component parts. This is done by disaggregating to the SIC two-digit industry level and considering the nineteen industry groups within the manufactoring segment of the United States economy, for the period 1946-57. Disaggregation yields additional information regarding productivity change; for example, it reveals the dispersion around the average of industry rates of technical change, thus indicating the extent to which shifts in the production function have been evenly spread throughout the manufacturing sector or concentrated in certain industries. It also gives us some notion of the importance of the \"aggregation problem.\

Gurley and Shaw on Money in a Theory of Finance

Abstract: THE recent volume by Gurley and Shaw presents a theory of the role of financial institutions in a growing economy. A neoclassical world is assumed in which prices are flexible, employment is full, and money illusion is absent. The authors' procedure is to begin with a rudimentary economy which contains only one financial market, that for money, and one financial institution, the government monetary system. Their second model adds a financial market for homogeneous business bonds, issued by private firms, which are purchased by both the government banking system and the public. The third model introduces a third financial market: that for non-monetary indirect assets which are issued by a group of nonmonetary financial intermediaries that purchase business bonds. In a final chapter the governmental monetary system is replaced by a private banking system, and the quantity of money outstanding reflects profit considerations of the private banking system, which is subject to control by a central bank. The book is intended to serve as a theoretical introduction to an empirical analysis of the role of financial intermediaries which is to be the subject of a second volume. The first section of this review discusses the issue that is central at each stage of the analysis, the neutrality of money and the rationale of monetary policy; the second section discusses an aspect of Gurley and

Welfare Aspects of Benefit-Cost Analysis

Abstract: IN RECENT years there has been substantial interest in developing decision rules for public expenditures under a variety of conditions. To a large extent in the literature dealing with governmental expenditures in the United States the interest has been confined to the field of resource development and the activity known in general as benefit-cost analysis. Benefit-cost analysis can be characterized as the collection and organization of data relevant by some conceptually meaningful criteria to determining the relative preferredness of alternatives (24, Parts II, III). As is typical of much of economic analysis, the objective is to attempt by analysis to indicate how a particular desideratum can be maximized-accomplished by comparing the differences in the relevant costs and benefits associated with alternatives among which choices are to be made. This activity, of course, does not differ in kind from the economic analysis employed in reaching decisions with respect to production or other policies of the firm. Nevertheless, while the analytic activity does not differ in nature, the desideratum and the choice variables on which it depends will differ. Essentially, a

Industrial Research and the New Competition

Abstract: IN HIS tribute to big business David Lilienthal described the social product of the large business organization as the "New Competition."2 While the title of Lilienthal's thesis is original, the rationale is not. J. A. Schumpeter expressed it eloquently in 1942,3 and others-notably J. K. Galbraith,4 A. D. H. Kaplan,5 and J. D. Glover6-have since given it added emphasis. Advocates of the New Competition share the view that large oligopolistic concerns are the principal generators of technological change by virtue of the new products, processes, and product improvements flowing from their research-and-development laboratories. We are told that the demands of modern technology are so great that only the large firm is able to spend the sums needed to participate effectively in innovation. We are further assured that we need not fear restraints upon the pace of technology, for the incentives to innovate-largely lacking in industries approximating pure competition-are present in abundance in an oligopolistic structure. Indeed, the large modern concern is likely to feel under considerable pressure to undertake research and to innovate in order not to be out-

Industrialization, Factor Markets, and Agricultural Development

Abstract: FOR nearly a decade, we have had under way at Vanderbilt University a large-scale research project on Southern Economic Development and Agriculture. This project has been concerned with testing for selected southern areas the locational hypothesis first advanced by T. W. Schultz in 1950 to explain wide international and interregional divergences in per capita incomes.3 As Schultz himself recognized, it would be virtually impossible to test his hypothesis on an international basis because of the vast number of uncontrollable variables.4 Instead, Tang and I have dealt with relatively small and homogeneous areas for which one might hope to isolate more successfully the effects of industrial-urban development (via factor

Elasticities of Substitution and Constant-Output Demand Curves for Labor

Abstract: ^_His paper presents a method for es|timating the elasticity of demand for labor with output held constant. Such an elasticity summarizes the contribution of the technological substitutability of labor and capital to the elasticity of demand for labor, the remainder of the elasticity in the usual sense being positively dependent on the elasticity of demand for output. The elasticity of the constant-output demand curve thus provides a lower bound to the usual demand elasticity. It has recently been shown that under certain assumptions (which are made in this paper) the estimated elasticity is equal to the elasticity of substitution between labor and capital.2 Thus, the empirical results of this paper, though tentative, have some bearing on the continuing controversy over the alleged historical constancy of relative shares and related topics.3 However, the primary focus of this paper is on the technological influences on the demand for

Problems of Majority Voting: In Defense of Majority Voting

Abstract: IN A recent article entitled \"Problems of Majority Voting,\" Gordon Tullock presented an ingenious model to illustrate certain problems which he believes arise from the use of simple majority voting in democracies.' It is my contention that the problems he describes are not caused by majority voting and that the generalizations he makes about the real world based on the model are not true, because real democracies do not use the form of voting he sets forth. Therefore, in this article I shall attempt to defend majority voting from Tullock's attacks, though this defense does not constitute a general rationalization of majority rule. The basic premise behind simple majority rule is that every voter should have equal weight with every other voter. Hence, if disagreement occurs, it is better for more voters to tell fewer what to do than vice versa. The only practical arrangement to accomplish this is simple majority rule. Any rule requiring more than a simple majority for passage of an act allows a minority to prevent action by the majority, thus giving the vote of each member of the minority more weight than the vote of each member of the majority. For example, if a majority of two-thirds is required for passage, then opposition by 34 per cent of the voters can prevent the other 66 per cent from carrying out their desires. In effect, the opinion of each member of the 34 per cent minority is weighted the same as the opinion of 1.94

Statistical Tests of Rival Monetary Rules

Abstract: University of Minnesota T HIS essay compares statistically the performance since 1900 of four rival monetary rules in the American economy. These rules are: 1. The \"judgment\" rule, according to which the monetary authority or authorities meet each situation as it arises to the best of its (their) own judgment(s). Discretion is subject to fixed rules only within very broad limits. In the American case, there is the further complication of a plural \"monetary authority.\" Responsibility in monetary matters is divided among the Federal Reserve system, the United States Treasury, fiftyone commercial banking systems, and various other lending and regulatory agencies, public and private. 2. The \"inflexible\" rule, according to which the money supply, somehow de-

Economic Factors in Specie Resumption the United States, 1865-79

Abstract: f'THE "greenback" period in the United States (1862-79) has atI tracted the interest of a number of historians and economists at various times. Although several competent studies have considered many political and economic aspects of the period, there seems to be no general agreement on the reasons why resumption of specie payments was successful in 1879 and whether it could have been successful before that date. During the Civil War the government had issued a sizable quantity of legaltender notes (the "greenbacks"). Since gold dollars sold at a premium over greenback dollars, and since resumption at the prewar parity obviously could not be successful until the equilibrium level of the premium fell to zero, attention has not unnaturally centered on the premium

The Economic Theory of Socialism: A Suggestion for Reconsideration

Abstract: T __HERE are queer traits in what is recognized today as the economic theory of socialism. Not only has it remained for a number of years in a stationary state which contrasts strangely with the dynamic growth in the number of descriptive works on socialist and particularly soviet economies, but also it takes an approach that is far from realistic and might even be termed utopian.2 Incredible as it may seem, the convictions of the authors, rather than the realities of socialist economics, are taken as the basis for theories. It can, of course, easily be explained why the economic theory of socialism started that way. When Pareto and, later, Barone discussed the working of the socialist state, no such state existed.3 They solved a theoretical problem and that was all they could do. Mises, as everybody agrees now, was wrong in his main contention that economic calculation under socialism is theoretically impossible, but he may be forgiven for not taking into account the realities of socialist economics, as he certainly could not have possessed sufficient data at that time about the actual economic problems of the Soviet Union and how they were being solved in practice.4 But strangely enough when the discussion of the problem was resumed in the thirties it continued along the same lines. In replying to the arguments of Hayek and Robbins concerning the practical impossibility of economic calculation in socialism, Lange put forward his celebrated proposal for the application of the trial and error procedure in socialist economics.5 This is a \"decentralized deci1 When this was written I was a guest of the Center for International Studies, Massachusetts Institute of Technology, as a Ford Foundation exchange professor. I wish, therefore, to express my thanks to the Foundation, which made my work possible, and to all those economists in Cambridge, Massachusetts, with whom I had the opportunity to discuss many problems relevant to the subject of this paper. As it is impossible to give all their names here, I shall only say that my greatest debt is to Professor Paul N. Rosenstein-Rodan, from whom I received constant help and encouragement during my stay at M.I.T.

