Showing papers in "The Review of Economics and Statistics in 1960"

Mercantile Credit, Monetary Policy, and Size of Firms

Abstract: IN the continuing debate about the role of money, credit, and monetary policy in our society, one of the major issues centers around the specific incidence of "tight money" on individual business firms. On the one hand, leading proponents of monetary controls as a regulatory device have emphasized the general, impersonal nature of such controls. They have argued that the impact of monetary policy is determined by the reaction of individual borrowers to changed market conditions. On the other hand, critics of general controls have suggested that institutional changes have led to discrimination by suppliers in the market for money and credit. Differences in size of firm, market structure, or type of industry, the amount of liquid assets which firms may accumulate, imperfections in the capital markets, and a variety of other institutional phenomena have been offered as reasons for the failure of monetary policy to operate as a general, impersonal, control device. Some of these institutional restrictions have been summarized under the general heading of "credit rationing." Both conjecture and empirical observation of the structure of bank loans have suggested that credit rationing favors large firms.' But those who suggest that this is the case ignore important institutional arrangements that work in the opposite direction. Banks and financial institutions are not the only sources of credit for small firms. The existence of a large volume of interfirm (mercantile) credit makes it apparent that business firms borrow from each other.2 Variations in the volume and distribution of mercantile credit are important accompaniments of monetary policy changes. During the recent tight money period, for example, the increase in mercantile credit by the manufacturing sector was three times larger than the increase in the money supply (currency plus adjusted demand deposits). We show below that, when money was tightened, firms with relatively large cash balances increased the average length of time for which credit was extended. And this extension of trade credit appears to have favored these firms against whom credit rationing is said to discriminate. Hence the credit provided by banks and financial institutions seems to have been redistributed to restore much of the general, impersonal nature of monetary controls during I955-57. Moreover, the reduction in cash balances by liquid firms helps to explain the increase in the income velocity of money during the recent tight money period. The following section examines the relationship between a measure of monetary tightness and the liquidity of manufacturing firms of varying size. Section II discusses the important factors influencing the allocation of trade credit. Section III points out differences in the sources and allocation of funds for large and small firms during I955-57 and compares the impor* I appreciate the assistance and helpful suggestions of my colleagues G. L. Bach, R. M. Cyert, David Granick, and Edwin Mansfield, who read earlier drafts of this paper. This research was supported by grants of the Carnegie Institute of Technology Graduate School of Industrial Administration from the School's research funds and from funds provided by the Ford Foundation for the study of organizational behavior. 'Professor W. L. Smith has suggested that small firms ''are more dependent on the banking system than large firms are, have fewer alternative sources of funds, and seem in general to be more vulnerable to the effects of tight credit." Compendium of Papers Submitted by Panelists Before the Joint Economic Committee, March 3I, I958, 505-506. Over a year earlier, the Committee had summarized the situation as follows: Chairman Patman: "It is the little fellow that is hurt, and the big fellow is not hurt at all." "Monetary Policy: I955-56," Hearing before the Subcommittee on Economic Stabilization of the Joint Economic Committee, December io and ii, I956, 34-35. See also J. K. Galbraith, "Market Structure and Stabilization Policy," this REVIEW, XXXIX (May I957), I24-33. 2 Lending by suppliers to their customers through the extension of trade credit has long been recognized as a form of interfirm relationship. Sayers and Foulke have noted that one of the prime reasons for the development of mercantile credit in the nineteenth century was the need of merchants to obtain short-term credits in circumstances under which banks did not lend. R. S. Sayers, "Central Banking in the Light of Recent British and American Experience," Quarterly Journal of Economics, Lxiii (May I949); R. Foulke, Behind the Scenes of Business, Dun and Bradstreet, I937.

The Economics of Tie-in Sales

Abstract: A tie-in sale or lease is ordinarily defined as one in which the seller of the ‘tying’ good requires that one or more other goods used with the tying good also be purchased from him. However, I intend to use the term more broadly and define a tie-in sale as one which simply requires that the purchaser of the tying good purchase his ‘requirements’ of one or more ‘tied’ goods from the seller of the tying good. Since I do not treat tie-ins requiring purchase of specific quantities of tied goods, it could be said that this study is essentially concerned with full-line forcing. An important conclusion of the study is that complementarity of the tied with the tying good is not essential to the rationale of a tie-in sale; all of the major results can be derived on the assumption that the tying and tied goods are independent in demand in the sense that ∂x i /∂p j = 0. The tying arrangement is seen as a means of extracting the profit inherent in an ‘all or nothing’ selling arrangement and can be analyzed in very general terms.2 The model is static; the study shows that tying arrangements can be viewed in a context apart from extension of monopoly or exclusion of entry. Of course, it does not follow that tying arrangements cannot be viewed dynamically. On the other hand, it is submitted that there are, for example, many cases of full-line forcing that cannot be explained by any hypothesis thus far advanced.

