Knowledge that Transforms

A major aspect of social policy in the United States during the 1960's was the effort to increase employment and lessen the extent of poverty. The effects of these efforts, in particular those of the Manpower Development and Training Act, have been discussed by economists solely within the framework of empirical cost-benefit analysis. In this note we take a different approach to the study of manpower programs. Under a set of admittedly restrictive assumptions we analyze the relative efficiencies in reducing unemployment of several alternative subsidy programs. It should be remembered that the reduction of unemployment is merely one goal of these programs and that the usefulness of our result must be qualified accordingly.

The recent growth in Soviet borrowing from the West, resulting in the rise of net Soviet debt to $16 billion by 1977, has raised the analytical question of considerable economic and political significance: how much are such credits worth to the Soviet Union? Several alternative approaches to answering this question are possible. Broadly speaking, they may be grouped into two categories: partial equilibrium and general equilibrium. In the partial equilibrium analyses, we may include (i) the econometric investigation of whether foreign capital goods have greater productivity in Soviet industry and branches than domestic capital goods, the relevance of this to the problem at hand being established by the argument that foreign credits may be jointly supplied with the capital goods embodying advanced technology; and (ii) the noneconometric examinations of the role that foreign credits and technology can or do play in specific sectors (for example, automobiles and oil). On the other hand, a partial equilibrium approach is not a satisfactory way to approach the question at hand. The productivity of foreign credits can be defined meaningfully only in the context of the use of resources generally, requiring a general equilibrium approach. In turn, a general equilibrium approach may be based on the incorporation of foreign credits into one of the models, either of the computable planning type or of the econometric variety as represented by the SOVMOD exercise of Donald Green and Christopher Higgins, the productivity of -foreign credits being estimated by the required variation in the levels of foreign borrowing therein. However, these large models tend to be rather cumbersome and the total effects of parametric variations are therefore extremely difficult to disentangle. Small models, by contrast, often have the advantage of both elegance and ease of interpretation, while not burying the essence of the economic system within a complex structure. In this paper, I have chosen the small, simple decision model approach and elaborated a general-equilibrium model of the Solow-Swan variety, using a CES production function. I have estimated the functional relationships postulated and calculated the productivity of foreign resource inflow (of which foreign credits are a component) within it. In Section I, the model is set out, its structure is justified, and the analytical methods to be used to calculate the productivity of foreign resource inflow in it are spelled out. In Section II, I present the estimates of the model and the productivity of foreign resource inflow that emerges from them. Section III offers some concluding observations, in light of the estimates.

How few traders constitute a bargaining problem or, alternatively how many traders constitute a market? Intuitively, people who meet to trade face a bargaining problem if several of them, with opposing interests, can influence the outcome of trade through their behavior. Traders constitute a competitive market only if the effect of any trader on the outcome of trade is insignificant. Analysis of bargaining using noncooperative game theory has been a lively research topic over the past ten years, while the formalization of perfectly competitive markets using a continuum of traders is now several decades old. In this paper I discuss a line of research that studies the transition between these two theories; in particular, a result from Mark Satterthwaite's and my paper (1989b) is presented that shows how a bargaining problem is transformed into a market as the number of traders increases. Incomplete information is an essential feature of the model that I discuss. In order to explain how traders achieve a competitive equilibrium, it is standard to assume that all potential gains from trade are commonly known at the outset. In contrast, each trader in the model that I describe privately knows his own preferences. A second feature is that a market with any finite number of traders on each side is modeled, rather than one with a continuum of traders. These two features together make strategic behavior seem especially likely. Price-taking behavior is not an axiom here; instead, the objective is to prove that a trader's equilibrium behavior is to increasingly act as a price taker as a market grows in size, and that only a small number of traders is needed on each side to compel each trader to act in this way. Though the background of this research will be discussed later in more detail, it is basically motivated by the intuition most of us share that a market can work pretty well despite having a relatively small number of traders who strategically act on their private information. While the axioms of perfect competition are, of course, never satisfied in the real world, I believe that this theory provides insight not only into immense markets but also into smaller markets. The research that I describe is another attempt to substantiate this belief.

The European centrally planned economies (CPEs) have sustained chronic hard currency deficits since East-West trade began to expand in earnest about fifteen years ago. While their outstanding hard currency debts almost doubled over 1975-76 as a result of an inability to adjust quickly to the Western recession-a previously unsuspected vulnerability-other systemic factors rooted in Stalinist central as practiced in the CPEs, have been responsible for the more secular balance-of-payments problems.' I refer to the wide use of direct controls to allocate intermediate products, the prevalence of or over full-employment planning, and irrational domestic pricing. These have several implications for economic performance which are relevant to the CPEs hard currency balances of payments. First, the CPEs tend to produce relatively low quality manufactured products and have a marked inability to sell their products in Western markets. Inability to compete successfully is not due to price, but, to quote a Hungarian economist, Imre Vajda, to deficiencies in performance, reliability, appearance, packing, delivery and credit terms, assembling facilities, after-sale services, advertising, selling itself , primarily factors other than price . (p. 53). This ineptness results largely from lack of competition-the fact that domestic products are distributed by the plan rather than sold and that quantitative goals take precedence over qualitative goals. Further, taut planning results in sellers' markets, additionally weakening managerial incentives to improve quality. Nor does play a significant role in intrabloc foreign trade. This trade is characterized by large state trading agreements, protected markets, and little or no direct contact between the producing enterprise in one nation and consuming enterprise in the other. Second (and related) is the well-known relative weakness of socialist nations in innovation and technological change. This is due to the absence of competition just noted, to rewards for innovation which are inadequate to offset the risks or overcome inertia, and to the dysfunctional organization of R&D establishments and their relations to operating enterprises. Third, the CPEs trade with each other and with the West at roughly world prices, even though these prices usually have no organic or consistent relationship to domestic prices. Their exchange rates serve as units of account but not as real prices. Their currencies are not only totally inconvertible into each other, they are also largely inconvertible into goodsso-called commodity inconvertibility (see the author, 1978). That is to say, foreign importers (exporters) are not allowed to compete freely with local enterprises for products (markets) because this would disrupt the plan. This significantly reduces short-run ad hoc exports-most exports have to be planned long in advance. These factors lead to at least three causes of persistent hard currency shortages: 1) the *Professor of economics, Tufts University and associate, Harvard Russian Research Center. Some of the ideas in this paper appeared earlier in my 1973 article. A much longer current version is available on request. I am indebted to Abram Bergson for incisive criticisms of two earlier drafts. 'Other than systemic factors may also be responsible. For example, the current availability of Western investments and credits on reasonable terms and the present willingness of the CPEs to entertain such relations with the West is one such factor. It should also be noted that the LDCs and some advanced industrial nations also have chronic balance of payments problems. However, I argue that the factors to be mentioned below are unique to the CPEs.