When unemployed workers are available, why don't firms cut wages until the excess supply is eliminated? In his book, Why Wages Don't Fall During a Recession, Truman F. Bewley concludes, based on interviews with managers and labor leaders, that the most important factor inhibiting wage cuts is the psychological factor of morale. Bewley's field research has made an outstanding contribution to our knowledge of labor markets, by providing a close-up view of exactly what happens from the vantage point of the participants.

It has been shown by Kaldor (1939, especially pp. 8-10) that the degree of price stabilizing speculation in a market depends upon two elasticities: (i) the elasticity of expected price with respect to current price, and (ii) the elasticity of speculative excess demand with respect to the difference between current and expected price. Speculation will generally stabilize the current price about the expected price, since a wide gap between the two gives rise to a counteracting pressure on the current price from the speculative excess demand. The smaller the first elasticity the smaller will be the fluctuations in the expected price resulting from fluctuations in underlying factors of supply or demand. The larger is the second elasticity the more closely will fluctuations in the current price reflect fluctuations in the expected price. Kaldor's analysis, like much of the more recent literature on speculation and stability (Friedman (1953), Telser (1959)) addresses the question of whether or not speculation will serve its traditionally cited role of ironing out some of the fluctuations in prevailing market prices that would occur in its absence. The question of speculation and stability has been phrased somewhat differently in the literature on general competitive analysis (Hicks (1939), Enthoven and Arrow (1956), Arrow and Nerlove (1958), Arrow and Hurwicz (1962), Arrow and Hahn (1971, 309-315)) where it is asked whether or not the presence of speculation makes it more likely that the process of market adjustment will converge asymptotically upon an equilibrium. In both of these branches of the literature the focus has been upon the first of Kaldor's elasticities, and the results have confirmed Kaldor's analysis. Putting the question either way, we may say (roughly) that speculation exerts a stabilizing influence if the elasticity of price expectations is less than unity, or if expectations are formed adaptively (Cagan (1956), Arrow and Nerlove (1958)), it exerts no influence on stability if the elasticity is unity, and it exerts a destabilizing influence if the elasticity exceeds unity or if expectations are formed extrapolatively (Arrow and McManus (1958)). The purpose of the present paper is to examine the importance of the second of Kaldor's elasticities for the convergence of the market adjustment process. In the context of a single market it is clear that if this elasticity is large enough the price-adjustment process will be stable, provided that the formation of expectations is not destabilizing, because, regardless of the slope of the non-speculative excess demand curve, a large enough elasticity of the speculative excess demand curve will imply a downward slope to the market excess demand curve. The central question of the present paper is whether or not the analogous result holds in the multi-market economy of general competitive analysis. The answer to this question is vital to the broader issue of the influence of speculation on stability, because the size of this elasticity can be interpreted as defining the existing degree of speculation. The characteristic feature of speculation that distinguishes it from similar activities, such as hedging or investing, that also may be influenced by future price expectations, is that speculation is primarily motivated by the expectation of capital gain, not by the desire to consume or otherwise transform commodities, to avoid risk, or to

A business cycle model is developed in which output is traded on Lucas-Phelps islands and labor services on each island are exchanged through costly search and recruiting with transactions externalities. The model exhibits persistent involuntary unemployment and inefficient equilibria, even though there are no nominal rigidities and no unexploited privately attainable gains from trade. It also exhibits employment fluctuations without any real-wage fluctuations. It yields a Lucas aggregate-supply curve (to a linear approximation). It also implies that the natural rate of unemployment depends positively upon the variability and persistence of relative price shocks.

This paper addresses the problem of explaining a household's choice of consumption and purchasing plans on the basis of a model of intertemporal utility maximization. Until recently the intertemporal choice models that have been developed by economists have simply not distinguished between purchasing, a market activity, and consumption, a nonmarket activity.' The importance of this distinction, and of incorporating it into a model of intertemporal choice, can be seen from the point of view of three separate areas of current research. First, recent work on the microfoundations of monetary theory2 has shown the importance of transaction costs in explaining the role of money in economic activity. The absence of these costs from standard general equilibrium theory makes it difficult to account for the special characteristics, and even the existence, of money within that framework. This research has underlined the need to develop a theory of transactions on the same level of sophistication as our theories of production and consumption. The present problem may be viewed as one part of the larger problem of developing such a theory of transactions. Second, in the area of short-run aggregate analysis, purchasing decisions are of more interest than consumption decisions because they are more closely related to the level of aggregate demand. Recent empirical investigations by Michael Darby have supported Milton Friedman's conjecture that the aggregate rate of purchase of consumer durables can undergo large fluctuations even when the aggregate rate of consumption is relatively constant. It would clearly further our understanding of short-run fluctuations in aggregate demand if both of these rates could be explained on the basis of intertemporal choice. Third, the area most closely related to the present problem is the inventory theory of the demand for money. This theory has been extended in recent years by several authors into a generalized theory of the size and timing of all sorts of transactions, including wage payments, commodity purchases and sales, and various

A multicountry Schumpeterian growth model is constructed. Because of technology transfer, R&D-performing countries converge to parallel growth paths; other countries stagnate. A parameter change that would have raised a country's growth rate in standard Schumpeterian theory will permanently raise its productivity and per capita income relative to other countries and raise the world growth rate. Transitional dynamics are analyzed for each country and for the world economy. Steady-state income differences obey the same equation as in neoclassical theory, but since R&D is positively correlated with investment rates, capital accumulation accounts for less than estimated by neoclassical theory. (JEL E10, O40)