Knowledge that Transforms

operations of war. It will be noted that it is the marginal profitability, i.e. the gain resulting from small increases in some factor, that is given directly by such analysis. He also notes elsewhere that Csome parts of modern economics seem to use a variational technique closely analogous to that described in the second (i.e. the paper dealing inter alia with the convoy analysis). Taking all the circumstances into account, it seems fair to conclude that the Admiralty team's choice of criterion for their investigation was correct. Appreciating the urgency of the situation, and being aware of the limitations of the data available to them, they did not seek to use over-sophisticated methods or achieve spuriously precise results. They dealt with the problem analytically at the level at which analysis was feasible, and they left to judgment and common sense the consideration of those factors which could not be handled analytically at the time.

IN a growing economy, current replacement falls short of depreciation. The implications of this fact were discussed at length in a paper by E. D. Domar.' The nature of the subject did not allow Domar to indicate the relationship between the two magnitudes in explicit form; in their place he had to present numerical illustrations. In the case of the individual firm, we can go one step further. Obviously a firm that buys its equipment first-hand will accumulate depreciation funds ahead of the replacement necessity. If the firm decides to reinvest the depreciation allowance, its gross or operating capital, in terms of performance, will increase for some time, although of course the value of the net capital stock by definition would remain constant. This is so because the performance of adequately maintained equipment declines less in proportion to depreciation. At the same time the average lifetime of the equipment items making up the gross capital stock will change. Since the initially installed equipment has to be replaced at some time, the rise in the gross stock from reinvestment of depreciation allowances will be interrupted discontinuously: the gross stock will suffer an abrupt decline, after which it will rise again. Let us give a simple illustration, the basic premises of which will be specified later on. Suppose a railroad invests at the beginning of I957 $IO million worth of rolling stock of a lifetime of exactly ten years, and applies straightline depreciation, amounting at the beginning to $i million per annum. It reinvests after the end of each year the depreciation allowance which was set aside in the preceding year, in rolling stock of the same kind. Assuming that prices do not change, the stock would grow as follows: Beginning of I957 $IO million I958 i i million I959 I2.I million, etc.

fore think that if the nation really wants to take the necessary steps, the present over-all inflationary pressure can be reduced to a relatively minor problem. 4. growth. The measures proposed above will also remove a number of the present barriers to achievement of an optimum growth rate. Elimination of government actions that favor special groups without commensurately increasing the national welfare, however, as in the case of most protective tariffs and of many other operations that are in fact subsidies, is also necessary. If, on the other hand, average growth is held back by persistent deficiencies in aggregate private demand, as indicated by rising average rates of unemployment, then government spending on socially desirable programs should obviously be accelerated, on the average, until the gap is filled. Optimum growth need not mean merely more automobiles, television sets, and advertising displays. for which productivity increases, as output grows, have typically been small or zero.

COLIN Clark's ambitious book The Economics of I960, published in 1942,1 was concerned with making world-wide forecasts of agricultural prices, agricultural working population and production, and total real income. Its main conclusion was that the level of agricultural prices relative to non-agricultural prices in the world the so-called terms of trade would, by I960, rise go per cent above the base period of I925-34, as a result of rapid industrialization. These forecasts rested upon an econometric model of the world economy. Because the forecasts related to I960, it is now possible to evaluate the accuracy of the predictions and appraise the adequacy of Clark's basic model. The purpose of this paper is to make such an appraisal, and to use it as a guide to the improvement of subsequent economic projections.

Shannon McCune, The New College Plan: I. The Planning Process, The Review of Economics and Statistics, Vol. 42, No. 3, Part 2. Higher Education in the United States: The Economic Problems (Aug., 1960), pp. 140-141