Knowledge that Transforms

characterize Solow's review as ad Iominem in larger design of his article, suggesting certain frivolity of purpose; (4) to defend his (Galbraith's) scholarship as perhaps not superior to Solow's but adequate; and, finally, (5) to suggest that Solow's personal interest in existing economic theory perhaps blinds Solow to new insights (such as The New Industrial State) that threaten vested interests in existing theory. My article criticized models of the corporate state and studies of concentration, not because they deviate from strict neoclassical orthodoxy, but because they employ such orthodoxy as the standard performance in a dynamic world. The article called for a standard of performance in such a world that would better distinguish between normal and deviant corporate behavior. The data were indeed carefully selected. They were selected from the scholarly works of academicians such as Neil H. Jacoby, Eugene Rabinowitch, Victor R. Fuchs, L. E. Thurow, R. E. Lucas, Peter Drucker, M. A. Adelman, Frederick L. Pryor, and Leonard Weiss, among others. Galbraith's statement that I was using doubtfully relevant data appears to be a gratuitous rejection of the work of these scholars, or else it is an accidental oversight of the references in my article. Rather than discuss the question on its merits, Mr. Galbraith urges careful thought on my part about my conclusion, that large corporations do not contribute enough to inflation to justify permanent price and wage controls, on the grounds that, consciously or unconsciously, I am too biassed to be taken seriously. Perhaps so, perhaps not. The conclusion that models of the corporate state do not measure up to scholarly standards is one I share with the distinguished and prestigious scholar, Robert Solow. The qualifications I possess for writing in this REVIEW as an individual are not mine to decide, but if my writing opens me to suggestions of intellectual prostitution, it is my worry, not Galbraith's, although solicitude is always gracious when heartfelt. As for the conclusion that large corporations do not cause inflation enough to justify permanent wage and price controls, the objective evidence analyzed by J. Fred Weston is that prices in concentrated industries have risen less than prices in nonconcentrated industries. My article advances many suggestions for increasing competition in the economy, besides suggestions for improving productivity and statistics.

Thomas E. Weisskopf, An Econometric Test of Alternative Constraints on the Growth of of Underdeveloped Countries: A Comment: Reply, The Review of Economics and Statistics, Vol. 55, No. 1 (Feb., 1973), pp. 133-134

Baumol and Tobin 1 applied the principle of profit maximization to the management of money balances. Under fairly restrictive assumptions they obtained the conclusion that the income elasticity of the transactions demand for money should be plus one half and the interest elasticity minus one half. The hypothesis is not directly testable because estimates of the transactions demand for money are not available. However, tests using the total demand for money do not support the Baumol-Tobin (BT) elasticities. We show that if profit maximization is assumed and more general assumptions employed the only restriction is that the interest elasticity of the total demand for money is between zero and minus one. This finding offers theoretical justification for many previously published statistical results. A very primitive theory of the demand for money may be obtained by assuming that income is distributed at the beginning of each month and that the individual spends it (all) evenly in the course of the month. The only money he holds is the as yet unspent balance. This model implies that the demand for money is proportionate to income. In the 1950's, BT demonstrated that these money balances would be interest responsive because some individuals would find it profitable to switch their funds from money into interest-earning assets at the beginning of the month and back into money when the expendiitures had to be made later in the month. The profit maximizing economic unit was to compare the marginal interest earned from making an additional switch to the marginal cost of making that switch. Let r represent the interest rate on risk-free wealth. Then the gross revenue (R) from any allocation of wealth (W) between money, (M), defined as demand deposits plus currency, and other assets is R = r(W-M). (1) In the simplest version of their model they assumed that -the cost of making each switch was a constant, which we call b. Therefore, the total cost (C) of T money-bond (or bond-money) conversions would be C = bT. (2)

HIS paper reviews the evolution of fiscal T indicators from changes in the Federal budget to the initial impact variables. The highly touted full employment surplus has severe weaknesses as a measure of exogenous actions.' Attempts to correct these weaknesses have led to the development of various alternative indicators. Of these, the indicators measuring the initial impact of fiscal policy changes appear to be the most promising.2

had a truly sensitive labor force series for the period before 1940. Indeed, to derive my aggregate employment series I estimated several hundred detailed employment series in order to reflect as best I could the true variability in that series, and thereby much of that in the unemployment series. And, though I made many checks to special censuses and city surveys, which did not disconfirm the unemployment figures, I emphasized the interpolations involved in the labor force series.6 We must recognize our ignorance, and the limitations of any data to portray those decades as lucidly as the powerful surveys of today permit. There is a clear alternative available to any model-maker who wants a different cyclical measure than that permitted by my labor force estimates. It is not to create a set of elasticities, assume them as constant, and infer that they permit us to test trend labor force participation rates. Nor is it to rely, half inadvertently, on series that appear more attractive because their derivation is less explicit. It is instead to include in the model specific additional measures. One obvious alternative is the standard Kuznet's income series (it being linked to different employment estimates than mine). The NBER cyclical indicators are another. Such cyclical measures can then be directly tested for their contribution to explain models of economic change during earlier decades, rather than through the screen of their contribution to shaping the measures against which we test models. 'Nor do I make the obvious point that linear interpolation between benchmark participation rates differential by age and sex permits interactions in the dynamic changes to net out. The result, however, would be inferior to that yielded by a perfectly specified model using superb and relevant data. (I omit reference to the various checks to benchmark figures made in my estimates for immigration, the impact of World War I on female participation rates etc.)

In a recent article of this REVIEW, Sato and Hoffman (1968) derive an explicit form of production function with variable elasticity of factor substitution (hereafter VES production function) and give some estimates of VES functions for United States and Japan. The authors contend that the overall impression (of regression results.) is that VES functions are more realistic than CES (C-D) (Sato and Hoffman: p. 457). The purpose of this note is to show that their results both for United States and Japan, which they report to be most useful ones among other estimates under alternative forms of VES functions, are not valid, primarily because their estimates are not logically consistent with their a priori estimates used for estimating VES functions.