Knowledge that Transforms

T is widely held that from the postwar discussion of monetary policy there emerged a new theory of quantitative control.' Over the past few years, much has been made of particular aspects of this theory, for example its emphasis on the availability of credit or the rationing of credit. But this in itself has tended to obscure the fact that this theory is really a composite of a number of lines of argument, each of which is based on a distinct set of considerations. In light of this, it would seem that what is required is a critical examination of the over-all structure of the doctrine. That is the purpose of this essay. In the following pages this theory is briefly described, and then interpreted in terms of conventional supply-demand analysis. Such an interpretation makes possible a convenient synthesis of the many hypotheses involved in the theory, thereby facilitating the task of exploring its internal consistency.

IN recent years, considerable interest has been shown in the growth pattern and turnover rates of the largest firms. Instead of viewing the giant firm with the suspicion born of classical and neo-classical market theory, exponents of the new competition have argued that giant firms are the engines of eco-* nomic progress.1 The role of market forces in determining the growth of firms has been supplanted by the management function.2 This current interest in the giant firm adds relevance to the examination of the hypotheses which are to be tested in this paper.3 The first hypothesis is concerned with the causes of growth of the largest firms, while the second examines the turnover rates of the giants.

JNFLATION is colloquially described as a situation in which the flow of purchasing power is increasing faster than the flow of goods and services with consequent price increases. Most remedies for inflation stress contraction of the flow of purchasing power. In this article I shall argue that these remedies often need to be supplemented by and sometimes even replaced by measures to increase the flow of goods. In the United States, inflation is intimately bound up with the wage-price spiral, and persistent inflationary tendencies appear to present a difficult, if not insoluble, dilemma. Undoubtedly wage and price increases can be prevented by a sufficient contraction of demand. But contraction of demand may have to go so far as to conflict with the political imperative to maintain reasonably full employment. The authorities may thus face a serious conflict between the objectives of full employment and price stability. They may be forced to turn their remedies on and off in the hope that by pursuing first one objective and then the other a reconciliation may be achieved. I believe that the dilemma is less acute than it appears and that a resolution may be found if the inflation problem is handled in the context of a growing economy. But to do this a combined use of the available control instruments, and possibly of additional ones, is needed.'

1CONOMISTS are generally aware of the impact of fiscal policy on the income stream and have prescribed the appropriate fiscal measures for expanding or contracting the flow of income. They have also given attention to the expenditure-stabilizing effect of the net stock of privately-held salable assets, when levels of prices and income fluctuate. However, they have paid little attention to the role of fiscal policy as a generator or destroyer of such assets. A budgetary surplus or deficit always has an impact on the balance sheets of the private sector, in addition to its impact on the income-expenditure accounts. This discussion is devoted to the effect of fiscal policy on the asset items in private balance sheets and the implications of this for the generation of income. The first section attempts to show that the government debt is one of the variables determining household expenditure decisions. From this it is shown that fiscal deficits or surpluses have cumulative effects on national income which are not present for corresponding magnitudes of private expenditure. The second section considers how the public debt should behave in order to keep national income growing at the full-employment level. It shows not only that the public debt must continue to grow in order to maintain full employment, but that for many rates of real income growth it must grow at a faster rate than income itself, given the model here considered.