Knowledge that Transforms

For more than a decade, there has been a great debate in the profession concerning the proper base for personal and business taxation. This debate has focused on the choice of the base versus the (or consumption) base. The concept of used in these debates is a comprehensive accretion measure often referred to as HaigSimons income, after the work of Robert M. Haig (1921) and Henry C. Simons (1938). This is the standard concept of income that has been used (with several variations) in tax policy analysis in the postwar period. However, it appears not to be widely recognized that, although Haig did ultimately settle on accretion income as the best feasible tax base, he definitely saw this as a second-best measure of true income. As will become clear, reexamination of Haig's famous article reveals that Haig actually felt that consumption expenditure would be a better measure of true income than accretion income, and he would have preferred a tax on this base-that is, he preferred what today would be called a consumption tax. He felt that

dominate modern economic history, taking that phrase to refer to the 50-year period from 1939 to 1989. One is the increasing strain on, and eventual structural failure of, centralized planning in virtually all of the self-styled socialist world. The other, less dramatic, but of no less historical significance, is the continued success of capitalism in its major strongholds. In both cases, I use as the crucial but not sole indicator of success or failure the political fortunes of the two social orders. There have been economic successes for socialism-above all, the initial industrialization of the USSR and the early modernization of China; there have been economic failures of capitalisminstability, uneven growth, unsatisfactory income distributions, dangerous international imbalances. From the perspective of the present, however, the half century is remarkable for the political verdict that has finally been passed on the two systems. With few exceptions, socialism has experienced a public delegitimization without precedent in modern, perhaps in all, history; whereas despite its failures, capitalism has enjoyed an uncontestable, and probably rising degree of internal political support. In this paper I shall be concerned only indirectly with these historical developments, for my purpose is neither to describe nor to explain the contrasting fates of the two great social orders. Rather, I wish to review and interpret the manner in which modern developments have been perceived by economists. Thus, as my title indicates, this is an essay in the history of economic thought, not in economic history. But it would be disingenuous not to admit to a more pointed purpose of my investigation. It is to inquire into the successes and failures of economic thought in anticipating the march of actual events. It will come as no surprise that failures have considerably outweighed successes in this endeavor, even excluding the momentous, and utterly unforeseen happenings at the conclusion of the period in 1989. A few observers have offered prognoses of history's long line that were subsequently vindi-

IN 1975 THE NOBEL PRIZE for economics was awarded to Tjalling C. Koopmans and Leonid V. Kantorovich for their contributions to the theory of the optimal allocation of resources. Koopmans' work in activity analysis, linear programming, and optimal growth, together with his influential doctrine of the price implications of optimality, is central to neoclassical economics. By contrast, Kantorovich's work in these areas remains poorly understood in the West. Many economists would have a hard time describing his contribution, much less justifying the award of a Nobel Prize to it. This paper aims at redressing this regrettable situation. Earlier assessments of Kantorovich's work have been made by Leif Johannsen (1976) and Aron Katsenelinboigen (1978-79). The brief entry in the New Palgrave by Kantorovich's coauthor V. Makarov (1987) as well as Kantorovich's Nobel autobiography and acceptance speech (Kantorovich 1976a, 1976b) should also be mentioned. However, the appearance of new material, most notably Kantorovich's own glasnost-era memoir (1987), as well as work on the nature and computation of his resolving multipliers by Roy Gardner (1988), justifies a new assessment. The argument proceeds by stages: (1) Kantorovich's life, in many ways remarkably similar to that of John von Neumann, (2) the discovery of optimal planning, the basis of the work for which he won Nobel Prize, (3) the computation of an optimal plan, in which his resolving multipliers play a crucial role, and (4) his indirect influence on the current restructuring of the Soviet economy, perestroika. In this way, the reader should come to a clearer understanding of the man and his economics.