International Differences in the Distribution of Income

Abstract: N this paper the distribution of before-tax income among consumer units in ten other countries is compared with that of the United States, and an attempt is made to explain the differences that are observed. The comparisons are made by selecting, from the relative wealth of American data, distributions that match those for other countries as closely as possible with respect to the strata of society covered, the concept of the incomereceiving unit, the definition of income, and general technique (e.g., whether tax returns or sample surveys or both were the basic source of information). The results are presented in a highly summarized form in Table i. The measures of inequality, the source materials, the way in which different bodies of data were matched, and the biases affecting particular comparisons are discussed in detail elsewhere.' Although we shall summarize some of the general sources of bias affecting the comparisons, our main attention in this paper will be devoted to the explanation of international differences in equality. While the comparisons in Table I still contain unknown margins of error, it seems likely that Denmark, Israel (Jewish population only), and the Netherlands have less inequality than the United States (with more certainty about Denmark than the others); Great Britain, Japan, and Canada about the same degree of inequality (with the first probably having a little less and the last a little more inequality than the United States); and Italy, Puerto Rico, Ceylon, and El Salvador more inequality than the United States (in most probable order of increasing inequality). The position of the last four countries tends to confirm the results of earlier comparisons indicating greater inequality in underdeveloped countries than in developed ones.2 Indeed, the remaining biases in the comparisons probably work in the direction of understating the relative equality in the distribution of income in the United States vis-a-vis the other countries, and, more generally, in the developed vis-a-vis the underdeveloped countries. Among the factors that tend to bias the comparisons so as to underestimate the extent to which the underdeveloped countries have less equality are (i) the frequent inclusion of non-money incomes in the data of developed countries and their exclusion in many distributions of the undeveloped countries, (2) the possibility that the lengthening of the accounting period beyond one year might reduce inequality more in the developed than in the underdeveloped countries, (3) the effect of old age pensions prevalent in the rich but not in the poor countries -in splitting off older individuals from units containing economically active persons and thus increasing the relative number of lowincome units in the rich countries, and (4) the likelihood that high incomes tend to escape measurement to a greater degree in underdeveloped countries which tend to have less efficient tax administration. The major factors working in the opposite direction are (i) the omission of incomes accruing mainly to high income units in the form of capital gains, expense accounts, and other tax-free forms, and (2) the existence of international differences in price structure of such a character that interclass differences in prices reduce the observed inequality in the distribution of money incomes more in poor than in rich countries. Considering the varied aspects of inequality measured by our five indexes, the results ' See Chapter VII of the author's Structure of Income, a forthcoming volume in the monograph series of the University of Pennsylvania's Wharton School Study of Consumer Expenditures, Incomes and Savings. The Study has been supported by a grant from the Ford Foundation. The author wishes to acknowledge helpful comments on an earlier version of this paper made by R. A. Easterlin, I. Friend, L. R. Klein, and S. Kuznets. Mr. Manoranjin Dutta did the statistical work. 2T. Morgan, "Distribution of Income in Ceylon, Puerto Rico, the United States and the United Kingdom," Economic Journal, LXIII (December I953), 82I-34; and S. Kuznets, "Regional Economic Trends and Levels of Living," F. M. Hauser, ed., Population and World Politics (Glencoe, Ill., I958), 79-II7.

The Distribution of Ability and Earnings

Abstract: ONE of the standard problems in distribution theory has been to explain the skewness of the personal income distribution. In particular much has been written to explain the apparent contradiction between the allegedly normal distribution of abilities and the skewed distribution of income.' While this attempt to relate the distribution of earnings to the underlying distribution of ability is still with us,2 another approach has become popular in recent years.3 This new approach is not concerned with the distribution of abilities; instead it shows how "chance" elements can generate a lognormal, a Pareto, or a similar income distribution.4 This "chance" approach has provided a new way of looking at the income distribution, but its proponents have paid too little attention to the economic meaning of the proportional shock mechanism.5 The present paper tries to combine parts of both of these approaches. It starts with the assumption of a normal distribution of ability and then shows how this leads to a lognormal distribution of earnings. This assumption of a normal ability distribution is only an expository device; as is shown in the Appendix there is little reason to assume that ability is in fact normally distributed. The theory to be developed here deals only with earnings, i.e., wages and salaries. For property income the economic rationale of the multiplicative assumption used by the "chance" theories presents no problem. If a man's income increases so will his savings, at least in dollar terms, and hence, next year he will have a greater stock of income-bearing property.

