Showing papers in "Journal of Political Economy in 1968"

Crime and Punishment: An Economic Approach

Abstract: Since the turn of the twentieth century, legislation in Western countries has expanded rapidly to reverse the brief dominance of laissez faire during the nineteenth century. The state no longer merely protects against violations of person and property through murder, rape, or burglary but also restricts ‘discrimination’ against certain minorities, collusive business arrangements, ‘jaywalking’, travel, the materials used in construction, and thousands of other activities. The activities restricted not only are numerous but also range widely, affecting persons in very different pursuits and of diverse social backgrounds, education levels, ages, races, etc. Moreover, the likelihood that an offender will be discovered and convicted and the nature and extent of punishments differ greatly from person to person and activity to activity. Yet, in spite of such diversity, some common properties are shared by practically all legislation, and these properties form the subject matter of this essay.

Money-wage dynamics and labor-market equilibrium

Abstract: This chapter discusses money-wage dynamics and labor-market equilibrium. A generalized excess-demand theory of the rate of change of the average money-wage rate has been developed for frictional labor markets that allocate heterogeneous jobs and workers without having perfect information and market clearance by auction. There are two explanatory variables: the vacancy rate and the unemployment rate. The unemployment rate and the rate of change of employment are shown to be joint proxies for the vacancy rate. Hence, generalized excess demand can be regarded as a derived function of the unemployment rate and the rate of change of employment. This relationship is the augmented Phillips curve. Some of its properties are deduced. Equilibrium entails equality between the actual and expected rates of wage change. The steady-state equilibrium locus is implied to be a vertical line at a unique steady-state equilibrium unemployment rate. This is consistent with the usual theory of anticipated inflation. But if there are downward money-wage rigidities, then, up to a point, every one percentage point increase of the expected rate of wage change produces less than a one percentage point increase of the actual rate of wage change. The steady-state equilibrium locus will then have the characteristic negative slope of the Phillips curve in the range of large unemployment rates. But at sufficiently small unemployment rates, equilibrium is impossible and under the adaptive expectations theory, an explosive hyperinflation will result.

Aspects of Rational Insurance Purchasing

Abstract: Problems concerned with purchasing of insurance coverage appear to be a fascinating and potentially fruitful field for application and testing of theories of riskbearing. In this note we shall analyze a series of such problems from the point of view of an individual facing certain risks. Given his risk situation and his economic background (as measured by his initial wealth), his problem is to decide whether he should provide for in­surance coverage and, if so, how much.

On Economics as a Life Science

Abstract: The purpose of this essay is to bring together some of the more salient similarities between biology and economics and to argue that, far from being superficial, these analogies are profoundly rooted in the fact that the ultimate subject matter of biology and economics is one, viz., the life process. Most of biology concentrates on the " within skin " life process, the exception being ecology, which focuses on the "outside skin" life process (Bates, 1960, pp. 12-13). Economics is the part of ecology which studies the outside-skin life process insofar as it is dominated by commodities and their interrelations. In what follows the traditional economic (outside skin) and the traditional biological (within skin) views of the total life process will be considered, both in their steady-state aspect and in their evolutionary aspect. Finally an approach to a more general "general equilibrium" model will be suggested by considering the human economy from an ecological perspective.

The Determinants of Industrial Research and Development: A Study of the Chemical, Drug, and Petroleum Industries

Abstract: Economists have recently grown interested in doing research on research or R & D, as it is called in industrial circles. Several studies have tested Schumpeter's hoary hypothesis that large firms are responsible for most industrial inventive activity.1 Few of these studies, however, suggest why this hypothesis is apparently valid for some industries and not for others. And statistical studies going beyond this question, to try to relate R & D expenditures to firm profit expectations and the availability of funds as in other investment decisions, are rare (Mansfield, 1964; Mueller, 1967). This paper reports the results of an empirical investigation into the determinants of research expenditures in three industries-drugs, chemicals, and petroleum refining. These industries have three advantages for such a study: (1) they are among the leaders in total R & D expenditures; (2) most activity is concentrated in an appreciable number of large or moderately large firms; and (3) government support of research work is relatively small, so that decisions are more closely analogous to ordinary

Optimal Insurance Coverage

Abstract: The literature of expected utility theory has treated extensively the problem of optimal portfolio investment, but there is limited treatment of the parallel problem of the optimal protection of assets against casualty or liability loss (Arrow, 1963, 1965). The problem of optimal insurance coverage is formally similar to the problem of optimal inventory stockage under uncertainty. To inventory a product is to "insure" against sales loss-the larger the inventory, given the distribution of demand, the greater the "insurance coverage." If casualty or liability loss (demand) is less than the insurance coverage (inventory level), excessive insurance cost (inventory holding cost) is incurred. If casualty or liability loss (demand) is greater than the insurance coverage (inventory level), one must absorb the cost of the unrecoverable loss (sales loss). These two components of loss must be balanced in determining optimal insurance (inventory) levels. In the analysis to follow, we will use V to denote the given value of an individual's property or assets which are insurable against loss. In deciding how much insurance to buy, an individual must choose A ? 0, the fraction (or multiple) of V which is to be protected against loss. That is, he chooses an amount of insurance or coverage level, A V. We assume, throughout, that the individual can buy as much insurance as he pleases at a fixed price, m > 0 in dollars per dollar of protection, for a given time interval of exposure to risk of loss. His premium for that time interval is then P = mAV if he buys AV dollars of insurance. The analysis will be divided into two sections, the first dealing with insurance against casualty losses of physical property due to fire, wind, storm, vandalism, and so on, in which it is assumed that the loss cannot exceed the value of the property, V. The second section will deal with insurance against liability claims on an individual's tangible and intangible assets, in which it is assumed that the liability claim can exceed the value of assets, but cannot exceed the value of assets plus insurance coverage (1 + A) V.

A Simple Macroeconomic Model with a Government Budget Restraint

Abstract: In choosing a mix of monetary and fiscal policies, government authorities (including the central bank) are bound by a government budget restraint. This restraint is less severe than a private individual's or firm's restraint because government authorities can issue fiat money. Nevertheless, the government budget restraint is important. It requires that in each period total government expenditure (transfer payments plus purchases of goods and services) must be equal to the total flow of financing from all sources (including printing money). This means there is a constraint upon the government's freedom to choose arbitrary values of such policy variables as expenditures, taxes, net amount of borrowing from the private sector, and net amount of new money issued. For example, if a government has already decided upon its expenditures, taxes, borrowing, and all other means of finance besides printing money, then it has no further choice about how much money to issue: The net amount issued must be just enough so that the total of flows of financing is equal to expenditure. It is the purpose of this paper to introduce the government budget restraint into a very simple theoretical static macroeconomic model of aggregate demand with a rigid price level, and to show how the analysis of macroeconomic policies is affected by the budget restraint.1 To summarize: the results indicate that the multiplier effect of a change in government purchases cannot be defined until it is decided how to finance the purchases, and the value of the multiplier given by the generally * The work underlying this paper was done partly at the University of Essex and partly supported by a National Science Foundation grant to the John Hopkins University. I am indebted for helpful comments to G. C. Archibald, H. G. Johnson, J. Johnston, D. E. W. Laidler, R. A. Mundell, and F. G. Pyatt. 1 The government budget restraint has also been recognized by Patinkin (1956, pp. 361-65), Hansen (1958, chap. iii), Musgrave (1959, chap. xxii), and Enthoven (1960, pp. 303-59, esp. pp. 315 ff.), among others. After this paper was accepted for publication, two related pieces of work came to my attention: Ritter (1955-56) and Ott and Ott (1965). Both employ the idea of a government budget restraint, but neither carries the analysis as far as is done here.

