Knowledge that Transforms

think there is an analogy here between the ultimate influence of economic reasoning on military planning and the gradual influence that economists are achieving in some types of business planning. In the first place, it is easier to convince somebody that he has done less than a perfect job in making complicated decisions than to tell him that his fundamental principles are unsound, that he misconceives the simplest problems of choice. Operations research, dealing with specific problems on which the client is aware of his need for help, can be an elementary lesson in disguise, a means of drawing the client into intellectual participation in the application of economic reasonlng. There is another reason why operations research is a good medium through which to reach the heads of business and the heads of military establishments. It gives the economist some credentials. Instead of posing as a mentor or intellectual kibitzer he can pull out a slide rule and save the man a little money, and show that there is a practical value to his way of looking at problems. Lawyers, I think, serve well in the higher echelons of business and government because of intellectual qualities and training; but they get started toward the top because there is a particular kind of problem, legal problems, that they can solve better than other people. Discussion of this topic is almost bound to sound patronizing towards the military establishment; the patronizing tone needs to be counteracted. Fortunately, there is evidence in the papers collected here that military planners compare well with the other professions. Heads of business too, according to Baumol, can make mistakes that look egregious to an economist; and perhaps the nature of their business gives them less excuse than the military planners. More than that, even the heroes of this symposium, the operations researchers, are accused by Mr. Hitch, with good illustrations, not just of making errors, but of making precisely the elementary error that has been attributed to military planners. So there is nothing in what I have said that in any way contradicts Mr. Hitch when, asking what lies behind military judgment, he answers, Frequently, first rate intellectual capacity.

NATIONAL income accounting provides a broad avenue for systematically surveying the state of a country's statistical development, for identifying the most serious statistical gaps, and for appraising the reliability of the data. This function may be particularly important in areas where statistics are not regularly published, but are presented in scattered and unsystematic fashion. While this statistical mobilization and survey function is methodologically quite important from the standpoint of further studies of China's mainland economy, it is a subsidiary rather than a primary purpose of this study. Thus, the major focus is upon an analysis of the structure and flows in the economy, upon composition rather than just size of national product. Our work on the Chinese Communist economy, its performance, its capacity for growth, the relative importance of different sectors, the rate of saving and investment, the sources of saving, etc., has been greatly handicapped by the absence of national income estimates for some recent period. All of the previous estimates are for the I93I to I936 period.' Owing to the profound structural and institutional changes in the Chinese mainland economy, these would be inapplicable to the I950's even if they were methodologically and statistically unassailable. For recent years, the Chinese Communists have published some highly aggregated estimates.2 However, it is difficult to work with these, since they are not buttressed by a detailed exposition of sources and methods used. The national income concept used in this context is apparently the same as in the Soviet Union, that is, it excludes passenger transport, government, and many other types of services. In recent years, particularly since I955, we have begun to obtain much more information on various aspects of the Chinese economy, e.g., agricultural and industrial production, government budget, agricultural taxation and marketing, profits of state enterprises, levels of investment expenditure, etc. However, it has been very difficult to interpret and appraise these data since they could not be fitted into a broader framework and could not be assessed against the background of performance and intersectoral flows in the economy as a whole. In effect, -all of our investigations have suffered from the lack of an analytically meaningful yardstick. It is my hope that this study, confined to an analysis of national income accounts in one year, will at least go part of the way toward filling this gap. It should be viewed as an attempt to explore a new field of inquiry rather than to furnish definitive estimates. One of the purposes here is to apply the national accounting framework to an underdeveloped sovietized economy and to work out a method of approach to the available data which can then also be used for future estimates. There is no doubt that as the work on Chinese national income proceeds, these methods will be improved and new information will become available so that our present estimates will need to be revised. Space forbids a detailed exposition of methods and sources. Neither is it possible to discuss at length the pricing and valuation problem. These tasks will necessarily be left to a forthcoming monograph on national income and product in Communist China. Therefore, the primary purpose of this paper is to summarize the findings, to give some general indications of the methods of estimation pursued, and to bring out some of the analytical implications.

P THE major part of Dr. Backman's criticism of my article, Means, Thorp, and Neal on Price Inflexibility, is concerned with my analysis of Thorp. The essence of my position was that Thorp's data, by their very nature, suffered from three and possibly four biases; that these biases operate against appearance of any relationship between concentration and price rigidity; and that they do not appear to be offset by any biases operating in opposite direction. Dr. Backman offers a new body of data which concerns bias resulting from Thorp's inclusion of products . . such as meat, whose costs are made up largely of raw materials and whose prices may therefore be expected to fluctuate more or less in accordance with changes in prices of their raw materials. Inasmuch as prices of these products tend to be highly flexible, question at issue is their level of concentration. If they tend to have high concentration ratios, result is to provide support to my position that their inclusion in Thorp's study tends to operate against appearance of a relationship between concentration and price rigidity. Using information compiled by Means on industries and applying it to Thorp's products, Backman finds that 'raw-materialaffected' products tend to have high concentration ratios. Of 9 I products, I9 had a concentration ratio of over 8o per cent, and 42 products had a ratio between 50 per cent and 8o per cent -or a total of about two-thirds of products in this category. Dr. Backman devotes a considerable amount of attention to bias resulting from Thorp's inclusion of products which are on a delivered price basis in nation as a whole, or at least a broad geographic area and have high ratios of freight costs to delivered prices. Presumably, during depression producers in such industries tended to increase proportion of their shipments made to distant areas, thereby reducing their realized prices. As to incidence of bias within Thorp's of a cross-section, I had listed as examples iron and steel, chemicals, and non-ferrous metals (all highly concentrated products). I added that it is difficult to find within sample any products of this type which have low concentration ratios. Backman's criticism does not go to incidence of bias, but only to its extent within iron and steel, chemicals, and non-ferrous metals. This is done through comparisons of Census price declines with BLS price declines. Although in two of three groups (iron and steel and chemicals) ' he finds Census price declines to have been greater than those of corresponding BLS series (thus again buttressing my position), not too much weight should be given to these comparisons because of differences in product definitions. The next bias stems from understatement of concentration in market resulting from use of concentration ratios on a national basis for products sold largely on a local or regional basis. Here, Backman conveys impression that class of products which I had cited (stone, clay, and glass) represents totality of products affected by bias. His conclusion, of course, is that they are so few in number as not to alter the general conclusion of Crowder-Thorp study. This, despite fact that I had specifically labelled these products as merely illustrations of bias.2 With respect to fourth bias, i.e. shift during a downswing to lower-priced items within a Census product (which can occur because of excessive breadth of many of Census product definitions), Backman quotes and then attacks an hypothesis which I had advanced to effect that bias may be more important in products of high than of low concentration. In quoting me, however, he omitted sentences setting forth central reason underlying hypothesis; effect is to reduce my argument to level of assertion. The full passage quoted

Charles S. Sheldon, II, Primary Effects on Employment of Shifts in Demand from Domestic to Foreign Products: Comment, The Review of Economics and Statistics, Vol. 40, No. 1, Part 2. Problems in International Economics (Feb., 1958), pp. 106-108