Knowledge that Transforms

William J. Baumol, Peggy Heim, Burton G. Malkiel, Richard E. Quandt, Earnings Retention, New Capital and the Growth of the Firm, The Review of Economics and Statistics, Vol. 52, No. 4 (Nov., 1970), pp. 345-355

posed to the balanced growth advance along all fronts. Both of these arguments would involve an association between G in the current period and V's in previous periods. Even if Swamy's results falsify the balanced growth theory (which is very much in doubt), they do nothing to support its alternative, the unbalanced growth strategy. A more meaningful approach would be the estimation of Gt = f (Vt-mn .-... Vt-n) where t m and t n bound the time period considered relevant to Gt.

David H. Pyle, Stephen J. Turnovsky, Safety-First and Expected Utility Maximization in Mean-Standard Deviation Portfolio Analysis, The Review of Economics and Statistics, Vol. 52, No. 1 (Feb., 1970), pp. 75-81

IN recent literature it has been generally asserted that key sectors play an important role in initiating the process of economic development and diversification of the industrial structure of the economy and that a substantial part of investment should be made in the key sectors. This paper is an attempt to identify key sectors empirically with the help of two alternative methods both based on the Leontief open static model (1) by defining key sectors purely in a technological manner as done by Rasmussen and Hirschman I and (2) by defining them with respect to the preference function of the planner, given the technological structure.

This paper assesses the fundamental determinants of changes in the long-term interest rate. Most recent studies of bond rates have emphasized the term structure relations between the bond rate and short-term interest rates.1 Although we recognize that the individual investor is very much influenced by arbitrage opportunities between different maturities, we wish to look behind the intercorrelated structure of interest rates to the economic forces that shift the entire level of interest rates. The result of our analysis is a synthesis of Keynes' theory of liquidity preference and Fisher's model of the role of anticipated inflation. Our estimates also show the importance of the public debt and of investors' expectations of future changes in the interest rate. We begin our study (section I) by considering a very simple, but nevertheless effective, liquidity preference theory. This is then generalized in a variety of ways by subsequent sections. Section II introduces the important effects of expected inflation, emphasized by Irving Fisher as early as 1896, but generally ignored by economists in more recent years. In section III, the liquidity preference theory is extended to a more general portfolio balance model by introducing privately held government debt. Section IV explicitly considers the implications of expected interest rate changes. Finally, section V examines flow disturbances that may cause the interest rate to depart from the equilibrium level. In sections I through V, the analysis deals with the average yield to maturity on Moody's Aaa corporate bonds, i.e., high grade bonds that are already several years old and have approximately 25 years to maturity. The yield to maturity includes a capital gain (or loss) if the current market price of the bond is less than (or greater than) the redemption value. No allowance is made for the special tax status of capital gains and the resulting distortion in yields during periods of substantial changes in coupon rates. To remedy this, section VI applies the generalized liquidity preference inflation model of section V to the yield on newly issued Moody's Aaa bonds instead of the yield on seasoned bonds. Section VII uses the generalized liquidity preference inflation equation to decompose the change in interest rates since 1954 into the separate effects of the several variables. A concluding section summarizes the results. The estimates generally relate to the 62 quarters from 1954:1 through 1969:2. The use of this period avoids the special characteristics imposed on the bond market by government behavior before the Treasury accord and unpegging of interest rates in 1951. Further details about the definitions of the variables used and the methods of estimation are discussed in the sections that follow.

T HE hypothesis that geographical mobility of workers is primarily a response to economic incentives arising from disequilibria across spacially separated labor markets has received considerable attention in the theoretical literature on investment in human beings.' In this paper I outline a simple model of migration as an economic process, and provide an empirical test of the model using data on net migration out of the United States South.2 To preview the main results, the model of migration as a response to economic incentive is supported. Specifically, the results suggest that the present value of the expected income gain from moving out of the South is positively related to the probability of moving and provides a better explanation of migration than the more conventional income measure based on regional differences in current incomes. Further, the level of schooling appears to increase the effect of income gain on the probability of moving, and age appears to reduce it. Significant racial differences in the main determinants of net migration are apparent.3

