Knowledge that Transforms

We characterize pension systems along three dimensions: 1) actuarial vs. non-actuarial, 2) funded vs. pay-as-you-go, 3) defined-contribution vs. defined-benefit. Increasing the degree of actuarial fairness, by strengthening the linkage between contributions and benefits, reduces labor market distortions and may increase welfare in a Pareto-efficiency sense. Increasing the degree of funding implies mainly a redistribution of income among generations, although a partial shift to funding also provides better risk-return combinations for individuals. Shifting from defined-benefit to defined-contribution schemes (with fixed contribution rates) shifts the income risk from workers and taxpayers to pensioners.

Examining the development of the Japanese financial system since the Meiji era, Hoshi and Kashyap derive a number of interesting propositions on the evolution of bank-centered financing, its contribution to rapid growth, and its future transformation. They argue that the piecemeal approach to deregulation is one of the main reasons for the current banking crisis, and conclude that Japan will shift to a capital market-based financial system like the one in the United States or in prewar Japan. Hoshi and Kashyap's work makes an important contribution as a coherent long-term overview of Japan's bank-centered financial system.

There are many “outsiders” who have written critiques of the global financial system. Insiders typically do not; they have too much to lose. What makes Stiglitz's book, Globalization and Its Discontents, unusual is that it is an insider's critique. This book sketches the unfairness of the global system and how institutions, like the IMF, perpetuate the asymmetries of power and wealth. Though the book provides a morally compelling account of recent global crises, and its plea that we must think about radical change is hard to dismiss, it does not break new analytical ground nor offer concrete suggestions of alternatives.

Roger Backhouse's book The Ordinary Business of Life is a comprehensive history of economic thought, from the ancient Greeks to the present day. It will be useful both to specialist economists and to people with a smattering of economic ideas who want to fill in the historical gaps. Backhouse's book provides much of the material for anyone brave enough to tackle the big issues.

This review argues that Allan Meltzer's account of the Federal Reserve between 1913 and 1951 complements Friedman and Schwartz's in their Monetary History. Meltzer emphasizes policy making within the system, rather than the evolution of the money supply and its effects on the economy. He stresses the uncertainty of the Fed's independence before the 1951 Accord, and the effects of economic ideas, notably the real bills and Riefler-Burgess doctrines, on policy. Many virtues in the book are noted, and one weakness, namely a failure to explain why inadequate ideas became dominant within the Fed when sounder alternatives were available in contemporary monetary thought.

We survey the evidence bearing on measurement error in the CPI and provide our best estimate of the magnitude of CPI bias. We also identify a weighting bias in the CPI that has not been previously discussed in the literature. In total, we estimate that the CPI overstates the change in the cost of living by about 0.6 percentage point per year, with a confidence interval that ranges from 0.1 to 1.2 percentage points. Roughly half of this bias is accounted for by the CPI's inability to fully capture the welfare improvement from quality change and the introduction of new items. Our bias estimate is smaller than that found in several earlier studies, in part because the BLS has recently made a variety of improvements to its procedures; our study highlights several potential areas for further improvement.

This essay reviews Networks and Markets, edited by James E. Rauch and Alessandra Casella. This book provides a useful vehicle for clarifying the main conceptual and operational issues facing the growing study of economic networks. Three types of networks are discussed: networks as concentrated or patterned exchange; as primordial relations; and, the most general, networks as structures of mutual orientation. An overview is provided of the challenges faced by research on the economic implications of three types of networks. The strengths and weaknesses of current research on economic networks are examined via a review of the contributions in the book.