Knowledge that Transforms

W HILE we can as yet do little to change the weather, we can nevertheless use weather variations to explain an occasional economic phenomenon. Considerable work has already been done on the connection between weather and the use of specific fuels in specific areas.' Recently, J. R. N. Stone and D. A. Rowe have related quarterly averages of temperature, rainfall, and sunshine to English consumption of fuel and light, entertainment, and beer.2 The present paper describes how year-to-year variations in winter temperatures seem to affect United States demand for all space-heating fuel combined. These temperature changes, it turns out, are of less importance than personal income in explaining the long-run trend in space-heat demand, though they are of considerable significance in explaining year-to-year variations. In general the demand equation obtained from I935-40, I946-Si data fits actual consumption well; the difference between actual and calculated consumption for I942-45 gives some notion of the relative unimportance of wartime fuel scarcity in the United States; and the predicted values for the years I952-59 differ from the actual values by an average of only i.6 per cent.

N the postwar period, both Great Britain and the United States have been committed to a policy of maintaining full and expanding levels of employment. Despite this similarity in policy objective, official unemployment estimates have been significantly lower in Great Britain than in the United States. Furthermore, the intercountry spread in unemployment rates has widened substantially since the end of the Korean War. This widening has been due to an uptrend in the American unemployment rate, which has averaged higher in each succeeding postwar cycle. There has been considerable controversy over whether this spread in unemployment rates was a measure of the relative success of full employment policies in the two countries or whether it merely reflected differences in statistical concepts and in the structure of economic activity. Official British sources attribute lower British unemployment rates almost entirely to the maintenance of a higher level of aggregate demand relative to resource availability in Britain. On the other hand, some private writers have maintained that the difference would be largely or totally eliminated if both countries defined and measured unemployment in the same way.' The purpose of this paper is the evaluation of those factors which may have a differential impact on British and American unemployment rates. First, differences in the concept and measurement of unemployment are analyzed to determine whether they result in any significant bias in the published unemployment rates. The influence of labor market attitudes and behavior on the level of frictional unemployment in the two countries is then examined. Finally, evidence that the British have managed to maintain relatively fuller employment conditions is presented.

would have received 56 per cent more under TAP. In the case of wheat this pattern is even more pronounced, and it is also present in tobacco; the case of corn has not been investigated. A much larger part of the subsidies to agriculture, therefore, would reach those for whom they are presumably intended. At the same time, by divorcing payments from current production cost TAP avoids the danger of encouraging inefficiency and of perpetuating uneconomic patterns of output. The cost of TAP can only be roughly estimated at the moment; the United States Department of Agriculture should be able to present more accurate calculations on the basis of its extensive market studies. Pending such calculations it appears that the cost of applying TAP to the three principal supported crops (wheat, corn, and cotton) at the rate mentioned earlier would not exceed $I.5 billion in the first year, and would be proportionately less in subsequent years.3 The cost of the present scheme is not known with any exactness but seems to exceed $4 billion per year. Some of the outlays under the existing program (notably those for storage and for the soil bank) would have to continue for some time after the introduction of TAP. Finally, it should be stressed that TAP is a transitional device and is consequently limited to a definite time period. By its very nature an acreage payment cannot be permanent without creating a caste of rural pensioners, and even the most sentimental devotees of the family farm would hardly advocate this. The appeal of this proposal is not to those who want to preserve the present structure of agriculture regardless of the burden on consumers and taxpayers; it is to those who recognize that in a progressive economy agriculture must change along with all other sectors, but who also recognize the wisdom of tempering the wind to the shorn lamb.

D ESPITE the growth in importance of other financial institutions the behavior of the commercial banking system remains a principal consideration in most discussions of national monetary affairs. Explanations of the way in which the Federal Reserve System exerts its influence on the cost and availability of credit in the economy continue to rely heavily on hypotheses about the loan and investment policy of the commercial banking system. For example, the postwar doctrine of credit rationing appears to rest primarily on the observed behavior of commercial bankers in dealing with their loan customers. Less exclusively but still significantly, the effectiveness of debt management and Federal Reserve open market operations in influencing the terms of credit to private borrowers has been linked to the responsiveness of commercial bankers to changes in market prices and yields of government securities. concept of the commercial bank which undergirds the argument for the sensitivity of commercial bankers to yield differentials is basically similar to that of an individual investor concerned with the yield, risk, and liquidity of alternative financial instruments. By an appropriate development of risk considerations' and by (rather general) allusion to oligopolistic imperfections of competition within the banking industry,2 this model has been extended to cover the rationing of bank credit by nonprice means. Nevertheless, the state of our understanding of commercial bank behavior is not entirely satisfactory. If commercial bankers are sensitive to yield changes on government securities why have they moved so freely out of these securities whenever the demand for bank loans was strong? 3 If oligopolistic conditions within the banking industry occasion nonprice rationing of bank credit what is their specific nature and how do they exert their influence? purpose of this article is to contribute to our understanding of commercial bank behavior by examining some implications for bankers of the demand deposit relationship of their loan customers. Anyone who troubles to inquire of commercial bankers will discover that the deposit relationship of a loan customer is a primary consideration in determining the cost and availability of bank credit to that customer. Despite this fact, the literature of monetary economics has little or nothing to say about the deposit relationship as one of the determinants of the investment behavior of commercial banks. Rather, as I have mentioned, we have preferred to carry forward the discussion in terms of the broader analytical categories of yield, risk, and liquidity applicable to any investor. But a discussion of commercial banks which is couched in these more general terms abstracts from some of the essential features of commercial banks as specialized financial institutions. In particular it neglects the role of deposits as the principal source of an individual bank's power to lend and invest. In what follows we shall examine the significance of the deposit relationship for the individual bank and then explore its influence on such broader issues as the cost and availability of bank cred* This article is drawn from a more comprehensive study of commercial bank loan and investment policy supported by Merrill Foundation for the Advancement of Financial Knowledge, Inc. author wishes to acknowledge the helpful criticism of Professors James Duesenberry, John Lintner, Lawrence Thompson, and Dr. Parker Willis. 1 For examples see Ira 0. Scott, The Availability Doctrine: Theoretical Underpinnings, Review of Economic Studies, xxv (October I957); and my own Risk and Credit Quarterly Journal of Economics, LXXIV (May I960). 2 For examples see John H. Kareken, Lenders' Preferences, Credit Rationing, and the Effectiveness of Monetary Policy, this REVIEW, xxxix (August I957); Monetary Policy and Management of the Public Debt, Joint Committee on the Economic Report, 82d Congress, 2d Session, Statement of Paul Samuelson; and Warren L. Smith, On the Effectiveness of Monetary Policy, American Economic Review, XLVI (September I956), esp. 593-96. 'This movement is chronicled and discussed in John H. Kareken, Post-Accord Monetary Developments in the United States, Banca Nazionale del Lavoro (Rome), Quarterly Review, September I956, 588-607; and Warren L. Smith, op. cit., esp. 597.

M /[ESSRS. Bowen, Davis, and Kopf have shown 1 that real burden of a project using up resources in can be shifted to generations by internal borrowing, providing one defines in a particular way. It just as easy to prove that all politicians are economists or that all economists are dunces, provided one defines economist in a particular way. But even if I call tail of a sheep a leg that will not turn sheep into quintapeds. The issue of course terminological rather than substantive. It nevertheless one of utmost importance because conclusion reached by Bowen et al., although not incorrect on their own definitions, bound to be misinterpreted as meaning what it seems to be saying in English and as indeed implying that most politicians understand economics better than economists most, if not all, of whom are dunces. Bowen, Davis, and Kopf are right when they agree that there absolutely nothing wrong with standard argument of modern economists that real burden of a debt can not be shifted to generations if it defined as the total amount of private consumption goods given up by community at moment of time borrowed funds are spent. But President Eisenhower appears convinced that costs of debt-financed public projects can be passed on to generations. Like Rabbi in story, Bowen et al. want to say that he too right, but in their enthusiasm they even say that purpose of their note is to suggest that in instance it President who -in at least one highly important sense right,' 2 thus clearly implying that economists are wrong. To make President appear right, Bowen et al. redefine present generation to mean people who lend money to finance project, and they redefine future generation to mean people who pay taxes that are used to repay principal and interest on loans. The perversity of redefinitions obscured by supposing that lenders (this generation), are all 2I years old at time of execution of project when they lend money and by supposing that they are repaid 44 years later, on their 6sth birthday, with funds obtained at that time from 2Iyear-old taxpayers (the next generation). The burden thereby shifted from this generation' to the next generation. What has been proved, if we obstinately insist in expressing conclusion in English, that it possible to shift burden from Lenders to Taxpayers or, we might say, fromn Lowells to Thomases. The Lowells are better off and Thomases are worse off than if Lowells had been taxed to raise money for project in first place. The red herring nature of having Lowells lend money now (so that we can call them generation) and having Thomases pay taxes in (so that they can be called generation) jumps to eye if we note that shifting of real burden of project from Lowells to Thomases (or indeed of any other burden) could take place just as well at time of project (or at any other time) by simply taxing Thomases instead of Lowells. No economist, so far as I am aware, has ever denied possibility of borrowing or of lending or of taxing some people instead of others, or of any combinations of such oper-

