Knowledge that Transforms

It seems a bit ironic that in the Bicentennial year of this country's history a session of the American Economic Association should concern itself with the problem of shortage, for surely this must have been a subject of discussion by colonial economists two hundred years ago. Yet clearly capital have not been a chronic problem of the U. S. economy, and most of us view this as a problem of more recent vintage. However, some of you may remember that almost twenty-five years ago Wassily Leontief (1953) stressed that the net impact of our foreign trade was to import and to export labor. He went on to argue further that because of the high productivity of U.S. labor relative to other countries, rather than labor was our relatively scarce resource. At the time of Leontief's original work this finding was considered a paradox and many individuals, including myself, were critical of his findings, either on theoretical or empirical grounds. Yet today his contention that labor is our relatively abundant resource and that is our scarce resource is regarded by some as an appropriate description of the economic scene. If I were to interpret today's assignment as an attempt to answer the questionWill there be a shortage? -my answer would have to be a simple No, for we are all aware that investment always equals saving and that in a free market economy there can be no real shortages of a reproducible good. Of course, I might 'also want to point out that while, in theory, such a disequilibrium could not persist, at least in the long run, in reality, institutional constraints and distortions do present obstacles to an automatic adjustment to an optimal level of formation. My talk today, however, will not discuss such issues but will concentrate on such questions as: 1) What level of fixed nonresidential investment is consistent with our pronounced long-run national objectives of full employment, increasing productivity, environmental cleanup and a drive towards energy conservation and decreasing dependence on foreign sources of petroleum? 2) How does one go about estimating these investment requirements within a consistent GNP framework? and 3) How sensitive are the estimates to the various steps of the procedures employed? The general methodology employed by the Bureau of Economic Analysis (BEA) in its requirements study was a combination of a macroeconometric forecasting model and a detailed input-output model. Such an approach was used because it was believed that building up the aggregate from detailed industry estimates would not only yield a better total, but would also permit one to see what was going on, that is, to separate out the various factors that contribute to total requirements by business: expansion, replacement, environmental cleanup and the drive towards energy conservation and self-sufficiency. The broad steps required for such an approach were as follows: 1) projecting GNP and its major components to 1980; 2) translating these aggregate GNP projections into detailed industry bills of goods; 3) deriving the Gross Domestic Output requirements by industry associated with this set of final demands (through the use of a projected input-output inverse matrix); 4) estimating the gross stock needed to produce the projected industry outputs (by multiplying the projected industry out*Associate Director for National Analysis and Projections, Bureau of Economic Analysis, U.S. Department of Commerce.

I. A Taxonomic Approach International financial intermediation can be defined to include three main types of transactions. 1) Financial transactions of a bank (a term used henceforward to include all intermediaries since banks are by far the major participants in these activities) with nonresidents denominated in the currency of the country in which the bank is resident. This item includes, for example, U.S. dollar deposits at American banks by nonresidents of the United States and U.S. dollar loans by American banks to nonresidents of the United States. 2) Financial transactions of a bank with nonresidents denominated in currencies other than the currency of the country in which the bank is resident. This category includes, for example, Eurocurrency deposits and Eurocurrency loans made by Eurobanks with nonresidents of the country in which the Eurobank is resident. 1 3) Financial transactions of a bank with residents denominated in foreign currencies. This category includes, for example, U.S. dollar deposits of Canadian residents at Canadian banks and U.S. dollar loans to Canadian residents by Canadian banks. Making use of these distinctions, one can construct a balance sheet of an individual bank or some aggregate of banks involved in international financial intermediation as follows.

Economics, whether radical or bourgeois, is concerned to a large extent with quantitative matters, and hence, it is not surprising that economic analysis turns towards statistical description and verification of abstract theorizing. This propensity towards quantitative methods is by no means a recent phenomenon. Primitive quantitative methods were evident in the tableaux of the physiocratic school and in the Malthusian population and Paretian distribution formulas. However, economists as diverse as Lawrence Klein (p. 416) and Joan Robinson (p. 76) have noted that the major impetus to the recent quantification of neoclassical economics has been economics. Unlike bourgeois economics, radical economics has not undergone anything akin to a Keynesian revolution, so that comparatively speaking, it has remained largely unquantified. The main theme of this study is that there is nothing intrinsic in radical economics which precludes quantification and, hence, econometric analysis. The radical literature can be characterized in part by its paucity of empirical analysis, and while it might be argued that this has been at the expense of a wider acceptance of radical doctrine by bourgeois economists, it will be argued here that more importantly, it has been at the expense of a more sound scientific foundation for radical analysis. I. Econometrics: Positive or Normative? In this essay will be distinguished from what has been called empiricism. Martin Bronfenbrenner (p. 12) has defined immanent empiricism as the doctrine which professes that if one looks at enough facts or cases long and hard enough, general solutions (or acceptable compromises) will become clear, less, by formal logic than by 'insight,' by 'vision,' by analogy, or sometimes by 'compulsive comparisons.' In contrast empiricism will be used here to describe the doctrine which tempers immanent empiricism with inductive reasoning based on a body of theory. Empiricism involves the concurrent development of theory and observation, and in this sense, it is an intrinsic element of scientific inquiry. As Robert Heilbroner (p. 18) has said: 'essentially the claim to being a scientific procedure rests on nothing more than a subscription to orderly repeatable methods and to the willing submission of hypothesis to empirical testing. In economics the methodology by which theory and observation are related, using appropriate methods of inference, is know as econometrics. The important distinction between the statistician and the econometrician is that the latter employs her or his statistical tools to the analysis of economic models. These economic models are the products of economic paradigms, and these paradigms serve as the bases for which endogenous versus exogenous classification and identifying restrictions are made. When the researcher replaces the statistician's hat with the econometrician's hat, then these actions involve statements conceming the economic operation of the real world. These actions serve as a source for normative inputs into econometrics. For years the debate over whether economics is a positive or a normative science has padded the publication *Associate Professor, Department of Political Economy, University of Toronto. Gratitude is owed to numerous individuals whose comments at various stages of development aided in preparation of this final draft; however, the opinions expressed here are the sole responsibility of the author.

At least since the time of Irving Fisher, it has been clear that nominal rates of interest differ from real rates not because of current or past price level changes but because of expected future price level changes. Accordingly, while nominal rates of return on fully discounted notes are observable magnitudes, expected real returns on the same notes are nonobservable. Nevertheless, real rates of return and real rates of interest are important concepts in the development of contemporary macroeconomic theory, particularly so as that theory develops richer theoretical roles for real rate and inflationary expectations measures. Furthermore, questions such as whether real rates are constant over time or are subject to systematic fluctuation through time reflect attributes of financial behavior that have important implications for understanding macroeconomic adjustment mechanisms. Even so, little attention has been given to the problem of forming and evaluating empirical measures of temporal movements in real rates of interest.' The work done by Fisher and several contemporary followers has proceeded on the premise the expected real rates of interest are constant over time. This theory has usually been examined empirically by estimating a model of the form:2