An Economic Analysis of Internal Migration in Brazil

Abstract: Analyzing interstate migration in Brazil 3 hypotheses or theories of migration are reviewed briefly before presenting the empirical results derived from 2 models--a single equation model and a simultaneous equation model. The model describing migrants behavior in Brazil cannot be formulated out of context with the data available. The major source of data on internal migration is the 1950 census of population. The study is confined to adult males. Migration is studied by age groups: the migrants in the age group 15-29 (to be denoted as "young" migrants) and the migrants in the age group 30-59 (to be denoted as "middle aged" migrants). The most important explanatory variables tried in this study are the wage rate education urbanization density of population geographic distance and the level the rate of growth and the dispersion of income both in the origin region and the destination region. In Brazil internal migration was found to be highly responsive to earning differentials. Distance was a strong deterrent to migration which to a significant extent can be attributed to the direct (monetary and nonmonetary) costs of moving though associated costs and investments are also important. There was evidence that education attracts migrants both in the origin region and the destination region and it clearly promotes migration to the extent that it influences other variables conducive to migration. Economic costs and returns appeared on the whole to dominate the behavior of migrants though some relevance of the noneconomic "push" and "pull" factors is not denied. There was evidence that urbanization and industrialization promote mobility but only shaky evidence that these characteristics in themselves attract migrants. Thus a policy of industrial and employment decentralization does not seem to prove detrimental to migration. Density acquires a gravitation like pull on migrants. The rate of growth of income employed to serve as a proxy for the expansion of income and employment though shaky in some regressions was a signficiant variable on the whole. Significant though not dramatic differences in response to various stimuli by migrants in different age groups were discernible. This result combined with the observed simultaneity among earnings and migration lends support to Juznets selectivity and interaction approach as well as to the capital theoretical approach of Schultz and Sjaastad.

Sources of Productivity Change in Ocean Shipping, 1600-1850

Abstract: Among economic historians, technological change has always held the pre-eminent position as a source of economic growth. Clearly, in the sense that man's productive capacity is always limited by the "state of the art," this imposes at least an upper limit on output. Yet in a world where technological information is at least nominally free, differences in ability to make efficient use of the state of knowledge must account for the widely disparate experience of national economies. While the relative importance of the other factors making possible the efficient use of technology is extremely difficult to isolate on a macroeconomic level, it may be more amenable to measurement on a microeconomic level. This essay presents evidence on sources of productivity change in ocean shipping from 1600 to 1850. its objective being to identify as precisely as possible those sources of productivity usually lumped into the general category of technological change. The conclusion which emerges from this study is that a decline in piracy and an improvement in economic organization account for most of the productivity change observed.

Liquidity Traps for Money, Bank Credit, and Interest Rates

Abstract: Few conclusions about economic events have been repeated as frequently or have had as much influence on economists' attitudes toward monetary policy as the assertion that the monetary system of the thirties was "caught in a liquidity trap." Empirical studies of the public's demand for money and the banks' demand for earning assets seemed to support the assertion about a trap and the closely related conclusion that monetary policy had no effect on output, employment, and prices during at least some part of the thirties.1 Conclusions about the occurrence of a trap and the ineffectiveness of monetary policy were reinforced by central bankers' statements that likened monetary policy to "pushing on a string."2 Taken together, the empirical evidence and the central bankers' interpretations convinced many economists that some form of a trap had existed (Keynes, 1936, p. 207; Fellner, 1948, pp. 81-83, 91-93; Villard, 1948, pp. 324, 334, 345; Shaw, 1950, pp. 283-85).3 There are a number of reasons for re-examining these conclusions and reopening the discussion of liquidity traps. First, recent empirical studies

Price and Non-Price Competition

Abstract: When a uniform price is imposed upon, or agreed to by, an industry, some or all of the other terms of sale are left unregulated. The setting of taximeter rates still allows competition in the quality of the automobile. The fixing of commission rates by the New York Stock Exchange still allows brokerage houses to compete in services such as providing investment information. If additional firms may enter such a price-regulated field at no cost disadvantage, profits resulting from the price regulation will be eliminated in long-run equilibrium. But in the absence of free entry-and both the medallions required of taxis and the seats of New York Stock Exchange members are fixed in number-the question arises: Will any monopoly profit achieved by suppressing price competition be eliminated by nonprice competition? We may emphasize that a symmetrical question arises if the firms are required to sell the same product (that is, have the same non-price variable) but are allowed to compete freely in prices. For example, let every seller of gasoline provide the identical product. Will free price competition eliminate any monopoly profits arising from agreement not to compete in the quality of gasoline? Economists generally attribute much more efficacy to price than to non-price competition without giving any clear explanation of the asymmetry of the two kinds of competition. Let us take advertising as the prototype of non-price variables. A previously competitive industry may form a cartel and (1) fix advertising jointly and allow competition in price or (2) fix price jointly and allow competition in advertising. We examine the two cases in turn. Let each firm be operating, under competition, at output Q0 and price P0 (Fig. 1). Upon colluding on advertising, marginal costs-which include the costs of advertising-are reduced at every output for each firm.1 The 1 Economists who find it uncomfortable to discuss advertising in a competitive industry can substitute another non-price variable (such as durability of product, investment advice, or warranties of free repairs) with only terminological effects.

The Dual of Duopoly Is Complementary Monopoly: or, Two of Cournot's Theories Are One

Abstract: The observation that two theories share the same formal structure, that is, differ only in the interpretation placed on symbols, can almost always be used to simplify a body of knowledge. The purpose of this communication is to demonstrate that Cournot's theories of duopoly and complementary monopoly are formally identical; furthermore, a precise statement of the correspondence which identifies them serves to extend a famous criticism of the duopoly theory. Cournot's duopoly theory (Cournot, 1963, chap. vii) applies to a market situation in which two producers sell identical products, and his complementary monopoly theory (Cournot, 1963, chap. ix) to a market situation in which two producers sell products which are of no use unless combined in a fixed ratio (say 1:1) to form a composite commodity. Edgeworth observed that, in the former case, "there cannot well be supposed two prices; and [in the latter case] . .. there cannot be supposed two (independent variations of the) quantities" (Edgeworth, 1925, p. 122). For two producers (A and B) this suggests a formal definition of duopoly as a situation in which the sum of the producers' outputs (denoted by

Peak-Load Pricing

Abstract: In his recent paper, \" Peak-Load Pricing and Optimal Capacity,\" Professor Williamson (1966) has provided a \"solution\" to the peak-load pricing problem, improving upon the various earlier analyses to which he refers. Both he and his predecessors have made a number of simplifying assumptions. These assumptions were made to make the solution determinate or at least to simplify exposition. The trouble with them is that they remove from the discussion some of the most interesting and important issuesin the field of electricity supply, at any rate. This paper picks out the most important of these assumptions and discusses the implications of removing them for electricity tariffs. Some of the authors in question have already done this for some of the assumptions but not sufficiently to make their solutions practically useful, except perhaps in the case of Houthakker (1951). Thus what follows is an attempt o bring them down from their ivory towers. Like Williamson (1966), I shall assume that the aim is to maximize the sum of producers' and consumers' surpluses. The basic notion which he and his predecessors put forward is fully accepted, given the assumptions. This is that the optimum requires price to exceed marginal running cost in periods when demand is high by amounts which will both restrict demand to capacity output in all of those periods and which sums up over them to equal the marginal cost of capacity. In other periods price must equal marginal running cost.1 The following sections first examine various simplifying assumptions, then discuss some actual tariffs, and finally describe the experimental approach which alone seems capable of giving practical answers to the problem.

The Economics of Fair Employment Laws

Abstract: Twenty-nine states have enacted laws over the past twenty-five years prohibiting discrimination in employment on the grounds of race, creed, color, or national origin, and have created commissions with powers to enforce these laws.1 The orders of agencies administering these laws may be judicially enforced, and failure to comply can result in imprisonment and fines. During this period, more than fifty municipalities have established commissions on discrimination, generally without enforcement powers, designed to supplement the state commissions. Finally, the civil rights bill passed by Congress in 1964 includes an enforceable fair employment law of national scope. Although legislators and civil rights groups have for a long time sought the enactment of new employment laws and the extension of those already on the books, little is actually known about the empirical effects of these

Risk, Impersonality, and the Social Welfare Function

Abstract: In the recent literature on welfare economics it has been held by some writers (for example, Arrow, 1964, pp. 9-10, and Friedman and Savage, 1948, p. 283, n. 11) that individual preferences among risky prospects have little or no relevance for constructing a pattern of social preferences for non-risky social states. In contrast, other writers have expressed the opinion that not only are individual preferences among risky prospects relevant, but also they have a certain logical connection with the intuitive concept of social welfare. The purpose of this note is to examine some of these formulations, to clarify the basic concepts involved, and to assess their bearing on the Arrowian problem of constructing a social ordering by aggregating the individual preferences. The formulations examined are those of Harsanyi (1953, 1955)1 and Vickrey (1960). Section I gives the main propositions advanced by these writers, section II analyzes their ethical bases, and section III suggests how some of Harsanyi's concepts can be used to deal with Arrow's problem. Finally in section IV we indicate some of the difficulties likely to be met in our attempt to use Harsanyi's concepts for deriving a social welfare function of the Arrow type.

