Knowledge that Transforms

T HIS PAPER considers a variety of theories of investment and attempts to find the importance of each of them. The theories considered fall into several groups. We shall consider these as parts of a single structure of investment which considers both supply and demand. The demand side of the model employs first, the acceleration principle using output, change in output, and expected output as explanatory variables. Next, this side of the model considers the cost of funds using the rate of interest, the flow of internal funds, and the debt-asset ratio. Finally, prices in the factor and product markets are considered. Supply restraints were taken into consideration by using the volume of unfilled orders and by restricting the analysis to the post Korean War period. This model is developed and discussed in the next section of this paper. It is well known that the investment process by an individual firm does not take place instantaneously but that there is a significant lag between the appearance of the need for additional capital goods and the actual investment. The lag structure employed is discussed in the third section of this paper. In the fourth section the data are discussed. This paper fails to find any significant effect on investment of prices or the volume of unfilled orders. All of the output variables and the cost of funds variables are of considerable importance. In particular, the rate of interest, flow of funds and debt asset ratio all play important roles. These empirical results are discussed in the fifth section below. II Theories of Investment Behavior

IN their audit of the sources of economic growth a number of writers have, in recent years, focussed on technical and improvements in the quality of capital and labor rather than increases in the quantity of factors of production. Implicitly, if not explicitly, this work has generated new theoretical propositions about aggregative production functions and has led to the revival of efforts to estimate them. This research has been pursued on a number of fronts, but much of it is centered in its applications on the United States economy. This paper reports the results of some experiments with a model that postulates technical progress together with possible nonconstant returns to scale using data relating to the United States economy. Though the assumption of embodiment of technical in factors of production is one of the latest fashions in growth models, the conventional trim is constant returns to scale. Models allowing for scale economies or diseconomies may even seem somewhat old-fashioned, although a number of studies have, in fact, emphasized the combination of improvements in factor qualities and increasing returns in explaining United States growth.' R. M. Solow, observed by A. Smithies 2 to be the Pied Piper of research on technical change, though consistently assuming constant returns for the United States economy whether he is leading us in the direction of disembodied or embodied change, has recently reported some statistical calculations for the German economy without the constant returns restriction.3 The relationship of economic to the size of the economy has been the subject of speculation for as long as there have been economists.4 Contemporary attempts at measurement, however, may not only have failed to give sufficient emphasis to the role of scale economies or diseconomies, but may have made, as a consequence, faulty assessments of the role played by other influences on the growyth process. A model that postulates constant returns to scale, one suspects, would overstate the growth resulting from technical when confronted with data generated by a generally growing economic system subject to increasing returns and, vice versa. The model would understate the growth due to technical change when the data are generated by a growing economy subject to decreasing returns. A. A. Walters [13], for example, obtains sharply increasing returns to scale for the Cobb-Douglas model of disembodied technical change applied to 1909-1949 data for the United States economy and finds a much lower rate of shift (i.e., technical progress) of the production function than Solow [9] with the same model applied to the same time period but with the restriction of constant returns.5 One should also recognize that for some models which assume constant returns, identification of both growth and scale parameters may not even be possible.

I N 1953 the Federal Open Market Committee concluded that it was desirable to confine its open market transactions to short-term securities, preferably Treasury bills. This policy was announced to the public in a speech by Chairman Martin, Transition to Free Markets, and has subsequently been called the bills-only policy.' Federal Reserve operations were to be limited to those necessary for supplying or withdrawing reserve funds and the authorities would not ordinarily intervene to prevent fluctuations in prices or yields of government securities. With very few exceptions, the Federal Reserve followed these principles, and open market transactions in Treasury certificates, notes and bonds were virtually eliminated. Except for 1955, and in 1958 when the market approached disorderly conditions, the Federal Reserve held its operations in certificates, notes, and bonds to something like one per cent of its total open market transactions. The policy was discarded in early 1961 when we were confronted with a balance-of-payments deficit at a time when the economy was operating at close to recession levels. In this paper, we present a statistical investigation of the movements in interest rates since 1953 to determine whether they conform to the suppositions of the bills-only theory. The substantive propositions of this theory concerning interest rate behavior are summarized in section I. In section II, we suggest several tests of this theory and summarize the statistical evidence. The conclusions are presented in section III.

