Knowledge that Transforms

DURING the last decade there have been increasing numbers of empirical studies made on technological advance of an aggregate economy or a sector of an economy. The most commonly used procedure for empirical investigations of this kind nets out intermediate product inputs consumed in the production processes. Netting out the intermediate inputs from both sides of the production function implies that there is no substitution between primary inputs and intermediate inputs. It is common knowledge, however, that some intermediate product inputs, e.g., fertilizers and weedkillers, are substitutes for primary inputs, such as land and labor. In reference to the general experience of advanced countries, specifically in reference to Japanese experience of agricultural development, an important objection may be raised. In this paper, I shall focus my attention on the measurement of the elasticity of substitution between labor and non-labor inputs by the use of data both including and excluding intermediate product inputs. I shall estimate the elasticities of substitution by combining cross section and time series data in postwar Japanese agriculture. Indices reflecting changes in production efficiency will be obtained. Finally, I shall compare the results of the grossoutput approach and the value-added approach with respect to both substitution of inputs and improvements in production efficiency. II An Estimating Model of the Elasticity of Substitution Between Labor and Non-Labor Inputs

Other calculations show that this conclusion is not particularly sensitive to the choice of bo. However, if the growth of capital per laborer were double or triple what we actually experienced, then, of course, the sensitivity of growth of output to the elasticity of substitution is significant. For example, the U.S.S.R. experienced approximately a 200 per cent increase in capital per man hour over the 1947-1960 period.7 Column 2 of table 1 shows that the effect of this large an increase in capital per man hour is much more sensitive to the elasticity of substitution. But even in this case, compared with the 140 per cent increase in output per man hour actually achieved in the Soviet Union over this period of time, the differences in the predictions of the effects of the growth of capital appear relatively small. The above analysis suggests that while the CES model may have significant advantages over the Cobb-Douglas model for analysis of growth of output in economies where the capital-labor ratio is changing rapidly, for analysis of growth of output in the United States it does not do much that the old Cobb-Douglas model didn't do. The road to improvement in our presently very unsatisfactory growth theory must lie in other directions. ublished data from Richard Moorsteen.

T HIS paper reports the results of a study on the import structure of India. To be more precise, the study refers to the territory which was known as British India and covers the time period from 1900 through 1946. The study of aggregate import demand has been done for the two time periods (1) 19001936, a period of 37 years (covering British India inclusive of Burma), and (2) 1900-1946, a period of 47 years (on the basis of the netof-Burma trade data as constructed for the present study). The variable to be explained is net retained private merchandise imports. Gross imports have been adjusted for re-exports and imports on government accounts. Imports in current rupee sums have been deflated by an index of import prices, and a series of net retained merchandise imports in 1939 import rupees has been obtained. Next, the total retained merchandise imports on private account in 1939 import rupees (m) have been disaggregated into three major economic categories: import of consumption goods (mi), import of intermediate goods (mi,,) and import of investment goods (mi). Each subgroup has been deflated by an appropriate price index. The results of this disaggregation, however, conform to the following identity: m 3 me + mi,ft + mi (all in 1939 import rupees). Economic theory teaches us that national income and relative prices are the two major economic variables to be used in explaining variations in the import demand of a country. Unfortunately, there is no official national income series for India for this period. Private researchers have made sporadic efforts to conc+riirt ciir.h cpritc. and la rpcent studvy has been completed for the purpose of constructing a series of national income figures for the entire period of the present study. The overall national income figures would not be expected to give good estimates. Adjustment of the available national income estimates for urban-nonurban effects, or for that matter, construction of a series on urban national income might be helpful. Not many imported goods were consumed in the rural agricultural sector of the Indian economy. Most imports were used either directly for industrial use, or indirectly for the use of the urbanized industrial sector of the economy, the income of which varied positively with the variations in the index of industrial output. Unfortunately, there is no index of industrial output for the period which could be used as a surrogate for national income. Again, there are secondary estimates,2 indices constructed by individual researchers on the basis of overall industrial activity. No index of industrial output as such was available. Activity indices have often given undue weights to financial and other quasi-industrial activities3 which may have no meaningful correlation with the import demand of the country. One approach to this problem is to make use of export earnings of the country as a proxy for national income. Ultimately, each country must be able to pay for imports by export earnings unless it has a perennial capital inflow and/or exports gold as an item of merchandise. In the particular case of India, neither exportation of gold nor such importation of capital was ever a possible course of action. As a matter of fact, over this period, India enjoyed a surplus

T HE last few decades have seen the presentation of a number of new savings theories. Traditionally these theories are grouped under the permanent income, relative income, and absolute income hypotheses. This paper will try to combine ideas from the permanent and absolute theories in order to obtain estimates of the transitory and the permanent income effects.' We will emphasize cross section problems, but our suggestions will also be appropriate to time series analysis. In section II, we will integrate the permanent and absolute savings theories. In section III, we will define normal income as a distributed lag in incomes and use a Koyck transformation to obtain an equation that yields separate estimates of the transitory and permanent (normal) marginal propensities to save. The section will include a discussion of statistical problems in using the Koyck transformation. In section IV, we will use different types of averages to define normal income; then we will derive the relevant savings functions. In the last section, we will present and compare empirical results using all the definitions of normal income.

