Knowledge that Transforms

In his comment, Alex Cukierman argues that to obtain better estimates of price, or money-illusion, effects in an aggregate consumption function one should disaggregate the consumer price index (CPI) into its components and include these separate price components in the equation, rather than just including the CPI as we did. He then estimates a consumption function for our sample period, 1955 1-1965 IV, using, our data for real per capita consumption, net labor income, and wealth, and disaggregated data on five individual price series the CPI components for food, housing, apparel, transportation, and health and recreation.' In his representative equation, the lag on income is shortened from seven quarters to four quarters while the lags on the individtual prices vary from one to three quarters, as compared with our original seven-quarter lag on the CPI,2 As is clear from Cukierman's Table 1, the coefficient sums of Cukierman's best equation (his 1-3) are fairly similar to those of our final equation (his 1-1). The sums of his income coefficients and price coefficients are a bit smaller than ours, and his wealth coefficient is a bit larger. The main difference between equations 1-1 and 1-3 in Cukierman's Table 1 is that the sum of his price coefficients (in 1-3) is only 2.85 times its standard error, while ours (in 1-1) is 11.6 times its standard error. From this result, Cukierman concludes that the money-illusion coefficient is smnaller and less sigynificant when the consumiier price index is disaggregated. Nevertheless the results still seemto indicate some deg,ree of monev illusion. The procedure Cukier-nian uses raises two questions that are best handled sequentially,,. First, to what extent are his estimi-ates the resuilt of changing the lag lengths in the estimated equation, and to what extent are they duie to disagg(regration of the price variable? Second, if disaggwreg-ation. is the imip ortant cause of the divergence between his results and ours, what is the best wav to interpr-et his resuilts? The first two sections below consider these two questions, and the third section concluides with somie further comnments.

As Bernard Nossiter commented in a review of a book on David Rockefeller, 'The subject of power in American life, political, economic, and their intimate relationship to each other, is essentially a mystery. It ought to be a prime area for academic inquiry but only a few of the less timid-Mills, Galbraith, Sweezy, Baran, Heilbroner-have attempted it. Two of the five are dead. One might add that a second major topic on which amazingly little recent work has been done by the academics is the distribution of income and wealth. Notable exceptions Robert Lampman springs instantly to mind-do exist but the most casual of inspections of the A merican Economic Review's annual lists of dissertations, approved and prospective, implies that when a graduate student analyzes inequality it is probably in order to construct a mathematical model elegant enough to earn him his doctorate. All too rarely does the dissertation focus upon the gritty statistics of income and wealth distribution. Still less frequently does the apprentice scholar seek to improve the data or bring them up to date. In so saying, I allege neither malice nor corruption on the part of my brethren. There is no need to be sensational, for elements of technical convenience complement the ideological predispositions of a rather conservative guild as sufficient explanation of the condition. As all know, reputations are made and degrees earned more quickly and dependably by theorists than by quantitative workers. As for the ideological inclinations of the profession, I take as handy illustration the treatment which Samuelson accords to unions in the eighth edition of his Economics. Chapter 7, Labor and Industrial Relations, is the only chapter entirely devoted to unions. In fourteen pages of text, Samuelson says something about union structure; the history of the American labor movement; communism, corruption, and democracy in unions; labor legislation; and current issues in collective bargaining. Unions pop up again in Chapter 29. Here three pages on wage determination explain the four methods by which unions seek to raise the compensation of their members. Possibly with relief, Samuelson quickly surrenders the task of evaluating the significance to the economy of labor unions to accredited experts. He quotes Albert E. Rees to the following effect:

fixed money wage assumption along with a flexible commodity price is often used to characterize the complete Keynesian model. This asymmetry means that firms are on their demand schedules for labor, as implied by equation (1) of my article, p. 631, but that labor is not on its supply schedule except when the system is in a full employment position. Alternatively, it could just as well be assumed that both the commodity price and the money wage are inflexible during the period of analysis under consideration; then firms are not on their demand schedules for labor nor are laborers on their supply schedules when the system is at less than full employment positions. This assumption is implicit in all of the pure quantity adjustment type Keynesian models (i.e., where both prices and wages are assumed fixed), and it is therefore implicit that the real wage is assumed fixed. Gordon Tullock suggests that under these circumstances my argument that anticipated inflation keeps the system closer to a full employment position would not follow. I will show that under these circumstances the argument still holds, and therefore is not the consequence of the asymmetric assumption about the fixity of the money wage and the perfect flexibility of the price level. This follows from the kind of period analysis which Axel Leijonhufvud (pp. 36-39 and ch. 2) has emphasized in his interpretation of Keynes: The standard 'Keynes and the Classics' analysis places great stress on the restrictive nature of the 'wage rigidity' assumption. But this strong assumption is not necessary in order to explain system behavior of the Keynesian kind. It is sufficient just to give up the equally strong assumption of instantaneous price adjustments (p. 37). My contention, p. 631, that anticipated inflation moves the system closer to a full employment position does not depend on the rigid money wage assumption, as Tullock asserts, but rather on the effects which anticipated inflation has on the demand for real monev balances. Consider once again the model of my article, but now assume that the price level as well as the money wage are inflexible. Using the same notation and equation numbers, the model now consists of equations (4) and (6), pp. 632-33; equation (1) no longer holds since firms are not on their demand schedules for labor. Assuming the anticipated rate of inflation p to be given, the model is