Knowledge that Transforms

PHE NEW BOOK by William J. Baumol, John C. Panzar and Robert D. Willig is the culmination of several years of research on the related problems of understanding multiproduct cost structures and their implications for competition and market performance. It is a significant book for several reasons. The empirical reality that forms the starting point for the theoretical work is, I think, widely recognized to be important. Cost structures constitute one of the foundations of competitive strategy, and strongly influence industry structure. Notwithstanding this fact, the amount of microeconomic theory directed toward competitively relevant attributes of costs has been, if not minimal, then certainly more limited than the subject deserves. In fact, prior to the work of our authors, economists and business strategists did not have a language or a set of concepts with which to talk precisely about scale economies in a multiproduct setting. We now have at least the beginnings of such a language, and a body of theory that provides a grammar for using it. The theory of contestable markets was the subject of Baumol's presidential address at the American Economic Association meetings in Washington in December 1981. Both the theory and its presentation have generated controversy, useful controversy I think, because it helps clarify issues that need attention. I shall have remarks to offer later in this review concerning the normative and descriptive relevance of the contestable markets hypothesis. My plan for this review is as follows. I begin by outlining some of the principal definitions and propositions of the theory. This outline should not be mistaken for a complete summary of the book. But the economist who has not yet read the book needs a reasonably detailed picture of the approach. Few of the propositions require long proofs: in fact once they are stated, the proofs are often simple exercises. Having outlined some of the principal concepts, I comment upon their usefulness for understanding markets. And finally, I conclude by suggesting some ways in which the general subject may be pursued from this point forward.

THIS ARTICLE'S MAIN PURPOSE iS to discuss certain key problems that arise in calculating purchasing-power parities (PPPs) when making international comparisons of real product, while reviewing partially the work of Irving Kravis, Alan Heston and Robert Summers (1982). Before beginning the discussion, the author wishes to record his opinion that this work of Kravis, Heston and Summers, carried out and successively published over the past 15 years, represents one of the great contributions to applied economics. In the article that precedes this one, Kravis provides a survey of the applications of this type of data, but it must be emphasized that any such listing can do only partial justice to the scope of new applications which seem to arise almost every day. Apart from applications to various aspects of international economic policy, there is so much greater international variation in basic economic variables, such as real income and relative prices, than is usually found in typical intranational/intertemporal comparisons, that the new data inevitably represent an enormous increment in our science's general capacity for statistical experiment. Thus, the debt owed to this team of research workers, by the economics profession at large, is immeasurable. A is essentially a form of international or interregional price index, complicated, but not essentially changed, by the existence of national currencies. For example, suppose we found, by some kind of index-number calculation, that the general price level in region A was 10 percent higher than in region B of the same country. Given a common currency, the between the money circulating in the two regions is clearly 1.0, but the for region A, in comparison with region B, is 0.91, this being the number by which it is necessary to multiply a given nominal income in A to give it the same purchasing power as a corresponding income in B. It follows that the must be some average of the ratios among individual prices in the two regions. In the case of two countries with different currencies, one can speak of a commodity PPP as being the rate of exchange between the two currencies which would equalize the price of a given commodity; then the general for the two countries is some average of the PPPs. In international, as in intertemporal, comparisons, there is a duality between the problem of measuring price levels and

The sixteen essays edited and synthesized by Emmanuel Akyeampong, Robert H. Bates, Nathan Nunn, and James A. Robinson contribute significantly to our understanding of the following questions: (1) When did Africa become poor?; (2) Why did Africa become poor?; and (3) Why has Africa remained poor? Although these questions are impossible to answer in a definitive way, the partial explanations offered in this book are insightful and thought provoking and are summarized in this article. However, they also rest primarily on economic and political arguments. The importance of geography, which is mostly not explored in these essays, is reviewed in the final section of this article. (JEL F54, I32, J11, N17, N37, N47, O10)

Mukesh Eswaran's Why Gender Matters in Economics presents a generally well-researched review of the literature on women and economics, and admirably attempts take a global perspective. Eswaran's analysis is compromised, however, by an unreflective use of perspectives and methods that themselves, when seen in a broader perspective, reflect gendered biases. With particular reference to Eswaran's discussions of gender differences in preferences, the preferential treatment of groups, and work/family issues, this essay outlines how these biases arise, and how economic analysis must change if it is to become more rigorous. (JEL A11, B54, D12, J16)