A General Equilibrium Model of Production, Interregional Trade, and Location of Industry

Abstract: T HIS paper contains a model that emphasizes the intimate connection between interregional trade and the location of economic activity. The author has blended input-output and linear programming techniques in order to achieve substitution and optimization within a general equilibrium framework. What emerges is a multi-region, multi-commodity, empirical study in comparative advantage. To the author's knowledge, it is the first such study. The Census regions of the United States are the areas analyzed. However, the model can be applied to most groupings of regions for which transfer costs rather than artificial restrictions are the major impediments to trade. It also seems likely that a related approach could contribute to understanding the problems of adaptation which confront members of the European Common Market and other contemplated economic unions. As mentioned above, the model synthesizes two approaches to interregional analysis: linear programming as applied to transportation problems, and regional input-output methods. These two techniques have been applied to quite different problems in the past. Three things are taken as given in the typical linear programming transportation study: (i) quantities of a specified good that are available at a number of originating points; ( 2) quantities of the good that are required at a number of destinations; (3) the cost of transporting a unit of the good from each origin to each destination. The problem is to find a network of trade which will satisfy the requirements with a minimum total expenditure on transportation. Thus, the transportation model concentrates on an individual good and sDecifies nothingz so far as interindustry relationships are concerned. It begins with known regional production and consumption and determines the network of trade for a specified good. Regional input-output techniques emphasize the interconnections between industries. Their aim is to determine outputs and requirements of all goods in all regions. To accomplish this, these studies have found it necessary to make assumptions regarding patterns of trade. In one way or another they have treated trade patterns as a datum. It is precisely this aspect of regional input-output analysis that is changed in the present study. Trading patterns as well as regional outputs and requirements of all goods are determined. The model involves the introduction of alternative production techniques and substitution into input-output analysis. This substitution takes place between regions. However, the model can be adapted to permit substitution between industries and between different technological layers of the same industry. The paper is divided into three sections. The first contains a description of the basic model. The second contains a brief explanation of the data and computational difficulties and how these difficulties were overcome by making adjustments in the model. The final section contains some of the empirical results and an analysis of these results. Thus, the first section will help the reader to comprehend more readily the empirical analysis and the reasons behind some of its restrictive assumptions. It also brings to light certain important issues which the empirical analysis must ignore. The second section, on the other hand, will help the reader to understand the process whereby the conceptual scheme was converted into an empirical study.

Another View of Cost-Push and Demand-Pull Inflation

Abstract: Some people regard “inflation” as a cause of a general rise in prices, while others use the word as a synonym for a general rise in prices. If cost-push inflation is the correct diagnosis, trade unions are to be blamed for demanding excessive wage increases, and industry is to be blamed for granting them, big business may be blamed for raising “administered prices” of materials and other producers goods to yield ever-increasing profit rates, and government may be assigned the task of persuading or forcing labor unions and industry to abstain from attempts to raise their incomes, or at least to be more moderate. If demand-pull inflation is the correct diagnosis, the Treasury is to be blamed for spending too much and taxing too little, and the Federal Reserve Banks are to be blamed for keeping interest rates too low and for creating or tolerating too large volume of free reserves, which enable member banks to extend too much credit.

Estimating the Returns to Education

Abstract: When any expensive machine is erected, the extraordinary work to be performed by it before it is worn out, it must be expected, will replace the capital laid out upon it, with at least the ordinary profits. A man educated at the expense of much labor and time to any of those employments which require extraordinary dexterity and skill, may be compared to one of those expensive machines. The work which he learns to perform, it must be expected, over and above the usual wages of common labor, will replace to him the whole expense of his education, with at least the ordinary profits of an equally valuable capital. It must do this, too, in a reasonable time, regard being had to the very uncertain duration of human life, in the same manner as to the more certain duration of the machine.2

Capital Formation and Technological Change in United States Manufacturing

Abstract: T HE present study represents an attempt to apportion increases in output per manhour between increases in capital employed per man-hour and a somewhat nebulous constellation of forces referred to as "technological change." It is hoped that a quantitative estimate of the relative importance of these two factors in contributing to an increase in the average productivity of labor in the past will help policy-makers determine what proportion of our investment resources should be devoted to improving the technology, rather than to expanding existing types of capital equipment and structures. My procedure is to examine the annual increases in output per man-hour of labor in the manufacturing sector of the United States economy between I9I9 and I955. I shall try to determine what proportion of these annual increases can be attributed to increases in capital input per man-hour, attributing the residual to technological change. The classification of causal forces is thus exhaustive, for technological change serves as a catch-all category. The implications of this will be discussed below. As a point of departure, I shall employ the model developed by Robert Solow,' which represents technological change as a shift in the aggregate production function. In its most general form, the production function can be written (using Solow's notation):

The Gains to India From Population Control: Some Money Measures and Incentive Schemes

Abstract: RECENT surveys of population growth in RIndia and the slow progress of the Second Five Year Plan confirm the awful suspicion that India's extra consumer-goods output will be needed for extra population. Some Indians accordingly wonder if the central government should not now institute a program of incentive payments to families that limit births. This would be a logical evolution of schemes already developed in India, where three states and one large private company already offer free vasectomies, sometimes with a bonus, to certain of their employees. Such bonuses, if paid by the central government, could be large in terms of average family income, because the discrepancy between the average and marginal product of population is relatively very great in India. The discounted value to the economy of permanently preventing a birth is at least Rs 500-600, or about twice the value of per capita consumption. It is possible that two voluntary incentive programs one of vasectomies for husbands and another involving three examinations annually of wives for non-pregnancy might reduce births by 24 million over ten years at a resource cost of Rs I2 to i8 crores.' This reduction in births should reduce consumption during the ten years by Rs 750 crores with no loss of production. The possible resource return over ten years is hence about 50 to i. Resources so invested can perhaps raise per capita consumption several hundred times more effectively than if invested in conventional development projects. In this paper a preliminary attempt is made to estimate the value of permanently preventing a birth, to outline one incentive scheme for husbands and another for wives to reduce births, and to assess the impact of these schemes on the economy's resources and the government's finances.2 Threat of Population to Indian Progress

Recent Trends in Southern Wage Differentials

Abstract: A HIGH birth rate, a declining demand for labor in agriculture, and poor educational facilities have traditionally provided the South with a relatively large supply of untrained labor for manufacturing industries. This condition suggests the following hypotheses: i. Average wages in manufacturing will be relatively low in the South because the southern industrial structure will tend to be heavily weighted with low-wage (low-skilled) industries. 2. Because labor and capital are not perfectly mobile, southern wages will tend to be lower than elsewhere for identical work. 3. For the same reasons of excess supply and incomplete mobility, southern wages will be particularly low for work requiring little skill and training. 4. Because of the wage differential, the South should be gaining in manufacturing relative to the rest of the country. 5. Because the differential is greater in lowwage employment, the South should be gaining most in those industries which make the greatest use of low-wage labor. The purpose of this paper is to test these hypotheses and to draw conclusions regarding the balance of forces which tend, on the one hand, to eliminate regional wage differentials, and on the other hand, to perpetuate them. In addition to examining shifts in the location of manufacturing, we will consider the influence of population change and minimum wage legislation on the southern wage position.

Employment and Consumption

Abstract: HE purpose of this paper is to explore T the effects of variations in employment on family and aggregate consumption. The results illustrate a general thesis that the effects of income variation on consumption expenditures depend on the sources of such variation. This is true in cross-sections as well as in time series, even though the major factors related to changes of income over time are not equally important as determinants of income differences at a point of time, and conversely. Growth of productivity is, of course, the essence of long-run changes in real per capita income, and fluctuations in amounts of factor inputs, particularly labor, dominate the short-run changes in income. In a cross-section, a long list of factors responsible for differences in income can be named, and, once again, differences in the degree of employment among individuals and families play an important role. For purposes of emphasis and brevity, we shall abstract from other factors in tracing the effects of the employment variable. Note that the degree of employment of members of a consumer unit observed in a given short period (say, a year) is a very unreliable indicator of the unit's longer-run income position, compared with other income-determining characteristics, such as education, occupation, property ownership, or even age (experience). This observation points to an obvious way of introducing the employment factor into consumption analysis. This is achieved by a special interpretation of the theory according to which a family's aggregate consumption is determined by its "expected" income.' As a first approximation, we may define expected or normal income as the income which a family receives per unit of time during which its labor input is "normal."2 This definition is likely to be quite satisfactory for analytical purposes, if we restrict ourselves to the wage-earning group, particularly the unskilled. If we include the whole range of skills up to the highly trained professions in our population, we must take account of another factor which makes for a difference between current and expected income, namely changes in income with age3 (experience), quite apart from the effects of variations in employment. These age-changes are more pronounced the higher the skill level of an occupation, so that in the top occupation groups (professional and managerial) they are much more important than employment changes in distinguishing between current and expected income. Thus, in each individual case the previously defined measure of expected income should be corrected upward whenever the individual is located on the upward phase of his age-income curve, the correction being larger the steeper the curve, and conversely. In the case of income from self-employment or from property, expected income is best identified with "normal returns" in a given industry, and the differences between current and expected income are cyclical for groups as well as both random and age-associated for individuals. Let us now specify a model of consumption behavior along the lines of expected income theory, using this particular approximation of the concept of expected income. Because of its commitment to a different interpretation of expected income, the Modigliani-Brumberg model is not useful in the present context. While Friedman's framework is more appropriate, some of its assumptions which the deliberate non-specificity of the concept of "permanent" income made possible will be changed to suit the purposes at hand. It is of interest to note that the modifications do not involve complica* This paper was presented at the Boston meetings of the Econometric Society, August I958. Research embodied in it was carried out as part of the Rockefeller Foundation Consumption-Income Distribution Research Project at the University of Chicago. The author is indebted to Dorothy S. Brady and Margaret G. Reid for valuable comments. 'As expounded by Friedman in A Theory of the Consumption Function (Princeton, I957); and by ModiglianiBrumberg in "Utility Analysis and the Consumption Function" in Post-Keynesian Economics, ed. K. Kurihara (New Brunswick, I954). 2 We abstract from property income throughout the analysis. 'Reference here is made to age and occupation of the family head.

