Knowledge that Transforms

TO AN ECONOMIST the study of economic development is in large part an investigation into the mechanics of capital formation. At least in theory, the output options open to a developing economy are more restricted in the case where possibilities for obtaining foreign exchange via trade or aid are relatively limited. Society's menu of choices is even easier to enumerate if it is further assumed that labor is surplus in the sense that labor supply is a non-binding constraint on economic development now and for some time to come. These conditions are roughly descriptive of the historical situation confronting some large underdeveloped nations wishing to industrialize rapidly; the U.S.S.R. in the thirties is a classic example. In such situations the key to economic growth is the capacity of the domestic capital goods sector. Increasing that capacity by ploughing back a high proportion of investment goods for purposes of self-reproduction will permit high consumption levels eventually, but not just in the near future. The reverse is true if, by bolting down a substantial percentage of investment goods there, the consumer goods sector is presently expanded. These thoughts underlie a very interesting model of economic development first propounded by the Soviet engineering economist G. A. Fel'dman in 1928 [7] 2 We are indebted to Professor Domar [6] for pointing out the significance of this model and for relating it to current growth theory as well as to the Soviet industrialization debate of the twenties. The same model has been independently formulated by the Indian statistician P. C. Mahalanobis [9] who places somewhat greater emphasis on making it operational enough to serve as a rough guide of sorts for Indian long term planning.3 In its simplest form this model splits an economy into two departments, investment and consumption. Investment goods are general ex ante and can be used to increase the capacity of either sector. But ex post, capital is specific to the

[The paper is partitioned into two parts. The first contains a description of an "economic system" which allocates resources in exchange environments when consumer preferences are not selfish. This section also contains the conditions under which this economic system allocates resources optimally. The second part utilizes the allocation process described above, as well as four variants, to examine the concepts, and formal definitions, of informational decentralization and efficiency found in Hurwicz [8]. It is shown that various types of trade-offs exist between optimality in resource allocation and informational decentralization.]

[A linear programming model is used to estimate the cost of achieving certain air quality goals for the St. Louis airshed. The choice set of control methods is based on engineering data compiled by the author. The model is used to generate a set of alternative air quality levels for sulfur dioxide and particulates which can be attained at the same total cost as the goals initially considered. This frontier of trade-off possibilities is compared to a particular social indifference curve which is based on medical considerations. It is found that both curves are concave in the same direction.]

[This paper describes empirical laws (formulated abstractly, as axioms) that lead to simultaneous measurement of utility and subjective probability under circumstances where decisions delimit which states of nature may occur.]

[The paper defines and analyzes a functional form for a one-output, many-factórs production function, which is homothetic (or homogeneous), and exhibits CRES; that is, its ES (Allen-Uzawa elasticities of substitution) vary along isoquants and differ as between pairs of factors, but the ES stand in fixed ratios everywhere. Given data on factor prices, quantities, and output, and assuming competitive costminimization, the parameters of CRESH are estimable from a system of log-linear equations, each containing at most three independent variables. The CES function, as well as its limiting forms (the Cobb-Douglas (σ = 1), Leontief (σ = 0), and linear (σ = ∞) functions) are special cases of CRESH. The Mukerji CRES function has an identical unit-isoquant surface, but it is not homothetic. Appendix A analyzes the Mukerji function. Appendix B derives the (implicit) CRESH cost function.]