Knowledge that Transforms

ROBERT SCHUMAN'S proposal of May 9, I950 to create a Coal and Steel Community in Europe found its final acceptance in the ratification of the six-nation treaty on June 25, I952. On February io, I953, the High Authority of the Coal and Steel Community proclaimed the opening of the common market for coal, iron ore, and scrap in the territories of the six member countries, and on May i, the common market for steel. The third anniversary of Robert Schuman's initiative found the Plan in full operation. Whatever may happen to other projects of integration now under way this venture seems assured of a span of life. A fifty-year treaty establishing a new form of control over the iron and coal industries of the six countries is in effect. This control, which has been hailed as the beginning of a European sovereignty, is exercised by an international agency of novel type. Neither intergovernmental nor intercorporate in nature, this agency, the High Authority, possesses sources of power that lie in diverse segments of the community. It wields this power by collecting and disbursing large funds and by regulating industrial processes in accordance with the basic law of the treaty and with the consent of the governed governments and industrialists that are bound by the treaty. Nothing short of a fundamental change of the power field in Europe could put the new institution out of existence. But what will its existence mean? The Metzer Platz in Luxembourg has become a center of administrative decision and activity of wide significance for the Continent's heavy industry, and a center of diplomatic and political life as well. There the High Authority receives the statistical reports, plans, requests, and complaints of producers, consumers, and dealers of basic products, and there it issues its new Journal Officiel and Amtsblatt which carry decisions on freight rates, prices, levies, subsidies, admissible and inadmissible market practices, and recommendations to national governments. It harbors meetings of the Council of Ministers, which is meant to coordinate the activities of the High Authority and the national governments, the Court of Justice, and the Consultative Committee of economic interest groups; while the Assembly, the parliamentary body, meets in Strasbourg, where it is a tenant of the Council of Europe. American, British, Swedish, Swiss, and other missions to the Coinmunity are observing the developments in Luxembourg and are making inquiries and representations to the members and staff of the High Authority. A large new bureaucratic and diplomatic apparatus has gone into business.

M OST macro-economic models developed in recent years are expressed in terms of two principal types of variables: endogenous and exogenous.1 The latter may be defined as variables which influence the endogenous variables but which are not themselves affected by the endogenous variables.2 In other words the exogenous variables are considered to be outside the model. Endogenous variables, on the other hand, are determined by the model. The extent to which exogenous variables are used in a model depends to a considerable degree on the ultimate uses to which the system is to be put and on the ambitiousness and capacity of the model builder and the tools he has at hand. Conceivably a comprehensive system would have relatively few exogenous variables; perhaps only noneconomic phenomena such as temperature, rainfall, earthquakes, and other acts of God would be considered exogenous. This would indeed be an all-inclusive model. At the other extreme are systems having large blocks of economic activity represented as exogenous. For example in several Keynesian models all investment is regarded as exogenous.3 Other models, to varying degrees, fall between these two extremes. Examples may be found in the works of Samuelson,4 Hicks,5 Klein,6 and others. More will be said about these later. It would undoubtedly be desirable to have an all-inclusive model of the type mentioned in the preceding paragraph. However, the implications of such a system must be clearly recognized. What is involved is scarcely less than a complete theory of society, embracing the fields of economics, sociology, psychology, politics, and so forth. This is clearly a big order, and there have been relatively few major efforts to develop such a system, the Marxian theory probably being the most ambitious attempt. To construct this sort of model in some theoretical sense is difficult enough; but then to attempt to treat it statistically brings up further obstacles, especially in view of the limitations imposed by the analytical tools and basic data currently available.7 Apparently, whether we like it or not, we shall have to be satisfied for the time being with models which are considerably less ambitious than the grandiose scheme of things mentioned above. This means that fairly large areas in the system must be specified as exogenous. Thus the question is not so much whether there are to be large exogenous areas in macro-economic models, but rather whether these areas are chosen judiciously and so as not to give a markedly distorted view of the reality which the system is supposed to describe. The purpose of this paper is to discuss the endogenous-exogenous problem briefly with respect to one part of macro-economic models the investment part of the system. In the opinion of the present author this is an area which has not been handled satisfactorily in many of the models formulated in recent years. Basically the problem is that of determining which types of investment should be considered endogenous, which types should be considered ex*The author is indebted to F. S. Hoffman and R. N. McKean of the Rand Corporation for helpful comments, criticisms, and suggestions. The views expressed in this paper are personal and do not necessarily reflect those of the Rand Corporation. 'In stochastic models a third type of variable is found: the non-observable random variable or the disturbances in the system. We shall not be concerned with random variables at the moment. 2T. C. Koopmans, Statistical Inference in Dynamic Economic Models (New York, I950), p. 56. 'E.g., Lawrence R. Klein, Economic Fluctuations in the United States, 1921-194I (New York, I950), p. 7. 'Paul A. Samuelson, Interactions Between the Multiplier Analysis and the Principle of Acceleration, this REVIEW, XXI (May I939), 75-78; reprinted in Readings in Business Cycle Theory (Philadelphia, I944), pp. 26I-69. 'J. R. Hicks, A Contribution to the Theory of the Trade Cycle (Oxford, I950). 'Op. cit., pp. 84-II4. Klein's Model i is undoubtedly the most comprehensive dynamic system we have to date. To the knowledge of the present author, the only other model which even remotely compares with Klein's is the one presented by Tinbergen in I939. See J. Tinbergen, Statistical Testing of Business-Cycle Theories: A Method and Its Application to Investment Activity (Geneva, I939). 7This is not to suggest that a model, to be useful, must necessarily be set forth in econometric terms.

The paper presents the contention that at least a partial way out of the present impasse on the question of passive defense would be to offer war damage insurance to protect property-owners from the chance distribution of losses due to enemy action. It is shown that an appropriate method of insuring property against war damage can be expected, over a period of years, to encourage purely private actions which will, aside from any governmental measures, tend to reduce the physical and economic vulnerability of our cities and industry to enemy bombing.