The author uses the life-cycle growth model to clarify the implications of government involvement in capital accumulation, arguing that a long-run trade-off between consumption possibilities is critical to long-run optimality. The long-run capital/labor ratio is shown to determine the amount that each member of a given generation will consume in each period of his lifetime. With the option of redistributing income between generations, the optimal path of a centrally planned economy is less-restrictive. This is not true in the case of government activities financed by debt, which suggests the government's desired role at present is to provide a mechanism for redistributing income between the younger and older generations.
It is common to assume that expectations about future inflation influence economic behavior. The behavior of an economic system over time is determined in part by the manner in which these expectations are formed. Theoretical and empirical investigations frequently utilize a hypothesis that agents forecast future inflation rates primarily on the basis of past inflation rates: static, adaptive, extrapolative, and regressive expectations adjustment schemes are examples of such forecasting rules.1 But such rules generally ignore the fact that individuals observe prices, not inflation rates. A change in observed prices can result from general price inflation, but it may also result from transitory shocks to the price level or observation error. Similarly, apparent changes in the general inflation rate may be purely transitory in nature or may signify the beginning of a trend. A model of inflation expectations should admit the possibility of these different sources of price change and embody the natural human tendency to extrapolate seeming trends. This paper examines the extent to which agents' reported price expectations are consistent with such naive forecasting. A multilevel adaptive expectations model is developed that takes observed prices as the information available to agents. On the basis of these prices, individuals revise their beliefs about not only the price level but also the underlying inflation rate and trend in the inflation rate. When fitted to the Livingston survey data the model appears to provide a unified explanation of price expectations in the United States from 1947 to 1975. This is contrasted with earlier investigations suggesting that expectations formation differed significantly in the periods before and after 1960.
Cartels are inherently unstable. At the joint profit-maximizing price and output every member has an individual incentive to expand output, secretly if possible, and cheat on the cartel even though it is better off with the cartel intact than if the cartel dissolved and the members competed. Dale Osborne has recently proposed a rule for cartel members which, if followed, will pose a credible threat of lost profits to potential cheating members and thereby reduce the inherent instability of the cartel. The rule is simple: once cheating in the form of increased output is detected, each member should increase output in the same proportion as the cheater so as to maintain the same share of the output as under joint profit maximization. This market share maintenance rule forces the cheater to share in the decline of profits and hence induces it to help the loyal members revitalize the cartel or, perhaps, not cheat in the first place. Following this rule the cartel should be far more stable than traditional theory would predict, consistent with the recent history of the Organization of Petroleum Exporting Countries (OPEC) which has remained remarkably stable despite prices incredibly far above some members' costs. The purpose of this comment is to point out some improvements in Osborne's analysis. In Section I it is shown that his proof that the market share maintenance line has a common tangency with all of the cartel members' iso-profit surfaces at the point of joint profit maximization is too restrictive. A more general proof is provided. In Section II it is pointed out that his proof that the market share maintenance rule provides the noncheater a profit-increasing retaliation against the cheater is not valid, but that the rule retains many advantages which Osborne does not mention. Section III points out some advantages of central purchasing agencies which Osborne has overlooked in his section on purchasing strategies.
The effects of price controls on oil production are examined for the period 1974 to 1976 and found to have had a negative elasticity in respect to world prices. The analysis considers the many regulatory changes that took place during the period and differentiates between the effects on independent and integrated producers and between production on old and new properties. New-property production reflects new exploration and expansion. The report concludes that, while controls may have caused initial increases in production, they were probably responsible for the subsequent decline. A supply curve has developed over the recent past that will result in a larger proportion of U.S. capital being transferred to the Organization of Petroleum Exporting Countries when future world prices increase.
The problem of determining short-run monetary policy is often posed as that of choosing which of several variables to take as the monetary instrument, which is understood to mean choosing which variable to maintain at a preassigned level under random shifts in the structural equations. In the simplest case, this problem has been unambiguously solved. Suppose that we have a static linear IS-LM structure with independent normally distributed errors and known coefficients: