Knowledge that Transforms

This paper is part of a Ph.D. dissertation submitted by the author to the Graduate College, University of Iowa, and was partially supported by the National Science Foundation Grant GS-1491. The author acknowledges the guidance and encouragement received from Professor S. Y. Wu.

N thi's paper we describe an econometric model of the American tobacco industry for the period 1949 through 1966. The model contains 19 equations and is divided into three major blocks - (1) leaf production, (2) leaf price, and (3) cigarettes. The objective is to explain the behavior of the tobacco industry over an 18-year period. Ultimately, we hope to use the model to perform policy simulation experiments to evaluate the effects of alternative governmental and managerial policies on the behavior of the industry. We begin with a brief description of the industry. Next we discuss the theoretical specification of the model and the statistically estimated equations. We conclude with some example simulation results which provide additional evidence of the validity of the model for explaining the behavior of the tobacco industry over the period 1949 through 1966

K. R. MacCrimmon, M. Toda; The Experimental Determination of Indifference Curves1, The Review of Economic Studies, Volume 36, Issue 4, 1 October 1969, Page

In 1938, the author analysed the paradoxical case of immiserizing growth where a country, with monopoly power in trade, found that the growth-induced deterioration in its terms of trade implied a sufficiently large loss of welfare to outweigh the primary gain from growth. An obvious corollary of this proposition was that, if the country imposed an optimum tariff this paradox would be eliminated. The original immiserizing growth phenomenon belongs to the class of cases where a welfare-reducing distortion in the economy is the cause of the immiseration. Since the primary cause of the immiseration is the reduction in gains from trade resulting from shifts in the foreign offer curve facing the country, even though optimal policies are being followed before and after growth, there is no possibility of devising policies to escape such immiseration. The reduction in gains from trade, required to produce immiseration, would merely have to be larger than in the case where the initial pre-growth situation is optimal and hence characterised by a higher welfare level.

There have been two broad strategic approaches to the study of economic growth. The first, exemplified by Solow's paper (1956), attempts to explain how an enterprise economy will grow, given its technology and the market behavior of its consumers. The second approach, exemplified by Ramsey (1928), attempts to determine an optimal development strategy for a fully planned economy, given its technological constraints. These approaches fail to capture a central policy problem of a modern mixed'" economy in which the government can influence investment and saving, but only indirectly, by manipulating certain basic variables like the deficit and the money supply. Our paper represents an attempt to begin the analysis of this problem.1 The very term "mixed economy" implies that there are two centers of decision making and that the preferences of the consumers and of the government are distinguishable.2 It is not at all clear where the preferences of the government come from, or even whether governments have consistent preferences of the kind we will talk about. But a constant theme of policy literature is that government intervention in the economy is effective and can be judged as good or bad for the economy without direct reference to consumer preferences. This is particularly true of policy prescriptions for economic growth. It seems to us that postulating a social welfare

The purpose of this paper is to investigate in detail the dynamics of a simple model with heterogeneous capital goods under alternative assumptions about expectations formation and saving. Before investment takes place, the entrepreneur has a choice over a large number (to be precise, a continuum) of types of machines; those which require more resources today require less labor per unit of output in the future. But once the machine has been constructed, it cannot be altered. This model raises, moreover, the interesting problem of economic obsolescence: machines may be constructed which subsequently, because of higher wage rates, are no longer profitable to operate. We shall be interested in determining how the dynamic behavior of this economy differs from that of the economy with malleable capital, as analyzed by Solow (1956) and Swan (1956) for the descriptive growth model and by Ramsey (1928) for the optimal growth model. It will be shown that, although there are fundamental differences in short-run behavior, in the long run the economy evolves much like the economy described by the simpler malleable capital models. On the other hand, econometric estimation based on the use of the malleable capital model, such as that of Solow (1957) in estimating the residual, or Arrow, Chenery, Minhas, and Solow (1961) in estimating the elasticity of substitution, may encounter serious biases from the specification error.

The welfare implications of factor flows between countries, unlike those of flows of goods, have received very little theoretical treatment to date. It is widely accepted that emigration of highly skilled people constitutes a loss to a country (Oteiza 1965, Perkins 1966) and fairly generally agreed that emigration of unskilled labor can improve the lot of the remaining populace. Yet these propositions are not self-evident.Grubel and Scott (1966b) have challenged these views, concluding that, in general, if each person is paid his marginal product, no loss accrues to the remaining population from emigration. Although arguing in the context of a "brain drain," they have analyzed only the effects of a marginal outflow of human capital. When the effects of nonmarginal migration (which the word "drain” suggests) are considered, their conclusions do not hold. (Neither, however, do those generally accepted propositions referred to in the previous paragraph.) Yet the concern over the "brain drain" reflects the fact that nonmarginal flows have been and still are by no means rare. This is true even for unskilled labor. The analysis here is carried out under the limiting assumption of classical markets (for both goods and factors) within a country, but (at least for factors) not between countries. A gain (loss) is said to occur whenever the total income accruing to nonmigrants increases (decreases). This welfare criterion implicitly assumes that the marginal utility of income is the same for all of the persons in the nonmigrating groups. It is assumed, first, that the emigration is a once and for all affair and that the supply of resources to the domestic economy is perfectly inelastic. Because of the latter assumption, this case may be thought of as referring to the very short run in which resource supplies do not adjust to the impact of the migration. Given the assumptions used, to be spelled out below, loss occurs in all cases except where the emigrants own a relatively high proportion of the capital in the economy and do not take it with them. External effects related to the emigrants, increasing returns to scale, and other conditions, can affect the results, but since the direction of such effects is usually clear, the only interesting question is whether they are quantitatively important. The other cases discussed allow for the readjustment of factor supplies and factor proportions to the migration. If there are only two factors, capital and labor, the results depend on the relative propensity to hold wealth of emigrants and nonemigrants and on whether the emigrants take their capital with them or not. Loss occurs in all cases except where the emigrants have relatively high propensities to hold wealth but leave a large part of their capital behind, or (a special case) where they own the same amount of capital per person as the nonemigrants and take it all with them. If three factors are introduced, by distinguishing between skilled and unskilled labor, the result depends jointly on the relative propensities to hold wealth, the skill levels of migrants and nonmigrants, the ease of transforming unskilled into skilled labor, and the extent to which emigrants take their (nonhuman) capital with them. In general, the conclusion is that emigration leads to loss.

Dobell and Ho have recently presented in this Journal 1 an aggregate model of the economy in which unemployment may be optimal with respect to a maximum consumption-over-time criterion. They carefully abstract from Phillips curve-type trade-offs involving the price level, or from frictional unemployment. Rather, they extend optimal capital accumulation models to include, in effect, human capital, with training costs and mortality considerationsi ntroduced. Their treatment of investment in training is analogous to wellknown results with respect to investment in physical capital. As is the case with respect to physical capital, there is some level beyond which consumption is diminished by further "human capital" accumulation. Costs of training (analogous to gross saving and investment) exceed returns, so that output remaining for consumption (output less investment in physical capital and less resources used in training) is lower than it might otherwise be. Dobell and Ho conclude that some unemployment (of "untrained" humans) may be consistent with maximum aggregate consumption through time. They mention the possibility of transfer payments to the unemployed, of course, though they are necessarily concerned with questions of production, not distribution..................