Problems of Efficiency in Monetary Management

Abstract: Monetary management as generally understood means the management of the money supply and monetary and credit-market conditions by the monetary authority (the central bank) in the pursuit of certain general social objectives. These objectives may either be assigned to the central bank by the national government or be left to the central bank to establish for itself, depending on whether the central bank is a subordinate instrumentality of national economic policy or is allowed a substantial measure of independence. In the past, economists specializing in the study of monetary management have been predominantly either institutionalists concerned with the detailed structure of the financial system and the precise institutional ways in which the central bank operates on that system in pursuit of its objectives, or economic historians concerned with the evolution of the financial organization of a particular country or countries, the theories of monetary management advocated by historically influential personages, and the influence of these theories on legislation affecting the structure of the financial system and the central bank's concept of its role and functions. (There have, of course, always been non-specialist critics of financial organization and monetary management, some of whom have in due course achieved the status of historically influential personages.) With the professionalization of economics, the accompanying increase in confidence in the scientific approach to economic problems, and the resulting tendency to apply the scientific approach increasingly to problems of economic policy-problems in normative rather than positive economic science-that has occurred since the 1930's and especially since the second World War, economists concerned with monetary management have become decreasingly concerned with institutional and historical questions per se and increasingly concerned with normative problems-that is, with problems of efficiency in monetary management. This approach requires

The Clandestine Distribution of Heroin, Its Discovery and Suppression

Abstract: Heroin that is illegally consumed in the United States derives, for the most part, from opium produced in Turkey which is converted there or in Lebanon to morphine base and which is, in turn, shipped through Istanbul or Beirut to France. In France it is transformed to heroin in small laboratories and is transported to the United States, either directly or via Italy, Canada, or Mexico (Giorgano, 1966, p. 5; U.S. Senate, Permanent Subcommittee on Investigations, 1964, pp. 881 ff.). A distribution system in the United States puts the product into the hands of consumers. There are said to be between 45,000 and 100,000 narcotics addicts in this country,1 about half of whom are in New York City. The trade is illegal, and various federal agencies (mainly the Bureaus of Customs and Narcotics and the Food and Drug Administration) and state and local law enforcement authorities are charged with the responsibility of the execution of the law. The prevention of the contraband introduction of narcotics into the country is apparently very difficult because narcotics are easily transported and concealed and have great value relative to their weight and volume (Anslinger and Tompkins, 1953, p. 172). It is estimated that one and onehalf tons of heroin are brought into the country illegally each year (President's Advisory Commission on Narcotics and Drug Abuse, 1963, p. 5); only a small fraction of this quantity is intercepted and seized by the authorities.

Optimal Capital Accumulation and Corporate Investment Behavior

Abstract: In a previous paper we tested a theory of investment behavior based on the neoclassical theory of the firm at the level of the individual corporation (Jorgenson and Siebert, 1968). More specifically, we have compared the neoclassical theory with alternative explanations of corporate investment behavior based on considerations of liquidity, expected profits, and capacity utilization. For any of the conventional measures of goodness of fit-minimum residual variance, conformity of turning points, number of coefficients exceeding twice their standard errors-the performance of the neoclassical theory is superior to that of the alternative theories.1 In this paper we study the neoclassical theory of corporate investment behavior in more detail. We begin by outlining a theory of optimal capital accumulation based on maximization of the market value of the firm. From a purely formal point of view, the theory is simply the intertemporal analogue of the usual atemporal theory based on profit maximization. Under our characterization of technology, a more direct connection with profit maximization may be developed. Maximization of the value of the firm implies maximization of profit at each point of time, where profit is defined as the difference between net revenue on current account and the implicit rental value of capital services supplied by the firm to itself. The implicit rental is calculated through a "shadow" or accounting price for capital services that depends on the cost of capital, the price of investment goods, the rate of change of this price, and the tax structure for business income.2 Of course, profit in this sense differs from the usual accounting definition for tax purposes.

