Knowledge that Transforms

A recent exchange between George Daly and J. Fred Giertz and Harold Demsetz focused attention on the social efficiency of extortion. Daly and Giertz suggested that extortion could be defined as ... the of obtaining payments from some entity in return for not imposing upon that entity some harmful effect, where the generator of the external effect receives no direct net internal benefit from the act (p. 998). Extortion is, they say, an which merely redistributes income and reduces social welfare by the amount of any transaction costs. It is thus distinguished from legitimate bargaining, which will produce social welfare gains. Demsetz replied to this argument by pointing out that there are many activities which might result in social welfare gains but are, nevertheless, prohibited as extortionary acts. The legality of a threat bears only a very rough relationship to the social utility of the act, and the definition of extortion is therefore rather than economic, according to Demsetz. The difference between these two positions relates to the definition of the extortionary itself. If A demands property from B under threat to accuse B of a crime, extortion has occurred. The which is being threatened may have individual utility to A of equal to or less than zero, as Daly and Giertz correctly point out. There may also be a net gain in social utility either if the threat is of some value to society (for example, it may help deter crime) or if the property transferred is worth more to A than to B (for example, perhaps because of unequal marginal utilities). Thus, an economic interpretation of extortion must be more narrowly defined as the threat to commit an which by itself would not materially benefit the actor alone. Daly and Giertz are correct in postulating the existence of an economic definition of extortion consistent with current legal practice, though wrong in their inferences about its direct social (rather than individual) utility. Demsetz correctly points out that individual acts of extortion may have positive social utility effects, but incorrectly concludes that any definition of extortion must therefore be legalistic. The following discussion indicates that legal theory is broadly consistent with an individual utility interpretation of extortion. It is only the delimitation of the benefits of the threatened extortionary act, not the definition of extortion, which is purely a legalistic question. English criminal law, as embodied in the Larceny Act (1916), specified blackmail (used synonomously with the term extortion) as ... the demanding of any person with menaces, and without reasonable or probable cause, any property or valuable thing .. (see J. W. C. Turner, p. 312). Such menaces include: threats to accuse another of a crime, unlawful violence or restraint, threats to publish and, in general, any threat that ... should produce in any ordinary man such a degree of fear or alarm as would unsettle his mind (Turner, p. 315). The distinction sought in the is whether there is a clear nexus between the threatened and the property demanded, and whether there is value by itself in the threatened, the degree of nexus being one criterion for judging the latter. G. L. Williams' survey of English law on blackmail provides ample evidence of the legal pursuit of this distinction, particularly the emphasis on the private utility of the extortionary itself. He refers to the Dymond case in 1920, which provided the modern English precedent. In this case, a girl who alleged that she had been indecently assaulted wrote to the man in question demanding money under threat of adverse publicity about his moral character. She was convicted of blackmail on the grounds that *Australian Graduate School of Management, University of New South Wales. This note has benefited from comments by an anonymous reviewer and from references supplied by Kenneth Ove.

Lloyd Metzler's Wealth, Saving, and the Rate of Interest has played a useful role in the development of monetary theory. Perhaps most importantly, it has stimulated significant contributions to our understanding of the nature of the classical general equilibrium. Among these contributions are two that I had thought were widely accepted: (i) in order for money prices to be determined they must impinge on some quantity or quantities that are fixed in nominal (money) terms (i.e., money prices must in a sense); and (ii) there is no real balance effect and money is neutral in all-insidemoney, equilibrium systems. Substantial portions of Don Patinkin's Money, Interest, and Prices are devoted to proofs and examples of these propositions.' It is no criticism of Metzler to point out that his seminal work failed to contain all of the refinements and corrections that it inspired. Less understandable has been the failure of several writers to apply the contributions of Patinkin and others to Metzler's representation of the classical framework, with the consequence that we have been exposed to repeated demonstrations of nonclassical results from a so-called classical model. purposes of my earlier paper were to bring Metzler's much used model into the mainstream of contemporary general equilibrium analysis and to derive the implications of that model when, as in other equilibrium systems, trading occurs only at equilibrium prices. I found that classical assumptions, when applied to Metzler's model, lead to standard classical results, such as the neutrality of money. This is true for both the insideand outside-money versions of the model. In addition, because Metzler made inside money proportional to the price level, the application of classical equilibrium trading implies an indeterminate money supply and an indeterminate price level. All of this is familiar to Patinkin's readers. In his opening discussion and equations (1)-(9), Meir Kohn fairly describes my restatement of Metzler's model with equilibrium trading. But he denies the two propositions stated above. His approach is to seek different results by means of an alteration in the assumptions. Instead of following Metzler2 in letting M be endogenous while the central bank exogenously fixes X, he reverses these assumptions by having the central bank fix M and letting X be endogenous. results of this switch, he claims, are that (i) the price level is determinate, and (ii) money is no longer neutral except in the case of the first open market operation. Variations in assumptions often generate variations in results. However, the inability of the central bank to acquire real assets (whose nominal values are proportional to the price level) in exchange for money prevails no matter whether we let M or X be the instrument of policy. Every increase in M causes an increase in P in the same proportion and leaves the central bank in possession of no more real assets than before the monetary injection. indeterminacy of prices in a system in which fixed nominal claims are absent is, it appears, a robust result. These assertions may be demonstrated as follows. Kohn's first open market operation is imposed on his equations (10)-(12) in the three unknown, r, and X: The central bank creates a predetermined sum of dollars M, and uses it to purchase private securities at the equilibrium price P, (p. 1094). He finds that r is not altered by the open market operation while X falls from 1 to X 1 < 1, where (1 X) is the proportion of securities (common stock, i.e., claims on real assets)