Knowledge that Transforms

THE very fact that an economy is underdeveloped implies that there are special limitations to the establishment of manufacturing industry. In the typical case the small size of the local market, the shortages of financial capital and skilled labor, and the availability of relatively inexpensive industrial products from abroad are among the factors that combine to severely restrict the types of industry that can be economically justified. Various criteria have been suggested by economists to assist in selecting industries under such conditions. They range from simple rules of thumb, such as those based on capital intensity and balance of payments effects,' to elaborate applications of the principles of marginal productivity 2 on the one hand and comparative costs on the other.3 This paper follows the latter approach in attempting to indicate by an analysis of industrial characteristics the extent to which various industries may be adapted to the conditions usually found in underdeveloped economies. This approach is particularly appropriate for a broad treatment of the subject. It does not require the detailed local economic data necessary for the successful evaluation of projects on the basis of the marginal product of capital, and yet it may provide a first approximation of the suitability of investments and so indicate the areas requiring more detailed analysis. The method used assumes a certain degree of constancy of industrial characteristics from country to country. This seems justified on technical grounds. The physical processes of production do impose certain characteristics upon each industry. The amount of capital required, the skills needed, and the presence or lack of significant economies of scale are all inherent in the processes themselves I as are also, for all practical purposes, the relationships between the location of the industry, its market, and its source of materials. The characteristics selected for study were the requirements of capital and skilled labor, plant size, and locational pattern. The importance of the first three is obvious. The lower they are, the more easily will an industry fit the conditions typical of underdeveloped areas. In the case of location, industries which are widely dispersed in developed countries or those oriented to sources of materials will tend to be in a strong position to compete with imports when established in underdeveloped countries. Material-oriented industries may also be successful in export trade.

Articles on economic theory are usually intended to explain to the reader what results may be expected to follow various policies or disturbances in given circumstances. The task of explanation is made difficult by the varying capacities and demands of the readers. If the theory is to be realistic, the given circumstances must reflect a great many of the complications of a real-world situation: an exhaustive account of these, whilst necessary for logical completeness, would be intolerably lengthy and boring for the reader who is well informed about the situation to which the theory is intended to apply. He can supply for himself, as obvious, many of the underlying assumptions about institutions and psychology which justify the reasoning in good non-mathematical articles on economic theory. But some readers will lack the experience or the docility to do this, and will either attempt to apply the theory to inappropriate circumstances, or will attack the writer for not giving an exhaustive account of his assumptions. Since proof is not always the most effective method of explanation, many writers are content to sketch their ideas in a manner which will enlighten sympathetic readers without attempting to convey complete conviction to anybody. The cautious economic theorist, whose overriding ambition is never to appear wrong and yet to appear in print at all, has little scope beyond the discussion of economic models. These are shadows of the real situations so drastically simplified that they can be completely described and many of their workings exactly portrayed within the compass of a single article. The logic leading from the assumptions about the model to the conclusions about how it will behave can now be made rigorous and independent of the reader's knowledge of the real world. Such models serve the useful purpose of making it possible to reach complete agreement within reasonable time: occasionally a study of them will reveal that earlier disagreements have been entirely due to a difference of intuitive assumptions about the real world. Unfortunately for the cautious theorist, his economic models will be judged according to the degree in which they appear to be relevant to the real world; so that in avoiding the appearance of being wrong, he may yet appear silly by publishing a long article whose relevance to any practical issue seems to be superficial. This danger of manufacturing mere toys is especially great since the assumptions which are most convenient for modelbuilding are seldom those which are most appropriate to the real world. Many would regard as the best and most important articles on economic theory those which reveal keen observation and judgment in choosing assumptions which accord well with facts and which are yet able to demonstrate fairly convincingly powerful conclusions of a simple nature, which suggest important analogues in the real world. They would regard the rigor of the logic and the exactness of the descriptions of the assumptions as secondary matters relating to their style rather than to their importance. The ability to judge the relevance of an economic theory and its conclusions to the real world is but rarely associated with the ability to understand advanced mathematics. An important article on economic theory is therefore likely to be wasted unless it can be set out in prose supported by the most elementary mathematics. It is obvious that there is no room in economics for long trains of deductive reasoning, 4 so that those economic models which are realistic and yet sufficiently simple to allow

RECENT contributions by Professors Evsey D. Domar I and Robert Eisner2 have analyzed the conditions under which current depreciation allowances equal, exceed, or fall short of current replacement requirements. The (substantially identical) findings of both authors may be briefly summarized as follows: In a seasoned plant,3 the ratio between replacement needs and depreciation charges depends primarily on the direction, as well as the rate, of the change in (a) gross plant size and (b) the general price level. If prices are stable, straight-line depreciation charges based on original cost and spread evenly over the true service life equal current replacement in a stable plant and exceed it in a growing plant. Under price inflation they keep below replacement requirements in a stable plant, whereas in a growing plant this may or may not be so, depending on the growth rate on one hand and the rate of inflation on the other. On the basis of the formula by which both Domar and Eisner have attempted to describe the algebraic relationship among depreciation, replacement, and growth, it would appear that, if we have stable prices, a constant rate of growth of about the size that has characterized the American economy for a long time, and an average service life of capital assets roughly in accordance with American reality, depreciation charges computed in the manner indicated must exceed replacement requirements by a considerable margin. This would mean that these allowances, to the extent they are earned and saved, can finance a sizable portion of the expansion. A corollary result would be that, under the stated conditions of growth and average asset life, it takes a heavy inflation to wipe out the excess of depreciation charges over replacement needs, and a very heavy one to turn the excess into a deficit.

mT HERE is now no danger of confusing one Paley with another. But in nineteenthcentury England Paley's Evidences was a household word. To pass an examination on this theological treatise was obligatory for Cambridge undergraduates; with certain alternatives allowed, it has remained an examination text until comparatively recent times. A direct descendant of the famous eighteenthcentury ecclesiastic was Mary Paley, who married Alfred Marshall, and appears as joint author on the title page of The Economics of Industry, published in I879. A distinguished figure linking modern Cambridge with its past, she survived into the I940's. To the modern world, however, the name of Paley means the long and sumptuously produced document whose official title is A Report to the President by the President's Material Policy Commission, of June I952. It is not intended as a condemnation of the report, but rather as a commendation, to say that its primary object was to influence public opinion. To a reader outside the United States, it would appear that the magnificence of its production, the skillful choice of words, and still more of diagrams, whereby simple but important points are unobtrusively yet firmly driven home to the mind of a reader not accustomed to economic literature, all seem to indicate that it was designed to influence business leaders and Congressmen, who are accustomed to having a great deal of printed matter put before them and are only willing to read that which conforms to the highest standards of presentation. This otherwise plausible hypothesis, however, becomes very difficult to sustain when one considers the extraordinary length of the document. One has to assume that one's hypothetical business leader or Congressman, once his interest is really aroused, is willing to go on reading for days. Not that any of the text can be called superfluous; though some of it is more specifically addressed to economists and statisticians, some to legislators. And least of all let us decry the imputed objective. That the United States in the coming generation, in respect of a number of important raw materials at any rate, will have to be an importer on a largely increasing scale is a truth whose comprehension by legislators and businessmen is urgently necessary. It is indeed a truth of such importance that, if it fails to be properly disseminated and comprehended, the entire world may be thrown into disorder. Immediately on its publication, the report did succeed in attracting a great deal of attention in every quarter and in many countries, and comments and reviews in popular and other periodicals. At this date, no summary is necessary. But a few postscripts may be in order. We may open the discussion with what at first sight appears to be one of the most important commodities, one moreover where the question of imports cannot possibly arisenamely water. Here is American prodigality at its most striking. Water consumption has risen from 550 gallons per head per day in I900 to i ioo. now. Of the present day figure, it is true, slightly more than half is accounted for by irrigation of crops. But even the remainder, over 500 gallons per head per day, is enormously high. In European cities, consumption of water for all purposes generally does not exceed 50 American gallons 1 per head per day. Even modern cities in hot climates, in Australia and South Africa, rarely exceed a figure of I00. We see the matter in a different light, however, when we realize that, of the entire use of water apart from irrigating crops, industry takes 8o per cent, household and farm use only 20 per cent. We find a further concentration when we ascertain that much of the former figure represents the enormous demands of steel, chemicals, petroleum, and cooling of electric power generators (for this latter purpose brackish water, which could not have been used for any other purpose, is often used).