CONFRONTED by differences in the size of the public sector between political units or within one political unit over time the public finance economist, traditionally, has focused upon the levels of urbanization and industrial development as the major explanatory factors. Often this position is corroborated by relating per capita expenditures to income or wealth as a measure of industrial development. Differences in social, physical, and economic environment, in individual needs, and in the institutional or political setting have not gone unnoticed. Rather, they have been relegated to a secondary position, and scarcely have been related to the levels of consumption of public services. The neglect of these factors may have been valid since they may have had little influence upon differences in the size of the public sector among countries or over great spans of time. This neglect may also have been necessary because of inadequate data and meager quantitative methods. However, the quantitative evidence gathered in this study suggests that when the analysis is limited to the variation in the consumption of public services in major localities in the United States, variables representing all these factors are significant; income is one of the less important.' Method of Analysis

ECONOMISTS have long attacked horizontal merger for its role in increasing concentration and defended it as a relatively painless means of attaining economies of scale and/ or inter-regional entry. This paper attempts to evaluate these divergent views using the experience of six large industries. In part I, the data and definitions used are explained. In part II, an attempt is made to measure the role of merger and of various other factors in concentration change. Part III examines the proportion of acquired capacity that is sub-optimal in scale, and part IV, the proportion that is inter-regional. Part V contains some brief conclusions.

IT is generally believed that foreign capital inflows play a strategic role in promoting progress toward self-sustained growth in developing countries. Yet the relationship between the two has received little rigorous analysis in the voluminous literature on economic development. The Foreign Assistance Act of 1961 enunciated the criterion of as a condition for United States foreign aid,' but the appealing self-help shibboleth has not been given analytical content. However, in a pioneering effort, Professor Rosenstein-Rodan recently raised some of the important analytical questions associated with the self-help notion:

CASUAL observation reveals that plants of different sizes exist and have always existed with little tendency to become more concentrated in any particular size class. This can only mean that plants are not operating under conditions of long-run static equilibrium,' and that concept of scale cannot be used to explain actual size distribution or growth patterns of plants.2 Some writers have suggested idea of an distribution, presumably based on stochastic nature of human ability and human foresight.3 Mathematically, optimal distribution may be related to stationary distribution corresponding to some stochastic process describing growth of plants. This growth in turn is explained by such factors as economies of scale, economies of growth,4 profit margin variations,5 and other dynamic factors. appropriate frame of reference for optimal distribution is expansion path, or scale path. path may be regarded as representing basic manufacturing activity of an industry. Plants cluster around this path, and their sizes are given by their positions on path. size distribution of plants is therefore defined with respect to this path. Similarly, from one period to next, growth of plants is given by their movements along path.6 It is reasonable to assume that this path is characterized by fixed elasticities (rather than fixed proportions) among input and output variables, since plants become more capital intensive as they grow. present paper investigates ( 1 ) extent of economies of scale along expansion path for each of manufacturing industries, and (2) relationship between economies of scale and growth pattern of plants. Our principal hypothesis is that with a given expansion path or given returns to scale all plants tend to expand at same rate. In this case, a strict form of Gibrat's Law would apply and it is possible to speak of an equilibrium lognormal distribution of plants with constant dispersion. When a shift of expansion path takes place, there is also a change in returns to scale along path. Our hypothesis states that there should be a systematic relationship between changes in returns to scale and changes in dispersion of plants. changes in returns to scale result in a differential rate of growth for plants of different sizes, until a new equilibrium lognormal distribution is estab* I would like to thank Frank Child and John Harsanyi for their helpful comments, Joseph King for providing me with empirical materials, and National Science Foundation for financial support. 1 Hymer and Pashigian have argued convincingly that dispersion of firms cannot be attributed to constant returns to scale. Stephen Hymer and Peter Pashigian, Size and Rate of Growth, Journal of Political Economy, LXX (1962), 556-569. In this paper, we are concerned with behavior of plants. However, much of discussion pertaining to size of firm in literature is equally applicable to size of plant. 2Some realism is introduced if Gibrat's Law is made starting point. Gibrat, Hart, Prais and others have discovered that in a large number of industries size distribution of firms is approximately lognormal, and law of proportionate effect that average growth rate is approximately same for firms of different sizes -was generally adopted to explain distribution. Since this results in a continuing divergence of plant distribution over time, it was further proposed that a process of regression is at work, that is, that the firms in any given size class at time t would still be distributed lognormally at t + 1, but their mean size would be nearer to mean size of all firms. P. E. Hart and S. J. Prais, The Analysis of Business Concentration: A Statistical Approach, Journal of Royal Statistical Society, Series A, Part II (1956), 150-191. idea implies that there is some optimal firm size, and plants tend to move towards that optimum. However, it is difficult to argue that optimal size is mean size, because there is little reason for a firm to expand beyond an optimal size. 'See, for example, Milton Friedman's comment on Caleb Smith's paper in Business Concentration and Price Policy (Princeton University Press, 1955). 4 Edith Penrose, Theory of Growth of Firm (New York, 1959). ?Joseph Steindl, Small and Big Business (Oxford Institute of Statistics, Monograph No. 1, 1946). 6 If plant is not on path, its size is determined by position of its projection on path. Of course, technological change and substitution also take place from one period to another, resulting in a shift of expansion path. This is discussed in a later section in paper.