The objective of the paper is to test the hypothesis that the structure of the economy is recursive with disturbances flowing from income to prices, but not back to income. Under this hypothesis, inflation shocks result in corresponding changes in output of the opposite sign. Tests are based on analysis of the vector stochastic process of GNP, the price deflator, and real GNP for the United States from 1954 to 1970. The results are consistent with the recursive structure hypothesis and would seem to reinforce evidence that stock prices and real interest rates vary inversely with inflation.

I begin this essay by reflecting on my early paper (Nelson, 1859), and Ken’s (Arrow, 1962), as period pieces. These papers certainly have been influential in shaping the discussion of science and technology policy over the last forty years, at least among economists, but at the time they were written, economists were just beginning to get into analysis of the key processes and institutions involved in technological advance. A lot has been learned since that time, and the discussion has become much more sophisticated. I will highlight two of those intellectual developments: the growing recognition that technological advance must be understood as an evolutionary process, and recognition that the institutions involved in that process include much more than the simple market institutions on which economists usually focus. Then I turn to the contemporary policy arena that is the focus of this conference: issues relating to intellectual property. Both to link the discussion to my old paper, and because my own recent research has been focused there, I shall focus particularly on the patenting of “science”. Finally, I will consider the institutional division of labor in research and development, and argue that the question of what should be private and what should be public about science and technology cannot be explored adequately without explicit consideration of mechanisms of funding, and of who is expected to do the work under what terms. I will focus particularly on the role of universities in the system of institutions that do R and D. 2

This book is a report on a research project in which computer simulation techniques were used to test the rationality of alternative methods of priee calculation in industrial firms.Most of the work was done at the Norwegian School of Economies, with the aid of the Computation Centre of the University of Bergen.Drawing as it must from the various fields of economies, accounting, mathematics, statisties, and computer science, the book is partlya product of a rich interdisciplinary academic milieu, in which I am grateful for having had the opportunity to work.Its defects, however, may be attributed to me.The project was financed by grants from AfS Norsk Varekrigsforsikrings Fond and

Introduction, 420. — I. The general framework, 422. — II. The use of weather information, 425. — III. The making of forecasts: optimal information structures, 431. — IV. Other problems of cost, 436.