Knowledge that Transforms

Corwin D. Edwards, M. A. Adelman, Four Comments on "The Measurement of Industrial Concentration": With A Rejoinder by Professor Adelman, The Review of Economics and Statistics, Vol. 34, No. 2 (May, 1952), pp. 156-178

T. C. Koopmans, J. Tinbergen, Nicholas Georgescu-Roegen, Guy H. Orcutt, Toward Partial Redirection of Econometrics: Comments, The Review of Economics and Statistics, Vol. 34, No. 3 (Aug., 1952), pp. 200-213

IN a recent article in this REVIEW 2 Mr. Robert V. Rosa refers to discussions of relation of bank supervision to by E. A. Goldenweiser, G. L. Bach, and a Subcommittee of Joint Committee on Economic Report. supervision is one of intangibles of control that has attracted considerable attention. . . Although none of writers would appear to believe that supervision can practicably serve as an active arm of and credit policy, Bach does rightly stress great importance of preventing bank supervision from going counter to in periods. 3 Bank supervisory has probably accentuated deflationary tendencies at times; and at other times relaxation of supervisory standards has tended to remove restraints on bank credit expansion. However, assumption of Bach, which seems to be prevalent, that in critical periods influence of bank supervision was directly counter to policy needs mnore scrutiny than has been given to it. This article is an examination of this assurmption period of late I920'S and I930's.' XVhether bank supervisory has been in conflict with depends in part on meaning attached to term monetary poticy. If is defined as government and central bank actions designed to influence rates of interest, or certain specific rates such as Federal Reserve discount rates, it can of course be said that supervisory during at least a portion of I929-33 period was in conflict with monetary policy. However, such a narrow interpretation of misses heart of problem of relation of to business activity and degree of full employment. Manipulation of or pressure on interest rates is not only method, and past decades has not been principal method, of influencing quantity of money or circulating medium, of which by far greater part now consists of obligations of banks in form of deposits. Under fractional reserve system as it developed in United States in nineteenth century, banks tended to expand their earning assets and deposits to limit permitted by reserves, as defined by law, available to them. This practice continued after establishment of Federal Reserve System, and in fact still continues. That is to say, Federal Reserve member banks do not as a general practice maintain more (reserves in of those required by law) than are needed use as clearing balances at Federal Reserve banks. special circumstances of period from I934 to I942, when this practice was interrupted or only partially followed and excess reserves were abnormally large, are discussed below. On June 30, I 9I7, legal of banks which were members of Federal Reserve System were fully concentrated in Federal Reserve banks. Since that date of member banks have consisted solely of deposit balances in Federal Reserve banks. aggregate amount of these balances depends on volume of assets held by Federal Reserve banks in of other liabilities, including capital accounts, of Federal Reserve banks. Consequently, since I9I7 most important influence on money supply-and during most of period since that date dominant influence is volume of assets held by Federal Reserve banks. It is not an exaggeration to say that has consisted primarily of asset acquisition and relinauishment Dolicies of Federal Reserve f' e opinions expressed in this article represent personal views only. 2 Robert V. Rosa, The Revival of Monetary Policy, this REVIEW, XXXIII (February 1951), 29-37. 'Ibid., p. 35. 'In Federal Reserve Policy-Making (New York, I950), which is work of Professor Bach to which Mr. Rosa refers, specific mention is made of I929-I933 period (p. 251). Reference is also made to cognizance for at least last decade or two of the cross-implications of banksupervisory and policies (p. 250).

THIS is a reply to an article of M. A. Adelman, The Measurement of Industrial Concentration, which appeared in the November I95I issue of this REVIEW. Comments by Edwards, Stocking, George, and Berle appeared in the May I952 issue. This reply will endeavor to avoid duplicating points already made by the other discussants, and therefore should be read in conjunction with their contributions in order to provide a full critique of the Adelman article. Adelman's article is broken down essentially into three sections: Parts I and II discuss conceptual problems of measurement; Part III is concerned with concentration during and immediately following World War II; and Parts IV-VI examine the long-term trend of concentration. This reply will take up each of these three sections in order.

ATT EMPTS by economists and statisticians to deal with the problem of the best method for mathematical formulation of the laws of economic behavior from statistical data go back at least as far as Ragnar earlier contributions.' According to Jacob Marschak, however, Frisch did not take full account of the random disturbances (shocks) in the economic relations, nor of the simultaneous character of these relations. 2 In addition to this, Frisch's hypotheses on random disturbances (errors) in variables were not specified in probability terms. 3 These shortcomings have been corrected, over the years, by Koopmans,4 Wald,' Mann,' and Haavelmo.7 Out of this body of contributions has grown the Cowles Commission's simultaneous-equation approach as a method for mathematical formulation of the laws of economic behavior from statistical data, and in I947 two papers were published making a practical application of this method to the marginal propensity to consume ' and to the demand for food.' simultaneous-equation approach draws attention, among other things, to what might be called the inconsistency bias inherent in the single-equation, least-squares method of estimating the parameters (constants) of a functional relationship between two (or more) variables-where the so-called independent variable (or variables) is not completely independent of the dependent variable.10 In this particular respect, the principal purpose of these articles has been to demonstrate that the reduced-form, simultaneous-equation method of estimating parameters is superior superior in the sense that it leads to estimates for the parameters of these functional relationships which are consistent with the estimates for the parameters of the other relationships embraced by the entire system of equations encompassed by the model. Apparently the inconsistency bias of the single-equation, least-squares method can lead to results widely divergent from those of the reduced-form, simultaneous-equation method. rLna possible significance of this to economicmodel building-whether for purposes of 1 Correlation and Scatter in Variables, Nordi7 Journal, Vol. I, I929, Pitfalls in the Construction of Demand and Supply Curves, Veroffentlichungen der Frankfurter Gesellschaft fur Konjunkturforschuing, Neue Folge, Heft 5, Leipzig, I933; and others. For a more complete list see Inference in Dynamic Economic Models, ed. Tjalling C. Koopmans (New York, I950), pp. 423-28. 2 Inference in Dynamic Economic Models, p. 4 of the Introduction by Marschak. 3Idem. 'Tjalling C. Koopmans, Linear Regression Analysis of Time Series (Haarlem, 1937). 5 Abraham Wald, The Fitting of Straight Lines If Both Variables Are Subject to Error, Annals of Mathematical Statistics, September, I940. 'H. B. Mann and A. Wald, On the Treatment of Linear Stochastic Difference Equations, Econometrica, ii (July-October 1943). 7Trygve Haavelmo, The Implications of a System of Simultaneous Equations, Econometrica, iI (January I943); The Probability Approach in Econometrics, Econometrica, Supplement, 12 (July I944). 'Trvgve Haavelmo, Methods of Measuring the Marginal Propensity to Consume, Journal of the American Association, XLII (March 1947). ' M. A. Girshick and Trygve Haavelmo, Statistical Analysis of the Demand for Food: Examples of Simultaneouls Estimation of Structural Equations, Economofetrica, I5 (April 1947). 10 From the statistician's viewpoint this is terribly imprecise phraseology, but it is not easy to phrase precisely without falling into the very terminology and modes of expression this paper seeks to avoid. Essentially -and this is much of the essence of this paperwhat is meant by the so-called independent variable not being completely independent of the dependent variable is that the dependent variable is neither functionally nor stochastically independent of the independent variable. Chart i, for example, illustrates the assumed stochastic behavior of consumption as a function of income: consumption is functionally dependent upon income, but stochastically independent of it in the sense that its random fluctuations about the functional relationship do not affect income. Chart iI, on the other hand, is illustrative of both functional and stochastic dependence: consumption is functionally dependent upon income, but stochastic dependence also exists in the sense that random fluctuations about the functional relationship do affect income. It is the fact that stochastic independence between consumption and income cannot logically be assumed, where both are assumed to be jointly determined by a third variable (as is the case in the model here under discussion), that leads to a biased estimate of the functional relationship between consumption and income using the single-equation, least-squares method.

THE possibility that there is a limit to the total tax burden which an economy can bear receives considerable public and professional attention from time to time, but few attempts have been made to examine this problem systematically. Presumably, this is a reflection of the fact that economists generally believe there is no single, immutable limit. However, Mr. Colin Clark has developed the bold generalization that there is a critical limit to taxation which is approximately the same for all nontotalitarian countries in time of peace. Although Mr. Clark first presented his thesis over six years ago in an article in the Economic Journal, it did not gain widespread public attention in the United States until late I950 when he summarized his views in a brief popular article published in Harper's.' Mr. Clark recently reaffirmed his views in a letter to the Joint Committee on the Economic Report.2 It is, therefore, timely to examine Mr. Clark's thesis and the statistical evidence which he presents to support it. Mr. Clark's thesis is that inflationary forces come into play when the tax burden (including federal, state, and local taxes) exceeds 25 per cent of the national income.3 This figure was derived from an analysis of data covering several countries for various periods. The limit is acknowledged to be approximate and should certainly be written 24-26 if not 23-27. 4 Beyond 27 per cent, there is a high degree of probability that inflation will materialize. The process may take as much as two or three years to work itself out. In his I945 article, Mr. Clark explained the limit primarily on the basis of the political argument that there is a transfer of allegiances by influential elements of the com munity toward inflation when taxation reaches the 25 per cent level. Since certain items of government expenditures, such as interest on the national debt and Civil Service salaries, are fixed in money terms, government expenditures are likely, during an inflation, to rise less than the general price level and national income Thus, the real burden of government expenditures may be reduced by inflation. As Mr. Clark puts it: