Knowledge that Transforms

T HIS is an empirical study of what determines the flotation of Canadian municipal and provincial bonds denominated in States dollars. The determinants of foreignpay flotations are important for two reasons: (1) States purchases of these flotations result in a significant inflow of capital to Canada from the States; and (2) a large part of States portfolio investment abroad is States purchases of new Canadian securities denominated in States dollars. This paper presents an analysis of individual issue data in order to establish the determinants. Many empirical studies of international portfolio investment have been conducted. Some of them are based largely on the Canadian-United States flows while others concentrate on the aggregate flows in and out of the States.' They are founded completely on aggregate economic data and are devoted to the analysis of time series. This paper is the first study to the author's knowledge that uses micro-economic data and cross-section analysis to investigate portfolio capital flows. If Canadian bond issuers behave rationally they will float their securities to enable their costs for any given issue to be minimized. These costs include both underwriting fees and interest payments. If the security is floated in the States and is denominated in States dollars, a subjective adjustment factor is included in the cost calculations to incorporate exchange rate risks. When Canadian issuers do make use of the States capital market to raise capital, they are expressing their preference for this market over the domestic market for these issues.2 During any given period does the States capital market appeal to a particular group of Canadian issuers or is the economic incentive to raise funds abroad spread evenly across Canadian issuers? If the incentive to raise funds abroad is equally great for each Canadian issuer, then foreign-pay issues will be selected from domestically floated issues by a random process; they will have no characteristics which distinguish them from domestic flotations. Alternatively, foreign flotations may appeal to a distinguishable group of issuers. If so, then what are the characteristics differentiating these issuers from domestic issuers? In part II of this paper foreign bond flotations are found to be statistically distinguishable from domestic bond flotations, and their differentiating characteristics are discussed. What factors give rise to the groupings observed in part II? The Canadian capital market may subject issues with certain characteristics to cost premiums so that the States market is especially attractive to these issues. Alternatively, the States market may offer these issues particular cost advantages. Thus, the grouping arises as a result of market characteristic configurations in Canada and in the States. * This article is based on the author's doctoral dissertation, United States Investment in Canadian Securities, 1958-1965, Harvard University, 1969 (unpublished). The research for this dissertation was financed by the Ford Foundation and by the National Science Foundation. The author accepts complete responsibility for the views expressed in the paper. 'For example see Robert Baguley, International Capital Flows and Canadian Monetary and Fiscal Policies, 1951-1962, unpublished Ph.D. dissertation, Harvard University, 1969; Gerald K. Helliner, Connections Between the States' and Canadian Capital Markets, 19521960, Yale Economic Essays, II (No. 2, 1962), pp. 351400; William Branson, Financial Capital Flows in the U.S. Balance of Payments (Amsterdam: North-Holland Press, 1968). 2 The distinction between the States capital market and the Canadian capital market is one between two regional markets. Each market is part of the world capital market but has characteristics which differentiate it from other components of the world market. This paper discusses the movement of capital from one regionally defined market to another.

Our analysis has shown that the allocative branch and the income distribution branch, to use Musgrave's terminology, in conjunction determine a Pareto optimum. It was shown that an insistence on conform solutions with tax prices equal to marginal rates of substitution, will guide us to the proper initial income distribution. The optimum can be found directly. However, in a setting in which all preferences are known and allocations are made according to the market principle, not much is gained by introducing the concept of income before-tax and tax prices. No new insights for the conduct of fiscal policy can be derived from this. We obtain an elegant general solution. In this case the distinction between an Allocation Branch and an Income Distribution Branch becomes blurred, because both branches simultaneously affect allocation and distribution. Another and more realistic possibility is to think of the economy as a computer which finds an optimum in a number of steps. We start out with a given income distribution and some system of tax prices. For the pricing rule to be chosen three criteria should be used, (1) it should induce preference revelation for public goods, (2) it should be effective with respect to adjustments in distribution and (3) it should be possible to approximate it through the political process. The income should be adjusted in line with such a pricing rule. In this process a case can be made for conceptually different branches. To have or not to have a division between the allocation branch and the income distribution branch thus depends on how one believes an economy grinds out an optimal solution. If we assume that all adjustments are simultaneous, smooth and in the right directions, we get a direct solution in an elegant grand manner. In it there is little room for distinct branches. Yet, it is more realistic perhaps to think of the way towards an optimum as a series of consecutive adjustments in distinct allocation and distribution branches. Many of the adjustments are cumbersome, involving trial and error as well as feedback and learning and, to this extent, reflecting the true nature of fiscal decisions.

