Knowledge that Transforms

SEVERAL writers have argued that real money balances are a factor of production.1 No one, however, has directly tested the hypothesis that real money balances are a factor input.2 The purpose of our paper is to report the results of such a test. We find that real money balances, regardless of definition, enter significantly in a Cobb-Douglas production function fitted to annual data over the period 1929-1967 for the private domestic sector of the United States economy. Quantity indices of output, capital and labor, published by Christensen and Jorgenson (1970) and adjusted both for quality changes and rates of utilization, are employed to estimate the production function. Data for nominal money balances are taken from Friedman and Schwartz (1970). Our results have important implications for production function analysis, the explanation of total factor productivity, and monetary growth theory. The plan of the paper is as follows. Section II deals with a brief discussion of the rationale for the presence of real balances in the production function. In section III we present the production function used in the study and discuss the data employed. Results are given in section IV. A summary and conclusions follow in the final section.

I BELIEVE it a safe guess that wage-price policy will assume, in the 1970's, a position of coordinate importance with employment policy, both in the United, States, and in most other industrialized countries which rely on reasonably free markets. Committed, as they are, to the maintenance of full employment, these economies will remain prone to a degree of intermittent and creeping inflation which, although modest by comparison with celebrated inflations of the past, will nevertheless be exceedingly visible. Even if the costs in economic terms of such inflation may be judged tolerable, I doubt that its costs in social and political terms will permit any government simply to ignore it, or to rely on policies that appear ineffective. Today's endemic inflationary problem is obviously no simple phenomenon. Its causes'> surely relate to fairly stable aspects of labor and product markets (of the sort analyzed by Phelps, Mortenson, Holt, Tobin et al.), the effects of which depend on the degree of resource utilization which we can assume will usually be high. Another important element is the dynamic mechanism through which current of price and income changes are generated from past events.1 But in addition to these basically economic elements, the process involves major sociopsychological and political aspects. My vision of the type of inflationary process which now concerns us sees it as essentially the by-product of a struggle over income distribution, occurring in a society in which most sellers of goods and services possess some degree of market power over their own wages or prices (in money terms). The extent of each firm's or union's power at any given time is affected by structural and market factors; the manner in which that power is used is affected by of what is happening, and by political attitudes and social norms. Market power is used both in an attempt to increase real incomes, and, defensively, in an effort to protect real incomes from past and expected increases in production or purchase costs. An inflationary process can be tripped off in any of a number of ways. And, once it begins, most increases in wages and prices are basically defensive made in an effort not to fall behind. Yet every defensive wage or price increase threatens the real incomes of other sectors, and prompts an endless chain of further defensive moves. Although some groups achieve relative gains and others experience loss of position during such a price-war spiral, the main effect is simply to raise the entire level of prices and money incomes. In my view, this model of an inflation-generating struggle to increase or protect income shares -although here grossly oversimplified provides a substantially meaningful description of wage and price behavior in a modern industrial economy. But what is most significant is that the problem it describes appears to have become aggravated in recent years, as the social norms regulating group behavior have for various reasons become more tolerant of -or even now encourage an increasingly aggressive use of market power. Moreover, there is an increasing sophistication of business and union leadership, along with better and prompter measurements of relative positioni.e., the perception-generating mechanism is altering. And recent experience with inflation has substantially heightened the sensitivity of most groups to actual or potential losses of relative position. For these reasons, there is a tendency to react more quickly, more fully, and frequently preemptively. The more prompt and complete are the defensive reactions to inflation, the faster is its rate that is, the more there is to defend against. 'I use the word perceptions rather than expectations. There has been debate whether the inflationary process basically involves efforts to catch up with past changes, to keep up with other current changes, or to anticipate future changes. Since any systematic explanation of expectations derives only from past and present events, the argument makes no operational difference. But, in fact, what influences current decisions is a complex perception of an on-going process, involving past, present, and future values. The perception-generating mechanism may not only be nonlinear, but also quite unstable.

IN the economic lilterature on externalities, two separate approaches to pollution control are distinguished; (1) government regulations to enforce control and (2) tax and subsidy schemes to stimulate voluntary abatement.' The dichotomy, however, is not always sharp. Enforced con'trols impose changes on economic activities which may increase costs and induce voluntary shifts away from pollution intensive activities. For example, a limitation on the sulfur content of industrial coal might stimulate the substitution of cleaner burning natural gas. In addition, the higher production costs associated with the shift to low sulfur coal or to natural gas may add to the prices of related outputs, reducing the demand for these products. In turn, substitutions among outputs may occur which will further alter the levels of production and consumption activities from what they would be in the absence of pollution control. Cost-effectiveness models for achieving environmental goals generally ignore induced voluntary abatement. As a consequence, the proposed solutions may be incorrect in that (a) the environmental goals would be exceeded and (b) the total cost of control would not be a minimum cost. This paper presents an air pollution control model in which both required control activity and the induced voluntary adjustments in consumption and production levels are taken into account. II The Cost-effectiveness Model with Fixed Production and Consumption Levels

Charles T. Nisbet, Firouz Vakil, Some Estimates of Price and Expenditure Elasticities of Demand for Marijuana Among U.C.L.A. Students, The Review of Economics and Statistics, Vol. 54, No. 4 (Nov., 1972), pp. 473-475

qi yj + (xjpjyj). Pi Stone, who applied this model in several papers (1954, 1964, 1965), suggested the parameters could either be given a time trend or allowed to depend on the past history of the branch of demand to which they relate. We want to explore the second suggestion and to see what happens when the y's are explained by past choices. In doing so, our approach will be close to the one followed by R. A. Pollak in (1970). Pollak redefines the y's as linear functions of consumption in the previous period, while we redefine these as linear functions of current values of state variables representing stocks of durable goods or habits. This has the advantage of bringing durable goods into the picture and in particular permits the introduction of a depreciation rate. Our approach is different from Pollak's in another respect: short-run behavior will be shown to be a partial adjustment to long-run equilibrium, thus permitting estimation of a reaction coefficient for each commodity. To a large extent, we follow the line of thought suggested by Houthakker and Taylor in the second edition of Consumer Demand in the U.S. (1970, chap. 5) in dynamizing the quadratic utl1it3 function. Improvements include the ex, ici t formulation of the partial adjustment procl. ;s implied in the maximization behavior anu specific consideration of the covariance structure of the error term.

PpTHE application of duality in economic analysis was initiated by Hotelling (1932) and Roy (1942) in the area of consumer demand. Subsequently, Shephard (1953) in his pioneering work on cost and production functions extended the duality concepts to the theory of production and derived many of the fundamental results, including the basic duality theorems and Shephard's (1953) Lemma, which asserts that the gradient of the dual function is equal to the supply and demand correspondences. More recently McFadden (1972) generalized the duality concepts in production theory to include profit and revenue functions. The profit function is a function of the output and input prices which gives the value of the maximized profit of a profit-maximizing and pricetaking firm endowed with a given technology. Because of Shephard's (1953) Lemma, the partial derivatives of the profit function with respect to the output and input prices give the supply and demand functions. Thus, the econometric analysis of the behavior and technology of the profit-maximizing and price-taking firms is greatly facilitated.' In this paper we are concerned with the properties of the profit functions of technologies with multiple inputs and outputs. Several theorems which relate the properties of the transformation functions to the properties of the profit functions and vice versa are proved. The specific properties considered are: (1) homogeneity, (2) separability, and (3) nonjointness. The properties of the profit function have been studied by McFadden (1972), Diewert (1969), and Jorgenson, Christensen and Lau (1970), among others. In addition, Hall (1972) has approached the problem of multi-output, multi-input firms from the point of view of joint cost functions.

T HIS study investigates within a comrnon analytical framework the determinants of firm expenditures o;n capital investment, research and development and dividends. Its two basic objectives relative to past work are: first, to probe more deeply into the forces determining these outlays by taking into account the interdependencies among them,' and second, to provide a framework for evaluating alternative assumptions regarding firm motivation. A firm maximizing stockholder objectives will exhibit different behavior in its expenditure decisions from one pursuing managerial goals. Consequently, two main variants of a model of firm expenditures, based on these rival concepts of motivation, are developed and tested.

IN recent years, the American public has become greatly alarmed over an apparent shortage of physicians, a shortage which is expected to reach crisis proportions within the next decade. The predicted shortage stems, in part, from the nation's current efforts to make health care accessible to all income classes and from past neglect of medical-school facilities. However, there is also some evidence that the shortage is further aggravated by widespread inefficiency in the use of medical manpower. It is a matter which is increasingly attracting the attention of health-manpower specialists, but one on which opinions still differ widely. Somne students of the health-care sector have argued, as early as a decade ago, that it would be techniically imnpossible to add to the already hea\y patient load carried by American physicians.' In contrast, Rashi Fein's recent book The Doctor Shortage (1967) concludes with the assertion that physicians could increase their productivity still further, either by joining large-scale group practices or by delegating more of their workload to auxiliary personnel. Fein admits, however, that in the absence of more research, one cannot be certain whether the gains from group-practice formation and from increased reliance on paramedical aides will be large or more modest. (p. 144) His argument therefore rests on essentially intuitive grounds. Fein's call for more research on the production of physicians' services is entirely justified. For, in spite of the crucial role played by physicians in the production and delivery of health services, there exists very little enmpirical information on the technical and economic determinants of the physician's productivity. This paper is an attempt to contribute to our understanding of this important parameter. Using a simnple model of physician behavior and a nationwide cross-section sample of physicians, the study seeks to identify the effects of auxiliary persoi)nel and of the mode of practice (solo or group) on the physician's rate of output. Our analysis leads to the conclusion that the average American physician could profitably employ roughly twice the number of aides he currently employs and thus increase his hourly rate of output by about 25 per cent above its current level. This figure takes on added meaning when it is recalled that a mere increase of 4 per cent in average physician productivity in the United States would add more to the aggregate supply of medical services than would the entire current graduating class froin American medical schools. Looked at in another way, our results suggest that, in choosing his combination of practice inputs, the average physician in our sample appears to have priced out his own time at a value much below that implicit in his medical fees. On either interpretation, the results therefore support the thesis that American physicians tend to be wasteful in the use of their scarcest and most expensive resource.

IN this paper I have esitimated the amount United States cigarette consumption has been affected by cigarette advertising and by the health scare over smoking. During 19531970 the health scare depressed cigarette consumption considerably more than cigarette advertising boosted it. Section I presents econometric estimations of the demand function for cigarettes, incorporating econometric corrections for multicollinearity. Section II gauges the comparative effects of advertising and the health scare. On these results, section III evaluates whether the recent Congressional ban of broadcast advertising of cigarettes will promote public health by reducing cigarette consumption. Although the advertising elasticity of demand was positive, it was quite small. More importantly, however, the ban also eliminated the health-scare-oriented antismoking commercials, which the Federal Communications Commission had forced broadcasters to air in proportion to cigarette commercials. Since the health scare has been the relatively stronger influence, the net effect of the ban may be to increase consumption, not decrease it. Ban advocates disregarded the interconnection of cigarette and antismoking commercials; the United States cigarette manufacturers apparently were not confused about the interconnection. Finally, the probable anti-competitive effects of the ban are noted in section IV.