The Report of the Commission on Money and Credit

Abstract: ECONOMISTS have long been concerned with fluctuations in economic activity. It appears they might usefully extend their investigation to include the \"long waves\" in economists' opinions about monetary policy. In the first decades of this century economists were gradually developing analytical forms applicable to monetary processes, and monetary policy slowly emerged as a significant instrument of economic policy. Appreciation of monetary policy vanished in the early thirties, and endeavors in monetary theory were mainly concerned with definitions supplemented by schemes classifying determinants of variable occurring in the definitions. Keynes's General Theory exploded therefore in a major intellectual and emotional vacuum. This circumstance explains the tremendous impact and the eager acceptance of the Keynesian frame of analysis. In Keynesian theory monetary processes were crucially dependent on two or three interest elasticities. Casual observations and a priori plausible arguments, fortified later by some econometric studies, suggested an order of magnitude for these elasticities which rendered monetary policy a highly dubious, if not completely ineffective, tool of economic policy. The early postwar period seems to have formed a cyclic trough in economists' opinions of monetary policy. In the late forties belief in the effective operation of monetary policy surged up again, nurtured to a good extent-as it should be-by the Federal Reserve authorities. The resurgence was associated with the emergence of the so-called availability doctrine, an idea intended to exhibit the structure of monetary processes and thus provide a cognitive basis for a rational belief in the efficacy of monetary policy. Unfortunately, it was more doctrine than adequately formulated theory, more impressionistic fragment than meaningful hypothesis. No wonder, therefore, that a new skepticism grew in the second half of the past decade. Investigations of our expanding financial system seemed to provide a rational foundation for this new skepticism. Irreversible shifts in behavior functions, changing interest elasticities, frictions, and lags were allegedly generated by the evolving financial patterns. These were said to attenuate an originally efficacious monetary policy. Decreasing relative importance of commercial banks and \"offsetting velocity behavior\" appeared as key words of the new conception. Logical analysis of the arguments formulated, 1Money and Credit: Their Influence on Jobs, Prices, and Growth. (A Report of the Commission on Money and Credit.) Englewood Cliffs, N.J.: Prentice-Hall, Inc., 1961. Pp. xiv+285. 2 J wish to acknowledge useful discussions with Harold Somers and extensive comments by Allan H. Meltzer. This review article is related to a research project on \"Monetary Theory and Monetary Policy,\" partly financed by the Bureau of Business and Economic Research at the University of California at Los Angeles and proceeding under the joint responsibility of both K. Brunner and A. H. Meltzer.

Correct Public Prediction and the Stability of Equilibrium

Abstract: T HE general problem of public (published) prediction can be broken down logically into the following three component problems: 1. Is correct public forecasting conceptually possible (the positive formal problem)? 2. Is correct public forecasting desirable (the normative formal problem)? 3. Can adequate information for correct public forecasting be secured (the empirical problem)? E. Grunberg and F. Modigliani have provided a positive answer to the first problem,2 contrary to previously prevailing ideas on the matter.3 My analysis deals exclusively with the second problem, assuming throughout perfect public forecasting. Obviously, the plausibility of this assumption depends on the possibility of overcoming the difficulties connected with the third problem. The importance of securing adequate information for correct public forecasting can hardly be overstated: correctness of

How Income Ought To Be Distributed: Paradox Regained

Abstract: THICAL controversy is perhaps endless; in any case, the issues that divide people cannot necessarily be resolved by logic or evidence. For example, the acceptability of the ten ethical postulates in my paper on "How Income Ought To Be Distributed"' is a matter of personal appeal, and it would be vain to hope that all readers would find them unexceptionable. Fisher and Rothenberg did not, and in their article in the previous issue of this Journal they neatly dispose of my "paradox in distributive ethics" by dumping several axioms along with the conclusion.2 Since a major motivation of my article was to induce the reader to struggle with the paradox, I am dismayed only that Fisher and Rothenberg found the struggle so simple. To regain the paradox, I shall get off the fence and argue in support of the rejected axioms and the conclusion. I do so because I think they ought not to be disposed of so lightly. But my defense can possess or lack merit only in terms of its persuasiveness; and all protagonists need not ultimately agree. It was my privilege to comment on an earlier draft of the Fisher-Rothenberg paper, and a number of my objections were met in the final version by qualifications in their text or in footnotes. Yet some of these passing qualifications are precisely the things to be stressed.