Effective Tariffs, Domestic Cost of Foreign Exchange, and the Equilibrium Exchange Rate

Abstract: The use of traditional two-commodity, two-country models had long restricted the theory of tariffs to a consideration of final goods. In recent years, however, attention has been given to the protective effects of tariffs on commodities at various stages of fabrication, and efforts have been made to evaluate the impact of trade policies on resource allocation. Two major trends of thought stand out in this development: Michael Bruno (1963; 1967, pp. 88-135) and Anne Krueger (1966) have examined the domestic cost of foreign exchange, while, among others, Bela Balassa (1965), H. G. Johnson (1965), and W. M. Corden (1966) have focussed on the effective rate of protection of individual industries. The purpose of this paper is to indicate the relationship between the two measures and their relevance for the choice among individual industries in a developing country. In this connection, we will also deal with questions of comparative advantage and "equilibrium" exchange rates.

Notes on optimal monetary growth

Abstract: The question of the optimal size and rate of growth of the money supply has at least as many meanings as there are definitions of "money." Three possible interpretations of the question are: (1) What are the optimal size and the optimal rate of growth of the central government's deadweight debt to its citizens? (2) What are the optimal size and the optimal rate of growth of the supplies of currency and other means of payment? (3) What is the optimal degree of financial intermediation in an economy, and what is its optimal rate of expansion? In some models one or two of these interpretations vanish, or merge. An important example is the simplest monetary extension of the standard aggregative neoclassical growth model. In this extension money as government debt and money as means of payment are identical. It is assumed, in other words, that all government debt takes the form of means of payment -either directly as currency or indirectly as demand deposits backed 100 per cent by currency or other government obligations-and that all means of payment are directly or indirectly obligations of the central government. Under these restrictive assumptions, interpretations (1) and (2) merge. At the same time these models ignore private financial markets and intermediaries, so that question (3) does not arise.

The Trade-Off between Inflation and Unemployment

Abstract: An economic policy which is designed to stabilize aggregate economic activity must be based on three fundamental decisions. They are, first, the decision on the optimum pressure of effective demand upon the aggregate productive capacity of the economy (this optimum pressure need not necessarily remain constant over the relevant planning period); second, the decision on the methods and speed of adjusting the present level of effective demand to its optimum; and, third, the decision on the methods by which the actual level of effective demand is to be kept at its optimum. The three decisions may be interdependent, and particular economic policy makers need not take them separately or explicitly; their policy measures, however, will imply them. The present paper is devoted almost exclusively to a discussion of the first type of decision, but this should not be taken to imply that the other two are either unimportant or easily taken. Discussions of the optimum level of effective demand are by no means new. One of the earliest careful studies of this problem seems to have been undertaken by Beveridge, who advocated a level of effective demand which would keep the level of unemployment at 3 per cent in the United Kingdom. As is well known, more recently the Council of Economic Advisers has recommended 4 per cent unemployment as a target in the United States. What does appear to be comparatively new is that economists are becoming more and more aware of the notion of "trade-offs" between varying pressures of demand and other objectives of economic policy. In Western industrial countries, a rise in effective demand usually leads to a rise in real GNP, and this happens even when the pressure of demand is already

