Knowledge that Transforms

On the fiftieth birthday of my Foundations of Economic Analysis, a deluxe edition of it was embalmed in the German Klassiker der Nationalokonomie series alongside of Adam Smith, Eugen von Bohm-Bawerk, Irving Fisher, and many other illustrious suspects. With it, as customary, was published a slim volume in German, a Vademecum, with review essays by Jurg Niehans, Carl-Christian von Weizsacker, and a foreword by the editor Bertram Schefold. By invitation, like Tom Sawyer at his own funeral, I provided for German translation my own recollections under the title "How Foundations Came to Be." Here is the English original, slightly abridged; for some technicalities, readers are referred to the full German text. I remembered much, and, with the perspective of time, learned not a little.

Many questions in economics can be fruitfully analyzed in the framework of matching models. Until recently, empirical work has lagged far behind theory in this area. This review reports on recent developments that have considerably expanded the range of matching models that can be taken to the data. A leading theme is that in such two-sided markets, knowing the observable characteristics of partners alone is not enough to credibly identify the relevant parameters. A combination of richer data and robust, theory-driven restrictions is required. We illustrate this on leading applications. (JEL C57, C78)

SOCIALISM, according to its proponents, has diverse virtues, but not least is the notable degree of equity that it is seen as assuring in the assignment of claims to the community's income. With the substantial replacement of private by public ownership of the means of production, it is held, a cardinal source of inequity in incomes under capitalism ceases at once to be operative. Under socialism the intimate relation between income and work done that prevails under the rival system supposedly will also give way soon or late to the alternative principle, proclaimed long ago as the only equitable one, of distributing the community's output simply according to need. In the socialist world today, as no one must be told, incomes hardly conform to need anywhere. The question remains, though, as to how far socialist countries may have progressed toward implementation of that norm. That is a matter of interest even to those who do not subscribe to such an egalitarian principle. What is essentially at issue, however, is the extent of income inequality in socialist countries and how such countries compare in that regard with the mixed economy countries of the West. Those are matters on which socialist countries have not always been especially forthright. That is an interesting fact in itself, but it necessarily obstructs accurate appraisal of income inequality. Even where relevant data on incomes are available, their meaning is often obscured by complexities of prevailing commodity distribution arrangements. Pervasive imbalances in the retail market are the best known but not the only example of such complexities. These difficulties are encountered in inquiring into comparative income inequality under socialism everywhere. They seem especially pronounced, however, in the case of the chief country where that system prevails. The USSR, though, is of particular interest as the country where

This paper reviews the literature on affirmative action in undergraduate education and law schools, focusing especially on the trade-off between institutional quality and the fit between a school and a student. We discuss the conditions under which affirmative action for underrepresented minorities (URM) could help or harm their educational outcomes. We provide descriptive evidence on the extent of affirmative action in law schools, as well as a critical review of the contentious literature on how affirmative action affects URM law-school student performance. Our review then discusses affirmative action in undergraduate admissions, focusing on the effects such admissions preferences have on college quality, graduation rates, college major, and earnings. We conclude by examining the evidence on “percent plans” as a replacement for affirmative action. (JEL I23, I26, I28, J15, J31, J44, K10)

JHE CLIOMETRIC revolution in ecoknomic history wedded neoclassical economics and quantitative methods in order to describe and explain the performance of economies in the past.' Economic history gained in rigor and scientific pretension, but at the expense of exploring a much more fundamental set of questions about the evolving structure of economies that underlies performance.2 Cliometricians have turned their backs on a long tradition stretching back from Joseph Schumpeter to Karl Marx to Adam Smith. These scholars regarded economic history as essential because it added a dimension to economics. Its purpose was to analyze the parameters held constant by the economist. If economics is a theory of choice subject to specified constraints, a task of economic history was to theorize about those evolving constraints. The failure of economic historians to provide their colleagues with a historical dimension to their perspective has reduced the effectiveness of economists in dealing with contemporary problems. Failure of economists to appreciate the transitory character of the assumed constraints and to understand the source and direction of these changing constraints is a fundamental handicap to further development of economic theory. The challenge to the economic historian which has equally compelling implications for the economic theorist is to explain the transformation of the structure of the American Economy in the past century.3 In the rest of this essay I shall explore this issue in order to specify some of the dimensions of the economic historian's task.

This essay tries to bring out some of the complexities that are overlooked in the usual treatment of the state in the institutional economics literature and supplement the latter with a discussion of some alternative approaches to looking at the possible developmental role of the state. It refers to a broader range of development goals (including the structural transformation of the economy) and focuses on problems like the resolution of coordination failures and collective-action problems, the conflicting issues of commitment and accountability and the need for balancing the trade-offs they generate, some ingredients of state capacity and political coalition building usually missed in the literature, the possible importance of rent sharing in a political equilibrium, the advantages and problems of political centralization and decentralization, and the multidimensionality of state functions that may not be addressed by markets or private firms. (JEL D72, H11, H77, K00, O17, O43, P26)

JN THE LIFE HISTORY of most sciences there are movements toward the study of larger aggregates or toward the detailed study of smaller and more fundamental units. My impression is that in most fields the movement toward the study of more micro units has predominated. Yet in economics in the 1930's the movement was in the macro direction. Both physics and biology (in the last three decades) have made great strides by studying smaller and smaller entitiesphysics by studying more minute fundamental particles and biology by studying the fundamental elements determining genetics. In a general sense economics has not been moving in this direction, although some work of this nature exists. The purpose of this paper is to review some samples of the work that exists and to argue that this area must become a major field of economic research and study. The question of how individuals in multiperson firms influence firm decisions seems like such a natural question to ask that it is amazing that it is not part of the formal agenda of economists as a profession. Of course it has been asked, but not by present-day economists in their professional capacity. In other words, micromicroeconomics has never become an established field. For the most part, theorists have not only not raised this question, but they have continued to develop micro theory in such a way as to discourage economists from raising this question. Part of the reason for this lies in the maximizing and optimizing biases of conventional micro theory, and part can be ascribed to the consequences of the long period required to refine the theory so that elements that did not fit the basic model were discarded.'

This article studies traditional and modern theories of executive compensation, bringing them together under a simple unifying framework accessible to the general-interest reader. We analyze assignment models of the level of pay, and static and dynamic moral-hazard models of incentives, and compare their predictions to empirical findings. We make two broad points. First, traditional theories find it difficult to explain the data, suggesting that compensation results from “rent extraction” by CEOs. However, more modern “shareholder value” theories, that arguably better capture the CEO setting, do deliver predictions consistent with observed practices, suggesting that these practices need not be inefficient. Second, seemingly innocuous features of the modeling setup, often made for tractability or convenience, can lead to significant differences in the model's implications and conclusions on the efficiency of observed practices. We close by highlighting apparent inefficiencies in executive compensation and additional directions for future research. (JEL G38, M12, M48, M52)

The objectives of this review are threefold: (1) to characterize the empirical literature on the cyclical behavior of real wages; (2) to identify the sources of the differences in results across studies; and (3) to enumerate key factors that determine the cyclicality of real wages. Given a host of measurement and methodological issues, drawing firm conclusions is difficult, but several generalizations can be made. The estimated cyclicality of real wages depends crucially on the time period of analysis and the choice of whether to examine the production or the consumption wage. Composition effects play an important but complicated role as well.