Knowledge that Transforms

TRADITIONAL ECONOMIC ANALYSIS of the theory of the firm has concentrated on single-product firms. But, in reality, most businesses produce many products, and many regulatory and antitrust issues involve only these enterprises. In recent years, economists and policymakers dealing with antitrust and regulatory issues have increasingly recognized the need for a theory that can be used to evaluate the efficiency of market structures in industries dominated by a few firms operating in a diverse range of markets. For such firms, conventional concepts of structure and performance such as economies of scale, measures of concentration, and barriers to entry do not adequately capture the complexity of market relationships. A few examples illustrate the complexities introduced by the multi-product firm and highlight the need for a theory that can be used to evaluate performance and conduct in its markets. In many trucking and air city-pair markets, the efficient number of carriers appears to be relatively small (perhaps even one). Does this imply, however, that trucking firms and air carriers that compete in a wide range of city-pair markets should be regulated as natural monopolists or that mergers involving overlapping markets should be disallowed? In the petroleum industry, there is a current trend to diversify into other sources of fuel, and in cable TV markets there are numerous attempts to integrate vertically. What should economists look for in evaluating whether these changes in market structure are motivated by efficiency or by anticompetitive behavior? For a dominant firm, such as AT&T, there is a frequent complaint that the incumbent firm is preventing entry by cross-subsidizing one of its products, which faces competition by entrants, at the expense of other of its products. What kinds of regulatory intervention in pricing or in market structure must be considered

M Y PERCEPTION of Chicago economics is that of participant-observer. As a working economist at Chicago, I have observed other members of the tribe at close hand, and have obtained their critical reactions to this description of their intellectual outlook and styles of work.' The perceptions of any participant-observer are conditioned, however, by his position in time and in the institutional configuration. My vantage points have been those of a graduate student in the Economics Department, of an assistant and personal friend of Oscar Lange from 1939-41, and of a Professor in the Graduate School of Business since 1974. Yet another source of perspective bias is field of specialization. As a graduate student, my primary interests were Pure Theory, Welfare Economics and Macroeconomics; my present focus is upon Labor Economics, with Industrial Organization a secondary interest. This pattern of specialization determines the workshops that I regularly attend, the manuscripts that I read and the individuals with whom I am in close contact. The influence of specialty upon one's perspective of Chicago economics is not trivial. In preparing this essay, I have found that our Chicago corner of the economics profession can look quite different to someone in Monetary Theory or International Trade than to a specialist in Labor, Industrial Organization or Law and Economics. This essay does not pretend to be an exhaustive account of Chicago economics during the past half century. It is primarily an attempt to describe the evolution of a few basic ideas associated with a particular institution. The focus is upon ideas rather than their protagonists or the institution whose name is their generic label. Describing these ideas is not easy because their central tendency has changed 1 Manifestly, this paper is a personal statement for which no one but the author is responsible. However, I have had far more than normal critical input from friends and colleagues at Chicago and elsewhere. My Chicago associates have served in the dual capacity of information sources and critics: George Stigler's contributions are acknowledged in footnotes, though inadequately, and I have also benefitted from the comments of Jacob Frenkel, David Galenson, Robert Lucas, Merton Miller, George Neumann, Peter Pashigian, Sam Peltzman, and T. W. Schultz. Among the non-Chicago friends who have made especially helpful suggestions are: Kenneth Arrow, Martin Bronfenbrenner, Albert Rees, and the editor. My readers have been unanimous in urging reduction in over-all length, but virtually all of them also suggested small additions. Of course, most of their suggestions would have improved the final product, if only I had had the skill to implement them. Lacking this, I have been compelled to omit discussion of many important ideas and persons. Also, I have not had space to relate the discussion of this paper to previous discussions of Chicago economics such as Warren J. Samuels (1976), Bronfenbrenner (1962), A. W. Coats (1963), Miller (1962), and Stigler (1962a). My only defense for these sins of omission is lack of space and inability to organize better.

Demand for money; Econometric models

Welch and Moses Abramovitz and two referees for help at various stages of our work. This survey represents a substantial revision of work originally supported by the Minimum Wage Study Commission.

Each of 2 Universities-National Bureau of Economic Research Conferences on demographic economics held in 1958 and in 1976 resulted in a volume of essays with great significance for those working in demographic economics. Both are discussed for the 2 sets of essays do much to illustrate what the subdiscipline is doing and neglecting. The 1st dealt nominally with more developed countries and the 2nd purportedly with less developed countries. During the 1st period the dominant idea was neo-Malthusian with emphasis on demographic performance as a consequence of economic progress although in which direction (more children and sooner or fewer children and later) was in part a matter of choosing between the Becker/Mincer formulation of opportunity costs of parenthood and the Easterlin formulation of satisfaction with oneself or alternatively a fear that prosperity was effectively bounded. The book of the 2nd conference includes 9 essays plus a brief introduction by the editor. Each of these essays is reviewed briefly. What is most impressive about this volume are the preferences for the Iron Law of Wages/neo-Malthusian approach -- economic progress leads to demographic response and not the other way around.

PRICES AND QUANTITIES iS the brilliant and disturbing last work of Arthur M. Okun (1928-1980). For more than a decade Okun was the foremost practitioner of macroeconomics in the United States. His critical intelligence at both the theoretical and empirical ends of economics was unsurpassed. These facts were virtually a manufacturer's warranty that the book, whatever its argumentation and evidence, would be significant; we want to know what Okun thought. But this background was no guarantee of an important treatise, and it must have taken some courage to venture a big theoretical work, in an accessible style, on urgent questions. In fact, Okun has delivered a creative and virtuosic study in economic theory. The book's contribution is to provide a complete description of an economy in which rational economic agents consider the distributional consequences of wage and price decisions. The perspective adopted, one which is winning growing favor of late, is contract-theoretic. Because they wish to economize on their costly transactions with one another, people trade repeatedly with the same agent; so trust and fidelity to understandings are important. The ensuing analysis lodges some basic dissents from the informational-expectational paradigm developed over the last score of years. It is particularly stimulating, and troubling, on the main policy controversy of the decade, the question of disinflation.

I wish to dedicate the paper to Mark Perlman, who guided this Journal until now. Perlman's help and encouragement in preparing this paper were characteristically vigorous and scholarly. I wish to express appreciation to the Hoover Institution where an early draft was written and to E. S. Shaw for his comments on that draft. Alex Cukierman, Brian Kantor, Scott Richard, and E. Roy Weintraub made several helpful suggestions, and Karl Brunner suffered through many discussions about Keynes and Keynesians. Many people read and commented on the previous draft, and their suggestions and criticisms have helped me to see points I would have missed. I am grateful especially to Paul Davidson and Donald Moggridge. Davidson commented generously and helpfully on almost every page. Moggridge helped me to strengthen my argument and graciously made available sections of volume 27 of Keynes's Collected Writings that had not been published at the time.