Knowledge that Transforms

I would like to extend my thanks to my colleague, Harry G. Johnson, for hi8 helpful comments, to Daniel Wisecarver, for help extending well beyond the normal call of duty for a research assistant, and to Rudiger Dornbusch and Robert Gordon for valuable suggestions given after the first draft of this paper was completed. Needless to add, they do not bear any responsibility for such flaws or deficiencies as may remain in this paper.

[1] Adler, F. M., The Relationship between the and Price Elasticities of Demand for United States Exports, this REVIEW, LII (Aug. 1970), pp. 313-319. [2] Banca D'Italia, Elasticita di domanda e di prezzo nel cominercio estero dei principali paesi industriali, Rome, 1970. Salvatore Leonetti is the author. An abridged version appeared in the Bank of Italy's Bolletino, XXV (Jan.-Feb. 1970). [3] Houthakker, H. S. and S. P. Magee, Income and Price Elasticities in World Trade, this REVIEW, LI (May 1969), pp. 111-125. [4] Office of Statistics and Reports, Agency for International Development, Gross National Product: Growth Rates and Trend Data by Region and by Country (April 30, 1970), RC-W-138.

The history of developing economnies indicates that rural-urban migration accompanies economic progress [2, 3, 8, 15]. The migration is considered to take place between the agricultural and industrial sectors as well as the farm and the city. In the Japanese development experience it would be inaccurate to label migration as a physical movement of labor to the city [11, 13]. The peasant was culturally tied to his rural surrounding by strong family ties. But certainly the migration can be labeled as one of moving the labor force out of agricultural and into industrial pursuits where the culturally immobile labor force resulted in rural location of many industries. An analysis of the economic determinants of the Japanese style of migration may shed some light on potential development strategy in terms of the effort required to achieve sustained industrialization, that is, a sustained rise in the industrial-agrarian labor and real output ratios. The theoretical models, which purport to explain the rural-urban migration where sectorial and location changes occur simultaneously, range from the simple wage differential models of Jorgenson [6], Lewis [7], and Ranis-Fei [11] to the more recent expectations models of Todaro [17] and Harris-Todaro [5]. The latter models stress the importance of both the income ratio and the probability of urban employment when analyzing the determinants of urban labor supplies. On the demand side, Eckaus' [4] famous factor proportions model is the most notable attempt to analyze the problem of labor absorption. In contrast, there have been few attempts to estimate a model reflecting the simultaneous impact of both supply and demand determinants of the distribution of labor between agricultural and industrial sectors. The objective of this paper is to construct and estimate a simple econometric model of the sectorial labor migration for a classic case of development, the Japanese economy. The basic sample on which the model is based extends from 1878 to 1937. The choice of Japan as a case study is predicated upon data availability [1, 9, 12] and recent interest in the development experience of that country. The interesting feature of the model is that it simultaneously considers the relative supply and relative demand determinants of the sectorial distribution of labor. Further, the dynamic properties of the model permit an analysis of the effort(s) required to achieve a sustained rise in the income and employment ratios which have been associated with economic progress through industrialization. In part II the basic model is specified, while in part III the Japanese economy is analyzed in terms of the basic model. In part IV the study is summarized and concluded.

V faL-e + [p(L1 K) -e]K-e} -l/e (1) where 4 is an arbitrary function. In the particular case where 4' 4 (L11K) is constant and e--O, the production function becomes V = r1 KA L1(L1/L)X. (2) While testing the ability of the production function (2) to explain the international pattern of labor productivity and wages, Mitchell does not present all properties of that function. Indeed, one special feature of the function (2) is to be easily workable for empirical purposes, if we have statistical data on physical quantities of the inputs and output, or on relative shares. Another main feature lies in the properties of that function, concerning the partial elasticities of substitution between pairs of inputs. This note considers those two points, with emphasis laid on the second one. We show that some of these partial elasticities of substitution are not constant. Uzawa [6] has characterized the class of constant Allen elasticity of substitution production functions (CAES), and McFadden [3] the class of constant direct partial elasticity of substitution production functions (CDES) as well as the class of constant shadow partial elasticity of substitution production functions. The function (2) is neither of the CAES class, nor of the CDES class. Hence, we must calculate the partial elasticities of substitution, according to each of the two conventional definitions. We begin with the Allen partial elasticity of substitution, as reformulated by Uzawa [6, p. 293] c a2 C

More specifically, section I develops a model for the analysis of the effect of changes in consumer demand on average educational requirements under rather restrictive assumptions. Some quantitative conclusions, based on income elasticities, input-output coefficients and capital-output ratios in the Israeli economy, are presented. Section II deals with the effect of changes in the composition of consumption on the demand for different levels of education, and their effect, in turn, on wage differentials. The discussion is based on the analysis and calculations of section I.

Economic historians should thank Larry Neal for his careful revision of the United States railroad investment series for the period between 1897 and 1914 [5]. However, the second major part of his article concerning the determinants of investmenit behavior over this period suffers from deficiencies of interpretation and requires further analysis which is the object of this note. Neal's thesis is that financial models, incorporating interest rates and cash flow variables, better explain railroad investment expenditures over this period than crude acceleration type mechanisms. In fact, he argues the time period 1897 to 1914 logically can be divided into two periods at the year 1907. In the earlier period (1897-1907) Neal argues that both easy access to external funds and the better use of internal funds are the primary explanations for investment behavior, while this was not the case after 1907. This thesis directly contradicts the earlier discussion of railroad investment made by Jan Kmenta and Jeffrey Williamson (K-W) [4]. The K-XV hypothesis purports that external costs were not important during this period and some sort of acceleration mechanism can best explain investment behavior. It is demonstrated below that the dominant determinant of long run railroad investment behavior over this period is the acceleration principle as asserted by K-W but that outside (as opposed to Neal's inside) financial conditions (the demand for financial instruments) contributed to the cyclical fluctuations of investment expenditures in the period prior to 1907.

[1] Ezekiel, H., and J. Adekunle, Secular Behavior of Income Velocity: An Intermational Cross Section Study, IMF Staff Papers, vol. XVI, no. 2, July 1969, 224-239. [2] Goldsmith, R. W., The Determinants of Financial Structure, Organization for Economic Cooperation and Development, Paris, 1966, 27-30. [3] Khazzoom, J. D., The Currency Ratio in Developing Countries (New York: Frederick A. Praeger, 1966). [4] Melitz, J. and H. Correa, International Differences in Income Velocity, this REviEW LII (Feb. 1970), 12-17. [5] Wallich, H. C., Theory and Quantity Policy, Ten Economic Studies in the Tradition of Irving Fisher (New York: John Wiley & Sons, Inc., 1967), 257-280.

[1] Bogue, A. G., From Prairie to Corn Belt (Chicago: University of Chicago Press, I963). [2] Fisher, F. M., and P. Temin, Regional Specialization and the Supply of Wheat in the United States, 1867-1914, this Review, LII (May 1970), 134149. [3] U.S. Department of Agriculture, Agricultural Marketing Service, Wheat. Acreage, Yield and Production, by States 1866-1943, Statistical Bulletin No. 158 (February 1955).