The purpose of this paper is to explore within the context of several simple macroeconomic models the magnitude and significance of the structural changes that have taken place since the 1930's. The method that is used to examine the structural-change hypothesis is first to estimate separately for 1921-41 and 1946-66 the parameters of a macroeconomic model of income determination. The parameter estimates are then compared to see if there are any significant differences between the two periods. Finally, the dynamic properties of the systems for each of the subperiods are derived and compared. The presumption is that the parameter estimates and the implied system behavior will reflect the structural changes that have been effected since the great depression. (Author)

Joseph L. Balintfy, John Neter, William Wasserman, Binary and Chain Comparisons with an Experimental Linear Programming Food Price Index, The Review of Economics and Statistics, Vol. 52, No. 3 (Aug., 1970), pp. 324-330

ANY attempts have been made to assess the relevant forces affecting the variation of the relative factor share since the monumental work of Hicks, The Theory of Wages. Some of the outstanding research on this subject has been conducted by Murray Brown and his associates [1, 2, 3]. Their analyses have been based on the Schumpeterian idea of discrete technological changes and on Hicksian propositions contained in [6]. Although the assumption of discrete technological changes facilitates the assessment of the impact of nonneutral technological changes as well as other forces, the reality of the assumption is questionable, particularly at the aggregate level of economy. In the present study, technological changes are regarded as continuous instead of discrete. Furthermore, technological changes are classified as factor augmenting and nonfactor augmenting, the rates of which follow exponential time paths. The former arise from the increases in education and training, improved health, and research and development, whereas the latter arise from managerial and organizational improvements. The production function system which includes a CES production function and the marginal productivity relations are used as the bases on which the subsequent model is derived. The model is applied to the selected manufacturing industries in the United States for the period 1947-1963.

T has long been recognized that the provision of nonpecuniary rewards to a of production creates a corresponding reduction in the observed market price of the factor. But the effect of the provision of nonpecuniary rewards on marginal products and thus on the relationship between marginal products and observed prices, has long remained an open, albeit unpressing, question in economic theory. This neglected question has recently grown in importance as several influential papers concerned with the estimation of production functions (e.g., Solow [ 7 ] and ACMS [2]) have been crucially based on the identification of marginal products with observed prices. Section I of this paper contains a generalization of the usual theory of the firm which allows for (1) joint production in a general form and (2) the existence of outputs which are not separately marketed. Differences between private marginal products and competitive prices, hereafter called discrepancies, are seen to be possible when and only when some of the firm's outputs are sold or evaluated in markets as nonpecuniary rewards. A factor's observed price is seen to equal its marginal product, its marginal product plus the reduction in payments to other factors made possible by a unit addition of the factor. Since the latter part of the net marginal product is not a derivative of an observed production function, the following empirical proposition becomes obvious: A factor's marginal product cannot be identified with its observed competitive price; nor can the magnitude or direction of the actual discrepancy be casually specified. This proposition immediately implies the existence of a fallacy, probably a crippling fallacy, in the modern approach to the estimation of production functions. Section II, which builds on the analysis of discrepancies in section I, contains the key result that any discrepancy can be considered a disaggregation biasthat when all firms are combined to form a competitively determined industry production function and all inputs are suitably grouped to form a single input index, the marginal product of the input index is equal to its average cost! To establish this, it is shown that for given relative output prices and given conventions on the indirect marketing of outputs, an ordinary industry production function generally exists in neoclassical, competitive equilibrium, that this aggregate production function is linearly homogeneous, and that observed payments exhaust the product; yet there are, in general, no equalities between prices and marginal products. This surprising result is used to show that the identification of the aggregate marginal product of a with its observed cost can be justified on neoclassical grounds only when the factor is a single index of all of the various factors of production. Thus, while the modern techniques of studying technology based upon identifying marginal products of individual factors with observed prices are theoretically groundless in the presence of nonpecuniary rewards, the techniques of testing for scale economies and measuring technical change introduced by CobbDouglas and by Abramovitz [ 1 ] and Kendrick [5] are valid applications of neoclassical theory under suitable treatments of the relevant input indices. Also rationalized is a technique devised by the present author [8] of estimating both the degree of aggregate returns to scale and the annual rate of technical change with a single index of all inputs.1 * This work was supported by the Institute of Government and Public Affairs at the University of California at Los Angeles and by the National Science Foundation under Grant G-16239. The author benefited substantially from a discussion with Karl Brunner and from the comments by a Referee on an earlier draft. 1 The empirical results of [8] strongly confirm a hypothesis suggested by the present paper; viz., that there is a great deal of inequality between the marginal products and prices of separate inputs but there is an equality between

