Knowledge that Transforms

Macroeconomics is currently dominated by two competing frameworks of analysis through which the adherents of each attempt to explain the paths of aggregate economic variables and address the design of policy. One, the market-clearing or equilibrium approach to business cycles, is most prominently associated with the work of Robert Lucas (1972), Thomas Sargent (1976), Sargent and Neil Wallace (1976), and Robert Barro (1976). The other employs the nonmarket-clearing framework made fashionable by the work of Stanley Fischer (1977), Edmund Phelps and John Taylor (1977), and Taylor (1979). Despite the apparent theoretical superiority of the market-clearing approach (i.e., the realization of all perceived gains from trade), the non-market-clearing approach continues to dominate analysis of macroeconomic fluctuations. This is explained partly by the failure of equilibrium macroeconomic models to fare well empirically and partly by the successful incorporation of the notion of rational expectations into non-market-clearing models. The current spirit of the non-market-clearing approach emphasizes forward-looking (rational) contractual wage setting in which wages are set to clear labor markets. Shortrun rigidity of the wage contract, however, prevents instantaneous clearing of the labor market in the face of economic disturbances, and as such, becomes a source of short-run deviations in aggregate variables from their natural rates. One aspect of the non-market-clearing approach emphasized early in the literature by Don Patinkin (1952) is the notion of spillover-a situation in which buyers facing markets that clear only gradually are unable to purchase all they intend of a good at a given price, and therefore, redirect part of their unspent income to another market. The micro foundations for spillover in a model of nonclearing markets were provided in a seminal paper by Herschel Grossman (1969) in which Patinkin's concept of spillover was synthesized with the Takashi Negishi-Frank Hahn (1962) nontatonnement transaction process and Robert Clower's (1965) dual-decision hypothesis. And yet, despite these contributions, the concept of spillover has been largely ignored in the majority of current genre non-market-clearing models. In two companion pieces (1980, 1983), we formally incorporated Grossman's (1969, 1971) work into a generalized macro model and used dynamic simulations to derive the implications of market spillover for income and interest rate determination in a short-run environment of gradual adjustment of demand and expectations and nonclearing markets. Our results suggested that spillover provides an additional potential explanation for short-run quantity adjustments and, as such, is important for the short-run design of monetary policy. However, two considerations serve to temper our earlier results: 1) the models employed were fixed price; and 2) the models were not estimated. Therefore, the question still remained whether spillover mattered empirically. This paper answers this question by specifying and estimating a generalized macroeconomic model that not only incorporates the concept of spillover into a framework of nonclearing financial and real markets, but also includes a supply side to allow for flexi*Associate Professors, Miami University, Oxford, OH 45056. We thank James Dunlevy, William Hutchinson, and Nicholas Noble for their generous help on this paper. And special thanks are due Bill McKinstry for his continuous support and encouragement. We alone are responsible for any errors.

Initially this paper was titled, Stephen Hymer's Influence on Public Policy in LDCs. In an attempt to research this impossible subject, I conducted a citation search in the SSCI. The SSCI listed 442 citations in 192 different journals over the period 1977 to 1983, a count that places Hymer in the top five writers on international business and the multinational enterprise over that period. His writings were cited in journals devoted to law, history, philosophy, sociology, psychology, political science, geography, business, anthropology, broadcasting, peace research, statistics, migration, and urban, regional, agricultural, trade, financial, labor, industrial, and development economics; they were cited in journals devoted to the study of Africa, Asia, Latin America, as well as Europe, Australia, New Zealand, and North America; and they were cited by authors across the spectrum from arch conservative to radical political economists. The breadth of discipline, geography, and viewpoint of the authors who found Hymer's writings useful in their analysis reflects Hymer's multidisciplinary approach to problems, the originality of his insights, the clarity of his thought, and the forcefulness of his writing. Although Hymer is best known for his work on the multinational enterprise (MNE), he also was intensely concerned with problems of less developed countries (LDCs) and the public policies they might use to alleviate the problems arising from trade and foreign direct investment (FDI). In his analyses, Hymer started from his base in economics, especially the economics of the MNE, but also used the insights of historical, political, and sociological analysis to illuminate these complex subjects. In using this approach Hymer may have fallen between two camps in the analysis of public policy issues in LDCs: the pure economists (who have often viewed him as a bright, but misguided and ultimately fallen angel) on the one side, and the radical political economists (who have viewed him as a rising, if somewhat backward star) on the other side. Instead of bridging the gap, Hymer may have fallen into it: his insights cited, but his conclusions discounted as faulty or half-formed. This is unfortunate, since Hymer, writing in the 1960's and early 1970's, speaks directly to many of the concerns of today and of the future: the New International Economic Order, the North-South dialogue, and the basic needs of those at the bottom of the income distribution in high-income and lowincome countries alike. Hymer's writings addressed two major questions: how best should a small, developing country interact with the world economy through trade, inward (and outward) FDI, and technology licensing? How best should such a country organize its internal economic activity to meet the needs of all its people, especially those in the lower two-thirds of the income distribution? To understand Hymer's approach to the analysis of these two questions and his contribution to public policy in LDCs, it is useful to set them within the context of his background, education and experience. Hymer was a Canadian. He grew up and received his first university degree in Canada, a country with a small, open economy, which largely exports raw materials and imports manufactured products, and whose manufacturing, energy, and mining sectors are dominated by subsidiaries of MNEs. In many ways, Canada was (and is) akin to the LDCs and his interests naturally turned in their direction. He was educated as an industrial organization economist at McGill and MIT. His experience and education, therefore, gave him a knowledge of large, multinational enterprises and the tools to analyze them. After MIT, Hymer worked in Ghana where he saw * Professor, School of Business Administration, University of Western Ontario, London, Ontario, N6A 3K7 Canada. I am grateful for partial funding from the Centre for International Business Studies and the Fund for Excellence, U.W.O.

