Knowledge that Transforms

G REAT WORKS often do not immediately get the attention they deserve. David Hume's Treatise of Human Nature fell, in his own words, dead born from the press.' John Stuart Mill's Subjection of Women was received coolly (it was the only book of Mill on which his publisher lost money).2 Bertrand Russell has recorded his disappointment at the reception that Principia Mathematica got: I used to know of only six people who had read the later parts of the book. Three of these were Poles, subsequently (I believe) liquidated by Hitler.3 remaining three readers apparently got back to their old lazy ways soon enough: The other three were Texans, subsequently successfully assimilated-a result as bad as being liquidated so far as the effect on the deserted Principia Mathematica

This survey outlines the evolution of thought leading to the rrecent delopments in the study of business cycles.The subject is almost coextensive with short-term macrodynamics and has a large interface withmeconomics of growth, money, inflation, and expectations.The coverage is therefore both very extensive , and selective. The paper first summarizes the "stylized facts" that ought to be explained by the theory.This part discusses the varying dimensions of business cycles; their timing, amplitude, and diffusion features; some international aspects; and recent changes. The next part is a review of the literature on "self-sustaining" cycles. It notes some of the older theories and proceeds to more recent models driven by changes in investment, credit, and price-cost-profit relations. These models are mainly endogenous and deterministic.Exogenous factors and stochastic elements gain importance in the part on the modern theories of cyclical response to monetary and real disturbances.The early monetarist interpretations of the cycle are followed by the newer equilibrium models with price misperceptions and intertemporal substitution of labor. Monetary shocks continue to be used but the emphasis shifts from nominal demand changes and lagged price adjustments to informational lags and supply reactions. Various problems arise, revealed by intensive testing and criticisms.This prompts new attempts to explain the persistence of'cyclical movements and the roles of uncertainty and financial instability, real shocks, and gradual price adjustments. One conclusion is that business cycle research will profit most from (a)the updating of findings from the historical and statistical studies, and (b)using the results to eliminate inconsistencies with the evidence and to move toward a realistic synthesis of the surviving elements of the extant theories.

AN EARLIER VERSION of this book was ready in second draft as long ago as 1966, as the authors Milton Friedman and Anna Schwartz, henceforth F-S, tell us in their Preface. But that version was restricted entirely to the United States. A National Bureau reading committee suggested that its scope be enlarged to cover the United Kingdom. Extending the coverage of the study to encompass the UK proved much more time consuming than had been expected. F-S now question whether the inclusion of the UK, the new material and the lengthened data period, were adequate recompense for the extra effort and long delay. They may be correct in this doubt, even though the inclusion of the UK is especially interesting for British readers. Since F-S began work on this book, much that was challenging and original in their approach, for example the relationship between monetary growth and interest rates, has been absorbed into the mainstream of economic thought. That is, of course, no criticism of the analysis, but it does mean that the book does not have quite the same punch and excitement that its publication, say, in 1966 would have engendered. Moreover, knowing that F-S were working on UK monetary data, I had been hoping for a repetition of that magical combination of historical and institutional understanding, statistical thoroughness and overall analytical brilliance that enabled F-S to illuminate the episodes of A Monetary History of the United States, but this time for the United Kingdom also. However, this was never intended to be that kind of book. It is not historical and episodic at all, strictly statistical. There is virtually no comment on the actual flesh and blood developments of British (or American) monetary history. Instead F-S have gathered together a small number of key economic series, on incomes, prices, money stock (M2 definition), interest rates, and put these series through a statistical/econometric mangle. As Thomas Mayer has indicated, this uncompromising devotion to statistical duty, unleavened by episodic and historical commentary, makes heavy reading. Nevertheless, besides compelling respect for the scholarship and thoroughness of the research, the book contains many new, important and provoking findings and analytical judgments, several of * See p. 1528, above, for publication information.

MILTON FRIEDMAN AND ANNA SCHWARTZ Monetary Trends reports a great many findings-53 are enumerated in the introduction-but paramount is the stability of the demand for money in the US and Britain over the past century. The money stock controls money income. This proposition more than anything else is the point of their painstaking investigation. Friedman and Schwartz argue against what might neutrally be called the early post-war view of the macroeconomic role of money: Velocity will move easily to reconcile any level of nominal income to any money stock. The demand for money in this view is a will-o'the-wisp, as the authors put it. Monetary policy has little influence over real activity; stabilization policy necessarily relies on fiscal instruments. The volume is completely convincing in disposing of this idea; today's reader is likely to be puzzled why so much space is devoted to a view that has no serious adherents among professional economists. Friedman and Schwartz are generals fighting an earlier war, a situation accentuated by the long lags in putting this volume into print. Though the opposing armies fighting for the early postwar view have withdrawn in total rout, a new front has opened up, and the quantity theory is fighting for its life once again. Worse yet, the new armies are fighting under the banner of free-market economics and are led by former colleagues and students of Milton Friedman. The midwest, once the stronghold of the quantity theory, is now largely occupied by the enemy. The new monetary economics views the quantity theory as nothing more than an artifact of government regulation. An economy organized along free-market principles could function without money at all (Fischer Black, 1970). It is true that the kinds of monetary regulations imposed by the American and British governments of the past century create a more-or-less stable relation between a certain class of assets called money and nominal spending (Eugene Fama, 1980), but different regulations would alter that relation. Even the real bills doctrine, anathema to quantity theorists because it invites unlimited expansion of the money supply, has advocates in the new school (Thomas Sargent and Neil Wallace, 1981). monetary system where the government is unconcerned about the money stock has been advocated by a University of Chicago economist while visiting the Hoover Institution (John Bilson, 1981). Restoring the intrinsic value of money, not limiting its quantity, has been found to be the key to successful disinflation by one member of this group (Sargent, 1982). critical summary, titled A Laissez Faire Approach to Monetary Stability, written * See p. 1528, above, for publication information.

The author reviews and evaluates Beckers A Treatise on the Family which concerns (a) the allocation of roles and resources and distribution of income within families; (b) the formation dissolution growth and structure of families and (c) the implications of these analyses for inequality and social mobility. In the present paper Beckers approach and substantive conclusions regarding the role of theory and empirical evidence in the study of economics and the family are critically examined. It is suggested that while Beckers discussion is a source of many useful insights the theory does not attempt a systematic treatment of the transition from traditional to modern types of family. (EXCERPT)