The Relationship between Output and Employment

Abstract: PpT HE modern theory of employment determination implicitly or explicitly assumes a close positive relationship between changes in physical output and changes in the volume of employment. If we construe employment very generally as referring to increased utilization of any resource (labor, capital, raw materials, entrepreneurship), then it is undoubtedly true in this general sense that to produce more requires more employment: it is impossible to produce more physical output without employing more resources of some kind. But modern employment theory specifically refers to labor employment. It is not quite so certain that employment in this more restricted sense is as closely related to physical output changes as employment in the more general sense. Yet most economists have carried over the equation, or rather, close positive correlation of output and employment in its general meaning to output and labor employment. It is usually conceded that the relationship needs "correction" for productivity changes (generally construed as 2 to 3 per cent annually), but that labor input and physical output are closely and positively related is seldom questioned. The responsibility for this assumed, and apparently common-sense, relationship rests largely with Keynes' who refused to use a physical production index and adopted the device of measuring output in terms of labor input. For example, he states that he will "measure changes in current output by reference to the number of hours of labor paid for."2 That Keynes had some doubt about the precision of the outputlabor-employment relationship is revealed by the following:

The Radcliffe Report

Abstract: W1 rITH the return of a Conservative AdAl ministration in I95I, Britain re-activated monetary policy as an instrument of economic control after a lapse of twelve years. At first, the relatively mild measures adopted in November I 9 5 I and in the early months of I 9 52 seemed to justify the high hopes of the protagonists the inflationary trends of the Korean boom year were rapidly reversed; there was considerable de-stocking, and Britain's balance of payments on current account improved sharply. In fact, as is now recognized, these were repercussions of the changing trend of world prices after the short speculative boom engendered by the Korean War and had little if anything to do with the monetary measures adopted by Britain. The turn of events, however, had certainly enhanced the belief in the efficacy of a "flexible" monetary policy, and when there was a renewed threat of domestic inflation and of a balance of payments crisis in February I955, much sharper restrictionist measures were taken. But on this occasion the hoped-for consequences did not materialize. Despite the pressure on liquidity, bank advances continued to rise, inducing a whole series of further measures of quantitative and qualitative credit restriction, including an unprecedented request by the Chancellor of the Exchequer to the clearing banks (in July I955) "for a positive and significant reduction in advances over the next few months." Nonetheless, the level of demand and the pressure on domestic resources continued to rise even after the volume of bank advances was at last stabilized. By the time the Suez crisis supervened (in September I9 56), opinion was fairly general that there was something wrong with the way monetary controls operate, and that if any reliance were to be placed on monetary measures in future, there had to be a thoroughgoing review of the mode of operation of financial institutions and of the controls exercised by the Bank of England. Hence the appointment, in May I957, of a Committee "to inquire into the working of the monetary and credit system and to make recommendations" under the chairmanship of Lord Radcliffe.' The Committee (the first of its kind since the Macmillan Committee reported in I931) sat for two years, questioned over 200 witnesses, received some I50 special memoranda, and finally issued a unanimous report of some 340 pages.2 The really remarkable feature of this Report is that it manages to maintain complete unanimity (without a single note of reservation by any of its members!) whilst putting forward views that are far from the traditional or the orthodox. The Report contains a detailed review of the history of monetary measures since I95I and an exhaustive analysis of the nature of British financial institutions which brings to light many important and interesting features not hitherto known, as well as a number of statistical compilations concerning the assets and liabilities of various types of institutions that were not previously available. But for American readers, and for students of monetary theory generally, the 6o pages devoted to "the influence of monetary measures" which deal with the fundamental issues will undoubtedly provide the main interest of the Report. It is not an easy task to summarize the Committee's views without danger of misrepresentation partly because some of its conclusions are expressed in rather guarded terms and partly because the conclusions stated in some of the paragraphs are contradicted (or at least seemingly contradicted) in others; thus, it is not possible to distill a consistent set of principles without a certain amount of interpretation. The reasons for this are to be sought, not in any lack of expository talent in the Committee, but in their desire for unanimity, which could only be secured at the cost of vagueness at critical points and the omission of important links in the chain of argument. From the point of view

Economies of Scale and Metropolitan Governments

Abstract: not to work in a stabilizing fashion over short cycles. Still another example is given in a recent article 6 which suggests that the orthodox notion of municipal finance being fiscally perverse, while correct for major swings in economic activity, is just the reverse for minor ups and downs. Our lists need reexamination in light of the postwar experience. This does not imply that major swings are no longer a problem; rather that lesser swings are different in character and also worthy of the attention of fiscal policy makers.

