Showing papers in "The American Economic Review in 1972"

Production, information costs, and economic organization

Abstract: This publication contains reprint articles for which IEEE does not hold copyright. Full text is not available on IEEE Xplore for these articles.

The Statistical Theory of Racism and Sexism.

Abstract: My recent book, Inflation Policy and Unemployment Theory, introduces what is called the statistical theory of racial (and sexual) discrimination in the labor market.' The theory fell naturally out of the non-Walrasian treatment there of the labor "market" as operating imperfectly because of the scarcity of information about the existence and characteristics of workers and jobs. A paradigm for the theory is the traveller in a strange town faced with choosing between dinner at the hotel and dinner somewhere in the town. If he makes it a rule to dine outside the hotel without any prior investigation, he is said to be discriminating against the hotel. Though there will be instances where the hotel cuisine would have been preferable, the rule represents rational behavior it maximizes expected utilityif the cost of acquiring evaluations of restaurants is sufficiently high and if the hotel restaurant is believed to be inferior at least half the time. In the same way, the employer who seeks to maximize expected profit will discriminate against blacks or women if he believes them to be less qualified, reliable, long-term, etc. on the average than whites and men, respectively, and if the cost of gaining information about the individual applicants is excessive. Skin color or sex is taken as a proxy for relevant data not sampled. The a priori belief in the probable preferability of a white or a male over a black or female candidate who is not known to differ in other respects might stem from the employer's previous statistical experience with the two groups (members from the less favored groups might have been, and continue to be, hired at less favorable terms); or it might stem from prevailing sociological beliefs that blacks and women grow up disadvantaged due to racial hostility or at least prejudices toward them in the society (in which latter case the discrimination is self-perpetuating). The theory is applicable to the class of "liberal" employers and workers who have no distaste for hiring and working alongside black or female workers. By contrast, the theory of discrimination originated by Gary Becker is based on the factor of racial taste. The pioneering work of Gunnar Myrdal et al. also appears to center on racial (and, in an appendix, sexual) antagonism. Some indications of interest in the new theory, and the independent discovery of the same statistical theoryby Kenneth Arrow, convince me that it is time for a formalization of the theory in terms of an exact statistical model. Though what follows is very simple, it may be useful to those who like exact models and it may stimulate others to develop the theory further. An employer samples from a population of job applicants. The employer is able to measure the performance of each applicant in some kind of test, yi, which, after suitable scaling, may be said to measure the applicant's promise or degree of qualification, qi, plus an error term, ps.

The Sizes and Types of Cities

Abstract: This paper presents a simple general equilibrium model of an economy where production and consumption occur in cities. The paper focuses on the different sizes and types of cities generated by market forces and whether these market forces generate optimally size cities. Before the model is presented, four complex questions are naively answered, revealing the most basic concepts underlying the paper and intellectual debts to the existing literature. First the model of a single city is presented. How factor rewards and cost of living vary with city size is analysed. Given these results, the paper presents an analysis of market equilibrium and optimum city size. Finally, equilibrium in an economy with multiple types of cities is examined. At the end of the paper, we discuss how natural resources and transportation costs in trade can be integrated into the model. Throughout the paper, it is assumed that capital and labour are scarce resources and perfectly mobile within the economy. The economy is situated on a flat featureless plain, large enough so that land per se is never a scarce resource (although location will be a scarce resource). This non-critical assumption implies the opportunity cost of land is zero. Lastly, there are no specified transport costs of inter-city trade.(This abstract was borrowed from another version of this item.)

The Demand for the Services of Non-Federal Governments

Abstract: The empirical literature relating crosssectional variations of per capita public spending to various economic, political and demographic factors is both lengthy and varied.' Differences in expenditures over political units are explained by differences in per capita incomes, urbanization, area, population density, taxable capacity, tax rates, absolute population size, grantsin-aid from higher levels of government, and school-aged population rates. With few exceptions,2 the models employed in these studies are ad hoc constructions with little basis in the theory of choice.3 Our aims are to posit a model of public spending derived from the received theory of collective decision making4 and to test the significance of certain variables assumed by this simple theory to be important determinants of the levels of state and local government expenditures.

