Knowledge that Transforms

A Laspeyres index of total input in the electric power industry was constructed. The nature of the bias imbedded in such an index, and its relation to the Paasche index and its bias, are investigated. Means to evaluate the actual size of the bias and means to reduce it are devised.

Peer Reviewed

W l THAT have we learned from ComIV Vmission on Money and Credit about processes and responses in monetary policy? So far as I can see, from Report itself, very little but perhaps experts in monetary economics were not a significant part of audience at whom Report was aimed. So most fruitful course may be to turn primarily to staff papers. Here there is substantial evidence of quantity theory reborn at least in sense that money matters a good deal in determining aggregate spending on current output and of an important postwar change in monetary theory. As noted in my introduction to this volume, this postwar shift in theory is centered in approach to demand for money and other assets. In this theory, channels through which variations in money supply affect levels of income and employment include not only a change in the interest but also changes in relative prices of all assets-real and financialwhich in turn lead to shifts in spending on existing assets and currently produced goods and services. Thus in its extreme form approach suggests that we need to look not at one interest rate but at an extremely large number, including implied interest rates on all real assets and including consumer goods of any degree of durability. In logical terms, this approach offers an elegant rapprochement for devotees of and quantity-theory approaches to role of money, and for monetary-versus-fiscal policy disputes since I930's. If look prevails, we may look back at much of this controversy as a good deal less significant than it has seemed en route. The great controversy over Is savings really equal to investment? of late I930's and early I940's springs to mind. But agreement on this mechanism doesn't necessarily tell us how important money is quantitatively. If we look at staff papers (or at least, at sample I managed), what does professional support for renaissance of money and monetary policy amount to? Friedman and Meiselman, as might be expected, plump for money as a prime determinant of level of spending on current output, and show convincingly that a simple, traditional monetary model versus a simple traditional Keynesian model test gives verdict clearly to stability for velocity over stability for ratio of autonomous to income, including cases where reasonable lags are introduced. Moreover, they go on to spell out portfolio balancing mechanism as at least a plausible mechanism through which this monetary effect may be exerted. If we take Section VI of their paper as a statement of new monetary orthodoxy, on intellectual grounds at least a good deal of basis for long quarrel between monetary and Keynesian economists has been reasoned (or compromised) away. Few, even most ardent neo-Keynesians, would disagree that impact of open market operations may be through spreading net which Friedman and Meiselman spell outnot merely through one (bond) interest rate alone acting on investment decisions. The major challenge to now generally accepted fiscal policy position as our really powerful stabilization tool becomes a strong one if a reasonably stable demand for money is added to mechanism as at least Friedman and Meiselman argue. The C.M.C. staff papers contain no empirical answer to Friedman and Meiselman challenge to show better results with another model. Tobin, in his paper on debt policy, provides an elegant statement of a very similar mechanism through which changes in money stock and liquidity may influence spending decisions on current output through rebalancing of asset portfolios. But I hope it will not be too dissident a note to suggest that we really know very little empirically about validity of this description of channels of monetary policy; and that elaborate portfolio-balancing general equilibrium approach lacks intuitive appeal

F what I have seen of the work of the Commission on Money and Credit, one thing stands out.It is a part of one question addressed by one task force to the Federal Reserve Board, and it reads as follows: "Given the customary credit control instruments and the ultimate objectives of price stability, highlevel employment, and economic growthhow is monetary policy formulated in the short run?For instance, what sort of factors are weighed in determining current policy, what guides are utilized and what are the immediate objectives of policy?"The merits of the Board's reply, the many contributed papers, the Commission's Report, and recent monetary policy itself, are all certainly debatablebut I submit, if you will pardon the use of strong language, that this is a damned good question.It asks, politely but firmly, that we omit the usual garbage about opposition to sin and advocacy of motherhood, and just say what it is we are trying to increase, decrease, or hold still.The Board's reply ran to some 35 doublespaced pages.The burden of drafting was carried by my colleague, Woody Thomas,

T HE theory of the demand for financial assets has come in for a good deal of discussion in the last few years. Undoubtedly the discussion has been fruitful and has given us many new insights into the nature of financial processes. But it cannot be said that there is any generally agreed upon view as to the way in which those processes work. It would be appropriate at a conference of this kind to review the different hypotheses and give a systematic summary of the present state of knowledge. Unfortunately, though I have read the literature assiduously I have found it rather indigestible. I do not feel prepared to give a fair summary of other people's views. I must fall back therefore on giving my own. In this paper I shall deal with the demand for liquid assets and money by households and corporations. Those two groups hold over twothirds of all liquid assets, and the same general approach though not the details can probably be applied to the demands of unincorporated businesses, farmers, state and local governments. In dealing with the demand for liquid assets we must at least implicitly deal with the demand for other types of assets, but I shall not, except incidentally, say anything in detail about the demand for stocks, bonds, or physical assets. I shall confine myself to the demand for currency, demand deposits, commercial bank time deposits, mutual savings bank deposits, savings and loan shares, savings bonds, and short-term federal securities. There are, of course, other liquid assets, but I shall have little to say about them. I have occasionally used the term money in the sense of demand deposits and currency but have usually referred to those assets specifically to avoid any confusion with other definitions of money. But though I am happy to try to avoid the semantic confusion involved in arguments about whether any particular asset should be included under the heading money, I do cling to the view that commercial bank time deposits are significantly different from demand deposits. For that matter, so is currency, and so perhaps we ought to dispense with the term money in theoretical discussions and say clearly what we mean. In the first section of the paper I have discussed very briefly the conditions under which liquid assets are supplied. There follow in section 2 a discussion of corporate motives for holding liquid assets and money and a review of some empirical evidence on the relative importance of various factors influencing corporate decisions. In section 3, this theory of household demand for liquid assets and money is discussed together with some empirical evidence.

