Knowledge that Transforms

A subject as complex as this is best begun as simply as possible. Would we be as we are with other beginnings? Obviously not. Those countries started as European colonial enterprises that had different beginnings are now Canada, Mexico, Brazil, Cuba, etc. We are as we are largely because of the materials from which our society was initially formed. All were transmuted with time, but despite that the original ingredients would remain in the mixture and influence the long-term results. We are still identifiably similar to our colonial ancestors in our institutional structure and behavior regarding economic life. The colonists, in turn, had transplanted their own laws and practices from England. Intellectual and institutional continuity is thus a reality. It is also interesting and sometimes surprising.

To imperial enthusiasts, Empire connoted the triumph of British principles over the powers of darkness and was a source of incalculable psychic and financial reward. The critics, however, saw an increasing burden on the British domestic taxpayer, while British subjects in the colonies contributed virtually nothing. Any analysis of the cost of empire in the context of nineteenth-century Britain must in large part rest on an understanding of the institutional mechanism that might have provided the base either for exploitation or selfless regeneration of barbarous places. In an earlier period, monopolies enforced by the military power of the state provided one such institutional structure. Later similar transfers might have been effected through the assertion of ownership over valuable resources in relatively fixed supply. However, even if British entrepreneurs had been omniscient enough to recognize such resources before their competitors, the profit opportunities must have been relatively limited. By 1860 Britain was committed to free trade and the Empire was as a consequence theoretically open to all. Thus, possibilities for direct monopolistic profits were very small; and similar competitive forces acted to reduce monopsonistic rents. Given such an environment, any exploitation must have rested on a set of government policies that thwarted competition and gave some shadowy imperialist an edge over his colonial, foreign and even domestic rivals. Thus the degree to which empire was exploitative as opposed to burdensome cannot be determined without reference to the government sector-and that appraisal is the focus of this paper. Every government policy involves a budgetary dual. Wars cannot be fought without armies being paid; tariffs can't protect local enterprise without some expenditure on enforcement, and even property rights cannot be guaranteed unless funds are devoted to legal and judicial needs. Of course, budgets are not always what they seem, but in the nineteenth and early twentieth centuries they did in large measure reflect the policies of government.

In the theory of exhaustible resources, the classical result, originally derived by Harold Hotelling (J. Polit. Econ., 39: 137-75 (1931)) is that the scarcity rent of the resource must increase at the rate of interest. The scarcity rent is the market price of the resource less extraction costs. At the depletion time, the market price must be equal either to the zero demand price or the cost of a perfect substitute, assuming no adjustment costs in switching to the substitute. The substitute may be either a natural resource with a higher extraction cost or a backstop technology. The Hotelling result is a price equilibrium condition in a competitive asset market (Solow, Amer. Econ. Rev. Proc., 64: 1-14 (1974)). It is also an efficiency condition for allocating the resource over time in a first best world. However, Solow raises the possibility that constraints creating a wedge between interest rates may be important considerations in the resource allocation problem. In a second-best world it is not at all clear how fast the scarcity rent of the resource should increase from a social viewpoint. However, for one simple case the analysis of this problem is straightforward. Suppose consumption is determined by a Keynesianmore » consumption function with marginal propensity to consume (1 - s); s is marginal propensity to save. With consumption determined in this behavioral manner, savings may be inadequate to reduce the market interest rate to the point where it is equal to the social rate of time preference. It is argued here that for this case the scarcity rent of the resource should increase at a rate equal to a weighted combination of these two interest rates.« less

It seems a bit ironic that in the Bicentennial year of this country's history a session of the American Economic Association should concern itself with the problem of shortage, for surely this must have been a subject of discussion by colonial economists two hundred years ago. Yet clearly capital have not been a chronic problem of the U. S. economy, and most of us view this as a problem of more recent vintage. However, some of you may remember that almost twenty-five years ago Wassily Leontief (1953) stressed that the net impact of our foreign trade was to import and to export labor. He went on to argue further that because of the high productivity of U.S. labor relative to other countries, rather than labor was our relatively scarce resource. At the time of Leontief's original work this finding was considered a paradox and many individuals, including myself, were critical of his findings, either on theoretical or empirical grounds. Yet today his contention that labor is our relatively abundant resource and that is our scarce resource is regarded by some as an appropriate description of the economic scene. If I were to interpret today's assignment as an attempt to answer the questionWill there be a shortage? -my answer would have to be a simple No, for we are all aware that investment always equals saving and that in a free market economy there can be no real shortages of a reproducible good. Of course, I might 'also want to point out that while, in theory, such a disequilibrium could not persist, at least in the long run, in reality, institutional constraints and distortions do present obstacles to an automatic adjustment to an optimal level of formation. My talk today, however, will not discuss such issues but will concentrate on such questions as: 1) What level of fixed nonresidential investment is consistent with our pronounced long-run national objectives of full employment, increasing productivity, environmental cleanup and a drive towards energy conservation and decreasing dependence on foreign sources of petroleum? 2) How does one go about estimating these investment requirements within a consistent GNP framework? and 3) How sensitive are the estimates to the various steps of the procedures employed? The general methodology employed by the Bureau of Economic Analysis (BEA) in its requirements study was a combination of a macroeconometric forecasting model and a detailed input-output model. Such an approach was used because it was believed that building up the aggregate from detailed industry estimates would not only yield a better total, but would also permit one to see what was going on, that is, to separate out the various factors that contribute to total requirements by business: expansion, replacement, environmental cleanup and the drive towards energy conservation and self-sufficiency. The broad steps required for such an approach were as follows: 1) projecting GNP and its major components to 1980; 2) translating these aggregate GNP projections into detailed industry bills of goods; 3) deriving the Gross Domestic Output requirements by industry associated with this set of final demands (through the use of a projected input-output inverse matrix); 4) estimating the gross stock needed to produce the projected industry outputs (by multiplying the projected industry out*Associate Director for National Analysis and Projections, Bureau of Economic Analysis, U.S. Department of Commerce.