Knowledge that Transforms

The many comments stimulated by our recent paper call into question its concluding assertion that no real paradigm has existed in this area of the theory of competitive supply. Several critics allege that our conclusions as to the existence of production as well as exchange inefficiencies depend on a particular form of the firm's cost function. An alternative form, said to be more in keeping with the standard assumptions of competitive theory, is shown to restore the orthodox analysis in its pristine purity and simplicity, including its implications for the efficacy of Pigovian corrective taxes. While we concede that the critics' specification of the cost function does rescue the orthodox analysis, we dispute whether their formulation more nearly reflects the traditional behavioral assumptions of competitive theory. Indeed, while legitimate argument on the point may exist, we continue to feel that our own formulation embodies the traditional assumptions. In any event, we are unconvinced that the alternative premise should be favored simply because it restores the neatness of the Pigovian prescriptions. The real issue is which of the formulations more accurately captures the behavioral rule followed by competitive decision makers.

In a recent article in this Review, Richard Zeckhauser examines the subject of income transfer and concludes that a wage subsidy scheme (WS) is superior to a negative income tax plan (NIT). Zeckhauser's results are derived from a model in which a single representative poor man faces a single, fixed wage rate. The purpose of this comment is to extend Zeckhauser's discussion by comparing the two plans in a setting of many potential recipients, some unemployable and the rest facing different wages rates. When this is done, the superiority of the WS approach over the NIT does not appear quite as clear-cut as suggested in Zeckhauser's article. The many-recipient setting requires two modifications in Zeckhauser's WS plan. First, a positive income floor is needed to cover those who are unemployable or who can work only a small number of hours. Under the scheme presented in Zeckhauser's article, with a negative basic stipend, such individuals would actually be taxed to subsidize the more affluent poor. Second, the subsidy must vary with the wage rate in such a way as to provide a smooth transition from subsidized and unsubsidized rates. The NIT deals with both those problems by providing an income floor and a break-even earnings level at which the subsidy ceases. Zeckhauser is also well aware of the problems and, with Peter Schuck, has suggested a realistic operational WS plan in another writing. The structure of that plan forms the basis for our subsequent discussion.