In both the United States and the United Kingdom the economics literature of recent years has been replete with discussions of the compatibility of price level stability and high employment. Interest in this broad subject has in turn stimulated renewed interest in movements of money wage levels, and particularly in the set of relationships between unemployment conditions and money wage levels. The general relevance of this type of empirical research for the "cost inflation" controversy and for the formulation of stabilization policies has been discussed at length elsewhere and so will not be considered in detail here. The main objectives of the present paper are fourfold: (1) to clarify the nature and significance of recurrent procedural problems involved in attempts to relate wage behavior to unemployment conditions, especially when only annual data are available; (2) to set forth statistical results obtained for the United States economy for the period 1900-1958 taken as a whole and for various sub-periods, with the level of unemployment and changes in the level of unemployment used as the main explanatory variables; (3) to consider in some detail the a priori basis for expecting a relationship between the rate of change of money wages and one particular explanatory variablechanges in the level of unemployment; and (4) to make some admittedly rough comparisons between the American results and the British results.

MECHANISM Si commodity, with each market in turn described by (a) supply conditions, (b) demand conditions, and (c) clearing of market or equilibrium conditions, of which one is redundant (Wairas' law).The main advantage of the general equilibrium framework is that it insures a systematic and, at least initially, symmetrical treatment of all markets.'For the commodity market, the demand conditions are described by equations (i) to (i); the supply conditions by (4b) and the clearing conditions by (7).In the labor market the supply is given by ( 6), to be reviewed more closely below; the demand by ( 5); and market clearing by (8).The remaining two markets are described under the next heading, 2.2. Explicit treatment of the bond market and

PpT HE subject assigned for this session covers too broad an area to be given even fairly cursory treatment in single paper. Accordingly, we have chosen to concentrate on the part of it that relates to in fluctuations. We shall still further narrow the scope of the paper by interpreting monetary factors to mean the role of the stock of money and of changes in the stock thereby casting the market as one of the supporting players rather than star performer and by interpreting economic fluctuations to mean business cycles, or even more exactly, the reference cycles studied and chronicled by the National Bureau. The topic so interpreted has been rather out of fashion for the past few decades. Before the Great Depression, it was widely accepted that the business cycle was phenomenon, a dance of the dollar, as Irving Fisher graphically described it in the title of famous article.' Different versions of theories of the business cycle abounded, though some of these were really theories misnamed, since they gave little role to changes in the money stock except as an incident in the alteration of credit conditions; and there was nothing like agreement on the details of any one theory. Yet it is probably true that most economists gave the money stock and changes in it an important, if not central, role in whatever particular theory of the cycle they were inclined to accept. That emphasis was greatly strengthened by the course of events in the twenties. The high degree of stability then achieved was widely regarded as consequence of the effectiveness of the policies followed by the only recently created Federal Reserve System and hence as evidence that were indeed central factor in the cycle. The Great Depression radically changed attitudes. The failure of the Federal Reserve System to stem the depression was widely interpreted-wrongly as we have elsewhere argued 2 and elaborate below to mean that were not critical, that real were the key to fluctuations. Investment which had always had prominent place in business cycle theories received new emphasis as result of the Keynesian revolution, so much so that Paul Samuelson, in the best selling textbook in the country, could assert confidently, All modern economists are agreed that the important factor in causing income and employment to fluctuate is investment. 3 Investment was the motive force, its effects spread through time and amplified by the multiplier, and itself partly or largely result of the accelerator. Money, if it entered at all, played purely passive role. Recently, revival of interest in money has been sparked less by concern with business cycles than with concern about inflation. Easy money policies were accompanied by inflation; and inflation was nowhere stemmed without more or less deliberate limitation of growth of the money stock. But once interest was aroused, it naturally extended to the cycle as well as to inflation. In the United States, indeed, there has been something of repetition of the I920's. A high degree of stability has been accompanied by large measure of talk about an active policy, and the authorities have often been given credit for playing an important role in promoting stability. As the experience of the twenties suggests, this fair-weather source of support for the importance of money is weak reed. Examining the present state of our understanding about the role of money in the business cycle, we shall first present some facts that seem reasonably well established about the cyclical behavior of money and related

In the October, 1961, issue of this Journal, my article on Valuation of Human Capital presented estimates of the capitalized values of expected lifetime earnings for males at various ages. At a 4 per cent rate of discount, the gross value (without deduction for consumption) of a male, age twenty to twenty-four, was $55,950. Thus, the gross value of 1,113 such men would be $62,272,350, or, rounded off, $62 million. The 1,113 is the number of Cuban prisoners from the Bay of Pigs invasion, and $62 million is the ransom demanded for many weeks by Fidel Castro!

Introduction, 349. — I. The two class model, 351. — II. The one class model: diminishing returns, 358. — III. The one class model: infinite growth with constant returns, 365. — Concluding remarks, 370