Knowledge that Transforms

In their seminal work describing the decline of American industry, Robert Hayes and William Abernathy (1980) identified competitive failures in world markets (loss of market shares at home and abroad); declining productivity (in both absolute terms and relative to Japan and West Germany from 1960 to 1978); and the loss of leadership in both mature and high technology industries. While other commentators had noted the relative decline in American economic performance and cited a large number of alleged causes for this decline, the Hayes and Abernathy article was notable for citing managerial failure as being at the root of the problem. Although Hayes and Abernathy acknowledged the influence of excessive government regulation and taxation, pressures from labor unions and public interest groups, dependency on OPEC-priced oil, and capital market emphasis on short-run financial returns, they argued that Japanese and West German companies were subject to the same constraints, only more so. How then, they asked, can one explain the poorer performance of American industry by these factors? Instead, they pointed to the new management orthodoxy as deserving a major share of the blame, and provided the results of a comparative study of management attitudes in the United States, Japan, and Western Europe to substantiate their charges.'

In this Review (1981), we attacked a proposition (P1) of Eitan Berglas (1979) and others, that unilateral tariff reduction (UTR) is necessarily superior to customs union (CU), provided scale economies and changes in terms of trade are ruled out. We put forward a much weaker proposition (P2) (p. 706) that UTR is sometimes superior, sometimes inferior. In his 1983 paper, (p. 1142), Berglas concedes that our 1981 Figure 2 (which he calls example El) illustrates CU superiority. He thereby concedes our main point: P2 is correct; P1 is not. A question remains: how interesting is the domain where UTR is superior?' We argued (1981) UTR is superior under narrow assumption Al (partner B's tariffs can be ignored) or A2 (no tariff by outsider C nor transport costs in trade with C). But a CU is superior in our main example (Figure 2), where neither Al nor A2 holds, and partners A and B trade with mutual benefit in the price wedge between C's import and export prices. In addition to wrongly claiming we were illogical and incorrect,2 Berglas argues (1983) that there are two other assumptions in his 1979 paper which, taken together, are also sufficient to establish UTR superiority. However, he misstates them. They are not, as he says, A3 (the CU does not affect the direction of trade) plus A4 (all three countries trade). Instead, they are A3 plus a much more restrictive A5: C trades every good with the CU. (This assumption, in Berglas, 1979, Figure 1 and Table 1, is distinguishable from A4 only when there are more than two goods.) Why must A5 be assumed, not just A4? Without A5, trade between A and B can occur in some goods within C's price wedge. In short, Berglas establishes UTR superiority by A5, assuming that A and B can't trade in the wedge where CU provides mutual benefits. (Our wedge becomes increasingly important in the n-good case. Consider cement, for example.) Moreover, Berglas's A3 rules out changes in trade patterns, and therefore Viner's concepts of trade diversion and trade creation which introduced the modern CU debate. Like a case based on Al or A2, the A3 + A5 case for UTR superiority is not interesting. Even if it were, one more special case does not establish the general principle that UTR is necessarily superior to a CU, any more than one more example where protection raises welfare would establish a general proposition that protection necessarily raises welfare.

In a recent issue of this Review (1983), William Shughart and Robert Tollison (S-T) hypothesize that the Fed pursues a bureaucratic objective which results in an in monetary policy. They test this hypothesis empirically and conclude that it is supported by the data. This comment, however, shows that their statistical procedures are flawed and when corrected provide little support for the inflationary bias theory. The data actually suggest a different, but not very interesting or surprising, interpretation.

The Equal Credit Opportunity Act of 1975 was amended in 1976 to expand the prohibition on discrimination in the extension of credit to include race, color, religion, national origin, and age. While studies have shown that differences exist between blacks and whites in capital accumulation (Henry Terrell, 1971) and in the use of financial services (Lindley-Selby, 1977), they have not concluded that the differences constituted racial discrimination in the supply of financial services. Evidence presented in support of the original Equal Credit Opportunity Act appears to have been statistically deficient in demonstrating discrimination based on sex. Richard Peterson concluded, ... that commercial banks did not systematically discriminate against potential borrowers based upon their sex before ECOA was passed (1981, p. 560). Testimony alleging racial discrimination in credit extension was given to Congress when it considered the 1976 amendment and to the Federal Reserve when it was in the process of promulgating Regulation B (Board of Governors, 1976, p. 243). Again, no statistical evidence supporting claims of racial discrimination was given. Despite the paucity of statistical evidence supporting the notion that financial institutions racially discriminate in the extension of credit, Congress acted as if such discrimination were pervasive. The mood of Congress is reflected by the statement in the Congressional Record of Representative Frank Annunzio of Illinois:

Over the past decade, the search for an explanation of aggregate money wage stickiness in the face of substantial shifts in the marginal revenue product of labor-of the kind that was associated with an increase in real wages in the depression of the 1930'shas led to an extensive examination of explicit (union) and implicit (nonunion) employment contracting arrangements. This distinction can be exaggerated: long-term union contracts have an implicit element in the sense that they specify only a limited number of contingencies to which wages will be adjusted. Moreover, the implicit contracting branch of the literature has pushed in the direction of implying that the explicit contracts observed in the union sector may be formalizations of common informal arrangements in the nonunion sector, so that differences between the sectors in the behavior of wages and employment may be more apparent than real. The purpose of this paper is to examine the empirical basis for some of the key propositions of implicit contract theories and to note some important differences in the outcome of implicit and explicit contracting.

It is a matter of great contention among economists whether economic stabilization programs can be instituted without imposing high real costs. Those believing in the core or underlying rate of inflation hypothesis argue that relying only on conventional monetary and fiscal policies will impose high costs. The rational expectations proponents, on the other hand, argue that a convincing antiinflation program will likely minimize these costs as economic agents respond to a genuine regime change or change in the rules under which monetary and fiscal policies are conducted.' A way of discriminating between these contending views is to examine the stabilization phase of the world's episodes of hyperinflation. Thus far, the work of Thomas Sargent (1982) on the post-World War I experiences in Austria, Hungary, Poland, and Germany, and William Bomberger and myself (1983) on post-World War II Hungary have adduced evidence in support of the rationalists' view. Price level stability was achieved rapidly without a prolonged period of high unemployment. The Greek stabilization of 1944-46 is not so straightforward and, as such, provides an interesting contrast to the other episodes. Its' unique feature is that price level stability took over a year to achieve following the initial reform of November 11, 1944. It was not achieved until, in a third reform in early 1946, the Greek 1018 1024