Knowledge that Transforms

The first half of Richard Roll's comment contains an argument that my interpretation of the traditional expectations hypothesis of the term structure of interest rates is incorrect. The second half argues that both the decision rule that I infer from the traditional theory and the decision rule that I have advanced as an improvement upon that approach are sub-optimal. Adolf Buse and Reuben A. Kessel, on the other hand, accept my interpretation of the received theory and argue that the traditional approach is correct. I will respond first to Roll's criticism of my interpretation (and that of Buse and Kessel) of the traditional literature.

Apart from some conventional sniping from behind improvised footnotes, the counterattack mounted by David Winch and Mel Krauss has the apparent aim of recapturing for Harry Johnson the right to continue to use producers' surplus in his analysis of the welfare effects of tariff protection. Since they do not appear to dispute the main thesis developed in the text of my paper (that producers' surplus is either a misnomer or a conceptual error), their gallantry in attempting to secure a special dispensation for the use of producers' surplus in the gains-from-trade case also involves a certain awkwardness; one that is, not surprisingly, reflected in their arguments. Broadly speaking, their tactics are first to churn up a terminological smokescreen so as to obscure traditional notions of consumers' surplus and rents, and then, while the innocent reader is blinking at the resulting swirl, to produce for him concepts guaranteed to be slippery enough to meet any contingency.