Knowledge that Transforms

T HE purpose of this paper is to suggest that the contemporary microeconomic model of the could be adapted to incorporate a more realistic description of ordinary human behavior. For many years economists have tolerated the amalgam of good sense and bad psychology that characterizes microeconomic theory because of the empirical plausibility of its predictions. There is growing pressure to expand the limits of this theory, however, and it is becoming more common for empirical regularities to be explained in terms of variables which never have had a secure place in the theory, or which even may be in open conflict with it. This is exemplified by Houthakker's and Taylor's (1970) use of a consumer's stock of habits a variable in their demand equations, and by Katona's (1960) appeal to low levels of consumer confidence in his explanation of the observation that saving rates tend to increase in times of unusual inflation. It is possible that these are merely cases in which economists have taken unconventional lines on situations in which orthodox models still might work were one to introduce such addenda information costs and lags, expectations formation, transactions costs and the like. Nevertheless, it is intriguing to find that behavior which does not correspond to the simplest traditional models is frequently explained, not with these modifications, but instead with propositions of a psychological or quasipsychological character. There are a great many psychological theories that appear to hold promise for application to economics. Indeed, some cognitive theories of behavior have, at least in appearance, points in common with traditional maximization theory, although they are rarely meant to be taken literally economists are prone to take them. In many cases, it is difficult to apply these models to economic problenas (particularly in the case of cognitive models) because there does not seem to be any means for making their exogenous variables endogenous to economic environments. There are other psychological theories for which this difficulty is not evident, however, and the purpose of this paper is to investigate one of the simplest: stochastic learning theory it would apply to behavior. The work of James Duesenberry (1952) has already brought the relevance of learning processes to the attention of economists concerned with the nature of the consumption function, although his work antedates the development of most of the quantitative models of learning that now exist. An additional impetus for this research comes from compelling demonstrations of the practical relevance of learning theory to experimental economic settings in a series of studies performed by psychologists working in the area of simple reinforcement learning (i.e., reward-induced learning), an aspect of behavior which psychologists have subjected to extensive experimental study. One of the remarkable features of these studies is the complete absence of any characterization of the a rational, maximizing decision-maker, although the experimental results often correspond closely to what would have been expected on the basis of traditional economic theory. For example, in carefully controlled experiments in artificial (token) economies, Ayllon and Azrin (1966) were able to demonstrate downward-sloping demand curves, upward-sloping supply curves (including the suggestion of a backward-bending supply curve), supply-demand equilibrium prices, and even the purchase of franchises. Often, such results are interpreted empirical support for the positivistic proposition that individuals behave as if they were utility maximizers. It is often the case, however, that learning experiments turn up phenomena that are quite difficult to reconcile with the maximization model. One such example occurs in Ayllon's and Azrin's work on the impact of advertising on consumption decisions. Their experimental procedure was to provide free samples: small quantities of those goods or services that were to be advertised. For a wide variety of items, the provision of these free samples was found to Received for publication August 31, 1977. Revision accepted for publication May 4, 1978. * University of Michigan. The author would like to thank John Fitts, Robert S. Holbrook and Sidney G. Winter for their comments upon earlier drafts of this paper.

T HE rate of aggregate output a nation's economy can produce under the conditions of full employment depends on, among other things, the available man-hours, capital stock, and technology. Previous studies on the output gap and potential output, however, have not directly introduced into their models underutilization of capital input caused by the fluctuations of demand. To cite a few of the more important studies, Okun's (1962) work was launched exclusively from the labor standpoint with no regard given to the contribution the underutilization of Capital made to the output gap. The entire output gap was measured and analyzed in conjunction with the unemployment rate. Other studies that have introduced more sophisticated models of cyclical fluctuations have again tended to emphasize the role which the labor force plays. For example, the works of Thurow and Taylor (1966), Kuh (1966), Friedman and Wachter (1974), and Perry (1971 and 1977) have aimed at elaborate estimates of labor force participation rate, average hours of work, and productivity in order to analyze the component parts of potential output, however, clouding in the process the underutilization of capital. In other words, although the underutilization of capital is indirectly accounted for in these models, numerical weights cannot be placed upon that part of the output gap generated by the underutilization of capital. In this paper we attempt to decompose the output gap in order to estimate cyclical fluctuations of inputs and their contributions to the output gap, while preserving the simplicity of Okun's Law. Our hypothesized relationship between the output gap and employment rate is the same as Okun's elasticity specification, but a more precise specification of potential and actual output is made by the use of an aggregate production function. The use of aggregate production function and additional hypotheses on the behavior of the capital utilization rate and man-hours enables us to estimate the input gap as well as the output gap. The decomposition of the output gap proved to be helpful in explaining cyclical variations of labor productivity.

