Knowledge that Transforms

SINCE I did not have opportunity of seeing Dr. Hansen's article in February issue of this REVIEW 1 before publication, I must offer a belated rejoinder, which I have promised Editor will be brief. Let me begin by correcting Dr. Hansen's impression that everything said in The Bogey of Economic Maturity about the stagnationists was intended to apply to him personally. To be sure, I quoted principally from his writings, which offer most coherent and systematic exposition of stagnationist theory, but I tried to make clear that I was addressing myself to a whole school of thought, not to its major prophet alone. Because some of Dr. Hansen's disciples have displayed less caution and moderation than master, I had occasion to -take to task some views he did not share, and for which he should not be held responsible. If my cautionary explanations did not make this sufficiently clear, I am glad of this opportunity to state in writing what I have long since told Dr. Hansen personally. In view of limited space at my disposal and untimeliness of a delayed rejoinder, I shall content myself with suggesting approach or direction my reply would take if spelled out, leaving a fuller development of argument to book itself.

A NY attempt to estimate the future volume of American exports should be based on an appraisal of the marginal propensity of the to import American products (the ratio of a change in imports of American goods to a change in national income), and on the relationship of the prices of American goods to foreign prices. Computation of the marginal propensity to import for the outside world is not possible because of lack of adequate data on national income for most of the foreign countries; and even when these figures are available, the logical and technical difficulties of combining them into a homogeneous magnitude are exceedingly great. Even greater obstacles stand in the way of a meaningful statistical approach to the problem of price relations. The price index of American exports pertains to prices received by American exporters and does not take into account the additions resulting from duty payments, license fees, cost of transportation, and similar charges incurred by the foreign importers. With the numerous changes in tariff schedules and other trade barriers of the interwar period in mind, it would be unwise to assume that these additions have remained constant (or have moved proportionately to export prices) and therefore can be neglected. If an attempt is made to appraise explicit tariff changes as a cause of changes in the volume of American exports, a simple comparison of American export prices with foreign wholesale prices has little meaning. A rise of foreign prices induced by an increase of foreign import duties would make prices of American goods relatively lower; and, assuming a normally shaped demand curve and other factors constant, this rise in prices would justify an a priori expectation of a larger volume of exports. On the other hand, the imposition of import duties in foreign countries for protective purposes would lead to the expectation of a decline of American exports unless the demand for American goods is completely inelastic. But even if these logical and technical difficulties could be overcome, another set of prices would have to be considered. For all commodities for which alternative sources of supply are available, the prices, or more precisely the supply curves, of potentially competing countries enter into the determination of the volume of American exports. For instance, the quantity of American wheat exports is, among other things, dependent also upon the supply of Argentine or Canadian wheat. Within the practical limitations of statistical data and techniques, it is impossible to include directly all relevant factors.

For descriptions of curves, see footnote to Chart 7. Equation found:

Official gold sales in the Middle East for the express purpose of combating inflation were inaugurated in Iran in June 1943; in Iraq, Palestine, Trans-Jordan, Syria, and the Lebanon in August 1943; and in Egypt in November I943. Official sales were discontinued in June 1944 in all of the above countries with the exception of Iran where they were continued into the fall of I944. Official gold sales in Bombay, India, began in August 1943 and were continued until April I945.2 Just how effective gold sales in the Middle East and India have been is difficult to determine. Nowhere have the proceeds from such sales accounted for more than a fraction of the

IT might at first seem a little odd that there should be any hesitation or embarrassment in suggesting to academic colleagues in another country advisability of investigations, which might ultimately issue in practical action, along lines rather different from those which on their own initiative they seem disposed to pursue. But there is one important sector of economic analysis, of far-reaching general interest, which has hitherto been largely neglected and which it is now peculiarly appropriate to press upon attention of American economists. And it also happens'that effective action in this sector would make much easier at least a partial solution of other problems which have been mentioned and of whose pressing importance we are all so painfully aware, while it is without any doubt within setting of American economy that a scientific examination of this sector could now most hopefully be undertaken. Let us suppose that by some miraculous accident we had an absolutely free hand to determine critical point within American economy upon which in immediate future whole resources of creative thought of that country were to be directed. In such unexpected and highly improbable circumstances what should our decision be? Many would undoubtedly vote for a still closer concentration of attention upon techniques of full employment, while others would urge a still more penetrating study of significance of United States commercial policy for establishment and maintenance of world equilibrium. A plausible case could, however, be made out for view that problem which now most urgently calls for attention and solution of which would incidentally go far to meet requirements of those who are most concerned to see effective action taken in regard to these two obvious great outstanding isues is to be found in a field to Which so far little more than passing notice is usually given, a field, moreover, which at first sight might appear exclusively, or at least mainly, one of merely domestic concern. The general principle of international economic interdependence is now a commonplace, though its formal acceptance is still no guarantee that concrete policy will not in certain important respects be based upon deeplyrooted prejudice that it may be dangerous to allow peoples of other countries to become prosperous, especially if their prosperity seems dependent upon expansion of lines of production in which we ourselves already have a lively concern. To maintain national product at a level commensurate with our capacity to produce, it has been said, the American people will have to advance their standard of living as a whole by somewhere around 50 per cent. 1 And it is most direct and immediate interest of people of other countries that this unique objective should be realized with minimum of friction and delay. Its expeditious attainment will not, indeed, by itself either afford complete protection against risks of violent employment fluctuations in United States, prospect of whose repercussions elsewhere frequently cause so much alarm, or guarantee a speedy reorientation of United States tariff policy. Probably, it is in nature of things that yearnings for complete protection must always be disappointed, but if United States succeeds in reaching high standards of living postulated, employment fluctuations will probably be less violent than they might otherwise be; and even if awkward fluctuations persist, shifts of national income above and below a highlevel may still permit a demand for exports of other countries sufficiently great to prevent repercussions elsewhere from being overwhelmingly embarrassing. The vested interests which