IN ITS usual sense, the term inflation (for example price inflation) implies the increase in some index relative to its own value at some other time. In what follows the term relative inflation implies the increase (with time) of one index relative to another index. And the term will be restricted to mean an increase in the cost of finished goods relative to the cost of materials and wages. This relative cost will be measured by the product of the ratios (V'/M) (V'/W) = V'2/MW (' = value added, M = materials, W = wages). Increase in this relative cost may then be measured either by increase in V'2/MW or by decrease in MW/V'2 = B, say.2 When B decreases we shall have relative inflation of V' with respect to M and W, the only relative inflation herein considered.
PRESENT methods of levying succession taxes in the form of estate, inheritance, and gift taxes leave much to be desired. Relatively minor changes in the form of transmission of property often produce substantial differences in tax. In order to take advantage of these differences, individuals are often led to dispose of their property in ways other than those that would obtain in the absence of such avoidance opportunities. The patterns of ownership thus encouraged by the operation of the tax are not necessarily better, and in fact are often considerably worse, considered from the standpoint of the community at large, than the patterns that would be selected in the absence of such arbitrary pressures. The root of the difficulty is that the tax is ordinarily computed on each transfer separately with very little if any reference to the relation of that transfer to past and future transfers of the same or equivalent property. The taxpayer is thus under considerable pressure to provide for the transfer of his property to the ultimate beneficiaries with as few taxable intervening transfers as possible. Property is accordingly bequeathed directly to children, grandchildren, and great-grandchildren rather than in the more normal sequence of transfer first to the widow, then to the children, and in turn to the grandchildren and great-grandchildren. The testator frequently may attempt to restrict the control of the remote heirs over the property thus directly bequeathed to them by the setting up of various forms of trust; in addition, by setting up trusts for the benefit of minors and even of unborn individuals, the number of taxable transfers may be still further reduced. In some states this may go to the extent of removing the corpus of the estate from further succession taxation for extended periods. The forms of property thus promoted have serious effects on the economic life of the community, in that they multiply the overhead of institutional investment, reduce the amount of capital available for speculative ventures, and are frequently less suited to carrying out the desires of the testator than less involved forms of devolution that might have been selected in the absence of tax pressures.
THE following production functions have been derived from business records of 609 Iowa farms for 1942, kept at Iowa State College.2 These records give a complete picture of all the business transactions and holdings of each farm and are carefully checked. They are, however, far from typical for the average Iowa farm. Their relationship to actual production conditions at the farm is perhaps comparable to the relationship between yields from careful experiments at an agricultural experiment station to the actual yields of an average field. We have included altogether 609 farm records in our analysis. They have been divided into four main types of farming (dairy, hogs, beef feeders, crops). We use as a regression equation a function which is linear in the logarithms. This is none other than the production function which Paul H. Douglas used in his many empirical studies.3 We do not, however, make the assumption of homogeneity, i.e., the sum of the regression coefficients is not necessarily equal to one. In fact, we shall later present a test of significance designed especially to test, in a fashion, the assumption of a linear homogeneous production function. The reasons which prompt us to use this particular form of the production function are the following: (1) It gives immediately elasticities of the product with respect to the factors of production (Paul H. Douglas called them flexibilities). That is, we get answers to the question: By how many per cent will the product increase on the average if the given factor increases by 1 per cent. Elasticities are dimensionless numbers and independent of the units of measurement. (2) Our form of the production function permits the phenomenon of decreasing marginal returns to come into evidence without using too many degrees of freedom. This would not be possible if we should fit a linear function