A FLAGRANT ERROR dogged James Steuart, Adam Smith, David Ricardo, John Barton, John Stuart Mill, Karl Marx, and classical writers generally. Modern commentators on classicism are enough tempted by the fallacy to generally overlook it as a vital flaw in the earlier writers. This fallay can be called classically classical-not in the sense of being the greatest error in the classical paradigm (an award that would be hard even to define) but-in the sense that modern scholars ignorant of pre-1900 literature would be little tempted by it. I do not denigrate or patronize a great writer of the past, such as David Ricardo, when I objectively delineate his hits and misses. The fallacy can be simply put. Fixed capitals are prejudicial to wages and the demand for labor; circulating capitals (wage fund items that represent outlays paid to workers at the beginning of a period of production, which are not recouped until the end of that period of production and which of course bear an interest or profit rate during the transition) are allegedly favorable to the real rate and to the demand for labor. Fixed capitals are durable produced inputs that render their services over a number of different production periods. Circulating capitals are produced inputs used up within one period of production; they are relatable to, but distinguishable from, wage fund advances paid to workers at the beginning of a period of production, to be recouped at its end along with an interest or profit return. In the minds of heterodox economists and the lay public generally, a technological change that made machinery newly viable was supposedly the kind of invention that could put people out of work temporarily, reduce market-clearing rates, and in long-run equilibrium at an unchanged subsistence rate call for a significantly reduced population. By contrast, therefore, a new invention that displaced machinery in favor of various raw materials as inputs, would supposedly raise the short-run real and increase the demand for labor. So powerful was the grip of what I shall dub the Classical Fallacy that it was being reminded of it in 1819-21 that appears to have enabled Ricardo to recant, in his famous Third Edition chapter on machinery, his previous boner that every viable invention can be expected to raise every factor's return. From today's wisdomor indeed the wisdom of 1900-that previous position of Ricardo was nonsense. There is no Invisible Hand that seeks out machines or new techniques only if they benefit everyone.I

Maurice Allais' well-deserved Nobel Prize fortuitously brought to our attention an injustice inadvertently done him, to which we were unknowing accessories. For years the literature has ascribed to us the parentage of the transactions-cost model of optimal cash balances, with its notorious square-rootformula derivedfrom inventory theory.' Recently, we found that its essence is contained in Allais' 1947 Economie et Interet (pp. 238-41). As Jacob Viner used to say, no matter to what source the origin of an economic proposition is ascribed, someone is sure to come up with an earlier one. In any event, here is a translation of the pertinent passages. Allais describes the model in footnotes (11) and (12) to the following text (pp. 238-41):

PHE ECONOMICS PROFESSION depends, to a large degree, upon its scholarly journals to disseminate the results and applications of its recently completed research. The Journal of Economic Literature is, in fact, evidence of that dependence; much of the contents of each issue is devoted to an indexing of the current articles to facilitate both access to primary sources and quick cross-referencing with related material. But how recent are the results reported in the current literature? How long does it usually take for a piece of research to evolve from a submitted manuscript to a published article? To my knowledge, only one study has confronted this question directly, and it was published nearly 15 years ago. In that study, Robert Coe and Irwin Weinstock (1967, p. 40) reported an average lag between submission and publication of 250 days (8.2 months) for articles published in 1966. What has happened since? There are no formal surveys to support the suspicion, but there is evidence to suggest that the lags have actually increased. Some journals have begun to charge submission fees ostensibly to reduce the number of manuscripts they must review. A plethora of specialized journals have emerged to provide new outlets for specialized papers and to relieve some of the burden from the traditional journals of more general scope. One new journal, Economics Letters, has been founded completely in response to the lag problem; it publishes short papers as quickly as possible in an effort to distribute at least the thrust of current research without a prolonged waiting period. All of these responses to long lags lead to one question: how severe are the current lags between submission and publication? This brief note will report on the results of a survey that can begin to assess the current magnitude of the lag problem, the major components of that problem, and the success of the various efforts to alleviate it. Information about the lags involved in the 40 most recently published articles in each journal was solicited from the editors of 66 journals whose contents are routinely recorded in the JEL. Twenty editors responded directly to the request, and their reports formed the foundation of this study. Seven other journals were also in-

This essay is the result of a long process involving many drafts and revisions. I am grateful to Duncan Foley for the careful and constructive criticisms offered throughout the project. The following people read the manuscript at different stages and, although they often disagreed with me, they generously provided helpful comments: two anonymous referees for this journal, Samuel Bowles, William Dickens, Greg Dow, Robert Drago, Richard Edwards, Kathleen Engel, Richard Freeman, James Galbraith, Herbert Gintis, Jody Hoffer-Gittel, SandfordJacoby, Tom Kochan, David Levine, Lisa Lynch, Paul Osterman, Michael Piore, Bob Rebitzer, Gil Skilman, Dan Slesnick, Robert Thomas, and Tsuyoshi Tsuru. Comments from participants in seminars at the Massachusetts Institute of Technology, University of Massachusetts at Amherst, and Hitotsubashi University are also gratefully acknowledged.

June Carbone and Naomi Cahn argue that growing earnings inequality and the increased educational attainment of women, relative to men, have led to declining marriage rates for less-educated women and an increase in positive assortative matching since the 1970s. These trends have negatively affected the welfare of children, as they increase the proportion of poor, single-female-headed households. Using data on marriage markets defined by state, race and time, and the Choo–Siow marriage matching function, this review provides a quantitative assessment of these claims. We show that changes in earnings inequality had a qualitatively consistent but modest quantitative impact on marriage rates and positive assortative matching. Neither changes in the wage distributions nor educational attainments can explain the large decline in marriage rates over this period. (JEL C78, D63, J12, J15, J16, J31)