The terms of soviet-satellite trade: a broadened analysis,

Abstract: : The study led to the following findings about Soviet export prices: (1) Individual Satellite countries experienced different average degrees of price discrimination on Soviet exports. The discrimination effect tended to be stronger for the Balkan countries than for Poland, Czechoslovakia and East Germany. Poland was the only Satellite that enjoyed a continual decline in the degree of Soviet export price discrimination over the period as a whole. (2) In comparison to West Germany, East Germany's terms on Soviet exports were, on the average, consistently unfavorable during the period. (3) Finland and Egypt, two non-Bloc countries with especially close trade ties to the Soviet Union, tended to pay more for Soviet exports than did Free Europe as a whole, but less than the Satellites. (4) Soviet export prices to the Satellites showed sizable year-to-year fluctuations, for individual commodities. But the uneven timing of these fluctuations from commodity to commodity, which was caused by the noted lag effects, tended to smooth out the movements of a general index of Soviet export prices to the Satellites, relative to an index of such prices to Free Europe.

Velocity Changes and the Effectiveness of Monetary Policy, 1951-57

Abstract: T1~HIS paper will analyze changes in income velocity from I95I through I957. Velocity changes are, of course, the composite of the various leakages to monetary policy, perhaps best interpreted, in Keynesian terms, as a shift of money from inactive to active balances (dishoarding). Indeed, it could be argued that the large increases in interest rates during the tight money policy of I955-57 served as the incentive to bring into play alternate sources of credit sources which were not directly subject to control by the Federal Reserve. The attempt to cut off the peak via general monetary controls did not prove effective. Under the circumstances, a re-evaluation of indirect controls may be in order. The usual arguments in support of general monetary controls turn on the supposed impersonality of such controls and their compatibility with the principles of democracy and free enterprise. General monetary controls may be defined as those which affect the environment within which individual decisions are made without consciously singling out any particular individual; the impact on individuals depending on the states of individual asset preferences or the changes induced in such preferences by changes in the intensity of general controls. The definition, of course, does not exclude the likely probability that the impact of a change in general controls will be unequal in its effects on different individuals, particularly when differences in individual market power exist. That is, as long as either (i) market power is unequally distributed, or (ii) asset preferences differ, general controls will be selective in their impact. It can be argued, further, that the patterns of asset preferences are not independent of the power constellations in the economy. And if the effects of general controls are not randomly distributed, they must follow the existing channels of power, with the consequence that the power differences are further reinforced. There is no such thing as a "neutral" monetary policy. An additional point concerns the dilemma of the general controls approach. Monetary policy, by design, does not intervene selectively in particular markets or sectors of the economy. The Central Bank does not have the power, in other words, to encourage expansion in depressed sectors and restrain other sectors or markets where expansion would result in economic disharmonies.' If an excessive rate of growth in one or more sectors of the economy introduces distortions which threaten the stability of the whole, indirect controls, in their general approach, are faced with a dilemma. Either they permit the disequilibrating expansion to continue, or general restraints are introduced which affect other sectors of the economy as well. If these other sectors were initially in a depressed condition, their situation worsens. If, on the other hand, they were expanding at a reasonable rate, they should have been left alone. In either case the results are not conducive to stability. And if general controls have only a minimal effect on the unduly expanding sectors because of their over-riding profit expectations, the net result is worse than if nothing at all had been done. It may be that if monetary policy is to be made an effective instrument for economic stability and growth, direct and purposefully selective financial controls are needed. This, however, is beyond the immediate scope of this paper.

Growth and Income

Abstract: N several occasions in the past I have presented to the Trustees of the University of Rochester the performance record of individual stocks, particularly those held by the University, over a period of time. Since the portfolio of the University includes a very large proportion of so-called "growth stocks," the performance of these stocks has been compared with the performance of a few income stocks held in the account at one time or another, and it has been quite clear that the growth stocks in this account have been better holdings than the income stocks. In a theoretical sense, at any given time it would seem difficult to defend the indiscriminate purchase of growth stocks because, while definitions of growth vary, the growth companies selected usually possess a strong increase in unit demand for the company's products, a high cash flow, a low current return, and the investor in growth usually adopts a long-term view. Since many of the stocks purchased for the University of Rochester's endowment fund have been held for only a few years, it is difficult to prove anything by citing the performance of these particular stocks in the short time they have been held. We have, therefore, selected ten stocks which can be termed "growth" stocks (all of which, incidentally, are held in the University account) and ten stocks which can be termed as "income" stocks (all held by the University at one time; only one of them is now held). The two groups selected are as follows:

Some statistical aspects

Abstract: I MUST make the standard disclaimer that people from Washington always make, and that is that any views expressed are not necessarily those of the sponsor. Those who have been around Washington know, of course, that there are very few items which are discussed in Washington on which there is unanimity of opinion, anyway. Table i is a summary of some salary data for the current year prepared in the College and University Branch of the Office of Education. I think that these tabulations will be of interest. These go beyond faculty salaries; salary data on management personnel are also included. Some educators have mentioned the seeming facility with which staff members who are concerned with physical facilities manage to get higher salaries than faculty members. This is a genuine problem to many of us in the Office of Education. It is so much easier to get consideration in Congress for measures to increase the facilities on the college campus than it is to get consideration of measures to improve the faculty.1

