Knowledge that Transforms

SOME time ago, an attempt was made to develop a practical method for the appraisal of projects of road construction.1 The proposed method is one of comparative statics and compares the national product before and after the construction of a road. The essential elements of the method are the following. The whole economy is divided into a number of geographically separated centers. The movement of products from one center to another gives rise to transportation costs and, consequently, the price of the product of center i in center k depends on the costs of transportation from i to k. Supply and demand equations are assumed for each center and each product. The supply of each product i depends on the price of product i and the prices in i of all other products as cost elements. Two alternative assumptions are made with regard to the reactions of demand to price changes:

IT is widely believed that for some individuals saving may be negatively related to the rate of interest. The argument is usually put in terms of a person's desire to have a particular sum (or an annuity of a particular size) available at some future date. In such a circumstance a rise in the rate of interest will make easier (in terms of present abstention from consumption) the attainment of that particular future sum (or annuity). Therefore, the argument continues, the rise in the interest rate will reduce saving.' We do not wish to question the proposition that such perverse reaction to changes in the interest rate may adequately describe the behavior of some individuals; however, we do propose to criticize the extension of the proposition about individuals to the body of consumers in aggregate. This paper takes issue with those who contend that the aggregate saving-interest rate function for households may be perverse. 2 Our purpose is threefold. First, we wish to demonstrate that the use of the saving-for-a-fixedfuture-sum argument as support for the hypothetical negative relation between aggregate personal saving and the interest rate has unacceptable implications. In particular, it will be shown that it implies that aggregate personal saving is non-positively associated with aggregate real income.3 Second, we shall argue that a more general way to discuss a negative relation between saving and the rate of interest is in terms of the price elasticity of demand for future goods. Saving for a fixed future sum is a special case of this more general phenomenon. But third, we shall demonstrate that if the aggregate saving-interest rate relation is perverse, then the implied reaction of consumers to changes in expected future money prices would also be perverse.4 We shall treat these matters in turn after introducing the geometric tools.

(e) Net interest paid by government. The national income net interest total comprises total interest accruing to United States persons and governments less the total interest paid by United States governments to persons, governments, and businesses. The personal income interest total is obtained by adding to the national figure the excess of interest payments by governments over their interest receipts. Thus it measures total interest paid to United States persons.3 The share of the national total attributable to any one state is extremely difficult, if not impossible, to estimate by direct means, if this were desired. But allocation can be made more easily, although the method rests upon the same sort of fundamental and hazardous assumptions as in the case of allocating corporate income. Figures are availalble from the Department of Commerce of private interest received by residents of Texas and the United States. The Texas state income component of United States net interest paid by governments was obtained by applying the ratio obtained from the private interest figures to the United States net government interest total. The assumption here, of course, is that Texas residents' entitlement to a share of the national total of net government interest was the same as their entitlement to a share of the national total of private interest, as reflected in the payments actually made or imputed. The method also, as in the corporate income case, has the merit of conforming to the conceptual framework which emphasizes the wherereceived measure. TABLE 4.-GOVERNMENT AND BUSINESS TRANSFER PAYMENTS, TEXAS, I950-58 ($ million)

FORECASTS of productivity changes are usually made by extrapolating time series. For individual industries productivity fluctuates widely from decade to decade1 and the extrapolation method is vulnerable. An alternative is to use leading series. In an earlier study it has been shown that a well-defined time lag exists in the cotton textile industry among the estimates of productivity from engineering data, plant data, and industry data.2 Leading best-practice series, unfortunately, are hard to come by. But the results have suggested a third alternative: the forecast of productivity changes in industries by studying the diffusion of more advanced technology among plants.3 The present paper is an attempt to develop and test a framework by which productivity changes may be deduced from cross-section plant data. The cross section provides the initial conditions concerning the technological mix before changes. A simple set of rules on innovation and diffusion, also suggested by the crosssection information, then yields the expected changes of the mix. The cross-section approach has many virtues. It is unconstrained by the existence and quality of historical series, and moreover a suitably designed sample also catches the peculiar characteristics of an industry at a particular time or in a particular region. The possibility of refinement is virtually unlimited. From a theoretical point of view the opportunity afforded for testing the behavior of individual plants is also invaluable. These merits are ranged against some equally conspicuous difficulties, the most important of which are probably the difficulties in introducing time variables and in interpreting the results.4 In this paper a simple method for ordering technologies is suggested. After a tag is attached to each technology indicating its place on the scale running from obsolete to advanced, a rule of technology diffusion is introduced. In the third section the rule is applied to each of the two-digit Census Standard Industrial Classification (SIC) manufacturing industries in New England. The results forecasts of productivity, inputs, and outputs are evaluated in the last section of this paper. Although it would be desirable to use the model to predict the known data of some past year, the information at hand has not permitted such an endeavor without gross assumptions. It will therefore be argued only that the long-range forecasts based on the present model are reasonable and consistent in view of historical and present conditions.

