Knowledge that Transforms

A SHORT-RUN model for the coal industry was formulated and solved in an article in the last issue of this REVIEW.2 The model is composed of two interrelated linear programming problems. Its data are spatially distributed demands for coal, capacities of spatially distributed coal deposits, and the unit costs of all possible deliveries from the deposits to the demand locations. The first programming problem, the delivery system, is to select a set of deliveries which minimizes the cost of meeting the given demands subject to the capacity restrictions; and the second, the price system, is to select a set of delivered prices for the demand locations and unit royalties for the deposits which maximizes total revenue net of royalty payments subject to the condition that every possible delivery must yield a nonpositive profit. The optimum solutions for these two problems were shown to provide a complete description of a perfectly competitive equilibrium. The model is normative in the sense that its solutions are those which would prevail if the assumptions of perfect competition were realized. The prices and royalties determined in the price system are only consistent with perfect competition, but the minimum-cost solution of the delivery system is consistent with monopoly as well as perfect competition. The solution of the delivery system furnishes a numerical description of efficiency in the sense that total cost cannot be reduced by any possible rearrangement of delivery levels, and the solution of the price system furnishes a numerical description of perfectly competitive pricing. The model was implemented with historical figures for the demands, capacities, and unit costs; and numerical solutions were computed for the delivery and price systems for I947, 1949, and I95I.3 The numerical values of the variables given in the normative solutions are in the present paper compared with the corresponding actual values. Actual outputs for the deposits recognized in the applications of the model are compared with efficient outputs derived from the solutions of the delivery system, in order to indicate how closely the coal industry approaches the efficient norm established by the model. The decline in output between I947 and I949 and the conformity of the actual outputs for surface deposits are specifically considered. Actual f.o.b. mine prices are compared with corresponding competitive prices derived from the solutions of the price system, to indicate the extent to which the prices prevailing in the coal industry approximate those established by the model. No industry meets all of the assumptions of perfect competition, and the question to be answered by our analysis is not whether the coal industry meets these assumptions, but rather how closely it meets them. The extent of competition in individual industries has been the subject of a large number of studies. A common procedure in such a study is to examine various factors, for example the number of sellers and buyers, the method of price determination, and the existence of selling costs, and then to judge the competitive structure of the industry on the basis of these f actors.4 These analyses are valuable in describing the niature of competition within an industry, but the extent to which an industry deviates from a perfectly competitive solution may not be directly related to the number of non-competitive practices which can be listed. The effects of one

DURING the late I930'S the between economic concentration and depression price behavior was a matter of considerable controversy. At the heart of the controversy were three elaborate statistical works.' The first, by Gardiner Means, found that a rough relationship existed between economic concentration and price rigidity; the second, by Willard Thorp and Walter Crowder, concluded that there was no such and that indeed price rigidity could be explained by the characteristics of the product (durability, use, etc.); and the third, by Alfred Neal, found that differences in price change are associated with differences in changes of direct costs and are therefore not to be attributed to differences in concentration. This article represents an attempt at a critical evaluation of these studies.

TWO decades of refinement of macroeconomic and econometric analysis have contributed only modest sophistication to the role in which investment is cast.' The nexus of investment interactions with other national income aggregates has long been recognized as considerably more complex than can be faithfully expressed by casting them in a simple exogenous role as in the earliest Keynesian models. Accordingly, Samuelson's expression of the multiplier-accelerator interaction became a classic early step toward endowing investment with a less aloof character.2 But again, as many others have pointed out, Samuelson's simple, dichotomous separation of all investment into exogenous public investment and endogenous private investment added only a modest amount of realism to the role of investment. An analytical structure that ties private investment wholly to the accelerator certainly constitutes only a second approximation at best. The object of this study is not to attempt to rationalize the full role of investment, either theoretically or econometrically. Such a tour de force will have to come from more ambitious undertakings. Rather, in an effort to make some modest contribution toward the eventual resolution of the exogenous-endogenous investment problem, we present an empirical analysis confined to certain segments of construction activity. In the process of establishing some tentative statistical estimates of one facet of the construction-investment nexus, some reflected light of a more generalized nature may be shed on the causal role of investment in macro-economic change.