Problems of Majority Voting: Reply to a Traditionalist

Abstract: ANTHONY DOWNS 'S objections to my article and monograph' can be divided into three general categories: Technical objections to my models, a very strong statement of the traditional argument for majority voting, and the claim that I deduce from my model the conclusion that the government budget as a whole will be too large. I will deal with these objections in order. Downs begins his attack on my models by restating one of them in the form of seven assumptions. Although I could quarrel with details, I can accept the descriptions for the purposes of the present discussion. Downs's objection to this simple model amounts to pointing out that direct democracy is rather rare in the present-day world.2 Normally, we elect representatives who meet in some kind of assembly to make political decisions. Downs quite correctly points out that the method of electing representatives violates the seriatim assumption and, consequently, that their election does not fit the model presented in my article. He then turns to the question of whether the model would fit the legislature so elected. He points out that the first six of the assumptions which he has listed as characterizing my model fit a legislature, but he raises questions about the seventh. This assumption is, as Downs points out, relaxed before I reach my general conclusions, and legislatures meet it in its relaxed form. It would thus appear that the model

The Lag in Effect of Monetary Policy: Reply

Abstract: N ow that Friedman has revealed what lies behind his assertion that monetary policy operates with a long and variable lag, which he has used in supporting his monetary policy proposals, we can attempt a more definitive appraisal.' The implications of the lag doctrine are extremely important for policy-planning, and although Friedman still does not face up to this they affect the whole body of existing theory and our view of how a market economy is governed. Since Friedman's attack does not overturn the points that I made in my note, let me develop them and weigh Friedman's response, dealing with (1) defects in Friedman's methodology, and (2) valid ways of estimating the lag in effect of monetary policy.

Convexity Assumptions, Allocative Efficiency, and Competitive Equilibrium

Abstract: I AM grateful to Professor M. J. Farrell for having lifted from its context and held up for scrutiny2 a statement on page 25 of my essay, \"Allocation of Resources and the Price System.\"3 For he has brought home to me-and I apologize for it-that the statement quoted does not adequately reflect the findings of my essay. The theory of efficient allocation through dispersed decision-making in response to a price system revolves around two propositions, which have not always been sufficiently distinguished in the literature. These two propositions are in a relation of logical inverses in that the conclusion of either occurs among the premises of the other. The first proposition, which I shall here call the direct one, says that any competitive equilibrium is a Pareto optimum.4 It is this proposition with which Farrell's article is concerned. As he indicates, no convexity assumptions are required for the validity of this proposition. For this reason, the artificial one-man (Crusoe) version of this proposition is discussed in my essay' before any mention is made of concepts of convexity of either production sets or preference orderings, and the accompanying diagrams exhibit nonconvex sets and orderings. Likewise, the general version of the direct proposition, and an extension thereof to allocation over time,6 are proved without any use or mention of convexity assumptions. The principle assumption is that the conditions of competitive equilibrium are satisfied: profit maximization by all producers within their respective production sets and utility maximization by consumers within their budget restraints, where both types of decisionmakers take as given a list of prices that clears all markets, and where each decisionmaker's production set or utility function is independent of everyone else's choices. The proposition is fundamental for both positive economics and welfare economics. Mathematically, it is elementary. The second proposition,7 which I shall call the inverse one, says that in an economy in which all production sets and preference ordering are convex, any Pareto optimum can be supplemented by a suitable list of prices and suitable income transfers to form a competitive equilibrium. As explained by I I am indebted to Gerard Debreu and James Tobin for valuable comments on the subject of this note. 2 In \"The Convexity Assumption in the Theory of Competitive Markets,\" Journal of Political Economy, LXVII (August, 1959), 377-91. The quotation referred to appears on p. 390.

How Income Ought to be Distributed: Paradox Enow

Abstract: A FEW years ago Robert Strotz propounded an apparent paradox in the ethics of income distribution and called for its resolution.2 Briefly stated, the paradox is this: Strotz places a number of apparently ethically desirable or innocuous restrictions on the class of admissible social welfare functions in a one-commodity n-person world, yet proves that the only member of the admissible class is an apparently ethically unacceptable welfare function, namely, that which is maximized by maximizing total income without regard for the way in which the income is distributed among persons.3 It must there-

Counter-Speculation and the Forward Exchange Market

Abstract: W ITHIN recent years there has been a renewal of interest in the theory of forward exchange. Understandably, much of the literature has been concerned specifically with the defense of sterling, but many of the issues involved are applicable with some modification to any currency that is subject to speculative attack. It has been argued that the appearance of sizable short positions on private account should be met by official counter-speculation in the forward exchange market. The forward rate would be pegged through official support so as not to encourage the loss of exchange reserves. In this paper I will consider arguments advanced in some recent contributions to the theory of forward exchange rates and seek to establish more clearly than before the limitations of official counter-speculation in the forward exchange market.

The Effect of Unionization on Wages in the Transit Industry

Abstract: U NIONIZATION of operating employees in the local transit industry began shortly before 1900, but until the late 1930's a considerable portion of local transit firms were nonunion. By the end of World War II, however, the great majority of transit operating employees had been unionized. The operating employees-motormen, including bus drivers-of local transit firms comprise over half of the wageearners employed in these firms. The occupation of motorman is a semiskilled one, the duties of which differ little among firms; until fairly recently almost all motormen were white males. This paper is a report of a study whose purpose was to estimate the percentage by which unionism of local transit motormen has raised the wages of unionized motormen relative to what these wages would have been in the absence of the unionization of motormen. I have construed \"wages\" broadly enough to include premium payments, payments for time not worked, and the value of other fringe benefits as well as basic wage rates. According to my estimates, the effects of unionization on motormen's \"wages\" until the late 1930's consisted almost entirely of effects on wage rates. Thereafter, however, unionism increasingly also affected the non-wage rate compensation of motormen. I have made estimates of the relative wage impact of unionism in local transit for selected dates 1920-48. I regard the estimates for the 1920's and early 1930's as considerably more accurate than those for later years. The transit industry is a section of a major industry group-transportation -that has not previously been studied on an industry basis.2 Transit is defined as the mass transportation of people within cities in electric streetcars, trolley coaches, and motor busses. Transit companies, with few exceptions, have been organized by the Amalgamated Association of Street, Electric Railway and Motor Coach Employees of America.3 The Amalgamated is not a large union, ranking twenty-first in size among unions holding original charters from the American Federation of Labor. The union was founded in 1892; its membership reached 100,000 in 1921, and today 130,000 oper-

The Effect of Monopoly: A Correction

Abstract: With this formula the estimate is 11.2 per cent of A VC.2 Confirmation of the procedure is found in the remarkable closeness of the monopoly profits now found to those computed by Harberger.3 My estimate of monopoly profits in 1954 now is $4.9 billion, while Harberger's for 1953 is $4.6 billion. Additional confirmation may be obtained from the use of the estimated monopoly profits in conjunction with the aggregate value of shipments in concentrated industries to estimate the effect of monopoly on price. Thus

On Convexity, Efficiency, and Markets

Abstract: IN HIS stimulating article, "The Convexity Assumption in the Theory of Competitive Markets,"1 Mr M J Farrell proposes "to reduce the minimum assumptions necessary for the validity of the 'received theory"' by demonstrating "that the traditional assumptions of convexity are by no means essential to the optimality of competitive markets" In the process, he chides Mr J de V Graaff and me for having engaged in "facile attacks on the theory of competitive allocation," in "debunking" which should be "taken with a grain of salt" In particular, he claims that Graaff and I were led into elementary error "by a rather farfetched analogy between competitive markets and one-man economies" The purpose of this note is (1) to substantiate a plea of "not guilty" to Farrell's charge; and (2) to raise a question about his suggestion for broadening the basis of the received theory I shall restrict myself to discussing only those parts of the Farrell paper which deal with non-convexity in production functions, partly because it is production non-convexities which are alleged to have led me astray, and partly because, in an article in the October, 1960, issue of this Journal,2 Jerome Rothenberg has dealt rather fully with Farrell's treatment of nonconvex preferences3