In his recent paper, in this Review, Samuel Bowles (1985) argues that involuntary unemployment in a competitive capitalist economy is an outcome of the Marxian notion of conflict between the firm (capitalist) and workers. The purpose of this comment is not to question the Marxian framework, but simply to argue that the model and examples in Bowles, though very interesting, do not in any cogent way reflect class conflict. Let me list the major points made by Bowles in the context of a competitive capitalist economy: 1) involuntary unemployment, leading to reserve army of the unemployed, is a reflection of class conflict; 2) capitalist technology may be profit maximizing but inefficient; and 3) discrimination among identical workers may be profit maximizing. I will focus primarily on the first observation which is the heart of the paper. The other two can be deduced from the first.
Vito Tanzi's comment on my earlier study (1982) is based upon his belief that the Mundell effect alone could not likely account for the ex ante negative real rates observed in his simulations. His suggestion is that Perhaps a Mundell effect, together with a fiscal illusion, provides the best explanation (p. 502). Nowhere did I argue that the Mundell effect was all-encompassing. nominal rate is determined by many factors besides expected (X). My reducedform nominal rate equation includes uncertainty, the current and lagged money stock, and the lagged price level as well as expected as arguments. Thus, at any point in time, the nominal rate will shift with a movement in any of these variables. One way of looking at this is that holding s constant, i will vary with the other predetermined variables so that the real rate changes. Since Tanzi and previous researchers have used partial equilibrium analysis to highlight the relation between 1T and i, we tend to forget that the level of the real rate depends upon all the predetermined variables of the system. To concentrate on the partial derivative of i with respect to sr, we must take as given some initial i, holding constant the other factors influencing i. Tanzi's simulations set the real rate of (r) initially equal to .03. Then by assuming different values for di/d7r and v, he generates implied values for the after-tax real rate (r*). Since the after-tax real rate turns negative at quite low rates of 7r, Tanzi concludes that fiscal illusion is present as interest rates did not adjust for the effect of taxes (p. 502). simple fact that the after-tax real rate turns negative need imply nothing regarding whether or not investors are cognizant of taxes. There is nothing inherently unusual about negative real rates of in the short run during inflationary periods. Clearly, if money can be costlessly stored, the nominal rate of cannot be negative but this in no way rules out negative real rates. a world of incomplete markets, there may be inflationary periods when a negative real rate of is the best that optimizing agents can earn. If there was a suitable asset available that guaranteed a zero return, we would not expect to observe ex ante negative real rates. Benjamin Friedman (1980) emphasizes the limited nature of portfolio substitution possibilities by arguing that if holding goods was a feasible portfolio alternative, then the expected rate of could be viewed as simply the return from holding such real assets. such a case, higher expected would reduce the lenders supply of loans directly via portfolio substitutions from loans (bonds) to real goods. problem with this scenario, as stated by Friedman is: In practice, however, the available opportunities for such portfolio substitutions involving consumption or other real commodities are usually extremely limited; purchasing the Consumer Price Index basket of goods is not a feasible portfolio alternative (p. 34). lack of such a real asset allows market instruments to offer a negative yield. Of course, with no (and costless storage), one could hold money so that we don't expect to observe negative rates in noninflationary periods. Frederic Mishkin provides corroborating evidence in this area as he finds The real rate, whether adjusted or unadjusted for taxes, is negatively correlated with inflation (1981, p. 191, emphasis added) and The real rate appears to have been positive in the 1950s and 1960s but has since turned negative in the midand late-1970s (p. 192). Regarding Tanzi's simulations, I do not believe that they correctly assess the path of the real rate following an exogenous change in inflationary expectations (nw). A major theme of my earlier paper was the emphasis *Arizona State University. I thank Don Schlagenhauf, John Schroeter, and Richard L. Smith for helpful discussions.
The comment of John Makin gives me an opportuinitv to elaborate on some of the implications the existence of a second reserve currency might have in the model and the empirical tests. In the model in Part I, we have assumed that there are only two reserve assets, gold and one reserve currency (dollars), and investigated what economic factors might determine the reserve policies of central banks. Of these factors, some characterize the country in question, others characterize the reserve-currency country (United States), and again, others the relation between them. If a second reserve currency (sterling) is introduced into the model, additional variables come into play which reflect the economic position of the second reserve-currency coun try (United Kingdom), its relation to the specific country as well as its relative position to the first reserve-currency country. Thus, if a country can hold pounds in addition to gold and dollars, it might rearrange
If utility functions can be compared in efficiency terms, as I argued is sometimes the case (see my earlier paper), it follows that there is a new research area for economists to explore. To be sure, no analytic perspective, no matter how useful it may be, is without problems. For example, as Dana Stevens and James Foster have correctly pointed out, the possibility (though not the certainty) of cyclic ranking of utility functions exists if more than two types are compared. Their comment is, I believe, intended not as criticism of the utility function comparability perspective but as a call for more research; for example, on the efficiency properties of various types of utility functions, and on the responsiveness of attainable commodity sets to changes in preferences. The point is that there do exist researchable questions that are suggested as soon as we recognize the possibility of subjecting utility functions to analysis within a Paretian framework. Conventionally such questions have not been asked, partly because they were regarded as equity matters on which economists had little to say normatively, and partly because the factors shaping utility functions have been regarded as lying outside the domain of economics. It certainly is premature to say that we now know enough to conclude that on efficiency grounds alone, resources shouldor should not -be devoted to shaping utility functions. Yet to entertain even the possibility that one type of utility function can be preferred to another, and that changing such a function may be efficient, is to reach out in a bold new direction. Important conceptual issues as well as vital public policy questions are at stake.
In his recent article in this Review, James Melvin stated his purpose to be estimation of the commodity-price effects of the corporate income through the use of the input-output (p. 773). While the input-output (I-0) tables and techniques are practicable for use in many problems, they are, unfortunately, of limited use in this case. But, more significantly, the particular use Melvin makes is actually a misuse of the input-output tables. Through a misinterpretation of the nature of the A table of input-output coefficients, Melvin accepts the standard, published (I A)inverse as a proper vehicle for price change analysis. That is, the U.S. is used, improperly, to derive estimates of price changes in the economy which would result from initially impacted cost changes in value-added. The inability of the published to provide price change estimates is not generally noted in I-0 literature while, at the same time, there are some unsupported allusions to the possible use of this table for price analysis. Somehow the I-0 is accepted as a generalized economic tool that can readily be used for analysis of a too-wide range of economic variables. The problem, I believe, relates in part to shorthand references to the actual title of the inverse. As published by the U.S. Bureau of Economic Analysis (BEA), for the 1967 base tables, the complete title of the U.S. is Total (Direct and Indirect) per dollar of Delivery to Final Demand (Producers' Prices), ('Base Year' Dollars). Too often only the Total Requirements part of this title is noted and considered. Yet this actually treats all values applied to it as though they are values, regardless of how they are characterized by the analyst. If, perchance, the characterized use is consistent with the final demand concept there is no problem; otherwise the consequence is a misuse and misinterpretation of results. Associated with this unheeding of the full title is the existence of a widely accepted misconception regarding the characteristics of the table coefficients. This misconception is that the coefficients in the represent direct and indirect requirements associated in such a way with the of an industry that the coefficients can be used with any values to derive estimates of whatever impact is desired. All too often total output values are applied against an without recognition or acknowledgment that this is a special, and not the normal, usage of the I-0 table.' Whether associated with the limited literature in this area or for some other reason, Melvin has gone ahead and used some interesting mathematical transformations to show that the inverse matrix from input-output analysis... gives us a simple way of calculating the price effect of the corporate income tax (p. 767). Since Melvin has derived algebraically a result which is conceptually incorrect there must be some demonstrable point at which his mathematics went astray. This