Knowledge that Transforms

Peter Bowbrick raises some interesting issues that deserve elaboration. Consider a differentiated product with attribute q that sells for p(q) per unit in the market. Assume an economy of scale in consumption of a particular type of good among a small group of buyers, a family, for example. Positive consumption of that variety requires incurring a fixed set-up cost k, independent of the quantity consumed. The fixed cost is incurred every time a member chooses an independent variety. For example, the location of consumption may be away from home. Then k represents the cost of transport in an auto with excess capacity. More generally, k derives from scale economies in home production, for which the good in question is intermediate product. Several types of outcomes are possible. Each member can go it alone and make a purely private consumption decision. This has the virtue of allowing members to consume their most preferred varieties, but entails duplication of set-up costs. Alternatively, the group may make a collective decision and choose a single variety that is consumed by all members.' The group decision is equivalent to choosing a public good. The variety actually chosen compromises among the most preferred choices of each person, but exploits the scale economy and allows greater consumption of other goods as compensation. Some possibilities are illustrated in Figure 1 for a group of size 2. Bid-price functions (price-attribute indifference curves) for both members are shown by the curves labeled 0' (the utility direction is southeast). The opportunity locus is k + p(q) when consumption decisions are made independently. The optimum good for each person is characterized by equality between marginal rates of substitution between q and other goods and the incremental cost of q for each person: d8O/dq = p'(q), i = 1, 2 (points a, and a2 in Figure 1). Alternatively, the per capita opportunity locus becomes (k/2) + p(q) when members choose a single variety and share fixed costs. The figure illustrates a case where a public decision Pareto dominates individualistic ones. This happens whenever the per capita group constraint cuts through the shaded area in the figure, the locus of possible Pareto-improving group allocations relative to independent decisions at a, and a2. All points between b, and b2 raise utility of at least one member without lowering utility of the other. All these points potentially satisfy a Samuelsonian public goods condition, (l/n)Ei dO'I/dq = p'(q), depending on welfare weights among group members. For example, both persons achieve larger utility at point c than at their mostpreferred independent locations. Cost savings due to exploiting group scale economies more than compensate for compromising on a variety somewhere in the middle. More structure is needed to nail the precise location of the compromise, say, a Nash bargaining game or an effectively altruistic head. The resolved preference structure might replace my original specification of preferences, but the essential argument regarding concentration and skew of market shares and reward among sellers is otherwise not affected. Nevertheless, the point is clear that small collective decisions of this sort promote a tendency toward mediocrity of choices within groups, in the literal sense of the median. This illustrates one aspect of the blandness of goods to which Bowbrick refers, but is not necessarily assured, because group decisions need not dominate individualistic ones. Experimentation with the figure reveals that a public goods decision is more likely: (i) the larger the scale economy; (ii) the greater the uniformity of preferences; *University of Chicago and National Opinion Research Center. I am indebted to the National Science Foundation for financial support. 'Coalitions of various subgroups should be considered, but space does not permit that development here.

A recent development in economic science is the attempt to integrate monetary theory with the theory of general economic equilibrium. This work takes as its starting point the idea that money cannot have value in standard, general equilibrium models. In these, too much trade can be accomplished in centralized markets (see Robert Clower, 1969, 1971; Frank Hahn, 1973; or Neil Wallace, 1980). Thus, to decentralize or break up the structure, either exchange must be made costly or there must be restrictions on who can trade with whom, and thus such choicetheoretic models offer the intriguing possibility that real and monetary phenomena can be understood as intimately related. This paper continues in the relatively brief, choice-theoretic tradition, motivated by real and monetary phenomena associated economic development and growth: 1) To be noted first is Simon Kuznets' seminal work on national income (1971). In a cross-section study of fifty-seven countries in 1958, Kuznets shows that the share of the agricultural sector, including forestry, fishing, and hunting, in Gross Domestic Product is inversely correlated with Gross Domestic Product per capita. The share of the industrial sector, including transportation and communication, is closely and positively associated with per capita product. The share of the service sector tends to be positively but weakly associated with per capita product, but the share of banking, insurance, and real estate shows a striking rise as one shifts from lowto higher-income countries. Moreover, the evidence suggests that the ratio of industrial prices to agricultural prices is perhaps lower the higher is per capita income, though the evidence on relative prices for the service sector is inconsistent. Turning to long time-series for thirteen developed and four less developed countries, Kuznets finds dramatic evidence for a decline of the agricultural sector and a rise in the industrial sector with per capita income, at least in developed countries. Again, results for the service sector are mixed, but Canada, France, and the United States are positive exceptions. The share of a transport-communication subsector rises quite consistently. Turning next to shares of sectors in the labor force, Kuznets finds, both on a cross-sectional and secular basis, that all the above movements are at least mirrored and in many cases amplified. In particular, both components of the share of the service sector, services and commerce, rise substantially with Gross Domestic Product per capita. 2) To be noted second is the extensive work of Raymond Goldsmith on financial structure and financial intermediation. For the United States, Goldsmith (1958) finds that the activity of intermediaries, as measured by their share in national assets, in tangible assets, and in all claims, has shown a substantial rise from 1860 to 1952. Similarly, Goldsmith (1969) finds that the ratio of financial institutions' assets to Gross National Product rises substantially from 1860 to 1963 in both developed and less developed countries, including Switzerland, Great Britain, the United States, Japan, Argentina, and India. Related, the number of households with savings accounts, the number with life insurance policies, and the number with stock ownership expressed as percents of the population are all low for less developed countries relative to developed countries, and *Professor of Economics, Carnegie-Mellon University, Graduate School of Industrial Administration, Schenley Park, Pittsburgh, PA 15213. This paper was motivated by a conversation with Thomas Sargent and has been aided by helpful comments from Robert Barro, Robert E. Lucas, Jr., Dan Peled, Kenneth Singleton, and Neil Wallace. Financial support from the National Science Foundation, the Alfred P. Sloan Foundation, and the Peterkin Symposium on Foundations of Monetary Policy and Government Finance at Rice University, and research assistance from Pramerudee Townsend are all gratefully acknowledged. I alone assume full responsibility for any errors and for the views expressed here.

