Pigou's parable of the belching factory imposing an externality on the neighboring laundry has elicited more controversy than one could have expected from such a simple situation. Ronald Coase claimed that the Pigouvian solution of taxes and subsidies was demonstrably inefficient while William Baumol recently defended Pigou by presenting a situation in which a tax placed upon the factory (without taxation or compensation to the laundry) optimizes resource allocation under pure competition. What if the externality affects the factory itself? Suppose the reduces the work efficiency of employees and causes ill health. It might be conjectured that nothing new is gained by adding the wrinkle of poisonous air which sickens factory workers, since the factory both generates the and is affected by it. By analogy, a city where everyone works in factories generating air pollution (which affects only the city) might be deemed consistent with Pareto optimality, presuming the factories compensate individuals for the air pollution with higher wages. 1 Similarly, recent policy discussions have advocated exporting air pollution by importing pollution-producing goods. Little concern has been given to the welfare implications since the republic of smoke would be experiencing the profit as well as the pollution from production. There are even proponents of the view that some regions of the United States ought to be kept quite clean, while others are allowed to become highlv polluted. Their reasoning is that
In a recent issue of this Review, Philip Coelho and Moheb Ghali have argued that various studies purporting to show a persistent differential between wages in northern and states have used data unadjusted for regional differences in price level; that the differential has been proved for nominal wages, not real wages. Using data for 1963 they show that the average nominal wage rate for a sample of five northern metropolitan areas is significantly greater than such an average for five southern metropolitan areas. However, after the nominal wage figures are adjusted for differences in the cost of living in each of the ten areas, this differential disappears. This result survives the introduction of dummy variables to account for differences in industry composition, sex, color, and capital-labor ratio. It seems almost unbelievable that earlier studies of the wage differential have ignored regional differences in price levels, and Coelho and Ghali must be commended for calling attention to this anomaly. However, they have not proved the end of the NorthSouth wage differential; at least not to the satisfaction of this writer. The reason is that of the five cities used in their sample, only one, Atlanta, would be accepted by many as southern, the classification of Baltimore, Dallas, Houston, and Washington, D.C. as by the Departments of Labor and Commerce notwithstanding.' The purpose of this note is to repeat Coelho and Ghali's comparisons for another sample of cities, half of whose members would be recognized as by any reasonable observer.2 Required data for each metropolitan area are number of production workers, total man-hours, and total wages for production workers, classified by industry, and cost of living indices. The first three items are provided in the Census of Manufactures 1967 and the latter can be obtained for the year 1967 from the Handbook of Labor Statistics 1970. Table 1 shows that our sample seems to give roughly the same results as that of Coelho and Ghali. Average hourly nominal wages for the five northern areas are 14.4 percent higher than for the areas. This differential drops to 4 percent when real hourly wages are considered. The same phenomenon occurs for annual wages. Looking at the figures for the individual cities however, it is clear that Baton Rouge is an extreme outlier. If we compare average hourly wages between the five northern areas and the four areas excluding Baton Rouge, we find that when we shift from nominal to real wages the percentage difference drops from 25.6 to 15.1, still a sizeable difference. It would be preferable to establish the continued existence of the North-South wage differential without excluding Baton Rouge from the sample. This might be accomplished by showing that the high average wages in Baton Rouge are a result of the industrial composition of that region. Our method of distinguishing between regional effects and industry effects is identical to that of Coelho and Ghali. We calculate wage rates and annual wages for every industry (two digit classification) and for every metropolitan area.3 The model takes the form: * Assistant professor of economics, Michigan State University. I The title of one of the sessions at the December 1971 meeting of the American Economic Association, at which two papers were presented, was Is the South Still Backward? M. I. Foster included only Atlanta in his definition of the South. F. Ray Marshall omitted Baltimore and Washington, D.C. from his definition. 2 We do not repeat the last part of their analysis involving regional differences in sex, color, and capitallabor ratio. 3 No observations were available for the following industries in: Boston, SIC 21; Buffalo, SIC 21, 31; Pitts-
Radical economics has an activist orientation. It is part of the movement to establish an alternative economic order that differs from private enterprise capitalism in its mode of production, in the social and property relations embodied in the mode of production, in its value system, in its governance, and in the ideologies that seek to explain and justify its existence. One task of economics is to construct a blueprint or blueprints for an alternative future that differs from the present in its fundamental structure.1 One step toward that goal is a critique of the existing order and its ideology that is designed to show why an alternative society is needed. Another element is an analysis of the process by which society can move from the present to the alternative future, showing why and how the future can emerge out of the present. Underlying these three components of economics is the value system on which it is based, including assumptions and preconceptions about man and society, the nature of the good life, and the goals of human activity. This value system provides the underlying rationale for the alternative future. Seldom stated explicitly, the ethical and moral preconceptions of the position comprise one of its most important distinguishing features. A fully developed economics will comprise all of these elements put together in a mutually supporting pattern. It will have a clearly distinguishable value system that defines the outlines of its alternative future. Its critical analysis of the existing order states what is wrong with the present and how it will evolve into the future society. The analysis of strategy and tactics in the process of change will itself lead into an explanation of how the future society will function. The design of the alternative society will demonstrate how it can achieve the goals inherent in the value system. As we shall see in a moment, however, few economists have been able to achieve this full development of their ideas. Instead, there has been a tendency on the part of most radicals to emphasize one of the four functional elements of economics, leaving the other elements relatively undeveloped. Four approaches can be distinguished. The life-style rebels against the moral values of society to lead an alternative way of life based on radically different values. The utopian * Professor of economics, University of Michigan. 1 The word radical is derived from the Latin word for root, implying that economics seeks to change the basic roots of the economic order. This concept has nothing to do with the process of change-it is quite possible for a to emphasize either evolutionary or revolutionary change, seizure of power or use of parliamentary means, governance by authority or by consent. Radical economics is defined bv its goals and not by its strategy or tactics.
We are gratified that mention of our paper on Relative Shares has been made in the preceding note by Paul Samuelson. Consistent with his past contributions, Samuelson has provided a simplified treatment of the various concepts of elasticity of substitution. We would like to take this occasion to make some further observations. With regard to Samuelson's statement about the usefulness of the elasticity concepts, first, it is hard to imagine that Samuelson would go so far as to belittle the theoretical contributions of all the studies done in such areas as growth, production functions, and technical progress which have greatly benefited by the use of the elasticity of substitution concept. In these studies the elasticity of substitution concept was not used in a trivial manner. Secondly, and this is more relevant to the type of problems we address, there is the matter of substitutes and complements which is an integral aspect of the multifactor analysis. In problems dealing with multifactor production, dual partial elasticity concepts developed by Allen, Hicks, Sato-Koizumi, etc.1 serve several useful functions. Besides providing a taxonomy of effects that need to be measured, these various concepts provide us with alternative frameworks of conceiving of substantive problems. Although it can be shown that the partial concepts are related to some of the other elasticitv concepts and hence need not be glorified bv fancy names, there do exist particular problems where it is crucial to understand how the total effect is divided into its component effects. For example, in the case where we are dealing with derived demand with some factors (subsitutes or complements) limited in supply, it is important to know exactly how the existence of substitutability or coomplementarity among factors works for or against a particular factor share.
The Report of the is of necessity a somewhat schizophrenic document. This is so because the Employment Act of 1946 (which called it into being) ordains that it seek to serve two purposes that are not entirely compatible. On the one hand, it is an apology for the President's economic program, prepared by the and a Council of Advisers appointed by him for no fixed term. In this role, it seeks to show that the economic policies of the and his party will be successful (and, if the incumbent president has already been in office for a year or more, have already begun to be successful) in solving the grievous problems created by the foolish mistakes made by the other party when it was last in power. On the other hand, it is a professional economic report on the American economy and related public policy, prepared by three leading professional economists. These three economic advisers are chosen from among those who have devoted their previous careers (and will in all likelihood devote their subsequent careers) primarily to teaching and/or research in economics. In this role, the Report seeks to present to the Congress and the public an analysis that is competent by the standards of the economics profession, describing and assessing the present state of the American economy, how it came to be the way it is, and how it can and cannot be changed by public policy especially at the federal level. I believe this schizophrenia is unavoidable, unless the rules are changed either so that the has no professional economists as advisers, or so that an independent body of professional economists is constituted and charged with issuing reports on the economy and public policy without being responsible to any elected official. Neither of these changes in the rules would be desirable. The first would deprive the President, the Congress, and the public of the competence and discipline offered by professional economic standards. The second would divorce the President's economic advice from the different but equally important discipline of the political arena. The 1973 Report, like its predecessors from 1949 onwards, consists of three very different components. The first is the Economic Report of the President proper, addressed to the Congress and signed by the President. Mr. Nixon's 1973 report, like his 1972 report, is just 5 pages long. The second is the Annual Report of the Council of Advisers, addressed to the and signed by the Council. The 1973 version, by Herbert Stein, chairman, Ezra Solomon, and Marina v.N. Whitman, is 174 pages long, including two appendices. It is in this second part that the schizophrenia is most evident. The third is a statistical Appendix, con* The Johns Hopkins University. I am indebted to my colleagues, Louis Maccini and Jurg Niehans, for valuable comments on an earlier draft, and to Mary Anne Matthews for drawing Figure 1.