Knowledge that Transforms

An understanding of the correct model of intertemporal consumption choice is crucial to evaluating the effects of fiscal policies. The debates over whether deficit policy matters (Martin Feldstein, 1974; Robert Barro, 1974) and, if so, how to measure such policy (Robert Eisner and Paul Pieper, 1985; Kotlikoff, 1986) are fundamentally debates about the correct model of consumption. Unfortunately, distinguishing empirically between different consumption theories is a subtle business that has produced no strong conclusions. One problem confronting many tests of alternative consumption theories is that they require joint and quite specific assumptions about preferences, economic resources, and the consumer's information set that may not be justified. In such cases, what is described as a rejection of a particular model may simply be a rejection of restrictive assumptions placed on the model. A second problem that is also routinely swept under the rug involves the implicit assumption that consumers optimize perfectly given their preferences and resources, and that they correctly value their resources. In order to explore these more fundamental questions we, have conducted an experiment to determine whether individuals, when placed in a controlled life cycle setting, make consistent and coherent consumption choices, and whether they correctly value their future resources. The experiment provides negative answers to both of these questions; in the experiment subjects made significant and systematic errors in their consumption choice, reflecting, in part, an overdiscounting of future income. This paper reviews several of the findings from our 1987 working paper, and then discusses their implications for fiscal policy. We give a brief description in Section I of the experiment. Section II describes inconsistencies and errors in consumption choice and traces them to the overdiscounting of future labor income. Section III presents some regression results also pointing to an undervaluation of future resources. Section IV discusses the implications of these results for viewing fiscal policy and suggests the need for additional experiments as well as consumption models that acknowledge, rather than avoid computation problems.

For the last twenty-five years, our society has scrutinized relationships between women and men to an unprecedented degree. In this discussion-at once a positive description of behavior and a normative evaluation of family life-neoclassical economics has contributed important insights concerning the connection between the labor market and the family. However, the neoclassical inquiry has proceeded in remarkable isolation from interdisciplinary and popular debates which have focused on the issue of power relations between men and women-a stance which ultimately restricts the explanatory scope of the analysis. The invisibility of power is particularly characteristic of the metaphor for marriage (Gary Becker, 1981; myself, 1987; Nancy Folbre, 1986). The exclusive focus on trade reduces social power to mere purchasing power, which is exercised over technical resources or consumption goods, not people. The transaction cost analysis of the family (Robert Pollak, 1985, and Paula England and George Farkas, 1986) has a richer conception of power relations between family members who are locked in bilateral monopolies, but here power seems to be little more than a phenomenon endemic to longterm personal relationships. In this paper I advance two different propositions concerning the mechanisms and consequences of power between men and women, and use them to consider some concrete questions about the household. First, the mechanisms of power include collective action (a point argued in other contexts by Douglass North, 1981; Amartya Sen, 1977; Albert Hirschman, 1985; Samuel Bowles and Herbert Gintis, 1986; and Heidi Hartmann, 1976). Second, the consequences of power include the social construction of gender. A discriminatory economic system produces men and women whose socially differentiated capacities for performing and enjoying various types of work are much more distinct than their innate endowments. In other words, preferences and productive abilities are endogenous. (In this paper, I borrow from the work of Hirschman, Sen, Gintis, 1972, and many feminist authors such as Alison Jaggar, 1983, to explore the endogeneity of preferences.) I use two questions to motivate consideration of these claims. The first concerns the informal marriage contract: why has men's participation in household labor and childcare been so slow to change as women's market income has increased? Time-budget studies generally show that men's household labor is not very responsive to women's market labor. At most, men took on about two more hours of household responsibilities per week in the 1970's when women's wage labor increased dramatically (Ellen Fried and Susan Settergren, 1986; C. Russell Hill and Frank Stafford, 1980; Hartmann, 1981). The second question concerns the formal marriage contract: why are there so many retDiscussants: Gary S. Becker, University of Chicago; Paula England, University of Texas-Dallas.

authors assess the baby boom generations impact on relative wages in the United States in the year 2020. Time series data for the period 1955-1984 from the MIT-Penn-SSRC data bank are used. An econometric model of the demand for workers in eight age-sex categories is estimated. The simulation results indicate that wages of prime-age workers will not deteriorate in relation to older workers as a result of the aging of the baby boom cohort. Conclusions for teens cannot be drawn. general result does not hold for women however. Prime-age women are predicted to lose in comparison with older workers and with men increasing rather than reducing wage differentials by sex ceteris paribus. (EXCERPT)