Knowledge that Transforms

U NINCORPORATED businesses comprise an interesting lacuna in the empirical knowledge of our economy, not to mention the unsatisfactory nature of theory which fails to account for the intertwining of household and firm behavior of those individuals who do not even have the legal structure of incorporation to separate their personal from their business activities. Lacking basic sources for statistical data on unincorporated business analogous to corporate income tax returns and accounting statements, economists have relied on scattered bits of information to piece together an incomplete picture of this sector. In this paper we shall examine data gathered from business respondents in past Surveys of Consumer Finances, conducted by the Survey Research Center for the Federal Reserve Board, to see what light can be shed on the structure of unincorporated business. As is well known, the Surveys of Consumer Finances are designed to give a statistical picture of the household or consumer sector of the economy and, in doing so, to provide in a rounded fashion various types of information on those households who have a whole or part interest in businesses. We have re-examined the questionnaire schedules from the I949-52 Surveys to extract as much information as possible on aspects of unincorporated business. The technical problems of using these schedules for the purposes at hand are taken up below. In each year's survey of 3,000-3,500 spending units, there are only 250-300 owners of unincorporated businesses, too few for most detailed analyses. In order to inaugurate work in this field on the basis of materials now available we have adopted, in many computations, the inadequate procedure of pooling the respondents from three or four surveys. We thereby get samples somewhat larger than 750 or i,ooo cases. The present phase of the study is, however, exploratory and preparatory to the ultimate conduct of a survey with a questionnaire tailored to our purposes and including an adequate number of cases for analysis. A motivating force behind this study of unincorporated business is the apparent existence of behavioral differences between business and other groups in the population. Statistical savings equations estimated from sample survey data indicate a hierarchical pattern in both marginal and average propensities to save: farmers are the highest savers; businessmen rank next; and non-entrepreneurial households are lowest. Various explanations have been advanced to account for the observed differences, and we shall consider these in some detail. The crucial issue is whether the differences are due to the savings and income concepts used or to alternative motivational forces and behavior patterns.' A by-product of this type of analysis is a contribution to the question whether the theory of behavior of businessmen can be compartmentalized into a theory of household behavior and a theory of firm behavior. If the compartmentalization is not possible, we are confronted with the necessity of developing a pooled theory of behavior. From the point of view of behavioral studies it may well be asked why we limit ourselves to unincorporated business. The reasons are largely pragmatic. The unincorporated sector is more of a terra incognita than either the farm or corporate sector. Legal differences in corporate organization carry some weight in distinguishing this type from unincorporated business, although it must be admitted that closely controlled small corporations may behave much like unincorporated enterprises of a comparable size. Many special features attached to farm enterprise, such as geographical location, government support, involvement in organized world markets, and so forth, lead us to exclude this sector from our present investigations.

The paper summarizes some preliminary findings of an investigation directed to the compilation on changes in the cost of living and in real wages in the Soviet Union for the years 1928, 1937, 1948, and 1952.

IN a recent paper, Domestic Production and Foreign Trade; the American Capital Position Re-Examined, 1 Professor Wassily Leontief utilizes materials drawn from his wellknown input-output studies to fill one of the more conspicuously empty economic boxes, namely: the actual structural basis of international trade. The general theoretical principle of comparative costs, long with us, indicates the advantage to be gained from a suitable allocation of productive resources in each of the countries engaged in trade. But we have had so little systematic knowledge of the productive structure of our own or of any other national economy that the application of such general theoretical principles to the analysis and explanation of actual foreign trade relationships has been practically out of the question. For practical conclusions, we have been forced back on common sense. Thus:

Dr. Novick has added his voice to the swelling chorus of exasperated voices protesting in a variety of ways, in rhyme 12 or with reason,13 the increasing use of formal language, constructs, and derivations in economic and statistical analysis, and the specialization that springs from this development. It is probable that the protest is not directed at the use of tools of long standing in economics, such as diagrammatic representation or simple calculus. Most of us, including the present discussant, have little knowledge of the battles over the usefulness of these tools, fought and decided long ago. It is rather the tools and concepts that have been brought into economics more recently, such as matrix algebra, set theory, difference equations, stochastic processes, statistical inference, and the axiomatic method, which are now the issue. There is a remarkable similarity between the present stage of economics and the situation which arose in physics in the I930's. intensive use of matrix algebra and group theory by the developers of quantum mechanics gave rise to strongly felt protests on the part of experimental, general, and even some theoretical, physicists. Alarm was expressed at the increasing tendencies to a formalism of which the function was neither generally apparent, nor even as yet fully visible to the developers of the new theories. However, since that time the clamor has abated and quantum mechanics has become an acceDted and fruitful Dart of physical theory. In fact, the headstart of physics over the political and social arts and has since become the major threat to contemporary civilization. There is nothing in the existing difficulties of communication between mathematical and non-mathematical economists-illustrated by the substantive contents as well as by the emotional overtones of Dr. Novick's comments that time and effort will not cure. Most of what needed saying on these matters was said eloquently, effectively, and wittily in the bargain, in two recent publications, by Professor Samuelson 14 and Professor Stigler.15 An equally thoughtful discussion in a more sober tone by Professor Allais 16 perhaps appeared too late to be taken into account by Dr. Novick. It is unfortunate, however, that Dr. Novick has not clarified his attitude, for instance, to Samuelson's arguments, on those points where his views appear to differ from Samuelson's. Without this clarification, mathematics as a quantitative method as used in the applied natural and physical sciences still looks to me like just one case a rather successful one of mathematics as a language form. In some of his statements Dr. Novick appears indeed to attribute to reasoning (as applied to the physical world) a power to establish the validity of propositions without reference to a set of premises. In any case, he fears that the innocent reader of economics studies may impute such powers to argument in eco* I am indebted to several colleagues at the Cowles Commission for Research in and in particular to Professor Kenneth Arrow of Stanford University, for valuable comments on a draft of this discussion. responsibility for errors is mine. 'See, for instance, F. Waugh, Applicability of Recent Developments in Methodology to Agricultural Economics, Journal of Farm 35 (December I953). 's See J. M. Clark, Economists and Others: A Plea for Communicability, Econometrica, I5 (April I947). ' Paul A. Samuelson, Theory and Mathematics -An Appraisal, Papers and Proceedings, American Economic Review, 42 (May I952), 56-66. 16 George J. Stigler, The Mathematical Method in Economics, the fourth of Five Lectures on Economic Problems, delivered at the London School of Economics (New York, I950). 16 M. Allais, L'Utilisation de l'Outil Mathematique en Economique, Econometrica, 22 (January I954), 58-7I.