Knowledge that Transforms

M OST economists agree that the primary source of cyclical instability is to be found in the determinants of investment behavior. Current cycle theory largely takes the following simple form. Today's value of output is equal to today's aggregate demand, which is the sum of consumption and investment (plus government expenditures). Consumption is assumed to be more or less inflexibly tied to current or past income. Hence the essence of the problem is to find the determinants of current investment. These determinants, so far as they are considered endogenous, are usually taken to be either the rate of change in total output (the acceleration principle) or the level of total output and the size of the total capital stock. The business-cycle models which result from this approach are open to a number of objections. They are unable to account for the important differences among past cycles; they abstract from most of the complexities of economic growth; they ignore some features of the cumulative process which observation suggests may be important in shaping the course of the cycle; and they yield explanations of investment behavior which, as often as not, do not seem to fit the facts. The purpose of the present paper is to suggest a different approach to the study of economic fluctuations one which links cyclical change more closely to the underlying forces making for growth and structural change than is usually the case today.2 First, we shall examine whether cyclical fluctuations are likely to take place in the absence of significant variations in (long-term) investment. Following this, we shall attempt to lay the groundwork for a theory of investment behavior in terms of the opening up of investment opportunities and the varying inducements to exploit these opportunities. The analytical framework resulting from these two sections is then used to elaborate and refine the usual distinction between major and minor cycles. In a concluding section, we shall try briefly to evaluate this way of looking at the causes of cyclical instability.

This set of studies investigates the nature and magnitude of the redistribution of income throughout the world. Each of the distinguished authors addresses questions as complex as how governmental social policies effected the redistribution of income and what were the consequences.

Mitchell O. Locks, The Influence of Pattern-Bargaining on Manufacturing Wages in the Cleveland, Ohio, Labor Market, 1945-1950, The Review of Economics and Statistics, Vol. 37, No. 1 (Feb., 1955), pp. 70-76

ONE of Keynes' less controversial judgments has seemed to be his recommendation that the scope of central bank open market dealings be widened to include a greater variety of debts. Professor Hansen has reminded us that within the last two years, by design rather than through the legal hampers and traditional straitjackets that Keynes deplored, the monetary policy of the Federal Reserve System has reverted to the limited base of short-term dealings.' Though the issues are clear and the conflict joined, and despite the importance of the problem from the standpoint of public policy and correct principle, it is most distressing that the question has largely escaped scrutiny in the professional journals. We are indebted to Professor Hansen for provoking discussion and inviting rationalization of the behavior of responsible officials. My comments are directed mainly to the open market policy of dealing in the short-end of the market rather than to Hansen's perceptive review of postwar monetary events and his efforts to impart perspective and to correct loose generalization and interpretation of policies over this period. Several of my remarks aim only at supplementing his views, at some places giving added emphasis and at other points elaborating further implications of the present program. On one matter there may be a difference of principle. Partial abdication of fiscal agent functions. Professor Hansen indicates that, whereas new private flotations enjoy underwriting support, the instruction that the Open Market Committee refrain from dealing in comparable maturities during a period of Treasury financing constitutes an abdication of fiscal agent functions performed by the Federal Reserve System for the Treasury. Hansen inclines to the position that this abdication is only partial, for the System professes its readiness to correct a disorderly situation. Considering the vagueness and hedging of the latter injunction, and the fact that for over a month prior to the mid-Februarv I 0o g financing the I'4 ner cent issue of 1978-83 was permitted to slide by over three points without intervention, the current abdication seems to be more rather than less complete. It is astonishing that this policy emanates from individuals who have derived much of their experience from investment markets, as in the case of Chairman Martin, a former President of the New York Stock Exchange. It would be extraordinary for investment bankers to relinquish their right to stabilize the market while in the throes of a new financing venture. If the principle is sound in private finance, the Open Market Committee directive is an unnatural restraint to place upon the Reserve System in its role as fiscal agent for the federal government. Perhaps it is an opening wedge to challenge all investment-stabilizing actions. The proposal is hardly calculated to whip up great enthusiasm among investment bankers best informed on the practice. The Open Market Committee attitude is not without bearing on Treasury financing. Without the occasional assistance of the Reserve System an encore for the bond-market consternation of late April I953, when the 314 per cent, thirtyyear offering went to a discount before issuedate, is conceivable. If such a situation were to occur again while memories of this debacle are still fresh, the abstemious ordinance might pave the road for future lagging subscriptions and financing failures. To surmount the artificial handicaps placed in its path the Treasury would have to underprice a new issue, prof erring terms more generous than the underlying market facts would warrant. Bonuses and premium gratuities would be the unwitting result of Reserve primness.

A RECENT study has attempted to provide a critical evaluation of some of the main savings, or consumption, functions proposed for the United States and has assessed the predictive accuracy of different forms of seven of these functions as applied to the early postWorld War II years, I947 to the first half of I950.' The results of this study are subject to the limitation of being based, in the main, on predictions made over a relatively short period of time and one in which more usual peacetime consumption-savings patterns may have been distorted by after-effects of the war, e.g., shortages of consumer durables. It is the purpose of this paper to test the validity of these earlier results in the light of the more recent trends in consumption and savings. In view of this objective, we shall begin by outlining the plan of the empirical work in the earlier study and summarizing the results obtained. Section II, the bulk of this paper, is devoted to an extension of the empirical analysis in the earlier study to I950-53; there is an appendix at the end of the paper providing additional details on particular questions. In section III there is a comparison of the results obtained for this later period with those for the earlier years, and a new set of conclusions is propounded.

A LTHOUGH the symmetry of the relation2i ship between factor and consumer markets has been questioned in studies of wage differentials,' little investigation has been undertaken to determine the directness of that relationship and the degree of symmetry which may exist. The findings of this paper offer some evidence for the conclusion that the relationship is inverse, and that where earnings are low, the cost of living tends to be high. An intercity comparison of both earnings and the cost of living indicates that the magnitude of the earnings differential among the large cities of the United States is three to four times that of the cost-of-living differential. The data presented in Tables i and 2 show an inverse relationship between earnings and cost of living which suggests that the worker in substandard earnings areas is forced to reconcile his position in terms of a lower standard of living than that prevailing in more advantageous factor markets. Table i shows the differentials in the earnings of direct labor 2 in 35 cities throughout the United States. Table 2 shows the cost-of-living differentials in 33 cities. Differentials are based on the relationships of local earnings and living costs to those in New York City during the period of full employment in I95i. The cities included are grouped into five regions: New England, Middle Atlantic, South, Middle West, and Far West. Both earnings and cost-of-living information are not available in all cases, but 23 cities common to both sets of data provide direct local comparisons. Some discrepancies in the timing of the collection of raw statistics should not be considered as hindering the reliability of comparisons, since it is proper to assume that these differentials are constant, at least in the short run.3 Differentials in the earnings of direct labor are presented in Table i as percentages of average hourly earnings in New York City for October I95 I.4 Average earnings for the month were computed by dividing the monthly earnings reported by the total number of hours worked.5 These were then converted to a simple index and ranked in column two. The method of computation included payments for premium hours nd such incentive wage systems as happen to have been in effect during the month of October. While it is not the purpose of this paper to discuss in any detail the circumstances which are responsible for the position of particular communities in the rankings, it should be noted that intercity comparisons reflect heterogeneous influences which provide a useful basis for investigation of the diverse factors involved in arnings differentials. The rankings retain the