Knowledge that Transforms

This survey outlines the evolution of thought leading to the rrecent delopments in the study of business cycles.The subject is almost coextensive with short-term macrodynamics and has a large interface withmeconomics of growth, money, inflation, and expectations.The coverage is therefore both very extensive , and selective. The paper first summarizes the "stylized facts" that ought to be explained by the theory.This part discusses the varying dimensions of business cycles; their timing, amplitude, and diffusion features; some international aspects; and recent changes. The next part is a review of the literature on "self-sustaining" cycles. It notes some of the older theories and proceeds to more recent models driven by changes in investment, credit, and price-cost-profit relations. These models are mainly endogenous and deterministic.Exogenous factors and stochastic elements gain importance in the part on the modern theories of cyclical response to monetary and real disturbances.The early monetarist interpretations of the cycle are followed by the newer equilibrium models with price misperceptions and intertemporal substitution of labor. Monetary shocks continue to be used but the emphasis shifts from nominal demand changes and lagged price adjustments to informational lags and supply reactions. Various problems arise, revealed by intensive testing and criticisms.This prompts new attempts to explain the persistence of'cyclical movements and the roles of uncertainty and financial instability, real shocks, and gradual price adjustments. One conclusion is that business cycle research will profit most from (a)the updating of findings from the historical and statistical studies, and (b)using the results to eliminate inconsistencies with the evidence and to move toward a realistic synthesis of the surviving elements of the extant theories.

Income comparisons between persons or groups of persons in different countries are a special field of inquiry because there are different currency units. For the most part, the other theoretical and empirical problems encountered in international income comparisons are similar to those of within-nation comparisons between different persons at the same time or different groups of persons either interspatially or, what is more common, intertemporally (e.g., constant price series of national income). The qualifications mainly and the most part are included because some writers hold that international comparisons are complicated or even invalidated by differences in consumption patterns. Sometimes differences in tastes are held to underlie these variations in consumption patterns, variations that are often much larger between countries than those found between regions within a country or between different periods in the same country. This essay focuses, in its methodological aspects, on these special problems. The basic problems that are common to international and within-nation comparisons are left to the standard literature on national accounts.2 We turn now to the currency unit problems and reserve the question of tastes for a later section.

The problem of expanding food supply has been made more complex and more dependent on technological progress by the encroachment of a burgeoning population on a limited land area. Rapid growth in the rural labor force in the low-income developing countries not only increases the problem of providing adequate employment, particularly in the face of diminishing scope for expanding the land area, but also reduces the possibility of solving poverty problems simply by a redistribution of assets and income flows. Section II reviews past trends and current levels of food production, trade, and consumption. Section III discusses a controversial issue: the extent and seriousness of food deprivation. These sections lead to the same conclusion: the choice of development strategy is decisive in determining the level at which the food equation balances. An examination of contrasting development strategies and their implications for food production (Section IV) is followed by an exploration of the emerging consensus on the complex and difficult task of implementing a unimodal pattern of accelerated agricultural development, consistent with a high rate of growth in employment and food consumption. Interacting health-, nutrition-, and family-planning programs are viewed as important claimants of organizational and other resources. The review leadsmore » to the conclusion that reduction of malnutrition and related manifestations of poverty requires a set of interacting forces, characterized as a ring, that link nutritional need, generation of effective demand for food on the part of the poor, increased employment, a strategy of development that structures demand towards goods and services that have a high employment content, production of wage goods, and an emphasis on growth in agriculture. 183 references, 4 tables.« less

Using the assumptions of the Capital Asset Pricing Model this paper presents a measure of the effective protection rate which adjusts for the industry's risk. It is shown that if the tariff on the final good is greater (smaller) than the weighted average tariff on the traded inputs, then the effective protection increases (decreases) as one moves from an industry with low risk (low beta) to an industry with high risk (high beta), holding other things constant. The empirical methodology of the new measure is also provided, as well as several illustrations from U.S. industries.

OTTO ECKSTEIN and I founded Data Resources, Inc. in 1968 after working together on Wall Street for several years. We came to know each other during the mid-1960s while I was attempting to build up the institutional stock brokerage business of Mitchell Hutchins and Co. The firm's business was mainly retail in nature, and we needed to distinguish ourselves from the competition in some fundamental way if we were quickly to establish an institutional franchise. I hit upon the idea of developing a consisting of nationally recognized authorities who would give portfolio managers expert insight into both the state of the economy and the larger political and diplomatic environment shaping economic conditions. I therefore put the following question to a number of my colleagues on Wall Street: Who is the best young economist you can think of to fill this role? The most frequent reply was Eckstein, who had just stepped down from the Council of Economic Advisers. I gave Otto a call and laid out my plans. He liked the proposal, and soon we were travelling around the country, meeting with clients and presenting our view of economic conditions. Bright and charismatic, Otto was very popular with clients. The consulting program was a great success and was later expanded with Otto's help to include Henry Kissinger and Bill Moyers. While Otto and I were on the road, we taught each other. He taught me a great deal about economics, and I introduced him to the world of commerce. Otto quickly learned that money managers were intelligent, interesting, and well-informed peoplesomething of a revelation to a long-time denizen of Washington, D. C. and Cambridge, Massachusetts. This was the first of many steps in Otto's business education, an on-the-job MBA that would eventually turn him into an accomplished businessman as well as a respected economist. Travelling was a tedious and time consuming way to impart information to our clients, and some time in 1967 Otto suggested to me that perhaps we could use a computer instead. If we set up a model that clients could access by timesharing they would be able not only to get Otto's most recent forecast when they needed it, but could shift the inputs in the model to reflect their own economic assumptions. If, for example, they thought mortgage rates would be 6% rather than 5% and that consumer spending would slow in the second half of the year rather than hold steady, they could plug these assumptions into the model and see how other variables changed. It struck me as an ambitious but promising project. Otto had formulated his basic view of how the economy worked from his early input-output research in graduate school, and then his extensive studies of the U.S. economy for Congress. Also he had produced a steady flow of micro-macro economic analyses at the Council of Economic Advisers. So, he was well along in his thinking about computer modeling of the economy. We discussed the project at great length, and I asked Otto to write a paper laying out his ideas more fully. The product concept developed by Otto had four basic elements-the model itself, a large data base, a computer, and the software-and each of them posed formidable obstacles for a fledgling enterprise like ours. Rather than use any of the econometric models then available Otto decided to build a new model of his own design-an admirable decision but an onerous task that challenged, I believe, even his formidable knowledge of economics and statistics. In building this model Otto worked with Gary Fromm of the Brookings Institution, who had developed a model of his own and was familiar with the latest advances in econometrics. He also consulted with other leading econometricians, including Martin Feldstein, Lester Thurow, and Dale Jorgenson. Even more important to our efforts was the Brookings database, which consisted not only of a large number of time series, but of subroutines for managing the data. Clearly the prior work of Fromm and his associates enabled Otto to begin much further up on the learning curve than he otherwise could have. Two members of the Brookings staff, James Craig and John Ahlstrom, joined our company and made herculean efforts to build *Paine Webber Group Inc.