The Second Crisis of Economic Theory

Abstract: This chapter discusses the second crisis of economic theory. It is related to the first crisis—the great slump of the thirties. The first crisis arose from the break­down of a theory that could not account for the level of employment. The second crisis arose from a theory that could not account for the content of employment. The second crisis links up with the first. The first crisis failed to be resolved because there was no solution to the problem of maintaining near-full employment without inflation. The experience of inflation has destroyed the conventions governing the acceptance of existing distribution. Income from property is not a reward of waiting but a reward of employing a good stock broker. There is also the problem of the relative levels of different types of earned income. The chapter also discusses the marginal productivity theory.

Job Search, the Duration of Unemployment, and the Phillips Curve: Comment

Abstract: Paul Gayer and Robert Goldfarb (G-G) are certainly correct when they claim that job qualifications are imperfect predictors, not accurate measures of the potential productivity of prospective workers. Their statement that my neglect of this distinction and the learning asymmetry, namely that employers have the opportunity to learn about the true productivity of any employee but not about the productivity of any rejected applicant, are responsible for my conclusion that there is no long-term tradeoff between unemployment and inflation may also be correct. However, G-G confuse the issue by appealing for the relevance of "institutional and organizational constraints" on wages; this argument is not needed to make their case. In my opinion, they have also overlooked potentially important contributions to our understanding of "hidden unemployment, "underemployment," and aggregate labor productivity. In this reply I attempt to clarify their argument on the Phillips curve issue and to point out some of these other contributions. To see clearly the implications of the G-G hypothesis for the Phillips curve, we must contrast the equilibrium situation implied by the model analyzed in my paper with that implied by the model as they amended it. For the purpose of the comparison, we explicitly assume that there are no artificial constraints on the eventual adjustment of wages. Hence, in either situation, the wage structure defined as a relationship between wage offers and qualifications will adapt so that all of those willing to work, given the structure, will be able to after an appropriate period of search. This conclusion appears to be at odds with the G-G statement, elaborated in footnote 3, that wages at the lower end of the structure may have to be negative. This appearance of conflict is resolved when one recognizes the fact that participants will decide not to supply their services well before the wage offered falls to zero. In terms of classical supply and demand analysis, it is reasonable to expect, for the reasons given by G-G, that the demand curve for labor whose qualifications are sufficiently poor will intersect the wage axis at a level equal to no less than the wage at which the supply curve intersects the same axis. In other words, no worker with these qualifications is willing to work in return for either his actual net marginal product in my world or his expected net marginal product in the world of Gayer and Goldfarb. Although the characteristics of equilibrium in the two cases can be described in identical terms, the interpretations differ significantly. First, consider the case in which qualifications and productivity are equivalent. Although we may lament for those whose low productivity have forced them to decide to stay home with the kids or engage in some other nonmarket activity and we may recommend training programs and minimum incomes as solutions to their economic plight, we cannot objectively classify them as involuntarily unemployed. However, if qualifications are only related to productivity in a stochastic sense, then there will be some among those who have chosen not to work who are nevertheless productive enough to earn a wage at which they would be willing to work if the true facts were known to the appropriate employer. Their unemployment is "hidden" behind a veil of imperfect information and will remain so because the existing information exchange mechanisms will not reveal the truth in equilibrium. One is hard pressed to classify the situation of such workers as anything other than involuntary unemployment. What about the Phillips curve? Having * Associate professor, Northwestern University.

Brazilian Size Distribution of Income

Abstract: The two postwar decades have resolved definitively the capacity of developing nations to expand at rates in excess of 2 percent per capita. Yet it has become increasingly apparent that such a yardstick is an inadequate measure of performance. Here I examine another and more neglected dimension of development, the distribution of income. My objectives are fourfold: to describe briefly the procedures used to derive an estimated income distribution for Brazil for 1960;1 to discuss the profile of poverty as it presents itself in a developing country; to indicate the factors operating to produce skewness in the Brazilian distribution; and to assess, in light of these and governmental policy measures in the 1960's, the apparent changes between 1960 and 1970.