IT is not generally recognized by economists that where governmental contracyclical policies are concerned common sense is a particularly dangerous tool. Policiesautomatic or notwhich appear to be properly designed may very well turn out to aggravate fluctuations.' Miscalculations on delicate questions of timing or magnitudes can be crucial, and these matters may well be out of the range of competence of the good judgment and experience of most of the practical men who determine or advise on our monetary and fiscal policies. This article describes tools which can be used to deal with at least some simple variants of these problems. Such tools can be particularly useful in indicating the nature of the pitfalls in the area. In particular, I will describe two rather plausible types of contracyclical fiscal policy and show that they can lead to some rather surprising results. i. The model and some contracyclical policies. The discussion assumes that we are living in the world of the Samuelson accelerator-multiplier model.2 It will be recalled that the time path of national income, Y,, in that model is described by the second-order linear difference equation: Y, = consumption + acceleration investment + autonomous investment + net government outlay = kYt_1+c(Yt_Yt2) +A +Gt where k is the marginal propensity to consume and c is the relation of the acceleration principle. In other words, we have:

IN recent years, there has been a very marked rise in the interest economists have shown in the process of invention, and in industrial Research and Development the institutionalization of inventive activities by business enterprises. developing interest in invention has stemmed from several roots. One important one is the growing body of research findings on productivity,' which turned the attention of economists interested in economic growth toward the process of technological change. These studies showed that only a small fraction of the total increase in output per worker which had occurred in the American economy since the late igth century could be explained by capital per worker. lion's share had to be attributed to something else, to or efficiency. term increased productivity covers a wide number of different elements and the operation by which is defined and measured obscures a variety of economic phenomena. Better allocation of existing factor supplies (the process of dynamic adjustment) and capital formation in humans (education, health, etc.) are two of the most important. But it seems obvious that technological change also has been an important ingredient. A second source of the interest in invention is the changing way that economists are coming to look at the competitive process. Increasingly the focus is on competition through new products, rather than on direct price competition. And concurrently, normative considerations are shifting toward conditions of long run growth rather than fixing on short term Pareto optimality. In a sense these developments represent a renaissance of Schumpeter. A third source of the heightened interest in inventive activity has been the cold war, and the growing awareness that our national security may depend on the output of our military research and development effort organized inventive effort for the purpose of creating more effective weapons. Closely related to the interest in military R and D 2 is the growing concern with the technological race to which the Soviets have challenged us. interest in inventive activity which stems from interest in defense and the space program has tended to be more micro-oriented than the interest stemming from concern with problems of economic growth. studies generated have tended to be normative analyses of conditions of efficiency (how resources should be allocated), rather than analyses of factors determining the actual allocation of inventive effort. This paper is focused on one aspect of R and D efficiency: the problem of achieving a given objective at minimum cost. Thus the paper is directly concerned with the third area of interest discussed above. However, some of the implications of the model seem to have relevance to more macro issues of policy, and to a positive analysis of the allocation of inventive effort. In Section I, the basic efficiency problem is discussed and the concept of a parallel path strategy is introduced. Section II presents a model. Lest the reader expect too much, let me state at the outset that the model is much too crude to provide reliable quantitative answers. Rather, the purpose of the model is to provide a framework for analysis and to explore some implications of two aspects of the R and D nrocess. the uncertaintv which exists * This paper is one product of a continuing RAND study of Research and Development management. idea of a parallel development strategy has a long history at RAND. Burton Klein, William Meckling, Emmanuel Mesthene, Leland Johnson, Thomas Marschak, Armen Alchian, William Capron, and others all have contributed to its evolution. ' See, for example: J. Schmookler, The Changing Efficiency of the American Economy, I869--I934, this REVIEW, XXXIV (Aug. I952); M. Abramowitz, Resource and Output Trends in the United States since I870, American Economic Review, XLVI (May I956); Robert Solow, Technical Change and the Associate Production Function, this REVIEW, XXXIX (Aug. I957); B. F. Massell, Capital Formation and Technological Change in United States' Manufacturing, this REVIEW, XLII (May I960). 2 Research and Development will henceforth be abbreviated as R and D.

[T]he only really sure way to beat inflation is to cut off inflation at the root. . . Milton Friedman [presents his strategy against] inflation in his penetrating . . . book . . . This is controversial stuff, and Professor Friedman . . . doesn't blanch at what he feels is his call of duty. And many a banker will just see red . . . [This book] can be recommended for a good look at the real roots of inflation-the look that thus far has not been widespread enough, among enough people.-The Wall Street Journal

Обсуждаются следующие темы: чистая теория производства, функциональное распределение дохода, технический прогресс, источники международных конкурентных преимуществ. Анализируются эластичность замещения между трудом и капиталом в обрабатывающей промышленности; производственные функции различного типа.