GOVERNMENTS in various underdeveloped countries have progressively assumed direct responsibility for economic growth and have often relied on borrowing from central banks to finance a part of their investment outlay. Consequently, central banks now have less freedom than before in the exercise of their monetary policy. However, monetary policy in these countries can still influence private outlay in such a way as to supplement or offset public expenditure and contain total effective demand within limits compatible with price stability. The present paper studies the case of India where the Government, through its Plans, has endeavored to step up public investment. The purpose of the paper is to focus directly on the policy decisions of the central bank the Reserve Bank of India. By directing attention to the accounts of the Bank, the present study reviews critically the Indian monetary policy since the beginning of the first Plan in 195I. Since the purpose is to evaluate monetary policy, the impact on Bank's accounts of fiscal operations and of the changes in foreign assets is assumed as given. In terms of Bank's assets, the changes in net claims on government directly influenced by government budgets and changes in foreign assets are considered as outside the scope of monetary policy.' It is further assumed in this paper that the objective of monetary policy is to maintain the prices of the previous year. Money Supply and Price Changes

In his recent publication, Gold and the Dollar Crisis, Professor Triffin revisits the old Keynes plan, designed during the Second World War for solving postwar international currency and payments problems. In Professor Triffin's view such a plan would solve our present difficulties in international payments. The book itself stems from two articles by the author, published by the Banca Nazionale del Lavoro in Rome in I959. An introductory section and a postscript composed of six comments on Professor Triffin's work (the sixth being by Mr. Khrushchev), have been added in the book form. In essence, the Keynes-Triffin scheme advocates the establishment of an international or supranational central bank of which all countries of the free world would be members. Such an institution would serve as a substitute for the present International Monetary Fund. It is clear that its merits and defects would have to be discussed on two different planes. On the one hand, Professor Triffin's New International Monetary Fund would create problems of a purely political nature, because much would depend upon on what basis, or by what type of voting system, the decisions of such an institution would be reached, given politically sovereign member states. On the other hand, a number of purely economic problems are raised by the existence and by the mode of operation of such an institution. It is beyond the scope of this note to discuss the problem of the decision-making process in detail. The difficulties that might arise are, however, quite clear. If all of the rules of the game were not laid down from the outset, whenever a decision were to be made, and no three-fourths, four-fifths, or unanimous agreement as envisaged by Professor Triffin were reached, it might impede the functioning of the institution. But let us assume that in one way or another decisions are made, and let us consider the impact of the new fund on international liquidity, and on the stability and policies of the member countries. Professor Triffin starts from the premise that the world supply of gold and annual gold production are insufficient to satisfy the international demand for liquidity generated by the growing volume of world trade. Moreover, he observes a striking, and in his view highly dangerous, concentration of reserves and of international short-term credit creation. To remedy this situation and to facilitate international payments, he envisages an international central bank which would absorb part of national gold and foreign exchange reserves and through which international payments simply would be effected as a bookkeeping operation. Under the Keynes plan, presented in the later years of the war, net surpluses or deficits in the balance resulting from autonomous transactions could accumulate in substantial amounts (not indefinitely, as Professor Triffin asserts-see page go). Professor Triffin realizes the damaging inflationary effects that such an unrestrained credit creation might entail. Consequently, he advocates a three, four, or five per cent ceiling on the annual expansion of world liquidity. Each member country would be required to hold a given proportion of its monetary reserves, say, twenty per cent, as deposit with the fund; it might, however, keep a greater proportion. With the twenty per cent reserve ratio, Professor Triffin estimates the initial capital of the fund at about $i I billion, initially held in the form of gold to the extent of about forty per cent, while the rest of the assets would be in the form of claims on member countries, primarily the United States and the United Kingdom. Thus in the initial stage not all official foreign exchange reserves of member countries (at present about $I9 billion) would be absorbed; there would be about $I3 billion outstanding, left in the hands of official short-term creditors within the member countries. Such balances would, according to Professor Triffin's plan, be absorbed over the early years of operation of the new fund. This, of course, would require some countries holding reserves with the fund well in excess of the 20 per cent. The expansion of world reserves would be effected in two different ways, comparable to those currently employed by national central banks. On the one hand, the fund could extend short-term credit on demand of the member countries; on the other, it could invest directly in members' security markets, both on short and on long term. It may be interesting to note that such credit creation would involve an annual increase of about i8 per cent of the fund's initial assets if the growth of reserves were to equal five per cent.