Knowledge that Transforms

ECONOMIC DEVELOPMENT is a field in search of itself. Within the last few years several surveys have appeared, ranging from article length to the definitive two volume Handbook of Economic Development with its 33 chapters and 1700 pages., 2 Even the World Bank's 1991 World Developmnent Report is devoted for the first time to a review of the fundamentals of the subject, rather than its customary analysis of specific problems like human resources, agriculture, industry, etc. This industry of self-reflection thrives from a conjunction of two circumstances. One is the disturbing reality of the lost decade of the 1980s which saw negative per capita economic growth for the countries of Africa and Latin America, even while positive results were being realized in most parts of Asia. for the first time in the postwar period, the presumption of continual

CHARLES BABBAGE deserves full membership in the club of mathematicians who have made significant contributions to economics, a club which began with Daniel Bernoulli (1738) and reaches at least to John von Neumann (1944). It is appropriate that Babbage's contributions were wholly nonmathematical, for his talents were richly varied and his behavior wonderfully eccentric. The invention of those ancestors of the modern computer, the Difference Machine and the Analytical Machine, is of course his greatest claim to fame: they are prodigies of both theoretical creativity and mechanical implementation. The Difference Machine was designed to produce and print mathematical tables by the use of finite differences. By 1822 Babbage had a small working model and was promising soon to produce logarithmic tables as cheap as potatoes. In building a large machine-which continually grew in power and complexity-he encountered and overcame innumerable analytical and mechanical problems. The work on the machine ground to a halt about 1832, after the Treasury refused to add to its previous grants of E12,000. Soon Babbage turned to the Analytical Machine, which consisted of two parts:

THIS ARTICLE critically reviews the Handbook of Industrial Organization (henceforward the Handbook), edited by Richard Schmalensee and Robert Willig. These two volumes are the tenth installment in the North-Holland Handbooks in Economics series, under the general editorship of Kenneth Arrow and Michael Intriligator. Like its predecessors, this Handbook contains a number of survey papers (in this instance, 26) on a variety of related topics. As such, they afford both authors and readers an opportunity to determine which directions research in the field has taken, what (if any) real advances have been made, and what questions are still unanswered. Consequently, this review also describes and appraises the current state of Industrial Organization. Research in Industrial Organization has undergone a dramatic change in the last 20 years. Neoclassical decision-theoretic analysis and competitive general equilibrium theory have been supplanted almost completely by noncooperative game theory. This change was not merely the adoption of the tools of another field.

WHILE THE U. S. PRODUCTIVITY slowdown wasn't first discovered by economists in 1980, it certainly began to get big play in that year. The American Economic Association devoted a session to the current retardation in U.S. productivity and the first in a series of major articles on the slowdown appeared in this journal. The latter was a review by Richard Stone (1980) of Edward Denison's Accounting for Slower Economic Growth: The United States in the 1970s (1979). Denison documented a substantial drop in the growth of labor productivity between 1948-73 and 197376, showing that the lion's share of that slowdown could be attributed to what had come to be known as the residual, or to what others have called total factor productivity growth. Stone's review of Denison was followed by contributions by Richard Nelson (1981), Roger D. Norton (1986), and Angus Maddison (1987). The citations to literature on the slowdown had ballooned from dozens to hundreds by the appearance of Maddison's article, and it had become everyday fare in our morning newspapers. In the midst of this surge of concern with the U.S. productivity slowdown, William Baumol was asked by the president of the Committee for Economic Development to prepare a statement on productivity policy for the United States. With disarming modesty, Baumol reports the CED was looking for someone whose ignorance of the subject ensured that the statement would not merely recapitulate the accepted shibboleths (p. ix). Baumol accepted the challenge in 1983 and with the appearance of Productivity and American Leadership seven years later he and his collaborators (Sue Anne Batey Blackman and Edward N. Wolff) have produced at least four books and nine articles. A productive collaboration indeed. Why another publication on the slowdown? In 1979, Denison regarded the slowdown as a mystery, and Stone concluded his review with a wistful sigh-If Denison is stumped who can expect to do better? (Stone 1980, p. 1539). A decade later, Baumol, Blackman, and Wolff (hereafter BBW) have shown that we can do a lot better. The book has four important virtues. First, it reveals an appreciation for history. If there ever was a topic for which an understanding of the long run mattered, productivity performance is surely it. United States experience with the productivity slowdown since the 1960s cannot be adequately understood without placing that experience in the perspective of a century of productivity growth, nor can it be * William J. Baumol, Sue Anne Batey Blackman, and Edward N. Wolff. Productivity and American Leadership: The Long View. Cambridge and London: The MIT Press, 1989. Pp. x, 395. $29.95. ISBN 0-262-02293-1.