Knowledge that Transforms

Harsanyi [1], after translating Zeuthen's bargaining theory [5, Ch. 4] into modern utility terms, has shown that it implies the same outcome as Nash's theory [4], namely a settlement that maximizes the product of the utility increments of the two parties. In the same paper, Harsanyi also reviewed Hicks's comparable theory [2, pp. 140-45] and found it, understandably, distinctly inferior to Zeuthen's. The context that both Zeuthen and Hicks had in mind was labor-management bargaining, where agreements and conflicts have time dimensions. Specifically in such situations, it will be suggested, it is possible to combine the central conceptions of both Zeuthen and Hicks in a composite theory that is superior to either of the separate ones. To prepare the way for the composite theory's presentation, its components will be briefly summarized.

It is suggested that the most natural mathematical model for a market with perfect competition is one in which there is a continuum of traders (like the continuum of points on a line). It is shown that the core of such a market coincides with the set of its allocations, i.e., allocations which constitute a competitive equilibrium when combined with an appropriate price structure.

In a recent issue of this REVIEW, twelve papers were presented on the subject of government budgetary concepts.' Several authors indicated that the measuring of corporate income taxes on an accrual basis in the National Income and Product Accounts (NIPA) was to be preferred to measurement on a collection and payment basis.2 Among their reasons was the position that . . it [is] . generally . . . agreed that much of the economic impact of corporation income taxes occurs at the time the liability is accrued, rather than when the payment is actually made. . .. 3 The NIPA budget deals with income determining flows and does not record the financial asset and liability positions of the sectors.4 However, the income determining corporate income tax accrual in the NIPA budget is also the gross increase in a financial liability of the corporate sector. This note will suggest, therefore, that gross additions to the accrual tax flows cannot be meaningfully interpreted alone but must be modified by tax payments; that is, income determining data must be modified by changes in assets and liabilities when used to measure the contra-cyclical impact of corporate taxes.5 If accruals are rising faster than payments, the firm, in effect, has received an interest-free loan from the government to finance assets or repay debts. Such a situation is clearly expansionary (from both microand macroeconomic points of view) and parallels increased sources of funds (to the firm and the corporate sector) from other sources, e.g., bank loans, trade credit, etc. On the other hand, if payments exceed accruals, the firm and the corporate sector are reducing a debt and must either contract assets, borrow from another source, or expand equity. Such a situation is contractive in the same sense that the calling of a loan, the arrival of the due date of a security, or perhaps even the tightening of credit is contractive. In both situations, taxes affect profits at the time of accrual, but funds available to the firm increase in the former case and decrease in the latter. The upper panel of chart 1 shows flow of funds data (seasonably adjusted totals at annual rates) for corporate profits before tax (after inventory valuation adjustments), tax accruals on profits, and tax payments on profits. The lower panel of chart 1 shows the difference between accruals and pay-