Knowledge that Transforms

It is well known that an income tax, indeed any tax that falls on capital, often produces a distortion by reducing the effective interest rate below capital's marginal product. This distortion is usually deemed undesirable. This paper demonstrates, however, that such a tax, in an economy constrained to make no intergenerational transfers, can in spite of distortion redound to the benefit of those on whom it is levied. The tax of optimal magnitude is shown to yield a gain which is extracted at the expense of posterity, and which constitutes the exercise of monopoly power by living generations over those yet unborn. Finally it is demonstrated that an economy characterized by such exercise of monopoly power by each generation ad infinitum may produce a utility stream dominating that of an otherwise identical laissez-faire economy. The paper assumes, unrealistically, that generations are aware of this potential gain and that the .political process is sufficiently responsive to translate the electorate's desires into taxes of the optimal size. Each generation is assumed represented by its own government during its years of positive capital accumulation. Factor pricing is as

Robert Gordon should be commended on a painstaking statistical effort, notwithstanding some serious flaws in his estimates. According to calculations made at the Office of Business Economics (OBE), the value of the investment which he calls mislaid is $76 billion rather than $45 billion. The OBE estimates of the investment types he discusses were published in a study by Robert Wasson, John Musgrave, and Claudia Harkins. However, I shall not deal here with statistical procedures. Rather, I shall examine the theoretical aspects of Gordon's article. As a preliminary, I should like to note that Gordon conveys the impression that he has discovered something of which no one before him was aware: that government owned, privately operated capital is omitted from the OBE estimates of private investment and private capital stocks. In fact, the omission of government owned, privately operated capital was discussed explicitly in 1956 in a basic OBE study devoted to manufacturing investment by Donald Wooden and Robert Wasson. OBE brought this study to Gordon's attention long before the publication of his article. All subsequent OBE publications on capital stocks have also made clear that they cover only privately owned stocks and exclude government owned capital. Moreover, Victor Perlo developed earlier many of the points featured by Gordon. If Gordon was nevertheless bent on creating the impression that he has made a discovery, he could with equal justification have staked out a broader claim. He could have discovered that government owned, government operated capital also is omitted from the OBE national accounting system, and he could have given his article an even more catchy title by calling it $768 Billion of U.S. Investment Has Been Mislaid, instead of settling for a measly $45 billion. But let us discuss Gordon's views on the definitional and conceptual problems underlying the measurement of capital. He writes as though his theoretical framework were obviously and unequivocally correct. In fact, however, he is dealing with difficult matters on which no agreement exists. To discuss these matters, it is necessary to distinguish between two components of capital which Gordon merges in his discussion. One is government surplus capital bought by the private sector; such capital belongs in the private capital stock and the question is how to value it. The other is government owned capital operated by the private sector; the question here is whether such capital belongs in the private capital stock at all. I shall argue that: 1) within the framework of the national accounting system used by OBE, government surplus capital is now properly valued in the OBE gross private investment series; 2) Gordon's valuation of government surplus capital as a component of the private gross capital stock is probably too high; 3) inclusion of government owned, privately operated capital in the private capital stock is inappropriate for production function analysis if OBE estimates of national product are used to measure output; and 4) that the where-used criterion proposed by Gordon for the classification of * Director of the Office of Business Economics of the U.S. Department of Commerce. He acknowledges the help received from Edward F. Denison and from his associates at the Office of Business Economics. However, they do not agree with all the points made in this paper.

Hayami and Willis Peterson present a practical application of Alfred Marshall's social welfare concepts.1 Their approach, in the tradition of public goods analysis, seeks to measure the social returns to improvements in information about U.S. farm commodities. Their strong theoretical argument is jeopardized by their empirical evidence leading to exaggerated and unrealistic conclusions. We have two basic criticisms of their analysis: 1) they use highly inelastic demand elasticities for grains which exclude export and animal feed uses; and 2) their conclusions are dominated by the marginal social returns for onlv two of the seventeen commodities studied. Their distribution of returns raises specific questions about sampling techniques for the two commodities which may be more important than the broader issue of social returns to public information services.