Christopher Green, Alfred Tella, Effect of Nonemployment Income and Wage Rates on the Work Incentives of the Poor: Reply, The Review of Economics and Statistics, Vol. 52, No. 4 (Nov., 1970), pp. 449-450

T HE theory of induced invention along Kennedy-Weizsacker lines has recently been incorporated into growth models with factor-augmenting technical progress by Samuelson [9], Drandakis and Phelps [4], Amano [1] and Fellner [5]. In these models they have shown that under the assumption of a proportional saving function, the condition that the elasticity of substitution (C-) be less than unity is sufficient for global stability of the long-run equilibrium. In this paper we attempt to generalize their results by employing a more general saving function and to examine the role of saving in a growth model of this type. We assume that the marginal propensity to save out of profits (s1) and out of wages (s2) are two different constant proportions. It turns out that, in the presence of a C-ambridge saving function, the condition C< 1 is not always sufficient to assure global stability of Kennedy's economy. The stability of the system, in general, depends upon not only the elasticity of substitution, but also the saving propensities. Furthermore, the position of the invention possibility frontier as well as its shape is an important element in stability analysis. This is due to an important feature of the generalization in which changes in income distribution between profits and wages resulting from factor substitution along the isoquants, and technological substitution along the invention possibility frontier, are taken into account in determining the changes of the rate of growth of capital. In section I we set up the model and derive the required dynamic equations. In section II we analyze the existence and global stability of the steady-state growth path. In particular, a local stability condition will be derived. Finally, in section III, after summarizing the principal findings, we interpret our stability condition and compare it with the condition which we found elsewhere in a model with exogenous Harrod-neutral technical change [2].

CEVERAL years ago I proposed a theory to explain how the supply in a developing country is determined which allows for factors other than the traditionally assumed control by a central bank [6]. Its validity was tested with an econometric quarterly model for Pakistan, 1953-1961. The passage of time makes it possible to reappraise the model which is the purpose of this paper. With the benefit of hindsight and reflections about economic model building, the reappraisal suggests that what I proposed as a general description of in a developing economy, in fact, more closely resembled a stationary one. Although some differences of opinion exist, economists agree that Pakistan's development during the 1950's was far less dynamic, albeit certainly not nonexistent, than what has since occurred.' My purpose, however, is not to propose a revised theory of how the supply is really determined in a developing economy, but rather to appraise quantitatively the extent to which the model's predictive capacity after 1961 differs from its performance during the original period. Though this is a more modest objective than attempting to reconstruct a theory which would incorporate the important developments of the 1960's, appraising the predictive capacity of econometric models during periods beyond that which was used for the original fitting, is a worthwhile endeavor which economists should more frequently practice. The postwar era has seen a tremendous growth in econometric studies. Generally, they have two features in common. First, although they really belong to the realm of economic history because the objective is to obtain the best fit to explain a set of for some past period, the hope is usually present that the estimated relationships should be useful to understand (i.e., predict) future changes, given a new set of new exogenous conditions. Second, except for narrowly conceived forecasting models which are often revised annually, we rarely have an opportunity to judge whether history repeats itself in the sense that the model's predictive capacity remains high for a new period beyond the time for which the original parameters were estimated.2 As has been suggested elsewhere, the infrequent publication of the predictive performance of econometric models is due to the fact that few investigators are willing to choose a specification on the basis of less than a complete set of the available data [3, p. 11].' Here, I hope to make amends for not having practiced in my original article what is here preached about the testing for predictive performance. My earlier article showed that the predictive performance of the model's structural equations was generally good and, furthermore, the model's capacity to explain the supply was demonstrated to be superior to a simple money multiplier model where certain controllable assets of the central bank were used to predict the supply. One simulation experiment which used the original initial conditions and the values of the exogenous variables produced a new set of predicted values which suggested that the model was quite stable, at least over the 34 quarters between July 1953 and December 1961, for which the parameters were estimated. In this paper I test, during 24 additional quarterly observations for the years 1962

T HIS paper reports results of a time series study of recent wage behavior in manufacturing. The principal conclusions reached are that labor market variables are of prime importance in determining wage movements and that the wage guideposts did retard wage advances between 1962 and 1966. A novel feature of the paper is that it utilizes wage and unemployment series not previously used in studies of wages. The paper has three main parts. Section I briefly examines recent money wage literature. Some measurement issues are discussed in section II and the main regression results appear in section III.