Knowledge that Transforms

An expected-utility-maximizing investor spends his portfolio income on commodities and real balances. Commodity prices and asset payoffs are determined endogenously in general equilibrium. The impact of commodity prices on investor welfare yields surprising relationships among the expected returns required on financial assets. Real (monetary) disturbances can generate a neg ative (positive) correlation between inflation and equity payoffs, but the expected nominal return on the equity can still be less (greater) than the nominal interest rate. The expected nominal return on an indexed bond can be greater than on a nominal bond. The expected real return on an equity can be lower than on an indexed bond.

In his posthumous essay My Early Beliefs John Maynard Keynes outlined his mental in the dozen years before the war and asserted their importance to his later life. Yet, despite Keynes's assertion of the importance of this part of his mental history to who he was and what he did in 1938 (the year the essay was written and two years after he published The General Theory), there is virtually no treatment in the of economic thought of this period of his life or of its impact on his economic theory. The purpose of this essay is to treat an episode of that period of his life which has particular analytical importance and to suggest some ways in which it might contribute to a clearer understanding of his later work in economics. The episode in Keynes's early life which the essay examines is his role in G. E. Moore's changing opinion about the importance of rules in ethics. In his classic Principia Ethica (1903), Moore had originally asserted that obeying certain rules is a necessary part of ethically correct behavior; but in his Ethics (1912) he makes exactly the opposite argument saying that individuals are always justified in judging a case for themselves and are under no obligation to follow general rules of conduct. In the parlance of modern philosophy Moore switched from a rule utilitarian argument to an act utilitarian argument.' The first four sections of the essay detail the role which Keynes played in Moore's change of heart. The final section discusses how the episode affects our understanding of Keynes's work in economics.

This paper views all interpersonal trade as Ricardian, while all international trade reflects each country's factor endowment. The model provides the logical link betwe en Heckscher-Ohlin and Ricardo. The strength of the model is that it allows simpler and more robust theorems about trade, welfare, and fac tor payments. Factor price equalization holds universally and Stolper -Samuelson is not tied to the number of goods or factors. A key resul t is that the old Mill theorem that the small country gains all from trade is incorrect. Trade patterns with three factors and two goods a re completely characterized.

The mathematical complexity of auction theory has restricted empirical work to qualitative tests of its basic predictions, with mixed results. This paper exploits the theory of order statistics to derive a Nash bid function that is linear in its parameters , allowing direct estimati on by linear least squares. The bid function is fitted to a cross section of auctions for highway construction contracts from thirty-three states, and provides support for several hypotheses of the theory of common-value auctions.

Was the Depression forecastable? After the crash, how long should it have taken contempo rary forecasters to realize how severe the downturn was going to be? These questions are addressed by studying the predictions of the Harv ard Economic Service and Yale's Irving Fisher during 1929 and the ear ly 1930s. The data assembled by the Harvard and Yale forecasters, tog ether with modern historical data, are subjected to statistical analy sis to learn whether their verbal pronouncements were consistent with the data. Both the Harvard and Yale forecasters were systematically too optimistic. Yet, nothing in the data suggests that the optimism w as unwarranted.

Liquidity considerations will limit the number of markets in a competitive economy. Welfare implications are ambigious. Since liquidity is a positive externality, there may be too little liquidity per market at a noncooperative equilibrium and too many markets compared to the surplus-maximizing market structure. But liquidity is also self-reinforcing. Given an existing equilibrium, new markets may not open because nobody wants to use a new market with low liquidity. There may be too few markets to achieve efficiency. A nondiscriminating monopolist will operate smaller and more numerous markets compared to optimality as well as to the equilibrium of independent auctioneers.

When exporting firms face the prospect of voluntary export restraints, they have an incentive to export more than with no prospect of a voluntary export restraint, since greater exports lead to larger license allocations in the event of a voluntary export restraint. Export-country governments' incentives differ, leading either to export tax or subsidy, depending on the circumstances. The prospect of one departure from free trade, thus, leads to another, a domino effect. Antidumping enforcement will ordinarily not eliminate and ironically may increase dumping.