Knowledge that Transforms

The theory of the shrinking of the core of an exchange economy to the competitive equilibrium (or set of equilibria) when the number of participants increases is one of the most important and interesting contributions to general equilibrium theory in recent decades, and ought to become part of standard courses in economic theory. It is important to have an exposition of this idea which appears as a simple and natural extension of the tools of analysis familiar to most students of economics. The purpose of the present paper is to make an attempt at such an exposition along traditional calculus lines. The paper does not contain results which are new to specialists in the field. In the literature there are, of course, some expositions which point in the direction taken here, but I have not seen the approach spelled out in the way it is done in the sequel. (Some relevant references are given at the end of the paper.)

As women's labor force participation rates have continued to increase, it has become commonplace to argue that the targets that policy planners set for average unemployment rates should be adjusted upwards to correct' for the fact that women's unemployment rates have historically been higher than men's.1 In this paper, we argue that most corrections are based on an oversimplified approach to labor market realities. This approach has tended to promote the attitude that the high unemployment rates of women are an incurable and unregrettable fact of nature, and has also tended to bias policy discussions in a direction that leads to the toleration of overall slack and puts low or zero emphasis on the labor market problems of women. Abstracting from issues of age and race, we may characterize the usual target correction methodology as starting with the estimation of a simple relationship between women's and men's unemployment rates (U, and U,,) such as

High measured unemployment, often accompanied by rapid wage and price increases, has plagued most Western nations in the 1970's. The aim of this paper is to appraise, albeit crudely, the contribution of three factors to these patterns in the Netherlands, Sweden, the United Kingdom, and the United States. These factors are: 1) insufficient aggregate demand, 2) structural imbalances in the composition of labor supplies and demands, and 3) changes in the relationship of measured unemployment to excess labor supply (referred to as the U-ES relationship). My main thesis is that measured unemployment bears a different relationship to real excess labor supply in the 1970's than it did in the 1960's, explaining much of the increase in measured unemployment from the 1960's to the 1970's.

In his criticism of several articles I have written alone or with colleagues, Arthur Goldberger concentrates on two issues. The first is the statistical methodology that yields our estimate that about 40 percent of the variance in earnings of white males at age 50 is attributable to differences in genetic endowments. He suggests the estimates rely on improper or overly strong assumptions. The second issue is whether in his words, the whole effort is misguided and that our results have no implication for policy. Clearly if the whole effort is misguided, any attempt to understand the statistical issues or to improve the methodology would be barren; hence, I concentrate initially on the question of what one can and cannot learn from (unbiased) estimates of the contribution of genetic endowments to inequality of earnings. There are some extremely important questions that we can answer and other important questions that we cannot answer with this information. Unfortunately people have tried to answer the unanswerable ones in the heated debate in the IQ literature. I believe Goldberger fears that some economists will mistakenly try to use my results to answer the last set of questions. It is helpful to conduct the analysis within the context of a human capital model in which parents and their children are assumed to invest optimally. We begin by assuming that a person's earnings depend upon his marginal productivity, which is a function of his skills. Let us assume further as numerous writers including Gary Becker and James Meade have done that a person's skills depend upon his genetic endowments (G) and his environment or investments in human capital (N). For simplicity let us also assume that a person's observed phenotypic earnings (Y) are related linearly to his genotype and environment as shown in equation (1).