Knowledge that Transforms

Recently in this Review, Harvey Lapan developed a dynamic analysis of distortions in domestic labor markets. His primary contribution was to point out that the static solution to the problem of distortions is incompatible with optimal adjustment to long-run equilibrium. Lapan concluded that labor market distortions could be handled optimally by providing employment subsidies to firms in the depressed sector that are somewhat less than the employment subsidies implied by static analysis. Unemployment would exist and serve as a policy instrument to encourage labor migration from the depressed sector to the rest of the economy. In contrast, I will argue that optimal intervention should consist of two elements: a subsidy to employment in the depressed area exactly equal to the static optimal subsidy; and transfer payments to workers to cover the costs of migration from the declining sector of the economy. With this program there would be no unemployment in the depressed area in the short run. The fundamental point I wish to make is that in a dynamic setting, optimal intervention requires the use of two policy instruments, not one. The optimal solution entails both an offset to existing short-run distortions, and a replication of the dynamic path the economy would follow if markets were perfect.

Jerome Stein (1974, 1976) boils the monetarist-fiscalist controversy down to this: Fiscalists believe a bond-financed increase in the budget deficit has permanent expansionary effects. Monetarists believe that an increased budget deficit, if unaccompanied by more rapid monetary expansion, will leave excess demand for goods virtually unchanged, because a rise in the financial wealth/money ratio will raise interest rates and crowd out private investment. For monetarists, bondfinanced increases in deficit spending have temporary stimulating effects which fade away as lower private investment offsets higher government spending.' Stein (1974) offers a general model in three differential equations which encompasses both fiscalist and monetarist views as special cases. His 1976 paper provides empirical estimates of two of these three equations in integral form: (1) [U ] =R 1+ Lzv j+[RiG]

The market for Ph.D. econiomists has changed drastically in the last twenty years. During the 1960's there was a market with the number of Ph.D.s granted tripling, the salaries being received by new Ph.D.s rising by a third and the number of entering graduate students in economics rising by 2.6 times its 1960 level. Since the early 1970's there has been a decline in all of these variables. Other graduate fields experienced booms at roughly the same time as economics but the boom in economics has not been followed by a bust of the proportions seen in other fields (for example, see Richard Freeman, 1971). Nonetheless there has been a change in the nature of placement in the economics market. It is more difficult for candidates of given qualifications to obtain a desirable job, and the probability of being unemployed or underemployed at the time of receipt of the degree has increased. Many individuals who would have qualified for academic jobs at highly ranked institutions are now accepting nonacademic jobs or academic jobs at lower ranked institutions. In order to analyze these changes in the market for economists a two-pronged approach has been applied to the academic portion of the market. Although the analysis applies specifically to the academic portion of the market, the conclusions reached are more general, since the majority of economists work in academia. The discussion is divided into three major sections. The first presents the results of a cobweb analysis of the market, recognizing the inherent feedbacks in the market while ignoring quality variations in both jobs and applicants. The second section addresses the variations in quality. The third gives conclusions which can be drawn from the combination of the two approaches.

Developing countries are justifiably concerned about year-to-year variations in food grain production, inside and outside their boundaries. For large segments of the population who live at the margin of adequate nutrition, short food supply and high food prices mean curtailment of consumption to unacceptably low levels. High food prices lead to upward pressure on wages and have other undesirable macro-economic consequences. Low food prices can erode farmers' incomes and adversely affect future production. High international prices may cause serious balance-of-payments problems for food importing countries. To cope with the problems of instability within the framework of the market system, a country can use a range of policy instruments that may be divided into three categories: operating buffer stocks, adjusting foreign trade, and implementing price subsidy and support programs for specific groups and sectors. However, each policy or combination of policies while having a desirable effect on one objective may have an undesirable effect on other objectives. In addition, some programs cannot be implemented effectively without drawing on resources beyond the means of most developing countries. In this paper we analyze the effectiveness of intervention policies in the national and the international food grain markets in achieving prespecified stabilization goals. The study is based on simulation experiments with a model of a developing economy, with parameters chosen to approximate orders of magnitude of a country like India. I

It has long been suggested that moves toward equality can have serious disincentive effects and, after a point, lead to unacceptable losses in real income.' We will now offer some theoretical grounds for believing that an approximation to equality achieved via the traditional instruments-transfer payments and progressive taxation-will cause an income loss far more serious than many of us have realized. We will prove that under a set of reasonable assumptions, any attempt to guarantee absolute equality of incomes using only progressive income taxes and transfers for the purpose must, at least in theory, reduce society's output to zero! However, we do not conclude from this that the search for very much increased equality is quixotic. Rather, we take this as a criticism of the means so far used for the purpose. What is called for is an exercise in imagination and ingenuity, to find some alternative ways to go about this quest. We will then show explicitly and examine an alternative procedure that, at least in theory, can achieve any desired degree of equality without necessarily exacting a serious loss in output, and will end by discussing briefly the possibility of practical approximations to such an arrangement.