Knowledge that Transforms

If utility functions can be compared in efficiency terms, as I argued is sometimes the case (see my earlier paper), it follows that there is a new research area for economists to explore. To be sure, no analytic perspective, no matter how useful it may be, is without problems. For example, as Dana Stevens and James Foster have correctly pointed out, the possibility (though not the certainty) of cyclic ranking of utility functions exists if more than two types are compared. Their comment is, I believe, intended not as criticism of the utility function comparability perspective but as a call for more research; for example, on the efficiency properties of various types of utility functions, and on the responsiveness of attainable commodity sets to changes in preferences. The point is that there do exist researchable questions that are suggested as soon as we recognize the possibility of subjecting utility functions to analysis within a Paretian framework. Conventionally such questions have not been asked, partly because they were regarded as equity matters on which economists had little to say normatively, and partly because the factors shaping utility functions have been regarded as lying outside the domain of economics. It certainly is premature to say that we now know enough to conclude that on efficiency grounds alone, resources shouldor should not -be devoted to shaping utility functions. Yet to entertain even the possibility that one type of utility function can be preferred to another, and that changing such a function may be efficient, is to reach out in a bold new direction. Important conceptual issues as well as vital public policy questions are at stake.

In his recent article in this Review, James Melvin stated his purpose to be estimation of the commodity-price effects of the corporate income through the use of the input-output (p. 773). While the input-output (I-0) tables and techniques are practicable for use in many problems, they are, unfortunately, of limited use in this case. But, more significantly, the particular use Melvin makes is actually a misuse of the input-output tables. Through a misinterpretation of the nature of the A table of input-output coefficients, Melvin accepts the standard, published (I A)inverse as a proper vehicle for price change analysis. That is, the U.S. is used, improperly, to derive estimates of price changes in the economy which would result from initially impacted cost changes in value-added. The inability of the published to provide price change estimates is not generally noted in I-0 literature while, at the same time, there are some unsupported allusions to the possible use of this table for price analysis. Somehow the I-0 is accepted as a generalized economic tool that can readily be used for analysis of a too-wide range of economic variables. The problem, I believe, relates in part to shorthand references to the actual title of the inverse. As published by the U.S. Bureau of Economic Analysis (BEA), for the 1967 base tables, the complete title of the U.S. is Total (Direct and Indirect) per dollar of Delivery to Final Demand (Producers' Prices), ('Base Year' Dollars). Too often only the Total Requirements part of this title is noted and considered. Yet this actually treats all values applied to it as though they are values, regardless of how they are characterized by the analyst. If, perchance, the characterized use is consistent with the final demand concept there is no problem; otherwise the consequence is a misuse and misinterpretation of results. Associated with this unheeding of the full title is the existence of a widely accepted misconception regarding the characteristics of the table coefficients. This misconception is that the coefficients in the represent direct and indirect requirements associated in such a way with the of an industry that the coefficients can be used with any values to derive estimates of whatever impact is desired. All too often total output values are applied against an without recognition or acknowledgment that this is a special, and not the normal, usage of the I-0 table.' Whether associated with the limited literature in this area or for some other reason, Melvin has gone ahead and used some interesting mathematical transformations to show that the inverse matrix from input-output analysis... gives us a simple way of calculating the price effect of the corporate income tax (p. 767). Since Melvin has derived algebraically a result which is conceptually incorrect there must be some demonstrable point at which his mathematics went astray. This

is asserted to be reducible to the question of whether a key reduced-form coefficient P5 iS positive or not. I argue that Stein has failed to work out fully the dynamic implications of his model. It has led him to the incorrect proposition that a positive P5 coefficient implies a permanent positive effect of fiscal policy on the equilibrium rate of growth of nominal income. This comment shows that the correct conclusion is that fiscal policy will, with the exception of a very special case where Stein's result holds, produce over the long run a rate of growth of nominal income that either attains an equilibrium value equal to the rate of growth of the