"Bills Only": A Critical Appraisal

Abstract: PROBABLY no single feature of monetary policy in recent years has provoked such widespread controversy as the so-called "bills only" doctrine -the decision taken in I953 by the Federal Reserve System to limit its openmarket operations exclusively to the purchase and sale of short-term government securities. Yet, despite the considerable comment, remarkably little empirical investigation of the subject has appeared in professional journals. The present paper attempts in some measure to fill this void. In general, the method used is to compare the two years after the Accord and preceding "bills only" with the six years following it.

Labor's Share and "Wage Parity"

Abstract: M UCH attention has been devoted in recent decades to the statistical evidence relating to labor's share in the national income of the United States. It is generally agreed that this evidence, though inadequate for the earlier years, clearly establishes that the share of wages and salaries in United States national income has been significantly higher since World War I than in the nineteenth century. Some economists have concluded that the share of wages and salaries continues to be characterized by an upward trend. In some studies this upward trend is viewed as evidence that labor unions have succeeded in obtaining a larger share of the "pie" for their members. Others have concluded that wages and salaries have tended to constitute a stable proportion of national income in recent decades, after allowing for cyclical fluctuations. The significance of the results obtained in such studies cannot be determined without consideration of the changing structure of the economy. The growth of corporate organizations and the displacement of individual proprietorships and partnerships have entailed the conversion of large numbers of self-employed persons to wage and salary workers; not only has the proportion of employees in the labor force been raised, but also many of those added to this category have been relatively highsalaried corporate officers, managers, research and similar personnel.' This process is a continuing one. In addition, the growth of public institutions at a more rapid pace than the private sector of the economy has had an important influence on the share of employee compensation in national income.Furthermore, a considerable part of the wage and salary payments made by government has gone in the last two decades to persons outside the civilian labor force, i.e., to military personnel. These and other changes in the structure of the economy call into question the contention that "labor's share of national income is best measured . . . by the ratio of Employee Compensation to National Income," 3 as well as many of the conclusions that have been reached by studying these ratios. The main purpose of the present study is to take account of some of the more important changes in the structure of the American economy, as they bear upon the share of employee compensation, by comparing this share with the percentage of employees in the labor force.4 To

Depreciation and the Dampening Effect of Income Changes

Abstract: EXCHANGE rate depreciation can be used by a country either to improve its balance of payments or to stimulate domestic employment and output. But there is a conflict between these two objectives. If expansion at home is allowed, the depreciation cannot be expected to result in the trade account improvement obtainable if domestic policies to stabilize output and employment were pursued. This article discusses the extent to which the income movements that are a consequence of devaluation conflict with the goal of improvement in the trade balance. The analysis of devaluation was extended to incorporate income movements in the studies by Laursen and Metzler' and by Harberger.2 Subsequent criticisms and extensions have clarified many aspects of the problem,3 especially the "money-illusion" that was implicit in Harberger's analysis. Emphasis in their work has been placed upon the value that must be exceeded by the sum of price elasticities of import demand in order to insure stability in the foreign exchange market. The dominant conclusion that emerged was that this "critical sum" exceeds unity if employment and output are allowed to respond to the forces set in motion by depreciation. In this paper I assume that demand elasticities exceed the critical sum for exchange stability, so that depreciation becomes a feasible technique for improving the trade balance, and examine the nature and extent of the dampening effect of output and employment changes on the balance of payments. This is accomplished by investigating what I call the dampening coefficient associated with output changes. Consider the improvement in the trade account with variable outputs relative to the improvement if stabilization policies are pursued. This fraction subtracted from unity is an index of the extent to which income changes have reduced the improvement in the trade account. The higher the value of this dampening coefficient, the greater the cost4 to the devaluing country of output changes. Two types of dampening coefficient must be distinguished. The first relates to the comparison between (i) devaluation in which all countries' outputs vary as they will and (ii) devaluation in which all countries stabilize levels of output and employment, and is a measure of the comparative importance of price effects5 and income effects. It is examined in the first section of this paper. The second dampening coefficient is relevant to trade policy in the devaluing country. It measures the diminution in the gains in the trade account resulting from failure to control output in the depreciating country when some specific assumption is made as to stabilization policies abroad. That is, it is assumed that decisions in the devaluing country concerning stabilization policy do not influence other countries' stabilization policies. For simplicity, I assume, in the second section of this paper, that other countries decide not to permit any fall in employment. The expressions for either dampening coefficient depend upon the period of time during which the effects of devaluation are considered. The distinction made in this paper between the short-run and long-run effects of currency depreciation is based upon studies suggesting dif* This paper had its origin in my doctoral thesis submitted to M.I.T. in 1955-56. It has benefited from comments by Robert Solow and Lionel McKenzie. ' S. Laursen and L. Metzler, "Flexible Exchange Rates and the Theory of Employment," this REVIEW, XXXII (November 1950). 'A. Harberger, "Currency Depreciation, Income, and the Balance of Trade," Journal of Political Economy, LVm (February 1950). 'For example, cf. Spraos, "Consumers' Behavior and the Conditions for Exchange Stability," Economica, xxII (May 1955); Pearce, "A Note on Mr. Spraos' Paper," Economica, xxii (May 1955); H. Johnson, "The Transfer Problem and Exchange Stability," Journal of Political Economy, Lxrv (June 1956). 4 Cost measured in sacrificed improvement in the trade account. 6 By "price effects" I mean the change in the trade balance resulting from the change in relative prices, neglecting the impact of changes in aggregate outputs.

The Illusion of Wage Rigidity: Long and Short Cycles in Wages and Labor

Abstract: T HE main proposition of this paper is that the tremendous long-run upward tide of wages has created an illusion of rigidity by drowning out wage variations that are not only wider than most related phenomena, but are also sensitive to short and long cycles in the general economy. Almost three-fourths of that wage trend has been "justified" by productivity advances. Slightly over one-fourth of it has been associated with price inflation and is therefore open to the suspicion that the wage trend may have been the prime mover in a wage-price spiral and an integral part of the problem of wage rigidity. Any attempt to convict wages of such responsibility, however, must explain why year-to-year percentage changes in wages rarely led the expansion of business, prices, employment, and productivity and why those in unit labor costs have normally lagged such expansions. Few notions about wages are more widely and firmly held than the belief in their comparative unresponsiveness to economic downturns. The literature abounds with statements like the following: Moderate changes in employment are not associated with very great changes in money wages.' Money-wage levels, like individual wage-rates, are rather insensitive to cyclical forces and decline only in response to major depressions.2 Changes in British and American factory wages during I9 I9-39 lagged behind business activity by substantial numbers of months, and their fluctuations were smaller in amplitude than those of production, employment, and wholesale prices of raw and semi-finished goods.3 The level of wages in prewar Britain was fairly constant in the face of wide employment fluctuations.4 German wage rates have failed to show genuine cycles and have reacted only to major depressions and then with a lag.5 Little decline in Swedish wages could be found in depressions between I887 and I930.6 "When there is a considerable increase in unemployment . . . do wages drop as they would in a competitive market? History answers, No."7 There has been no lack of explanation for this apparent wage rigidity in contractions. The most usual has been union resistance, but other explanations have included statutory wage minimums; insistence of the unorganized worker on maintaining his living standards; 8 reluctance of employers to invite popular disapproval, provoke unionization, or risk loss of valuable employees; 9 time required to ascertain that a recession is on; and finally the bureaucratic wage policies of big firms and unions, which can be altered only at substantial cost and difficulty.10 Opinion has been less unanimous concerning wage behavior in expansion. Some believe that wages initiate and aggravate inflation-at least under the recent drive of mass unionism.11 But

Expectations and the Regression Fallacy In Estimating Cost Functions

Abstract: M ETHODS used to fit cost functions either to time series or cross-section data have been extensively criticized.' In a recent article Johnston2 has reexamined some of these criticisms and has to some extent succeeded in reestablishing the validity of the two major findings, i.e., (i) constant marginal cost, (2) decreasing long-run average cost. There are, however, criticisms made by Friedman (and Stigler) which Johnston is less successful in countering. The first which we shall consider here is a version of the classical "regression fallacy." Friedman expresses this as follows: "Suppose a firm produces a product the demand for which has a known two year cycle, so that it plans to produce ioo units in year one, 200 in year two, ioo in year three, etc. Suppose also that the best way to do this is by an arrangement that involves identical outlays for hired factors in each year (no 'variable' costs). If outlays are regarded as total costs, average cost per unit will obviously be twice as large when output is ioo as when it is 200. If, instead of years one and two, we substitute firms one and two, a cross section study would show sharply declining average costs. When firms are classified by actual output, essentially this kind of bias arises. The firms with the largest outputs are unlikely to be producing at an unusually low level; on the average they are clearly likely to be producing at an unusually high level, and conversely for those that have the lowest output" (page 236). And Stigler says: "Suppose that three firms on average (over say a decade) produce ioo units each per year at an average cost of $io. In any one year because of weather, catastrophe, illness or death of a salesman, regional differences in business, etc. ('chance fluctuations') the firms will have sales (outputs) above or below the decade average of i0o. Suppose firm A sells only 8o units in a given year, firm B, Ioo units and firm C, I20 units. Suppose further that for each firm costs include (I) $500 of fixed costs plus (2) $5 of variable costs per unit of output. Tabulating the results: