Knowledge that Transforms

Let V(X) be any direct utility function characterizing consumer preferences that are reflexive, transitive, and complete, and whose parameters are fixed relative to the usual linear budget constraint p X = M. Here X designates the vector (X1,.. ., X,) and is confined to the positive n-orthant; Xi designates quantity of the ith commodity; p is the vector (P,, ...,pn) of positive commodity prices; and M designates total expenditure. Let X(p, M) designate the system of demand functions derived from V(X) subject to pX = M, which possess the properties of zero degree homogeneity, symmetry, and semidefinite negativity. Let W( X; 0) designate a direct utility function with (a) parameter vector 0 dependent on the price vector p that appears in the budget constraint and (b) that rationalizes the same system of demand functions as V(X), namely, X(p, M). Probably, many economists who have considered price-dependent preferences' would conjecture that every such price-dependent utility function W(X; p) satisfying (a) and (b) is of the rather restricted form

Sebastian Edwards uses a new, money variable-based on the addition of the contemporaneous fiscal deficit to my autoregressive money growth equations -to argue that 1) in Brazil and Chile there is no significant relationship between unexpected money growth and output growth, 2) unexpected money growth has different estimated effects on output in Colombia, Peru, and Mexico, and these effects substantially exceed those estimated in Brazil and Chile, and 3) thus my 10 percent rule for the effect of unexpected money growth on output growth does not hold. In addition, Edwards incorporates the terms of trade in his output equations and finds they are important in the case of Chile and Mexico.' Finally, Edwards takes issue with my use of lagged inflation to explain output. Edwards and I use somewhat different data, not only in terms of sources, but also Edwards often uses M2 rather than Ml in reporting his best results. However, Edwards' and my basic results are broadly similar (compare his Table 1 and my original Tables 1 and 4). This is encouraging, and in general makes it seem not worth quibbling over the differences in data. However, there is one difference which affects the results that I will discuss later. The inclusion of the fiscal deficit in the money growth equation is a key difference in our work. As I pointed out in my earlier article, fiscal and monetary policy often are closely related in Latin America. Thus it is not surprising that Edwards finds the deficit (divided by lagged money) is a significant factor in explaining money growth. However, the point is not to explain money growth, but to estimate a relationship which the public could have been using to predict how much money, and thus nominal aggregate demand, has grown since the last observation on the money stock.2 It strains credulity to assume that, in Latin America, the budget deficit could be used by the public to estimate money growth contemporaneously. Data on the cash deficit usually are available publicly only with a long lag. Moreover, many alternative versions of a deficit, involving creative accounting methods, are reported. For example, for many years in Colombia, the reported deficit, which is available with about a one-quarter lag, treated both the unspent portion of the budget and the accounting profits from the revaluation of the local currency value of exchange reserves as income; procedures which caused great confusion inside as well as outside the government. Despite such problems, the cash deficit still might be useful as a monetary growth predictor; for example, it may be correlated with some other easily available contemporaneous indicator of money growth. However, its usefulness can best be judged from a comparison of the results when the deficit is used only as the money growth predictor to determine unexpected money (a constrained equation) with those obtained when it is used as an additional independent variable (an unconstrained equation), a test Robert Barro has suggested in another context. *World Bank. The views and interpretations expressed in this article are my own and should not be attributed to the World Bank, its affiliated organizations, or to any individual acting in their behalf. 'Edwards also uses the seemingly unrelated regression technique to take into account possible interrelationships in the error terms across countries. Judging from the reported t-statistics, this procedure did not improve the fits greatly. 2Surprisingly, the deficit is not significant in explaining domestic credit in Mexico. This result and the estimated negative relationship between Edwards' domestic credit series and output suggest a problem in the domestic credit variable.

Rather than start directly on the sensitive issue of the economic role of unemployment, I would like to spend some time first on a parallel question of rather less social importance, and then draw some analogies to the problem of unemployment. The phenomenon I will examine is the time people spend idle at airports. Ultimately, I will compare the analysis of idle airport time with the analysis of idle time in the labor market. In any airport at any time, numerous people are waiting for something to happen. These people are not doing anything particularly constructive with their time-they are waiting because they arrived early, because their planes have been delayed, or because they are in a queue for the next available flight. An observer who knew nothing about the purpose of an airport would be puzzled by the chronic idleness of most of the people there. The observer might gather data on airport idleness along the following lines. At any given time, 0.2 percent of the population is idle at the airport. The idle population turns over frequentlythe median duration of a spell at the airport is 35 minutes. But long spells account for the bulk of idleness-half of all idleness occurs in the course of spells which will last 5 hours or more. Airport idleness is highly concentrated in the population. In a given year, three-quarters of the population are never idle at the airport; 5 percent of the population incurs half of all idleness. A predictable seasonal pattern is apparent-idleness reaches sharp peaks at Thanksgiving, Christmas, and Easter, plus a broad peak in the summer. Were it quantitatively more significant, airport idleness would be a social issue. The airport idle are not usually engaged in useful activities. Few of them spend time trying to locate earlier flights, nor do many of them try to accelerate their movement by offering to pay a higher fare. A surprisingly large fraction do nothing more than sit. The opportunity cost of time spend idle at the airport is essentially zero, it would appear.

According to demographic transition theory a decline in infant mortality is viewed as a precondition for a fertility decline. This discussion describes some new methods that can be applied to cross sectional data in transition theory--the replacement hypothesis. The objective is to show how the effects of direct replacement hoarding and biological replacement can be separated and then estimated. Focus is on the methodology although data from the Malaysian Family Life Survey are used to illustrate the method. The methods employed use statistical techniques more fully described elsewhere. To estimate the fertility hoarding component of replacement in cross sectional data it is necessary to relate variations in the child mortality rate across families. The true child mortality rate for a family is not observable; only the realized mortality rate for a family which measures the true rate with error is observable. The child mortality rates for families may differ because of actions taken by the family. If conscious actions concerning inputs of time to child care are correlated with conscious actions to have children the familys observed mortality rate may be related to fertility not because of hoarding but because parents who desire more children also like to spend more time with them and so suffer a lower rate of child mortality. To avoid this source of contamination it is necessary to calculate the family mortality rate net of those factors which affect child survival and are possibly subject to parental choice. To do this a model of waiting time to the death of a child over the first 10 years of life for each child in the family was estimated. The method involves the estimation of a regression equation with the length of life of a child as the dependent variable. Once the family specific component of the child mortality rate has been estimated the number of births can be regressed on the number of deaths and the family specific mortality rate. The family size regressions given cannot reveal the effects of breastfeeding nor can they indicate the speed with which couples replace dead children. Because the Malaysia data used here provide detailed information on the dates of birth weaning and death of children it is possible to directly observe the effects of breastfeeding or the death of a child on the probability that another conception leading to a live birth results. The best way to exploit this data is to estimate a waiting time model. The model developed with Wolpin is again used to estimate the conception interval waiting time model. When the number of births was regressed on the number of deaths and corrected for spurious correlation the estimate replacement rate was 0.21. The uncorrected least squares replacement rate was 1.4 demonstrating the large effect of the spurious correlation.

Current interest in food prospects for the developing world is based on a set of four relatively straightforward questions. Upon closer analysis, however, these questions prove to be successively more complex. The first question is quite direct: Will food production in the Third World grow more rapidly than population? The answer seems to be a clear yes. Between 1961 and 1977, the growth of Third World production of major food crops averaged 2.6 percent a year, slightly higher than the 2.5 percent annual increase in population (Leonardo Paulino, forthcoming). There is every reason to believe that Third World food production in the future will continue to exceed population growth, since the processes for accelerated agricultural growth are now in place in so many developing countries and population growth rates are generally declining. The clear exceptions are Sub-Saharan Africa and the least developed countries (these are nearly synonomous). Even with a change in agricultural policies in these countries, there will be considerable time lags before food production growth rates exceed population growth rates. The second question is more involved, and much more important with respect to its policy implications: Will ratios of food production self-sufficiency increase in the Third World? In the long run, self-sufficiency ratios in the Third World will indeed increase-but that is the long run of decades. In the short run of this decade and the next, these ratios will just as certainly decline, as rapidly accelerating growth in the demand for food in the Third World exceeds capacity to accelerate domestic production growth rates. This conclusion is reinforced by the tendency for accelerated food production growth to be associated with forces that further accelerate growth in demand. The third question is decidedly complex: Will the real price of food (defined in terms of relative shifts in the demand and supply schedules for food) shift upwards over the next two decades (as compared to the zero or slightly negative trend over the past few decades)? It is my judgment that it will. In the Third World, demand for food will clearly continue to shift more rapidly than supply. It is less certain that the forces in developing countries will overbalance the converse relationship for the developed countries. The final question is the most far-reaching: What will be the impact of these forces on the nutritional status and the degree of poverty of low-income people? Since lowincome people spend 60 to 80 percent of increments to income on food (see my 1978 article), food prices are a principal determinant of their real income and nutritional status. Increasing per capita food production and imports allow a rising number of people to eat better. Preliminary analysis of crosssection data for African countries show that as aggregate per capita food supplies rise, the proportion of malnourished children declines (see Shubh Kumar, 1981). Increased capital intensity and the dynamics of food production itself will raise real wages for much of the laboring class (see Uma Lele's and my 1981 article). But for some individuals and particularly for those in countries left out of development processes, the situation will be more difficult in the future than in the decades of the 1950's and 1960's. This, I should emphasize, is the note of pessimism in this paper.

In 1958, James Tobin generalized the Keynesian theory of liquidity preference by means of his famous portfolio model in which the demand for money (narrowly defined) is treated as behavior towards [interest] risk. Whatever merit this theory may have had then has long since been questionable. The reason is the existence of a large set of substitutes for money, typically short-term money market instruments, which can be regarded as riskless, or virtually so, and which pay substantial interest. The availability of these instruments would appear to make Tobin's theory that money is held to cope with interest risk resemble a scenario without a recognizable cast of actors. In the literature on monetary theory, other authors have also expressed misgivings about the Tobin theory by noting that savings and (nontransferable) time deposits have the same risk properties as money but pay interest (see, for example, Robert Barro and Stanley Fischer, 1976). Although correct, the allusion to these deposits is simplistic. It is true that while both types mimic money's freedom from interest risk in the conventional sense of capital loss, time deposits are still exposed to a kind of interest risk, because they can be liquidated before maturity only with interest penalty. More important, business firms are either denied access to savings deposits or, as in the United States, can hold a maximum of $150,000 (per account) at commercial banks, thereby effectively eliminating large firms as holders. Furthermore, although business firms can own most time deposits, they typically do not (except for negotiable CDs, a money market instrument); they are loath to tie up funds in long-term maturities, and they can usually obtain the same or higher yields on other types of short-term debt instruments that are also negotiable. In the United States, households have long accounted for about one-third of demand deposits, business firms owning most of the rest. Therefore any effort to rest a case against the Tobin theory of money demand on the existence of savings and time deposits gets at only a small part of the problem. This stricture extends to so-called NOW and ATS accounts. These interest-bearing demand deposits (disguised under other names) are also denied to business firms. For them, the short-term instruments of the money market are the principal alternative to money in asset portfolios.