Measuring Protection in a Developing Country: The Case of Pakistan

Abstract: In the recent literature on international trade and economic development, the subjects of protection to domestic manufacturing industry, the encouragement of "import substitution," the possible gains from restricting trade through the use of tariffs, and the welfare losses from inappropriate trade restrictions have all played an important part. One recent contribution familiar to readers of this Journal is the notion of protection to value added, or implicit or effective protection, as opposed to the more usual procedure of examining the level of tariffs on goods to determine the level and structure of protection. As yet there have been few empirical studies of the levels of effective protection, particularly in the developing countries.' The purpose of the present study is to examine various measures of the level and structure of protection, both in principle and empirically, in the case of Pakistan. First, we have made use of a substantial body of material on direct price comparisons for goods in Pakistan and in international trade in order to calculate a basic set of effective rates of protection or subsidy. Price data are used because tariffs are not the principal determinant of the differentials between world and domestic prices in Pakistan, since (1) some tariffs are redundant and overstate the level of protection implied by the tariff structure and (2) quantitative restrictions, not tariffs, * Comments by Bela Balassa, Richard Bird, Hollis Chenery, Paul Clark, Morton Grossman, Harry Johnson, John Sheahan, other colleagues at Williams and at Harvard, and other participants in a Colloquium on Industrialization and Trade Policy, held in Williamstown in November, 1966, were all helpful to us in revising an earlier draft of this paper. We remain accountable for the final result. This paper was prepared in connection with a study entitled "The Structure of Protection in Developing Countries," sponsored jointly by the World Bank and the Inter-American Development Bank, who, of course, are not responsible for any errors or for the opinions expressed by the authors. 1 Studies have been made for Argentina (Balassa, 1966), Pakistan (Soligo and Stern, 1965; and Lewis and Radhu, 1966), and the Philippines (Power, 1967) and are in the process of completion for other countries.

How to Co-operate in Business without Really Trying: A Learning Model of Decentralized Decision Making

Abstract: It may be said that learning is involved in a decision whenever a previous action is evaluated according to its success or failure in satisfying some criterion of choice and the succeeding action is influenced by this comparison.1 Learning may enter the decision-making process in either or both of two non-trivial ways. A fixed decision-making procedure or \" operator\" may include alternative responses or strategies that depend on the success or failure of preceding actions. Or, learning may involve the selection of alternative decision-making procedures by altering the way information is considered, that is, by altering the strategies or rules themselves. The first involves adaptation to experience according to fixed rules. The latter involves adaptation to experience by modifying the very rules by which decisions are made.2

Monetary and Fiscal Policies in Open Economies under Fixed Exchange Rates: An Optimizing Approach

Abstract: Assigned the task of discussing the choice of monetary and fiscal policies for open economies under fixed exchange rates, one has a hard time not to end up writing a general treatise on macroeconomic theory. This paper will perforce be limited to a number of selected topics, unified by what may be called an optimizing approach. Emphasis will be on problems of the analytical infrastructure rather than on specific prescriptions for current policy problems. The first section is a brief survey of the usual fixed-target approach. Section 11 presents the analytical outlines of an optimizing approach with variable targets. This approach is then illustrated by a short-run model in Section III. In Section IV the optimizing approach is applied to a long-run growth model of an open economy. Section V extends the analysis to two interdependent economies. In Section VI the problem of the "policy mix" is considered from the point of view of the gold-exchange-standard area as a whole. The paper concludes with a discussion of long-run price stability.

Normally, Factor Inputs Are Never Gross Substitutes

Abstract: It is said that production is normal when an increase in the input of one factor increases the marginal productivity of the others. A method introduced by D. V. T. Bear (1965) can be used to demonstrate that factor inputs into competitive firms are normally gross complements. This result has been anticipated for the case of " nearly " constant-returns production.' In contrast, some results about relative factor inputs can be deduced which agree with the usual assumptions that increasing one factor price increases the demand of the others relative to the one. To recapitulate Bear's analysis, the firm maximizes

Adam Smith, Consumer Tastes, and Economic Growth

Abstract: of Smith's major work is explicitly concerned with the theory of value. If one is interested also in inquiring into the nature and causes of the wealth of nations-and it is at least arguable that Smith possessed such an interest -it is possible that demand-side forces may be utilized in an important way. In describing and accounting for the process of economic growth as it occurred in Europe, does Smith rely heavily on demand forces as explanatory variables? Granted his limited use of demand within an analytical context, are such forces important within the framework of historical generalizations concerning economic growth? This paper will attempt to furnish an affirmative answer to the last question. It will be argued that the taste and preference structure of consumers-or at least certain classes of consumers-is indispensable to Smith's explanation of the process of economic growth. More specifically, it will be shown that (1) the composition of demand and (2) the impact of the availability of new commodities upon household behavior have, historically, been critical determinants of the "progress of opulence in different nations." 1 It will be argued further that Smith has a fairly well integrated view of