Forces which link biological and behavioral factors to infant mortality and fertility in the United States are examined. Estimates can be arrived at if all of the important types of behavior affecting infant survival prices and income constraints facing households are diligently gathered. Using equations to determine the relationship between a family health endowment index in conjunction with a childs health information about optimal prenatal and postnatal behavior can be estimated and observed. This estimate which is strongly a factor of parental and environmental health related factors attempts to characterize the biological effects of parents behavior on birthweight gestation and the rate of fetal growth. Another estimate presented is one which establishes a link between biological effects of birth order on infant mortality. In this analysis factors such as medical care during pregnancy mothers rate of smoking mothers age duration of breastfeeding mothers race and childs sex were included. Household socioeconomic and health data were also estimated in order to understand state and county ability to provide adequate health facilities for pre and postnatal maternal care. In particular results suggest that child mortality declines in developed countries and that mothers seek prenatal medical care in early stages of their pregnancy when risk is anticipated. Further study of the differential pattern of black and white fertility behavior in regard to seeking medical care is warranted.

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Most students of international trade have long had at least a sneaking suspicion that conventional models of comparative advantage do not give an adequate account of world trade. This is especially true of trade in manufactured goods. Both at the macro level of aggregate trade flows and at the micro level of market structure and technology, it is hard to reconcile what we see in manufactures trade with the assumptions of standard trade theory. In particular, much of the world's trade in manufactures is trade between industrial countries with similar relative factor endowments; furthermore, much of the trade between these countries involves two-way exchanges of goods produced with similar factor proportions. Where is the source of comparative advantage? Furthermore, most manufacturing industries are characterized by at least some degree of increasing returns (especially if we include dynamic scale economies associated with RD the arguments of many observers that much trade among industrial countries is based on scale economies rather than comparative advantage; and the common argument that a protected home market can promote exports. Until recently, however, none of these alternatives was presented in a form which economists would properly call a model: that is, a formal structure in which macro behavior is derived from micro motives. This lack of formalization essentially barred alternatives to comparative advantage, however plausible, from the mainstream of international economics. In the last five years or so, however, there has been a significant change. A number of theorists have begun to apply methods drawn from the theory of industrial organization to international trade, to produce a new genre of trade models. These models offer a new way of looking at tradeand particularly at manufactures trade among the industrial countries. A characteristic feature of the new models is that they often rely on very special assumptions. This is probably inevitable: given the inherent complexity of the world once the great simplifying device of constant returns is dropped, only special assumptions will yield tractable analysis. In spite of the specialness of individual models, however, the new literature on trade is starting to give rise to concepts which look more general than the particular models used to illustrate them. The purpose of this paper is to sketch out two such concepts which I believe are important and more general in application than the particular models in which they have been expressed. The first is the theory of intraindustry trade, a view which incorporates scale economies as well as comparative advantage as major causes of trade and gains from trade. The second is the (less well developed) theory of technological competition, which may begin to shed some light on the dynamics of international competition in research-intensive industries.