Knowledge that Transforms

Warren Robinson dismisses the strength of the on the grounds of Gorin Ohlin's data which suggest that children are a costly way of securing old-age support. Quite apart from Robinson's confusion of marginal and average costs and returns, suppose the rate of return on children were so low as to be even negative. Should we then conclude that the pension effect has no force? Surely it would be naive to do so. Rates of return cannot be appraised in vacuuo. For example, suppose nature offered people negative rates of return on children and everything else, and that intergeneration transfers are ruled out. Then parents, planning for their retirement, must invest at that negative rate, which will then be the observed rate, quite apart from their time preference. Only if children turn out to be bad investments, relative to other assets, can we conclude that the pension effect is weak. Even then, we might observe relatively low rates of return on children as assets, if they are thought to be relatively safe investments in diversified portfolios. But if Robinson's conclusions still hold, if children have no place in a rationally selected retirement portfolio, then I am grateful to him for having highlighted the argument in Section IV of my article when I suggested that a dominating . . good asset (bonds) drives out the bad asset (children) (p. 387) so that population will wither away unless there are other motives for having children (p. 388). Robinson goes on to question my assumption that human motivation has something to do with human fertility. Nothing he says convinces me that the desire to reduce family size is not an essential ingredient in the problem. The costs of fertility control can be viewed as costs associated with achieving a desired portfolio. If condoms, intrauterine loops, or other devices reduce these costs then I am in favor of them as much as is Robinson. Finally I do not think Robinson and I really disagree about the nature of the fundamental market failure in my model economy. It was precisely intergeneration effects, within the family, I had in mind. But surely we do future generations a disservice if we ignore time-wise generation effects. If the postwar baby boom turns out to be a bulge on the population pyramid, then Robinson is shortsighted in discounting the relative magnitude of the intergeneration transfers when that bulge of babies becomes a bulge of dependent grandparents. Perhaps Robinson belongs to an unconcerned generation. After all the crunch will not come until 2010 A.D. or so. * University of British Columbia.

Michael Manove's recent contribution in this Review is fundamental in at least two respects. For the first time he has shown precisely how the formulation of each year's plan could be facilitated by taking advantage of data derived in the course of constructing the plans of previous years; and he has demonstrated the relationship between the changes in supply and demand generated in the present year to the imbalances of previous years. Although the logic of Manove's models is unasssailable, I do have some reservations on the way he interprets, or seemas to interpret, what is going on in some of these iterative processes he describes. It clearly emerges from his paper, in particular, that a procedure that calls for more will necessarily produce absolutely smaller imbalances in the long run, for given yearly final demands and increments in output. In other words, the absolute value of the elements of the vector of supply-demand imbalances in year T will be smaller under the centralized procedure that includes retrospective iterations (Manove's equation 21), than under the procedure that does not (equation 20), provided that the input-output matrix A is productive. In symbols, ETI< IE'j,where

In a recent article in this Review, Martin Weitzman argued that the observable slowdown in the of output (gy) of the Soviet economy in the 1960's need not be associated with a fall in the of total factor productivity (ga), as is usually suggested, but rather can be better shown to be a manifestation of diminishing returns to capital. By directly estimating a Constant Elasticity of Substitution (CES) production function' for the two decades following World War II, he found an elasticity of substitution of capital for labor (o-) significantly less than one. From this he concluded that the slowdown in the of that economy could largely be explained in terms of the diminishing returns to capital which resulted from the small substitutability between capital and labor and rapidly increasing overall capital deepening in the economy. Weitzman concluded that Instead of capital, labor and technical change will have to be increasingly relied upon as alternative sources of future economic growth (p. 685); and [that due to demographic trends] This rests the spotlight finally on technical change .. the way of raising g, is now to increase ga because gL iS more or less fixed .. . (p. 686). We should like to advance the proposition that the record of of the Soviet economy during the 1950's and 1960's (as presented in Weitzman's Table 1, p. 677) points to aspects of the underlying Soviet macro-production process other than the small elasticity of substitution as possibly the kev culprits effecting the noted slowdown in g,. Furthermore it is suggested that perhaps the most appealing way of raising g, may after all be not through the overall productivity relationship A (or ga), but rather through the term slighted by Weitzmanthe rate of the labor force gL. We fit the data in Weitzman's Table 1 to a maximum likelihood, non-linear regression program,2 similar to that used by Weitzman. A more general model was employed which imposed neither a geometric time trend, nor unitary returns to scale on the data. The specification used was: