Knowledge that Transforms

Benton F. Massell, Elimination of Management Bias from Production Functions Fitted to Cross-Section Data: A Model and an Application to African Agriculture, Econometrica, Vol. 35, No. 3/4 (Jul. - Oct., 1967), pp. 495-508

To most economists the single equation least squares regression model, like an old friend, is tried and true.Its properties and limitations have been extensively studied, documented and are, for the most part, well known.Any good text in econometrics can lay out the assumptions on which the model is based and provide a reasonably coherent --perhaps even a lucid -- discussion of problems that arise as particular assumptions are violated.A short bibliography of definitive papers on such classical problems as non -normality, heteroscedasticity, serial correlation, feedback, etc., completes the job.As with most old friends, however, the longer one knows least squares, the more one learns about it.An admiration for its robustness under departures from many assumptions is sure to grow.The admiration must be tempered, however, by an apprecia- tion of the model's sensitivity to certain other conditions.The requirement that independent variables be truly independent of one another is one of these.Proper treatment of the model's classical problems ordinarily involves two separate stages, detection and correction.The Durbin -Watson test for serial correlation, combined with Cochrane and Orcutt's suggested first differencing procedure, is an obvious example.*

He then interprets Walras' Law as asserting that we drop one of the two excess demand equations, and thus the remaining system contains a liquidity preference equation and a loanable funds equation.We cannot eliminate one of the markets if it is a stock-flow good.But this conclusion is quite wrong.Lloyd misinterprets Walras' Law.Let Xi = excess flow demand for the ith good and xi = the investment demand for the ith good.In this ,.context Walras' Law merely states that L p,(x,+xi) = 0 ([2], p. 29).Accordingly, if , = 1 all markets but one are in market equilibrium, so is the nth market.Similarly, if all markets but one are jn full stock equilibrium, the nth market is in either market or full stock equilibrium.Thus if n -1 markets (including money) are in any kind of equilibrium, the bond market is at least in market equilibrium.We have thus established the static equivalence of liquidity preferences and loanable funds for mixed stock-flow economics.The dynamic equivalence of these two theories has not been establishe<!,;and, indeed, under general dynamic assumptions it is impossible to do so [5,6].,-

MR. SYRING (1967) suggests that I relied on assertion rather than evidence or proof to support my statement that "little bias results from the exclusion of human wealth from the measure of wealth used to test the [demand-for-money] hypothesis" (Meltzer, 1963, p. 234). Further, he finds nothing in the empirical evidence to support my assumption that the ratio (d) of income from human wealth ( y h ) to the stock of human wealth ( w h ) is constant in the long run, although he recognizes that the assumption may be correct. In this note I will show that the estimated elasticities of real money balances with respect to real income and real non-human wealth are quite consistent with my assumption that d is constant in the long run. I will then discuss the more general problem that he raises, namely, whether it is possible to distinguish empirically between income and wealth as constraints on the demand for money.

THIRTY years have passed since anyone wrote a book exclusively—or even largely— devoted to an analysis of the supply of money. Phillip Cagan's Determinants and Effects of Changes in the Stock of Money, 1875-1960 (1965)1 would be welcome, therefore, if it did no more than intensify interest in a subject that lay dormant until recently. The book does much more, however. Cagan patiently examines the multitude of factors that influence the principal determinants of the money supply and hence the money supply itself. He then extracts from his data information about the perennial questions: Do changes in money cause the subsequent changes in output and prices? Or, is the stock of money pulled up and down by secular and cyclical changes in prices and output so that movements of money may be regarded as of little or no causal significance

It is well known (Kemp, 1962; Samuelson, 1962; Bhagwati, forthcoming) that, for a country with no monopoly power in trade (or domestic distortions), free trade (in the sense of a policy resulting in the equalization of domestic and foreign prices and hence excluding trade, production and consumption taxes, subsidies, and quantitative restrictions) is the optimal policy. It follows, therefore, that free trade is superior to no trade. It has also been argued recently (Kemp, 1962), that, even in the case where there is monopoly power in trade, so that both no trade and free trade are suboptimal policies, it is possible to demonstrate that free trade is superior to no trade. What of the case where the country has no monopoly power in trade but has a non-economic objective which consists in requiring production to be maintained at a certain level in a specific activity? In the standard, two-commodity case, this type of objective can be treated as requiring production to be necessarily at a particular position on the production-possibility frontier-as has been done by earlier writers, such as Corden (1957) and Johnson (1965). Can we still rank trade as superior to autarky in this case? In the following analysis, we distinguish between two sets of possible trade policies: (1) trade with consumption at international prices and (2) trade with tariffs and (trade) subsidies.

This is a critique of the Arthur Maass article on Benefit Cost Analysis.