Knowledge that Transforms

In contrast to the twentieth century, over the nineteenth century economic fluctuations became increasingly severe. This paper uses a structural vector autoregression estimated on ante- and postbellum data to distinguish the influences of changes in the nature or magnitude of the disturbances from those of changes in the response of the system to shocks (i.e., changes in structure) in contributing to this increased economic instability. The increased cyclical severity in the postbellum period is found to have been the result of greater sensitivity to monetary disturbances, rather than of larger or more volatile shocks. Copyright 1993 by American Economic Association.

There is an old joke about economics which says that the questions stay the same, only the answers change. Though there is some truth in that idea, I would argue that over the past 50 years, there have been marked changes both in the questions and in the answers, but that many of these changes are still only imperfectly reflected in undergraduate textbooks.

There appear to be two main conclusions of Fred C. Graham's paper. First, he argues that the empirical evidence in Aschauer (1985) supporting the permanent-income hypothesis and a significant degree of substitutability between private consumption and government spending is specific to the sample period and to the nature of [Aschauer's] 'unrestricted' alternative (Graham, 1993 p. 666). Second, after disaggregating government spending into various components he finds limited support for the hypothesis that federal nondefense spending-as opposed to total federal, state, and local spending-substitutes for private consumption. The focus of my 1985 paper was on deriving a test of the Ricardian equivalence theorem within an Euler-equation framework. Graham seems to have missed this point. Indeed, there is no evidence in his paper to support the Keynesian view that tax cuts stimulate private consumption and aggregate demand. Admittedly, Graham finds that changes in disposable income lead to changes in private consumption; but this is not enough to support the standard Keynesian analysis. Specifically, it is necessary to determine whether tax changes per se induce changes in consumption spending. Consider a model similar to Graham's equation (4), namely,

I was asked to report on the effect of economics on the development of antitrust analysis of exclusionary vertical relationships, particularly on the current acceptance of post-Chicago theories of exclusionary market power such as raising rivals' costs (RRC). In order to better understand the role of economics in vertical-restraints law, however, I first analyze acceptance of the free-riding efficiency theory. This provides a second data set. In addition, since antitrust involves balancing market-power harms with efficiency benefits, a more complete picture is achieved. I have reached three basic tentative conclusions. First, developments in economics clearly have an effect on developments in the law. This has been true for both the free-rider and exclusionary-market-power theories. However, the process by which antitrust adopts new economic concepts seems to be subject to a long lag. Second, the process appears to be subject to considerable randomness. It appears to depend on the (partly) random draw of judges, lawyers, and economic consultants. Third, when economic theories are accepted, courts often restrict their engagement with the theories. Assertion sometimes is substituted for economic evidence, and legal conclusions sometimes are overly broad.

During the past 15 years many trade theorists have incorporated scale economies and imperfect competition into their models. This abandonment of perfect markets has profoundly changed the way that economists think about the determinants of trade flows and the effect of trade policies on performance. Below I selectively review the empirical evidence on both issues, focusing on the role of increasing internal returns to scale (IIRS).1 To conserve space, I refer the reader to the working-paper version of this document (Tybout, 1993) for more extensive references.