Knowledge that Transforms

SPECULATIVE activity may contribute to the stability of price, or it may promote and feed on instability. But how may one determine, for a specific market over a specific period of time, whether on balance the activities of speculators have been stabilizing or destabilizing? It has been maintained by Milton Friedman that destabilizing speculation must be unprofitable since it involves selling at low prices and buying at high prices.' If this proposition were valid, and if it were also true that stabilizing speculation is always profitable (because it involves buying at low prices and selling at high), the question would take a more tractable form. For then the empirical investigators need only identify the sign of speculative profits: if they were positive, the speculators must have contributed to price stability; if profits were negative, speculators must have added to instability. Unfortunately, neither proposition is generally true; counter examples will be produced in sections 2 and 3. They may be untrue, however, only under conditions which in practice are most unlikely to be satisfied. If this were so, speculators' profits might yet serve as a useful, if not infallible, guide to the stabilizing or destabilizing effects of speculators' activities. This possibility is examined in Section 3. In Section 4 there is outlined an alternative, more direct approach to the problem of determining the effects of speculation on stability. It possesses the incidental but substantial advantage of not requiring the direct measurement of speculative profits and losses.

T HE migration of Puerto Ricans to the continental United States (primarily to the New York City region) represents a most striking and important example of population redistribution. The purpose of this study is not only to chronicle some of its important aspects, but also to make use of a fruitful method for relating migration to economic incentives. In it we treat population from the point of view of its function as labor supply; consequently this is a study of net migration. The movement of population from Puerto Rico to the United States mainland provides us with an unusual natural experiment something which is very hard to find in the social sciences in that both the source and receiving areas of movement are readily definable, and information is available over a series of years. Perhaps it is crude to think of the United States and Puerto Rico as points which are receiving and source areas of migration, respectively, but a study of the geographical distribution of the origins and destinations of migrants must follow this preliminary analysis. Of course, since Puerto Rico is politically a part of the United States there are no legal barriers to hinder the flow of population. The theoretical framework which forms the basis of this examination is straightforward. It assumes that migrants change homes in order to improve their lifetime earning prospects; against the expected gains from moving must be balanced various pecuniary and non-pecuniary costs. Examples of the pecuniary costs readily come to mind. Among the most important are transportation and the loss of earnings to migrants while they are travelling and initially unemployed in the receiving country. Nonpecuniary costs involve, among other things, the psychological discomforts of changing social environments. We should expect that changes in the difference between the gain and cost of moving will affect the quantity of migration, and, over the length of time considered in this paper, that the pecuniary factors have fluctuated more widely and systematically than the non-pecuniary. Therefore, a discussion of the migration primarily in economic terms should prove fruitful. The basic model we have used is inspired by a simple empirical observation: in the short run, relative hourly wage rates in the source and receiving areas appear to have but little effect on population flows, but employment rates or job availabilities have an important effect. Consider a potential migrant.' He will probably derive some notion of the gain to him from moving by observing the interregional pattern of wage rates over some length of time, and he is unlikely to be influenced greatly by day-to-day, or even year-to-year fluctuations in these rates. But having decided that the longrun gains outweigh the long-run costs, the potential migrant must decide exactly when to quit his old job and board plane or boat. This will probably depend largely on the difficulty of financing the trip. It is not surprising that, especially when funds for moving are scarce, fluctuations in the short-run cost of migration will be closely associated with fluctuations in migration, itself.2

In both the United States and the United Kingdom the economics literature of recent years has been replete with discussions of the compatibility of price level stability and high employment. Interest in this broad subject has in turn stimulated renewed interest in movements of money wage levels, and particularly in the set of relationships between unemployment conditions and money wage levels. The general relevance of this type of empirical research for the "cost inflation" controversy and for the formulation of stabilization policies has been discussed at length elsewhere and so will not be considered in detail here. The main objectives of the present paper are fourfold: (1) to clarify the nature and significance of recurrent procedural problems involved in attempts to relate wage behavior to unemployment conditions, especially when only annual data are available; (2) to set forth statistical results obtained for the United States economy for the period 1900-1958 taken as a whole and for various sub-periods, with the level of unemployment and changes in the level of unemployment used as the main explanatory variables; (3) to consider in some detail the a priori basis for expecting a relationship between the rate of change of money wages and one particular explanatory variablechanges in the level of unemployment; and (4) to make some admittedly rough comparisons between the American results and the British results.

highly abstracted purely competitive model A of a factor market has as an end result an equalization of factor prices throughout the market. Consequently, the persistence of sizeable regional wage differentials in a national labor market calls for an explanation. An often offered one is that there are barriers to the free flow of resources between regions, barriers such as a lack of labor mobility, high moving costs, lack of labor market information, etc. Such an explanation is suggested by Cairnes' concept of non-competing groups 1 and receives support from the findings of the labor market research of Reynolds, Kerr, et al.2 However, explaining regional wage differentials by such a device is not entirely satisfactory. To a sizeable extent this approach is a question-begging one. While it provides considerable insight into the factors which serve to perpetuate a wage differential, it does not afford much that is helpful with respect to determining the forces which generated the initial differential. After all, the existence of regional wage differentials insistently demands an explanation primarily because it represents a deviation from the expected result of a competitive market. Explaining such a differential by merely pointing out that the market is imperfect is next to no explanation at all. This is tautologically implicit in the conceptualization of the competitive market. If a competitive market eliminates differentials and differentials persist, then the market is obviously not competitive and barriers to the adjustment process must exist in order to perpetuate the differentials. This suggests that an appropriate point of departure for attempting to explain the existence of regional wage differentials is to accept as a working proposition the assumption that barriers to the free flow of resources between regions do exist. Given this, the task of accounting for regional wage differentials becomes one of determining what forces work to create differentials. Several alternative explanations may be considered. Trade union representatives would argue that regional wage differentials are created by the ability of employers to exploit an unorganized labor force. Others have suggested that an explanation may be found in a more plentiful labor supply or a deficiency of product demand 3 while a fourth possibility is that the production functions vary interregionally so as to produce a lower marginal value product schedule for the workers of one of the regions. In this paper an attempt will be made to shed some light on the nature of regional wage differentials by developing suitable empirical tests for several of the suggested explanations of their causes. As a vehicle for discussion, the best known of the regional wage differentials, the North-South one, will be treated.

FEDERAL spending to maintain defense establishments and personnel is an important segment of the Hawaiian economy. Some idea of the magnitude and relative importance of this can be seen if we look at a breakdown of Hawaii's income from the mainland.' In I959, Hawaii earned $953 million in mainland dollars. Of this amount, $338 million, or 35 per cent, was in military expenditures.2 The importance of defense spending is also reflected in the data on employment shown in Table i. This table shows that the defense sector accounted for i8.i and 32.8 per cent of total employment in Hawaii in I939 and I955.3 This study was conducted to obtain a quantitative measure of the economic impact of changes in military spending on the Hawaiian economy. Findings as a result of this research and detailed support of them are presented below. The measure derived is the employment multiplier. This shows the change in the total employment of an economy which results from a change in the number employed in one sector of the economyin our case, changes in the defense sector. The employment multiplier was computed rather than the related and more commonly used measure, the income multiplier. The latter, which describes the change in income due to changes in expenditures in one sector of the economy, was not computed because certain data necessary to derive the income multiplier were not available in Hawaii. It will be shown that an increase in the number employed in the defense sector of IOO employees will lead to a further increase in total employment in Hawaii of 28 employees. That is, the employment multiplier for Hawaii is I.28. One can only conclude from this that the total level of employment in Hawaii is significantly affected by changes in the level of employment in the defense sector. We also find that there is little time lag between changes in military expenditures and induced changes in total employment. This is to say that the effect of an increase or decrease in defense spending on the over-all economy is mostly felt within one year from the time the initial change occurs.

tinue to neglect them for the present purpose. The specialists who now buy bills from the Treasury and then resell them to the ultimate investors are presumably being compensated for their activities. They have many alternatives. It is hard to see that they receive any economic rent that the Treasury in any way taps by its present method of auction. On the contrary, the Treasury enables those specialized abilities required to guess accurately the outcome of weekly auctions to earn a higher rent than they otherwise could. Private distribution costs are therefore higher under the present method of auction than they would be under the alternative method. Who pays these additional costs? Since we have assumed that the demand by ultimate investors is not affected, since the amount of bills is presumably not affected, since the Treasury does not succeed in imposing discriminatory prices on ultimate investors, the price paid by ultimate investors must be roughly the same whatever the method of distribution. It follows that the Treasury must pay the additional distribution costs by receiving less on the average from its bills than if it used the alternative method of auction. Two final comments. First, if this analysis is correct, it means that Brimmer's conclusion that noncompetitive bidding should be eliminated from present auctions is wrong. The introduction of such bidding reduces the unnecessary cost imposed by the Treasury on itself by the present method of bidding. Second, the defects of the present method of auction are quantitatively minor, and may be negligible, for bills because of their short maturity, large volume, and broad market. The defects are far more important for bonds and are more important, the longer the maturity. The main obstacle to using auctions to distribute longer-term securities has been the implicit assumption that the present method of auctioning bills must be used for them as well, as it has been in earlier experiments. The adoption of the alternative method would enable the Treasury to auction all securities issued, whatever their maturity, at a gain both to itself and to the economy.5

OST research in housing demand has M focused on the explanation of aggregate behavior. Studies have tended to concentrate on statistical analysis, emphasizing construction of econometric models of aggregate housing demand. Research by Klein, Mattila, and Muth, among others, has provided considerable insight into the determinants of aggregate housing demand.1 However, it is being increasingly recognized that many relevant differences among individual households -for example, age of head, marital status, occupation of head, community type -ought to be considered in conjunction with the conventional economic variables, in studying the demand for housing. Moreover, a model built upon individual decision units has been developed in recent years to simulate the socio-economic system of the United States.2 This type of model also requires extensive knowledge of the behavior of individual decision-making units on housing expenditures. An analysis of crosssection data can provide this type of information about the individual demand for housing, but only fragmentary work has been done along these lines to date. In this paper, a cross-section analysis using economic and demographic characteristics is carried out to investigate the determinants of several aspects of the demand for housing. It attempts to answer the following questions: What are the factors affecting the decision to buy a house and the amount spent on purchase of a house? Given the purchase of a house, what are the factors influencing the decision to incur mortgage debt and the amount of mortgage debt incurred? In presenting the results, comparisons are made with empirical findings of earlier studies. This study differs mainly from other research in this area in that it treats house purchase and new mortgage incurment as jointly determined, and that investigation is undertaken of the marginal and conditional distributions of these aspects of behavior.

AMONG the behavior equations which enter ,I -into any economic model, the consumption function and the demand for money functions are of key importance. Originally, the consumption function was said to have a negative second derivative. This claim was based on a fundamental psychological law, upon which we are entitled to depend with great confidence . . . from the detailed facts of experience. . . ) 1 The detailed facts referred to by Keynes were all based on cross-sectional studies of the income-consumption relationship. Only much later, more extensive analyses of time series showing the relationship between consumption and income indicated that, over time, the second derivative of the consumption function is zero or close to it. This forced a revision of economic analysis employing the consumption function.2 In the case of the money market the situation is reversed. We have innumerable studies analyzing the demand for money by the use of time series; we have but one study relating the demand for money to its determinants on the basis of cross-sectional data. Yet, if the history of the consumption function is any guide, our understanding of the demand for money is likely to rest on shaky foundations as long as it is based on the analysis of only one type of data. In this paper I explore the determinants of the demand for money by the use of crosssectional data. Except for a minor digression dealing with the British demand for money as reflected in cross-sectional data, I deal exclusively with the demand for money by the population of Czechoslovakia in the fall of 1945. The country and the period have been selected, not because either would be of independent intrinsic interest to the profession, but because of the unique nature of the data. It is hoped that my exploration of these data will yield valuable insights into the determinants of the demand for money which can then be profitably employed in the utilization and interpretation of other empirical studies into the nature of the demand for money.