Journal Article Recent Literature on the Origins of Modern Capitalism Get access M. M. Knight M. M. Knight Paris, France Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 41, Issue 3, May 1927, Pages 520–533, https://doi.org/10.2307/1883704 Published: 01 May 1927
Journal Article Christmas Clubs Get access Lloyd M. Crosgrave Lloyd M. Crosgrave New York Search for other works by this author on: Oxford Academic Google Scholar The Quarterly Journal of Economics, Volume 41, Issue 4, August 1927, Pages 732–739, https://doi.org/10.2307/1884889 Published: 01 August 1927
The Review of Economics and Statistics19279(4), 184
mHE economist is concerned with determining the and prospects of society. I In a more restricted, but nevertheless important, aspect of his work, he is concerned with determining the condition and prospects of business enterprise. The economist who is investigating problems relating to business is interested principally in the economic cycle, because our economic welfare is subject to the vagaries of this phenomenon. The data that exhibit economic cycles are of statistics. Methods for determining the correlation of are therefore fundamental to the investigation of economic cycles. The purpose of this paper is twofold. The first object is to describe a theory of correlation of that is particularly suited to determining the laws of economic cycles; the second is to introduce a practical application of the theory by means of a study of cycles in interest rates and in wholesale prices. Those wishing to obtain an idea of the theory here presented without going into the mathematics of the subject should limit their attention to Sections I, II, IV, VIII, and IX, on general theory, the correlation equation and the system factor, the economic indexes, forecasting, and the nature of the elements in the economic structure. Section III on solution for the system factor Y and, perhaDs. Darts of Section II will be of interest only to ose who may wish to apply the theory. Those interested in the practical results obtained by applying the method to a study of the relation between interest rates and wholesale prices will find Sections V, VI, and VII of primary interest. The type of statistical array called a series2 is one in which the items are ordered in a sequence that is fixed with respect to time. Annual, quarterly or monthly data of wholesale prices, interest rates, trade activity and rainfall are examples of important The difficulties encountered in applying the classic theory of correlation to are recognized by a number of statisticians. These difficulties are inherent in the problem, and are due to the fact that the fundamental propositions of random sampling do not apply to data that are definitely ordered with respect to time. We require, therefore, a more general theory, one that explicitly recognizes the possibility of mutual dependence between the successive items in the The essential idea of the theory proposed is that the correlation of presents a problem of multiple correlation, in which each item in one may depend upon not only the concurrent, but also upon the preceding, items in another The method of simple correlation, which is adequate for deducing the relation between of other types, is not sufficiently general to apply to series, because it considers only the relation between concurrent items in the series, and ignores the possible influence of preceding items. If, in a particular case, the preceding items are actually without influence, this fact can be demonstrated only by applying the more general theory. An intrinsic part of the theory is the concept of a system. Where two trains of events of different kinds are so related that each event of one kind exerts a definable effect upon the later events of the other kind, a systematic phenomenon is acting. A system is conceived to be an arrangement of connections and constraints 1When the Statistical Society of London was organized in I834, five years before the American Statistical Association, the prospectus announced that its functions were to 'procure, arrange and publish facts calculated to illustrate the condition and prospects of society' (presidential address by Warren M. Persons at the eighty-fifth annual meeting of the American Statistical Association). 2 The term is unfortunate, because, in mathematical usage, commonly refers to the sum of a number of quantities: thus, I+2+5+3, not I, 2, 5, 3. The data referred to as time series throughout the paper are sequtences of numbers that give the values of a variable at discrete, equally spaced intervals of time. They are, therefore, functions of time, in the way that function is understood in the calculus of finite differences. It has been suggested, therefore, (by Mr. John R. Carson of the American Telephone and Telegraph Company) that time sequences would be better than time series. The latter term is used so extensively in the literature of the subject, however, that I have refrained from introducing a new term.
The Review of Economics and Statistics19279(2), 93
TN this REVIEW for January I926 we brought together some of the results of our studies of the relationship between money rates and speculation in the business cycle. There we stated our general conclusion that substantial quantitative changes in money rates, regardless of the length of time during which those changes take place, have been, in general, highly significant for security markets.' This general conclusion resulted from our statistical studies of the cyclical fluctuations of monthly average rates on prime commercial paper, duly adjusted for seasonal variation, on the one hand, and of monthly average industrial stock prices, monthly average railroad stock prices, monthly average prime railroad bond prices, and monthly average miscellaneous bond prices, on the other hand. The periods studied were I884-I925 for money rates and stock prices, and I890-I925 for money rates and bond prices. For these periods both the magnitude of fluctuations of the series, and their sequence in time were examined to ascertain whether systematic and simple relation between the money market and the securities could be proven to exist. In making this examination it was found convenient to divide the periods into the following four sub-periods: i884-i896, a period characterized by declining commodity prices, agitation for free silver, and difficulty in maintaining the gold redemption fund for greenbacks; I897-I9I3, a period of rising commodity prices, unquestioned maintenance of the gold standard, and comparative freedom from nonbusiness disturbances; I9I4-I8, a war period of large gold imports and abnormally low money rates followed in I9I7, after the entry of the United States into the war, by a money market controlled with reference to the exigencies of war finance; I919-25, a period characterized by, first, continued control of money rates with reference to the government's post-war financing, second, the withdrawal of control, for government purposes, of the money market and, third, paper inflation and deflation in Europe, unprecedented gold imports into the United States, and abnormally low money rates in this country. When we undertook the search to find some systematic and simple relation between the money market and the securities markets we did not expect to discover, nor did we in fact discover, a constant mathematical relation between money rates and security prices holding invariably in war as well as in peace, in times when the gold standard was threatened (such as I895-96) as well as in times when its permanence was not questioned, and in times of abnormal international gold movements (such as I92225) resulting from non-business influences as well as in times of movements resulting from fluctuations in trade. No one with the slightest familiarity with business and economic affairs would expect to find that security prices were in constant mathematical relation to money rates certainly not for such a long and varied period as I884-I925. Although an unvarying function was neither expected nor discovered our studies had led us to expect that a systematic and simple relation between money rates and security prices might be found to hold during the normal cyclical fluctuations of business from depression to prosperity and back to depression. Disturbances of a non-business nature were fewer and less pronounced during the interval of I7 years from I897 to I9I3 than during any other interval of equal length in the last 40 years. In fact the Spanish War was the only momentous non-business disturbance during these i 7 years, so far as money rates in the United States are concerned. Consequently, the investigation began with a study of the period I897-I9I3. For this test period the conclusion was reached that the simplest and most unvarying relationship of any discovered, between changes of money rates and subsequent levels of stock prices was given by the table showing (i) the rise (or fall) of I4 per cent and (2) the level of stock prices for the month immediately following the rise (or fall) mentioned.2 For the levels of bond prices,
The Review of Economics and Statistics19279(1), 20
THE accompanying chart presents a bimonthly index of general business conditions for the period I875-I9I3 consisting of three curves representing, respectively, speculation, business, and money (Chart i of the insert).' For the interval I903-I3 the index is that published in this REVIEW in January I924.2 For the interval I875-I902 the index is here published for the first time. The purpose of the present article is to describe the method of construction of the index for the earlier period, to discuss the relations existing between the fluctuations of its constituents compared with the relations found to exist between the curves for the i i years immediately preceding the war, and to make a brief survey of the period I875-I902 in the light of the new index. This index, like the one for I903-I3, is based upon corrected statistics. That is to say, the constituent statistical series of the three curves of the index of general business conditions have been adjusted for secular trend and seasonal variation. The following discussion relates to the fluctuations of the adjusted and not the actual series, unless otherwise specified.
It is generally recognized that one of the leading factors contributing to the present high level of prosperity is the economy from large-scale production. The reduction of overhead and the lowering of unit costs due to the manufacture of commodities in large quantities has brought within reach of the average workman comfort. which were sheer luxuries a generation ago. This would scarcely have been possible under the sole-proprietorship and partnership forms of organization, as no small group of investors would have been able to furnish sufficient capital to finance the requisite volume of business. It has been the corporation, under the guidance of farsighted executives, which has contributed so largely to this progress. This change in the general aspect of business (with the scientific approach to problems of finance, production, and marketing which is now required) has placed business on the plane of a profession; and colleges and universities have recognized this by establishing departments of business administration with curricula designed to train men as leaders in this profession.
The article focuses on the valuation of intangibles in business practices for the purpose of purchase and sale. There have been a large number of variable factors that have to be taken into account in the process. However, there are several general considerations which are to a greater or less extent taken into account in all case of valuation of intangibles. In buying a business with an established earning power in excess of what is considered ordinary in the particular line of industry, the purchaser expects to pay for the capitalized value of the estimated excess earnings which may be judged to continue for a fairly definite number of years. In computing this value, a number of factors have to be considered, like, the earnings of the concern; the value of investment or which a normal rate of income is to be allowed; normal rate of earnings for the industry concerned; the amount of the excess earnings that can be transferred; the number of years during which the transferable excess earnings may be expected to accrue; and the rate for capitalizing the excess earnings thus determined.