Knowledge that Transforms

Today, I thought it might be appropriate for me to say a few words about the nature and causes of the accelerating inflation from which the world has recently been sufferinig, and in particular about any interrelationships that may exist between inflation and recent developments in the exchange rate system. A certain degree of price inflationi has been pervasive throughout the postwar period. Durinig the 1950's its importance seemed on the whole to be declining, but later the trenid was reversed. During the decade of the 1960's, national income deflators in the industrial countries rose, on the average, at an annual rate of 3.4 percent. While the rate of increase fluctuated somewhat, therc was a gradual tendency for inflationi to gather speed towards the end of the decade. For a year or two this tendency was checked by the recession of 1970 and 1971, but in the following years the acceleration was rapid indeed with price increases of over 7 percent in 1972 and almost 12 percent in 1973 and 1974. Developing countries have always, on the average, had higher rates of inflation than industrial countries, but the same trend is visible among them: their consumer price indices, which had risen at an average rate of 13 percent during the 196572 period, accelerated to 24 percent in 1973 and 35 percent in the early months of this year. During the 1950's anid 1960's those who

This paper is based on my own firsthand research in the People's Republic of China and India during the second half of the 1960's, as well as information derived from numerous other sources. (See Richman and Richman and M. Copen, as well as the extensive documentation contained therein.) My interest here is in explaining major differences in the economic development of these two countries in terms of certain fundamental differences in their social development and underlying ideologies. Economic development performance is reflected in such conventional indicators as gross national product and per capita income growth rates, industrial and agricultural output, etc. China has done considerably better than India in the last twenty-five years or so with regard to most indicators of economic development. (See, for example, the following works and the numerous sources cited therein: T. Weisskopf; K. I. Chen and J. S. Uppal; Richman; and Richman and Copen.) I use the term social development here to include not only progress with regard to education and human resource development, health, welfare, social mobility, and raising real living standards, but also in connection with major changes in the attitudes, values, motivation, and behavior patterns of the population, as well as relationships between individuals, groups, and the broader society. Income distribution, which is also of major interest here, can be considered as part of economic and/or social development, although I treat it as being more a part of the latter since it tends to be more a sociological and ideological issue than an economic one.

In their well-known paper, William Brainard and James Tobin advocated 'general disequilibrium' framework for the dynamics of adjustment to a 'general equilibrium' system. The Pitfalls framework has subsequently been widely used in the construction of flow of funds models of financial markets. The Brainard-Tobin paper has also elicited notes from Mark Ladenson and Kevin Clinton in this Review which attempt to interpret and elaborate upon the Pitfalls model. However, these authors seriously misinterpret the model and seemingly obscure rather than extend the Pitfalls framework in a maze of unnecessary mathenatical techniques and notation. Ladenson and Clinton both attempt to work with linearly dependent explanatory variables whose coefficients are not identified and cannot be meaningfully interpreted. Clinton uses this indeterminacy to provide a superficial counterexample to a BrainardTobin argument. Ladenson, on the other hand, discusses two (of many possible) sets of expedient parameter restrictions which will allow him to assign values to all of the coefficients of the linearly dependent variables. He believes that estimation of the model necessitates substantive behavioral assumptions, whereas in fact the elimination of a redundant explanatory variable alters only the appearance of the model and the interpretation of individual coefficients. In addition to discussing the errors of Clinton and Ladenson, this paper will demonstrate the simplicity with which adding up constraints can be derived, the relationship between the form of a model and the interpretation of its coefficients, and how the parameters might be estimated subject to adding up constraints. In Section I the Pitfalls model is compared with the ClintonLadenson formulation; Sections II and III concern the respective details of the Clinton and Ladenson articles; and estimation procedures are discussed in Section IV.