T HE copper industry appears to believe firmly that short-term copper market forecasting is infeasible.1 Despite this pessimism, considerable effort has been devoted to precisely that task. The better known and more complete models include those of Fisher, Cootner, and Baily (1972) (henceforth FCB) and Charles River Associates (1970) (henceforth CRA). Relative to these studies, the present research estimates a quarterly instead of annual model, extends specification of the domestic price equations,2 and examines prediction of employment. Results of particular interest include substantiation of the dual roles of capacity and output in determining employment, the use of the scrap price as a signal for change in the refinery price, specification of intermetal complementarity in ferrous and nonferrous scrap collection, and inclusion of a price expectations variable in consumption. Refinery price, scrap price, total refined supplies, refined consumption and employment are presented and discussed in detail. Stock variables which are used in several equations cannot quite be derived tautologically from lagged inventories, consumption, and supplies. Incomplete stock data and lack of consistency in defining the points in the continuum of copper production that the refined copper becomes produced, becomes part of stocks, and is consumed, prevent the basic stock change identity from holding. However, some simple refinements on a near tautological equation permit accurate estimation of inventories. Some of the equations presented use subdivisions of total refined supplies, e.g., primary refined production. Some work was done on estimating the subcomponents. Although the outcome of this effort is not presented in detail, some of the results derived from this phase of the research are discussed in the section on supplies.

IT has long been suspected that price uncertainty may cause allocative inefficiency in farm operation.' This may be especially true for small farms since they cannot afford expert economic advice (Schultz, 1964, p. 118). It is also a common understanding that output uncertainty may reduce allocative efficiency.2 Therefore, if prices and output are known with less uncertainty, farmers should allocate their resources more efficiently. This study is intended to investigate empirically such a relation.3 The data are for the small-scale family farms of Taiwan in the mid-sixties drawn from three mixed farming regions of the island.4 Most of the family farms of Taiwan grow rice alongwith other crops. The extent to which a farm is engaged in rice farming may be measured by a ratio of rice income to total crop income, to be referred to as the rice income ratio. Due to government price stabilization policies on rice, rice prices have been the most stable among almost all crops.5 The unit yield of the rice crop had also increased rather steadily before 1967 while that of other crops showed much larger year to year variations.6 Rice farming in Taiwan thus involves less price and output uncertainty than other crops. It seems reasonable to assume that a farm with a larger rice income ratio is involved in a lesser extent of price and output uncertainty and the variable rice income ratio can be used as a proxy of the degree of price and output certainty facing each farm. When this variable is related to allocative efficiency, it is therefore expected to have a favorable effect on the latter due to less price and output uncertainty.

Richard E. Caves, J. Peter Jarrett, Michael K. Loucks, Competitive Conditions and the Firm's Buffer Stocks: An Exploratory Analysis, The Review of Economics and Statistics, Vol. 61, No. 4 (Nov., 1979), pp. 485-496

Brown, Douglas, and Frank Giarratani, as a Simple Econometric Model: A Comment, this REVIEW 61 (Nov. 1979). Gerking, Shelby D., Reconciling Reconciliation Procedures in Input-Output Analysis, International Regional Science Review 4 (Spring 1979). Goldfeld, Stephen, and Richard Quandt, Some Tests for Homoskedasticity, Journal of the American Statistical Association 60 (Sept. 1965), 539-547. Mariano, R. S., and T. Sawa, The Exact Finite Sample Distribution of the Limited Information Maximum Likelihood Estimator in the Case of Two Endogenous Variables, Journal of the American Statistical Association 67 (Mar. 1972), 159-163. Miernyk, William et al., Simulating Regional Economic Development (Lexington, Mass.: D.C. Heath, 1970). , Comments on Recent Developments in Regional Input-Output Analysis, International Regional Science Review 1 (Fall 1976), 47-55. Richardson, D. H., The Exact Distribution of a Structural Coefficient Estimator, Journal of the American Statistical Association 63 (Dec. 1968), 1214-1226. Zellner, Arnold, Estimation of Cross-Section Relations: Analysis of a Common Specification Error, Metroeconomica 14 (1962), 111-117.

the supply of municipal services in terms of such factors as wage costs, population density, personal income, and city area. In general, these attempts compare a service in several municipalities and rely on statistical analysis to uncover significant relationships between provision of the service and various factors under investigation. In most studies that develop statistical models, however, little attention is directed towards the particular operating characteristics of the service being examined. Moreover, in different cities, a given service may be rendered in different ways, making the development of comparable service measures, and consequently inter-city comparison, difficult. This paper reviews the provision of municipal fire suppression service. It attempts to avoid the difficulties inherent in inter-city comparisons by examining the service provided to different sectors of one city and relating the differing levels of service to the differing levels of fire incidence, population density and fire hazard in those sectors. In the first part of this paper a general cost/ benefit-framework is presented for the supply of fire suppression service to one sector. Then it is shown how the single sector formulation can be transformed into a multi-sector distribution framework that is more amenable to empirical verification. Finally, the results are applied to a study of fire suppression service distribution in New York City. The emphasis in this study is on the description of an existing allocation.

Lee R. McPheters, William B. Stronge, Impact of the Terms of Trade on the U.S. Trade Balance: A Cross-Spectral Analysis, The Review of Economics and Statistics, Vol. 61, No. 3 (Aug., 1979), pp. 451-455