Knowledge that Transforms

Two recent books evaluating modern economics from the standpoint of the philosophy of science are examined: Hollis and Nell, Rational Economic Man, and Rosenberg, Microeconomic Laws. The former, severely critical of orthodox economics, advocates a philosophy of radical rationalism and construes Marxian economics to be its necessary consequent. The latter, adopting an empiricist philosophy of science, concludes that orthodox microeconomics rests on sound foundations. The paper goes on to make some remarks on the role of the philosophy of science as a scholarly discipline.

Optimization of the part of consumers is shown to imply that the marginal utility of consumption evolves according to a random walk with trend. To a reasonable approximation, consumption itself should evolve in the same way. In particular, no variable apart from current consumption should be of any value in predicting future consumption. This implication is tested with time-series data for the postwar United States. It is confirmed for real disposable income, which has no predictive power for consumption, but rejected for an index of stock prices. The paper concludes that the evidence supports a modified version of the life cycle--permanent income hypothesis.

Gould and Segall argued that the introduction of a third, composite good vitiates the Alchian and Allen (A-A) theorem that a common charge on two substitute goods leads, real income held constant, to a relative increase in the consumption of the higher to lower quality commodity. Using Hicks's third law, however, it is demonstrated that the direct substitution effect tends to dominate the interaction effect with the third good, if the two substitutes are close. Absolute changes are also investigated and some operational propositions offered with casual supporting observations. A-A's proposition is shown to be a useful price-theoretic construction, though not a direct implication of the law of demand.

In order to estimate the effects of unions on worker productivity, a Cobb-Douglas production function is modified so that unionization is included as a variable. The resulting functional form is similar to that used to isolate the effect of worker quality in previous studies. Using state by two-digit SIC observations for U.S. manufacturing, unionization is found to have a substantial positive effect on output per worker. However, this result depends on two important assumptions which we cannot verify directly; attempts to relax these assumptions are not conclusive.

We show that limitation of firm size caused by loss of control across hierarchic levels depends crucially on the nature of the supervision process. If the employees cannot identify the times at which their performance is monitored, there is no limit imposed on the firm size by the heights of the hierarchical structure. "Loss of control" may impose such a limit if the employees are aware of the times at which they are being monitored. The analysis also shows the rationale for hierarchical wage differentials for essentially identical employees.

A much smaller fraction of professional men live in two-career families than do professional women. The restriction that couples accept jobs in the same geographic location thus weighs more heavily against professional women than against professional men. A probabilistic model of the placement process is developed that predicts the geographic distribution of female professionals that would be observed in the absence of employer discrimination. This distribution is much more than proportionally concentrated in large urban markets. It is concluded that the proportional guidelines employed in the Affirmative Action program discriminate against employers located in small labor markets.

[The excess burden of a tax is the diminution of utility above that which would have occurred had the tax been collected as a lump sum. Usually, excess burden is measured by a method which relies on a second-order approximation to an arbitrary utility function. In this paper, excess burdens are computed using explicit utility functions and the results compared with those obtained from the second-order approximation.]

According to the Easterlin hypothesis, the positive relationship between income and fertility is dependent on relative income. The hypothesis presumes that aspirations are significantly determined by family background. If income is high relative to aspirations, individuals will tend to have more children. The definition of variables as sibling differences controls family background and yields a measure of relative income. Analyzing the Kalamazoo Brothers sample in this fashion produces no evidence in support of the hypothesis.

This paper studies the transmission of economic fluctuations under flexible and fixed exchange rates. In a model incorporating short-run and long-run Phillips curves, two channels of interdependence are studied: one through the balance of payments and the other through changes in the terms of trade and wage-price spirals. Under fixed rates both channels work; under flexible rates the second channel still works, although the first is blocked. While a recession in one country tends to be transmitted as a recession in the other under fixed rates, it tends to be transmitted as stagflation in the other under flexible rates.

This paper analyzes the dynamic response to a relative price change in a two sector model when the movement of capital from one sector to another requires the use of economic resources. The adjustment process is analyzed as a problem in investment theory; owners of capital balance the costs of capital movement with the expected future benefits. The expectations of capital owners concerning future rental rates in the two industries are shown to play a critical role in determining the efficiency of the adjustment process. When expectations are "rational," the competitive adjustment path maximizes the present discounted value of the economy's final output. When expectations are not rational, the competitive adjustment past is distorted and diverges from the socially optimal path. The paper also analyzes the implications of different assumptions concerning the technology of the adjustment process, establishing that both the adjustment path of the economy and its ultimate long-run equilibrium depend critically on this element of technology.