I NDEX number has richness and complexity of a jungle and includes a number of unexplored spots. In spite of an extensive and high-quality literature, of accuracy of economic measurements is far from being fully explored. It is interesting that economists dealing with market-type systems usually turn their attention to theory of cost-of-living index numbers, whereas students of centrally planned systems are captivated by problem of measuring economic growth. quantity index numbers and nature of their biases have received special attention from a number of Sovietologists, including Nutter [9, 10, 11], Levine [7], Bergson [2], Morsteen [8], and [4, 5, 6]. These people were in agreement that series aggregated by means of preindustrialization weights grow considerably faster than series aggregated by later-day weights. Nutter [9], Levine [7], Morsteen [8], and Bergson [2] used production possibility curves to demonstrate theoretically fact that base-yearweighted quantity indexes tend to drift upwards.' Gerschenkron, using actual data (selected items of United States machinery output in different years), offered empirical evidence to support this position. In order to explain phenomenon, he formulated a hypothesis which is often called Effect. present paper will re-examine this proposition.2 provides an explanation of why a quantity index, in binary comparison of preand post-industrialization situations, weighted with base-year prices, can be expected to be biased upwards. A brief summary of this explanation is that, during process of industrialization, scarcity relations change in such a way that production of highly fabricated goods increases proportionately more than that of slightly fabricated goods; and, at same time, relative prices of highly fabricated goods decrease. These inversely correlated price and quantity movements create a drift upwards in baseyear-weighted quantity index, and extent of divergence from current-year-weighted index depends on these opposite movements. One formulation of this proposition in Gerschenkron's words [6, p. 48] -is the process of industrialization in field of machinery production may be regarded as consisting (1) in an increase within total machinery output of share of highly fabricated goods in terms of low fabricated goods and (2) in a concomitant decline in prices of highly fabricated goods in terms of low fabricated goods. . . . To use . . . [an example] it is tractors whose output at beginning of industrialization process is small in relation to that of sickles. In course of industrialization, output of tractors increases much faster than that of sickles, while price of tractors in terms of sickles declines. I Thus characteristic feature of Gerschenkron-type industrialization process is a negative coefficient of correlation between price and quantity relatives, which is responsible for 'This fact was also shown by use of isoquants by Yoram Barzel, Some Observations on Index Number Problem, Econometrica, XXX, July 1963; and same method was used for interpretation of aggregate output indexes in R. Morsteen and R. Powell, Capital Stock (Homewood, Ill.: Irwin, 1966), p. 5. 2 Gerschenkron Hypothesis and Gerschenkron Effect should be kept apart. former refers to development characteristics in initial period of industrialization in some European countries; it proposes that these can be explained better if reference is made to relative backwardness prior to great spurt. See: A. Gerschenkron, Backwardness in Historical Perspective, in Progress of Underdeveloped Areas, ed. by Bert F. Hoselitz (Chicago: University of Chicago Press, 1962), pp. 3-29; The Early Phases of Industrialization in Russia: Afterthoughts and Counterthoughts, in Economics of TakeOff into Sustained Growth, ed. by W. W. Rostow (New York: St. Martin's Press, 1963), pp. 151-169; The Discipline and I, Journal of Economic History, XXVII (Dec. 1967), pp. 443-459. present paper is concerned only with Effect, or with reasons for upward bias of base-year-weighted quantity index. 'Gerschenkron gives same explanation for index number bias in Chapter IX, Soviet Heavy Industry: A Dollar Index of Output, 1927-1937, Economic Backwardness in Historical Perspective (Cambridge, Mass.: Harvard University Press, 1962), pp. 235-250.

T HE determination of marginal stockholder tax brackets is an important and unresolved issue in the economic literature. Marginal stockholder tax brackets play an important role in stock valuation models [ 1, 6, 14], in normative investment and dividend policy models [11, 16], and in descriptive capital allocation models [ 7, 8, 10, 12 ]. The purpose of this paper is to present and test a method of determining marginal stockholder tax brackets and to explore the implications of our findings for corporate investment policy, corporate dividend policy, and the assumption of market rationality. In the first section of this paper we expand upon the reasons for studying marginal stockholder tax brackets. In the next section we show how marginal stockholder tax brackets can be inferred from the ex-dividend behavior of common stock. In the third and fourth sections we compute marginal stockholder tax brackets and discuss their implications for capital theory.