FOR a proper evaluation of the development over time of national accounts data referring to product flows, a distinction has to be made between the developments of volume and price which together account for changes in value. In order to make this possible these data are usually presented in constant as well as in current prices. In the United Kingdom accounts, for instance, we find a special table presenting the gross domestic product at I948 prices by categories of expenditure (see, e.g., Table i i of National Income and Expenditure, I946-I953 1) alongside tables which present the same data in current prices. The data concerned are shown in the form of a special accounting statement, known as the domestic production account, which shows all product flows, duly aggregated, for a number of years. If the data were not related to each other in this way then they would only permit an analysis of the current value development of each individual item into a price and a volume component. Thanks to the accounting form in which the data are presented, we can take the analysis one step further by distinguishing changes in pattern from changes in level for both prices and volumes. The fact should be stressed that this further statistical analysis of the data, which would appear to be of value to macro-economic model-building and economic analysis in general, can only be carried out successfully in the framework of a national accounts statement. It is one of the special features of these statements that they provide a consistent picture of the structure of the economic process without leaving any loose ends. The definitional relationship between the aggregates appearing in these statements is duly reflected in them. They are always complete in the sense that they present a rounded-off picture of economic activity, though the amount of detail shown may of course differ from one statement to another. In economic analysis a certain interest attaches to each of the four components mentioned: price level, price structure, volume level, and volume structure. Changes in the general price level, for instance, play an important part in monetary theory, and there is little doubt that the first price indexes to be constructed were meant to measure the change in the purchasing power of money. Changes in the price pattern, on the other hand, are often considered as being of more importance than changes in the general price level in the analysis of supply and demand, since in supply and demand analysis particular emphasis is put on relative prices, that is, on the ratios between the price of one product or group of products and that of another. Although the distinction is perhaps less pronounced in economic theory with regard to volumes than with regard to prices, the separation of the two elements of volume change, that is to say, the change in the level and the change in the pattern of economic activity, often proves to be equally helpful in economic analysis. Once an attempt is made to apply this comparatively simple idea of distinguishing four instead of two components of change in the statistical analysis of changes in the values of national accounts aggregates, it soon becomes clear that matters are more complicated than one might have expected. This being so, it is not surprising that there is a good deal of confusion as to how to calculate the eff ct of changes in the terms of trade on the amount of resources which an economy has at its disposal for satisfying its needs. After all, the measure of this effect is in essence nothing but a measure of the effect of a change in price structure, namely that of world market prices. Different calculations of this effect show different results, and all of them would seem equally justifiable at first sight. It is actually in attempts to throw more light on this particular problem that the present ' Central Statistical Office, London, I 954.

IN an earlier article it was shown that there was a fall in private fixed investment in 1948-50 which played a considerable part, and possibly the most important part, in inducing the fall in production and reduced inventory investment in the United States from late in 1948 until early I950.1 It is proposed to examine here aspects of private fixed investment during the period I946-50 which have some theoretical significance. When the official investment statistics are broken down by sector and industry, a considerable variety of cyclical patterns emerges. Rates of postwar expansion and dates of turning points differ considerably. The dates of turning points of total investment have little significance unless they are viewed as averages; this in itself is not a particularly novel conclusion. This pattern in turning points becomes significant when considered in relation to the more general causes of the postwar expansion in investment, and in relation to both the immediate and deeper influences that may have checked the expansion. When the statistics of investment in producers' durable equipment are examined from the point of view of type of equipment, a similar variety of cyclical patterns emerges, which because of the clearness of the pattern and the greater reliability of the statistics can be related in quite a precise way to the causes of the expansion or, more generally, to the determinants of the rate of investment. In summary form, the conclusions drawn from the statistical studies are as follows. On most types of durable goods, the peak and ensuing decline in expenditures occurred earlier (i.e., more quickly after the end of the war) the greater the expansion in expenditures during the war. The rates of expansion just before the war, the rates of expansion in the postwar period, and relative price changes do not alter this conclusion, although they are needed as elements to supplement the exDlanation. The sector analysis, which includes private new construction, supports these conclusions, although it is obvious and well known that special factors influenced investment on farms, railroads, public utilities, and residential construction. Neither the annual change in output, the annual level of output, nor the level of corporate profits can be satisfactorily related to the changes in the rate of fixed investment over the period in ways which would provide explanations of the rate of investment. The set of circumstances governing the changes in the rate of investment after the war would appear to be (a) the different wartime rates of investment of different corporations, industries, and sectors; and (b) the different wartime rates of investment in different types of plant and equipment. Generally, the less a firm had invested during the war, or the lower the production of a particular type of equipment (presumably because of the wartime allocation of resources), the longer was the period after the war during which the firm's investment, or investment in the particular type of equipment, increased. The deferred investment demand of the war years or the deferred replacement investment was a large enough proportion of total investment for the gradual falling off of the former in I948-49 to cause a change in the total. The absence of any noticeable accelerator or profit relations except possibly a short-period accelerator effect in the middle of I 949suggests that that investment which was not specifically deferred replacement investment continued to increase after 1948. It is this which explains the recovery in total investment expenditures in early I950, and which partly explains the short lived character of the I949 slump.2 These conclusions have been based upon a study of the available official statistics. Annual figures have been used throughout, both

THE main purpose of this article is to examine those cyclical and structural developments which affect the United States balance of payments developments such as changes in trade and investment patterns and the rising role of government transactions. Some of the problems and pitfalls encountered in the interpretation of balance of payments data are discussed in the course of the argument. The balance of payments of the United States has been of more interest in recent years to those concerned with foreign economies than to those interested in our own. The direct effects of foreign transactions upon United States business activity have been frequently neglected,' as were indirect effects through changes in gold reserves since these could be offset by the Federal Reserve System, because the reserves exceeded the requirements by a sufficient margin. The lack of concern with our balance of payments is also due to the fact that a substantial part of our foreign expenditures, particularly those on government grants and loans and for military purposes, are sometimes considered of marginal importance and subject to reduction in case a deficit in our foreign transactions should have a serious effect on our reserves. Moreover, the possibility that our foreign expenditures may have to be curtailed for balance of payments purposes is usually dismissed because during most years, since the I930's at least, the foreign demand for dollars seems to have exceeded our expenditures abroad and an increase in our foreign expenditures would merely have made it possible to meet a larger portion of the current foreign dollar demand. On the other hand, for the development and stability of foreign economies the United States balance of payments is usually regarded as one of the most importantif not the decisivefactors. Dollar receipts may limit dollar expenditures and thus the purchases from the United States of raw materials and equipment which are required in the operation of foreign economies. Perhaps even more important, dollar receipts by foreign countries affect their monetary reserves, and thus may permit an expansion or force a contraction of international trade, including trade between foreign countries themselves. Because the dollar is used as an international monetary reserve and as a means of settling international accounts, the indirect effects of changes in foreign dollar holdings on foreign economies can be considerably greater than the changes in trade with the United States alone. Because of the multiplier effect of changes in the United States balance of payments, fluctuations in United States business activity are followed with considerable apprehension abroad. Experience in I954 has not borne out these apprehensions. Foreign economies continued to * The opinions expressed in this article are those of the author and do not reflect the official position of the Department of Commerce. 'The relatively minor role in the domestic economy attributed to foreign transactions is to some extent due to the inclusion of net figures in the Gross National Product presentations. It is obvious that net exports or imports, or net foreign investments generally, have to be rather small figures, since the net movement of capital and of reserves is relatively limited. This applies not only to the United States which exports and imports 4 to 5 per cent of its output, but also to countries such as Canada or the Netherlands which sell and buy abroad 30 to 40 per cent of their production. The mere fact that, ex post, exports and imports have to be more or less in balance does not indicate that the ex ante effect of foreign transactions upon the economy also has to be minimal. Changes in exports may have affected output and consumption which in turn result in a corresponding movement in imports. If only net trade is entered in the GNP data and the rise in GNP is shown as a rise in consumption, the usefulness of the GNP data for the interpretation of economic developments is considerably reduced. On the other hand, if gross sales to the rest of the world are shown together with sales to the domestic sectors of the economy, and purchases from the rest of the world are deducted from total sales, the importance of exports becomes more obvious. In the case of the United States for instance, exports of goods and services, excluding military goods and services supplied under grant-in-aid programs, of $I7.8 billion in I954 substantially exceeded consumer purchases of automobiles and parts ($I2.5 billion) or residential nonfarm construction ($I3.5 billion). Furthermore, the rise in exports of goods and services from the third to the fourth quarter of I954 at an annual rate and after seasonal adjustments of $i billion provided as much impetus to the upswing of the economy at that time as the rise in consumer purchases of all durable goods, or the rise in total new construction.

rrHE economic evaluation of public policy 1 must be based to a considerable extent upon the way it influences the distribution of income. This is especially true for such matters as labor legislation, agricultural subsidy payments, the tax structure, the tariff structure, and public works programs. Accordingly, a systematic examination of the effects of changing income distribution seems greatly to be desired. One aspect of this problem is considered in the following analysis: the effects of the equality of income distribution upon consumption expenditures. More specifically, our concern is with the effects of income distribution upon (a) the percentage of disposable personal income spent, and (b) the allocation of the expenditures which are made. Review of theories. Thus far two theories have been advanced regarding the effects of equality of income distribution upon consumption expenditures: the comparative propensity to consume theory and the emulation theory. The comparative propensity to consume theory holds that the effect of a change in equality of income distribution may be analyzed by comparing the relative marginal propensities to consume of those incurring the income decrease and of those receiving the corresponding income increase. Thus, a reasonably symmetrical equalizing of income distribution presumably would tend to raise the aggregate consumption function for the economy as a whole, since the nch are believed to have a lower marginal propensity to consume than the poor -and vice versa.' Furthermore, it should cause the allocation of what expenditures are made to change as follows: food to increase. clothing and transportation to decrease, and shelter to remain nearly constantand vice versa.2 Veblen's emulation theory holds that people in any given socio-economic class tend to have as their material standard of living the goods and services actually consumed by the next higher socio-economic class.3 For this reason, it is argued, the spread between the standard and plane4 of living for consumers in the aggregate (hence, the pressure on them to spend) is a function of the income differences between the various socio-economic classes in the economy. From this it follows that a reasonably symmetrical equalizing of income distribution should tend to reduce the income disparity between the various socio-economic classes, thus reducing the spread between their standards and planes of living (reduce the pressure on them to spend), and consequently cause the consumption function for the economy as a whole to fall.5 The opposite reaction logically should occur as incomes become less equally distributed, but only for moderate decreases in income equality. Too great an income disparity between the various socio-economic classes presumably would cause them to lose

M OST writers about the relation of capital to output in American manufacturing have been impressed by the tendency for the ratio to increase with size of firm. They have usually emphasized one explanation, although they have not agreed on the one that should be stressed. It is the purpose of this paper to present evidence not readily available that the tendency may not be as universal as often assumed and that, where it exists, the explanation is likely to differ from one industry to another. The usual analysis of capital ratios for American manufacturing has been based upon the industrial aggregates compiled by the Internal Revenue Service (formerly Bureau) of the Treasury Department.2 Accordingly it has not been possible for the investigator to analyze the capital ratios of each firm in relation to those of other firms with which commonly classified. In contrast, it was possible in the study reported here to examine the behavior of the ratios for each industry, firm by firm.3

Margaret G. Reid, Marilyn Dunsing, Effect of Variability of Incomes on Level of Income-Expenditure Curves of Farm Families, The Review of Economics and Statistics, Vol. 38, No. 1 (Feb., 1956), pp. 90-95