Jules Dupuit and the Early Theory of Marginal Cost Pricing

Abstract: The name of Jules Dupuit, the nineteenth-century French engineer, has been frequently invoked in contemporary economic literature concerned with marginal cost pricing (Hotelling, 1938, pp. 242-44; Nelson, 1964, pp. vii-viii) and cost-benefit analysis (Prest and Turvey, 1965, p. 683). Although his contributions in the area of utility theory (Stigler, 1950), consumers' surplus (Houghton, 1958), and price discrimination (Edgeworth, 1912) were, by any standard, remarkable for the time, his role as proclaimed mentor of the modern theory of marginal cost pricing and, more generally, of cost-benefit theory has been largely unexplored and often misunderstood. The result has been a general confusion among modern theorists concerning his achievement in this area.1 Most writers have not bothered to investigate Dupuit's original works and, following Hotelling's original attribution, have simply accepted Dupuit as the first marginal cost theorist. Ragnar Frisch, Hotelling's first critic, may be placed in this camp (Frisch, 1939, p. 145). Such neglect has probably been nurtured by the relative obscurity of his writings and by the fact that, until recently, only two of his economic articles have been translated into English (Dupuit, 1844, 1849b). The purpose of this article is to assess the nature of Dupuit's contribution to the welfare theory of marginal cost pricing. It will be concluded that although Dupuit has rightful claims as the first cost-benefit economist,

A Note on the Quality Dimension in Education

Abstract: We report here some evidence of association between the amount a state spends per year on primary and secondary education and the later earnings of people who went through those school systems. The relation remains strong, even after strenuous attempts to eliminate spurious correlation, and can be interpreted as an estimate of the payoff to individuals from added annual expenditures which presumably increase the quality of education. We start with a national probability sample of family heads interviewed early in 1965 and remove most of the effects of the " quantity " of education (years of school completed), and of age, sex, and racial differences, on the hourly earnings of family heads. Then we relate the unexplained residual earnings to the average state and local expenditures on primary and secondary education years ago in the state where each person grew up.1 Most of the microanalysis of the "payoff" to investment in education has used "years completed" as the measure of the amount of education, but only some additional information on the "payoff" to investment in ' more education per year" can answer the question of whether the correct social policy is more years of school or more expenditure per year.2 Macroanalysis can make use of expenditures on education rather than years of school, but only at the expense of aggregation that causes other difficulties. The investment in education includes more than the public expenditures, of course, and the return is more than the increase in earnings. We use hourly earnings rather than annual earnings to assess the potential effect, and if one is interested in social return, it can be argued that differential

The Uniqueness of Commercial Banks

Abstract: a) Fluctuations in bank reserve ratios have a significantly greater impact on total intermediary credit than comparable, or even substantially larger, fluctuations in ratios of non-bank intermediaries. b) This greater potential impact of banks on credit is most pronounced in credit expansions, but it is also evident in credit contractions. It holds irrespective of whether non-bank intermediaries can produce "multiple credit" change. c) These patterns persist even after considering the more rapid secular growth of non-bank intermediaries than of banks. d) In the absence of controls, banks probably also have a greater propensity to vary their reserve ratios in a destabilizing way; however, our main point that banks have greater potential for instability holds even without this propensity. e) The destabilizing impact of changes in bank reserve ratios arises directly from their role as custodians of the means of payment.

Excise Taxes and the Gains from Trade

Abstract: The ability of a given country to improve its welfare at the expense of its trading partners by imposing an appropriate tariff is well known1 Moreover, it is also well known that a given country can reproduce an optimal tariff by appropriate combinations of production and consumption taxes (Lerner, 1936) However, with relatively few exceptions, the implications of the imposition of a separate consumption or production tax have not been analyzed2 It is the purpose of this paper to rectify this omission and to examine explicitly how a country can exploit a degree of monopoly power in international trade by imposing either one of these taxes The framework for the analysis is the standard two-country, twocommodity model of international-trade theory Let C1 and Xi represent consumption and production of commodity i in the home country, and let Et, the excess demand, be defined as Ci Xi Starred variables refer to the corresponding quantities in the foreign country The home and world prices of the second commodity in terms of the first are denoted by p and p*, respectively The technology and the fixed factor endowments of the home country are reflected in an increasing-cost production-possibility frontier, described by X1 = T(X2), T' 0 and E*' < 0 Let U be a social-welfare index depending only on the aggregate amounts of the two commodities consumed