Knowledge that Transforms

The efficiency of public and private firms is usually compared in industries which have heavy regulation and limited competition. In this paper we present a case study in which the effects of property rights can be isolated from the effects of regulation on noncompetitive markets. We compare the postwar productivity performance of the Canadian National and Canadian Pacific Railroads. Contrary to the predictions of the property rights literature, we find no evidence of inferior performance by the government-owned railroad. We conclude that any tendency toward inefficiency resulting from public ownership has been overcome by the benefits of competition.

Extending the traditional treatment of the corporate tax to an economy with a progressive personal tax fundamentally changes the analysis. While the corporate tax system (CTS) does increase the total tax rate on corporate source income for some investors, the exclusion of retained earnings implies that the CTS lowers the tax rate for high-income investors. Analyzing such an economy requires replacing the traditional "equal-yield" equilibrium condition with a more general portfolio balance model. In this model, introducing a CTS can actually increase the corporate share of the capital stock even though the relative tax rate on corporate income rises.

This paper examines the apparent contradiction of diminishing returns to labor due to procyclical real wages and labor productivity. The paper shows how this problem arises using Cobb-Douglas production function estimates for the private business sector in the United States during the period 1948-73. The difficulty with this evidence is that it ignores the cyclical pattern is taken into account, the resulting estimates indicate diminishing returns to labor. More important, the results show that procyclical real wage and productivity are consistent with the theory when the cyclical behavior of factor employment is taken into account.

[In "The Inefficiency of Interest-bearing National Debt" (J.P.E. [April 1979]), we argued that private sector transaction costs are needed in order to explain interest on government debt. It follows that if the government's transaction costs do not depend on its portfolio, then, barring special circumstances, an open-market purchase is deflationary and welfare improving. In this paper we show that this result can survive a potentially relevant special circumstances: reserve requirements which limit the size of insured intermediaries.]

The manner in which information is accumulated in the firm offers an explanation for the firm's existence. Information is an asset to the firm, for it affects the production possibility set and is produced jointly with output. We call this asset of the firm its organization capital. The costs of adjusting the stock of organization capital induce the firm to constrain its growth rate, thus explaining certain facts about firm growth and size distribution. Adjustment costs arise endogenously rather than being assumed.

The strong relationship between commodity price changes and factor price changes that characterizes the standard Ricardo-Viner model does not extend to a model which includes interindustry flows. A change in relative commodity prices, induced, for example, by a tariff, may have an unambiguous effect on real wages--an effect that is free from index-number considerations involving labor's preferences. Labor may gain or lose more than any other group in the economy. Capital owners in the protected industry may be hurt by protection, or capital owners in the unprotected industry may benefit from protection. Employment may be shifted from the protected to the unprotected industry.