W HILE students of the American economy IV, I are blessed with some excellent data for measuring the functional distribution of personal income for individual states, there are virtually no statistics on the size distribution of income for these areas. (Stigler's state-by-state estimates of the income shares of the upper one per cent of the population are the best effort yet made to get at the latter kind of information.)' Nor does the present paper give income size distributions for states. My purpose here is the much more modest one of reporting the results of a try at deriving indicators of income inequality that can be used as a basis for comparing each state with the others. The first part of this report describes how Gini indexes of income were constructed for states and the District of Columbia for the year 1959. The bulk of the remainder is occupied with assaying the credibility of these indexes. This evaluation may be thought of as a test of the hypothesis that the Gini indexes of income possess merit as a basis upon which to compare these 51 areas. The test consists of correlations of the indexes with corresponding Gini indexes for housing and education, created especially for this purpose, as well as a few other characteristics for these areas. Alternatively, were one disposed to simply accept the Gini indexes of income as being adequate for their professed role, it might be interesting to regard the following exercise as a test of the hypothesis that there is a demonstrable interrelationship among various sorts of measurable inequality.

G. S. Maddala, Joseph B. Kadane, Some Notes on the Estimation of the Constant Elasticity of Substitution Production Function, The Review of Economics and Statistics, Vol. 48, No. 3 (Aug., 1966), pp. 340-344

PpTHE GROWING dependence of the local public sector on intergovernmental aid and the current interest in new forms of aid to be directed to the development of slower growing regions, such as Appalachia, make an increased knowledge of the relationship between these intergovernmental grants and the actions of the local public sector of particular importance. Have these intergovernmental grants increased or decreased the activity of the local public sector? Is there a discernable difference in the impact of federal as opposed to state aid and in the impact of the programs among individual states? One method of measuring the effect of aid programs would be to consider the relationship between these transfers and expenditure levels.' In this paper, however, the focus is on the impact upon the proportion of locally received income disbursed to the public sector or local fiscal effort. Consideration of this particular relationship is useful because of the interest centered on local fiscal effort in the literature on intergovernmental relations. As intergovernmental aid is only one of the several factors which should bring about changes in the level of local fiscal effort, multivariate regression analysis is used to estimate the impact of all these factors. Before considering the details of the multivariate analysis, a review of the nature of the expected relationship between the local fiscal effort and intergovernmental transfers is useful. For lack of a better model let us assume that local governments complement the operation of the private market in providing goods which the private market cannot effectively handle. Attacking the problem in this framework means that the effect of an increase in intergovernmental transfers on fiscal effort can be thought of as the result of a combination of three factors: (1) the marginal evaluation by the community of the benefits of public consumption versus private actions concerning present or future private consumption and work effort or leisure, (2) the degree of legislated controls and restrictions over the use of transfers imposed by the donor jurisdiction, and (3) the institutional structure. Any community has available to it a package of state and federal aid programs. Some of these programs are tied to expenditure levels or require local matching as a prerequisite for participation. community is able to purchase an additional amount of a specific public good at a discount. actions of the community will reflect both an income and substitution effect. If the community chooses to increase its consumption of the cheaper public good, it will have to raise its fiscal effort. Other aid programs fall into a category of income grants that are not encumbered by matching provisions. It would seem reasonable to assume that a community would spend part of this additional income on public goods. In the process of making the remaining income available for private uses local fiscal effort as defined in this paper must be reduced. This means that aid has some positive effect on public expenditures, but some of the aid is used as a substitute for local charges. If more than one type of public service is being provided, adjustments may take * author is Assistant Professor of Economics and Research Associate in the Bureau of Business and Economic Research at the University of Maryland. This research, undertaken while the author was at the University of Pittsburgh, was supported by Area Redevelopment Administration Technical Assistance Grant No. Co-6042. Computations performed at the University of Pittsburgh Computation Center were partially supported by National Science Foundation Grant No. G-11309. author is indebted to Professors Harvey Brazer, George Break, Jerome WVells, George Green, and Alarina v. N. Whitman for their helpful criticism, and to William Duffy for his assistance in collecting data. 1 For some recent direct estimates of the effect of intergovernmental grants on the expenditures of specific types of jurisdictions see Edward F. Renshaw, Note on the Expenditure Effect of State Aid to Education, Journal of Political Economy (Apr. 1960), 170-174; S. Sacks and R. Harris, The Determinants of State and Local Government Expenditures and Intergovernmental Flows s of Funds, Nratio,tal Tax Jouirnal, (MIarch 1964), 75-85; and George A. Bishop, Stimulative versus Substitutive Effects of State School Aid in New England, National Tax Journal (June 1964), 133-143.