Knowledge that Transforms

FEW WOULD DISAGREE that Adam Smith's invisible-hand theorem is the heart of the economist's Weltanschauung. Ask whether trade barriers should be lowered, the spread of multinational corporations restrained, oil prices deregulated, cartels dissolved, or more fundamentally whether a market-based capitalist system is economically superior to a state-run socialist system, and economists almost certainly will begin to answer the question by trying to apply the theorem. Every student knows that the theorem depends on the assumption of atomistic competition, which in turn assumes that the system is decentralized and that no competitor is large relatively to others. There is another crucial assumption, however, that is often ignored and usually underemphasized, namely that all competition is price competition. In reality one of the most distinctive features of capitalism-one that is most often raised in lay discussions of its merits and demerits-is the prevalence of other forms of competition, such as competition in research, development, and advertising; competition to obtain and hold monopoly; and competition for corporate growth. These various forms of competition, we shall aim to show, are not clearly analogous with the theory of price competition: more non-price competition, rather than less, is not necessarily Pareto optimal. Self-evidently, the production side of a market economy is decentralized only to a limited degree, i.e., to the level of a decision-making unit composed of more than one human. Such a unit-playing Neuron to the Invisible Hand-is typically called a firm. It is in fact a team. Rather than remaining small, firms are in practice composed of any number of individuals from a handful on to half a million. Some

Robert H. Nelson has been a member of the economics staff of the Office of Policy Analysis of the U.S. Department of the Interior since 1975. He thanks Christopher Leman for his particular helpfulness over many years in identifying literature on American government and for comments and criticisms from the viewpoint of a political scientist on several drafts of this article. In addition, Donald Bieniewicz, Robert Crandall, Robert Davis, Herbert Fullerton, Jon Goldstein, Joan Hartmann, Ted Heintz, Evan Kwerel, Larry Lane, Ross Marcou, John Schefter, Eugene Steuerle, Richard Stroup, Richard Wahl, and Jeffrey Wasserman-all past or presentfirst-hand observers of the policy-making process-read earlier drafts and made helpful comments.

James J. Heckman, John Eric Humphries, and Tim Kautz make a powerful case for noncognitive skills—or what they conceptualize as character—as an explanation of educational achievement and other important outcomes in life. They do so while exposing the myth of the GED, arguing that the GED harms its intended beneficiaries by failing to instill the character skills that predict adult success. Childhood interventions to build personal character, especially self-control, are emphasized. The Myth of Achievement Tests is a major contribution, but I integrate relevant research on crime and social control across the life course that motivates a more dynamic conceptualization of character. I also review evidence on the environment as a source of both cognitive and noncognitive skills, including exposure to concentrated deprivation, violence, and lead toxicity. Moreover, I review evidence suggesting that social reactions to character shape life chances in ways not reducible to individual propensities, such as changes in criminal-justice policy that created large cohort differentials in incarceration for the same underlying behaviors. Social context and the character of American society itself are thus central to fostering individual character—not just skills but the desire to conform. It follows that self-control and social control need to be better unified theoretically and in designing interventions.

In their recent book, Colander and Kupers (2014) argue that viewing the economy as a complex adaptive system should change the way in which we make economic policy. This would necessitate a paradigm shift. Economics has, over time, tried to produce a coherent model to underpin the dominant laissez-faire liberal approach. But we have never proved, in that model, that left to their own devices, the participants in an economy will self-organize into a satisfactory state. This is an assumption. Complex interactive systems with direct interaction between heterogeneous agents may show no tendency to self-equilibrate and will undergo endogenous crises. Economists should concentrate on the emergence of certain patterns. Colander and Kupers suggest that we may be able to nudge the system into “good” basins of attraction. A more radical view is that there are no fixed basins of attraction; these change with the evolution of the system and it is illusory to believe that we can choose good basins. We may be able to recognize and influence the emergence of certain states of the economy, but we are far from Leon Walras's dream of economics as a science like astrophysics.

You asked me to review this book for you, and try to digest what lessons it might hold for you. I can well understand why you delegated this exercise to me. You were, no doubt, already aware that Alex Cukierman (AC) is an eminent theoretician, who has been applying, currently fashionable, game theoretic modeling techniques to the study of monetary policy; and you may have had some concerns whether you would find the book user friendly. In the rest of this review, following both your instructions and my own inclinations, I shall concentrate primarily upon the lessons and light that his work provides for monetary issues in general, and for the conduct of Central Banking in particular. Neither you, nor I, have either the interest, or the mathematical competence, to assess how far this book represents an advance in the application, or technical procedures, of game theory as such. In that respect, the author will no doubt regard this as only a partial and one-sided review of his work. Nevertheless, AC hopes that you, and other practitioners, will read at least some part of the book, and he has gone to considerable lengths to try to structure the book into modules of differing levels of technical difficulty and abstraction, so that you will read the easy bits. Thus,

THE HIGH UNEMPLOYMENT RATE of American youth, especially of black youth, has been a source of deep concern for many years. This concern has given rise to a voluminous literature. The purpose of this essay is not so much to review this literature as to distill from it some important elements of agreement and to reflect on their implications. In the American economic literature, the term youth generally refers to people between the ages of 16 and 24, and teenage refers to people between the ages of 16 and 19. The age categories 16-19 and 20-24, which are frequently used in U.S. government statistics, include people with very different patterns of activities, for these ages cover almost the whole transition from school to work. In the Census of 1980, which gives data by single years of age, the percentage of males in the labor force, including the armed forces, rises steadily from 31.7 percent at age 16 to 89.0 percent at age 24, with the largest jump between the ages of 17 and 18. The measured unemployment rate drops steadily from 18.0 percent at age 16 to 9.3 percent at age 24. Clearly, youth is not a homogeneous population. Measures of employment and unemployment are derived from administrative statistics such as payroll data or unemployment insurance records, or from household surveys. Administrative data, however, are not reported by age, so, all statistical information on youth employment and unemployment is from surveys. These include the Decennial Census, the Current Population Survey, the National Longitudinal Survey of young men, and the special survey of young black men in inner cities done for the National Bureau of Economic Research. A person is employed who does any paid work during the survey week; a person is unemployed who does no paid work during the survey week and is looking for work or is on layoff from a job. These definitions apply to students as well as to others. A student who works part-time after school or on weekends is employed and one who is seeking such part-time work is unemployed; both are in the labor force. The fraction of unemployed youth who are enrolled in school is surprisingly high. For example, in January 1985, according to the Current Population Survey, 50.4 percent of unemployed teenagers were in school. A youth not in school may be employed, unemployed, or out of the labor force. Youth who are in school or working (or

AHEORY of public finance remains unsatisfactory unless it comprises both the revenue and expenditure sides of the fiscal process. The classical (RicardoMills-Edgeworth-Pigou) tradition of a taxation-only view neglected this axiom. Holding expenditures unproductive, or disregarding them altogether, the task was to arrange taxes so as to impose equal (or least total) sacrifice. As a theory of taxation, this approach collapsed with the old welfare economics; and as a theory of public finance, its exclusive concern with taxation bypassed the central problem of how to allocate resources for the provision of social goods. Subsequently, various attempts were made to combine the revenue and expenditure sides in a more satisfactory system. We shall note these briefly, and then consider how cost-benefit analysis fits into the picture.