Knowledge that Transforms

A formal restatement of the numerical example Ricardo invoked to explain his change of mind on the feasibility of the depressing effect of technology on labor underlines the analytical difficulty that he could not overcome and thus explains his inconclusive results. This difficulty is basically due to the absence of a clearly perceived demand theory--demands for goods, factor services, and money--characteristic of him and of classical economics in general. Since the focus of the technology labor issue is on the expected change of demand for labor in response to technical change, the failure of classical economists and of Ricardo to propose a relevant theory was inevitable.

Consider a firm in which labor and management bargain over division of the firm's organizational rent and negotiate the firm's policy. I emphasize the relationship between the bargainer's contract curve and the firm's Slutsky equations. I can describe a bargaining firm as a hybrid of a neoclassical profit-maximizing firm and a pure labor-managed firm. I apply the methodology to models of employment contracts and identify three separate circumstances in which labor's bargaining power affects the firm's comparative static behavior. First, there is inefficiency in contractual bargaining. Second, income effects in the worker's utility function interact with the firm's capital-cost burden. Third, labor's interest in long-term utility maximization need not coincide with management's interest in profit maximization. This last case arises from the incompleteness of the market for property rights in the firm.

Indivisibilities in consumption, investment, choice of employment, and so forth have been used by others to justify the behavior of the insurance-buying gambler. Unfortunately, these theories ignore the market incentives to make the indivisible divisible through leasing or variation in quality, as well as individual initiative through borrowing and lending. In this paper the same behavior toward risk is explained without resort to indivisibilities or market imperfections, using the effect of work rates and retirement decisions on lifetime earning profiles. This is done using assumptions normally consistent with risk aversion: diminishing marginal utility of consumption and time-separable utility.

Cost of living escalators are an important feature of North American labor contracts. This paper presents a measure of the response of indexlinked wage increases to concurrent price increases for a sample of Canadian contracts, and then analyses this response in terms of a simple model of indexation to the aggregate price level. The model highlights the importance of aggregate price movements in conveying information about industryspecific prices. The empirical analysis confirms that industry-specific correlations between input and output prices and the Consumer Price Index are important determinants of the response of wage to prices across index contracts.

The paper examines the path of final good price changes when a monopoly supplier of an intermediate good vertically integrates into a competitive, constant returns final good industry. I show that the price rises while the monopolist is taking over the downstream industry and then falls after downstream monopolization is complete. The relationship of these results to the existing literature on full forward integration is established.

According to the legal restrictions theory of the demand for money, characteristics such as denomination and negotiability of interest-bearing debt are what prevents it from being employed as a transactions medium. During the years 1915-27, the government of France used as a financing instrument securities that, by the legal restrictions theory, should have circulated in exchange. An experience by Eleanor Lansing Dulles, attempting to use one of these securities in a purchase, as well as other evidence, suggests that they did not.

In a closed economy with interest taxes at rate τ and with a constant real et rate of interest, the nominal rate of interest should rise by 1/(1 - τ) points for every point rise in the expected rate of inflation. However, a large body of empirical work examines the determinants of nominal interest rates and generally finds that the coefficient of expected inflation is close to or less than one. We model the determination of interest rates in an open economy with taxes. Under plausible conditions, increases in inflation cause the nominal interest rate to rise roughly point for point. This suggests that open-capital-market considerations are central for understanding aggregate economic behavior. The analysis also suggests that inflation is not neutral with respect to the real net interest rate earned by domestic savers or paid by domestic borrowers.

The hypothesis that crop production is more variable under socialism than under capitalism because of systemic differences between incentives and the structure of property rights in private and socialized farms is tested in two ways. The first test compares the variability of output for seven crops in five eastern European countries for a period when agriculture was private with a period when it was socialized. The second test compares the variability of output in state, collective, and private farms within each country. These tests confirm that socialization of agriculture increases the variability of crop output and that the source of this increased variability is not greater fluctuations in yields but rather in the acreage devoted to individual crops.

Although many economists argue that resale price maintenance (RPM) enhances the efficiency of distribution systems, RPM has proven politically unpalatable. Opposition to RPM arises primarily from concern that it raises prices, an empirical judgment based on comparisons of prices in RPM states with prices in "free-trade" (non-RPM) jurisdictions. We develop a model of RPM pricing that shows that prices chosen by manufacturers under universal RPM are close to those chosen without RPM. Manufacturers "pay" for dealer services through lowered wholesale prices. When jurisdictions are mixed, manufacturers select compromise wholesale prices, and retail prices in RPM jurisdictions exceed those in free-trade states. We use the theoretical results as a basis for the analysis of the evolution of political attitudes toward RPM.