Our approach to Heiner's thesis is shaped by interest in the processes of cognition, other sources of human behavior, and the implications of knowledge growth for man and the biosphere. His work is illustrative of uncomfortable implications and problems created by the explosive growth of knowledge in the modern era. Many of us work inside large organizations where our responsibility is to promote a kind of intelligent, flexible, and adaptive behavior that Heiner says must emerge as a condition of increased organizational complexity. From that perspective we were attracted to two of Heiner's major points about human behavior: first, that people cannot cope with all the information available; second, that knowledge creates uncertainty. We affirm these statements, but are uncertain of Heiner's view on how increasingly complex, viable, social structures evolve. One of our initial impressions was that he attributes consciousness to subhuman forms of life, even though his article claimed to be imputing only sensory or perceptual powers, not cognitive or conceptual ones. There remains nonetheless an impression that some kind of economic or biological (i.e., success or survival) rationality is the outcome of successful behavior. If Heiner is not attributing consciousness, he is at least observing development of behaviors that permit survival. Economic reasoning might call such behaviors from a retrospective viewpoint. As organisms and organizations become more complex, rationality of this kind seems to require more and more nearly conscious effort. Heiner calls optimization a special case occurring when uncertainty (the C-D gap) approaches zero. Optimization would be rational and also conscious, we infer, since it implies deliberate decision taking. At lower levels of certainty, rule-governed behavior prevails. The choice of rules and of behavior within them could be rational without full consciousness. This we infer is Heiner's meaning and we do not necessarily disagree (as some of our examples will demonstrate). We believe an implication of Heiner's work is that rational (i.e., enabling survival or success) behavior requires increasing degrees of conscious effort. We are given to understand that he is aiming at a more general theory of human behavior, one that subsumes optimization, or economic rationality, as special cases. He aims at illumination rather than revolution he says, but we think the implications are revolutionary. If he is not preserving economic man, then he is destroying the Invisible Hand. From the anthropological perspective, Heiner has situated economic debate squarely into the mainstream of Continental intellec*Wilde: Economist/Strategic Planner, Canada Department of Agriculture, Ottawa, Ontario, KIA 0C5 Canada; LeBaron and Israelsen: Resource Economist and Economist, respectively, Utah State University, Logan, UT 84322. 'This is the summary of a longer paper by A. H. Esser, Psychiatrist, Editor & Publisher, New York City; R. W. Jackson Physicist/Policy Advisor, Science Council of Canada; S. Miles, Policy Consultant, Toronto; J. Mitchell, Anthropologist/Information Manager, Canada Department of Agriculture; R. A. Schulz, Faculty of Management, University of Calgary; W. H. C. Simmonds, Engineer/Sociologist/Futurist, National Research Council of Canada (retired); G. Spraakman, Organizational Design Analyst, Government of Alberta; J. A. Wojciechowski, Philosopher of Science, University of Ottawa.