Testing for the Existence of a Consistent Aggregate Index of Labor Inputs

Abstract: : The purpose of the report is to estimate a production function for U. S. manufacturing with the labor input disaggregated into production and nonproduction workers, and then to test whether a consistent aggregate labor index exists. It is found that nonproduction workers and capital are complements, while production workers and capital are substitutes. This authors conclude that even though production and nonproduction workers in U. S. manufacturing are highly substitutable, there is no way to consistently aggregate them. (Author)

The Contradictions of the Green Revolution

Abstract: Radical intellectuals have been noticeably absent from recent discussion of the Green Revolution. This neglect is surprising given the importance being openly attached to this new agricultural strategy by the same foreign policy institutions which are often targets of radical research. The Ford and Rockefeller Foundations, the Development Advisory Service, the World Bank, and USAID have all provided either financing or managers for the Green Revolution. The neglect is also strange in a generation of radical economists who have been more impressed by the peasant revolutions of China and Vietnam than by Marx's vision of revolution by an industrial proletariat. Even a cursory review of the easily available literature shows an omnipresent fear on the part of capitalist policy makers that in parts of Asia the Green Revolution may have a sizable negative impact on social stability and increase the possibility of peasant insurgency. This paper attempts to bring the Green Revolution to the attention of radical economists and to open a discussion about the importance of the phenomena to U.S. imperialism and revolutionary strategy at home and abroad. I. The Green Revolution and Imperialism

Constraints on Government Investment Opportunities and the Choice of Discount Rate

Abstract: (outline): section i contains the basic argument and the most important conclusions. it would be possible to take away the main message without reading further. the remaining sections are principally concerned with the amplifications and extensions required to enable the theoretical conclusions to be practically applied. in section ii i discuss the procedure for calculating the shadow price of capital, which plays a central role in the theoretical analysis. in section iii and iv the model is extended to recognize many different private investment sectors and multi-period projects. in section v i offer some concluding remarks about the prospects for detailed application of the model, coming back at that point to the thesis that discounting at a pure time preference rate a defensive rule of thumb for government choices.;

Security Pricing and Investment Criteria in Competitive Markets: Reply

Abstract: Recently, Jan Mossin presented a security pricing model within the framework of a market equilibrium theory. The model is based on particular preference structures of investors, specified in terms of quadratic utility functions with final wealth as the argument of the functions. As an implication of his model for the firm's optimal investment policy, Mossin demonstrates how Proposition III put forth by Franco Modigliani and Merton Miller (1958) can be validated. In addition, the analysis is extended to suggest investment criteria for investments with completely arbitrary yield characteristics. The purpose of this comment is twofold. First, to show that Mossin's proof of the validity of M-M's Proposition III is questionable, given his assumptions. Second, an attempt is made to show how a troublesome assumption of Mossin's analysis could possibly be eliminated. For the sake of exposition, Mossin's securitv pricing model as shown on page 752, equation (6), is stated below with all relevant definitions:

Maximum Principles in Analytical Economics

Abstract: Lecture to the memory of Alfred Nobel, December 11, 1970 (This abstract was borrowed from another version of this item.)

Macroeconomics of Unbalanced Growth: Reply

Abstract: There is no doubt that Michael Keren is right and that the point is important.1 In the initial discussion of my model, I simply misinterpreted the rising relative cost of the urban public services to nmean that it will beconme harder for society to provide them. As Keren shows, the rising productivity elsewhere in the economy that is the source of the increasing opportunitv cost of the services, also automatically nmeans that the conmmunity will be able mor-e easily, if it wishes, to pay for these services, despite their rising cost. The implications of Keren's point are worth spelling out. The basic argument of the original anal-sis still renmains valid: the financial problem of the cities increases (in part) because the costs of the services rise more rapidly than the general price level. This may well lead to cumulative deteriora

The optimum life of a patent : reply

Abstract: The pure case of invention, royalty, and patenting in my work and in Scherer's exposition is based on the following assumptions: 1. The supply of inventors (or inventing firms) is perfectly inelastic. Inventors choose the level of inputs to maximize discounted profits. 2. Inventions are "small" (or "run-ofthe-mill") process inventions. 3. There is no uncertainty, and the social rate of discount is equal to the private discount rate. 4. Patents confer complete protection over the invention. 5. There is no technological change, cost reduction, or competitive patenting. 6. The product and factor markets are competitive.