elsewhere (1982), economists' beliefs that modern capitalism is a fine innovation-generating machine have no intellectual grounding in contemporary neoclassical theory. The twin theorems take technologies as given. The apparent effectiveness of capitalism in this arena must reside in characteristics and mechanisms other than those featured in the microeconomic theory textbooks. In our book, we attempt to analyze these. It also is true that the capitalist engine is a much more complicated one than many economists seem to think. I presently am

In a recent article in this Review, Morton Paglin proposes a measure of concentration which he claims will correct the Gini ratio for overstatement in populations where each individual may be expected to vary his income or wealth over his life cycle. The Paglin measure suggests that the Gini ratio overstates income concentration in the United States by a third and does not reveal a 23 percent decline in concentration which has occurred between 1947 and 1972. These results are based on an improper decomposition of the Gini ratio. In this note I decompose the Gini ratio to derive the Paglin measure. It is shown to correct for neither demographic nor life cycle income effects and to understate intracohort income or wealth inequality.' If properly normalized, the Paglin measure shows that the Gini overstates U.S. income concentration by 7 percent or less, and indicates a decline in U.S. interfamily income concentration of less than 12 percent. Four percentage points of this decline are the result of demographic change, while less than 7 points (comparable to the 5 percent decline of the Gini) are the result of decreased income concentration within cohorts of family heads. Decomposition further reveals major changes in the division of income among cohorts and in concentration of income within cohorts. These changes compensate each other in the Paglin measure, the use of which as a measure of income or wealth concentration is not recommended. The Gini concentration ratio

In nursing this essay through several drafts, I have benefited greatly from suggestions by Edward Denison, Robert Evenson, Zvi Griliches, Richard Levin, John Kendrick, Edwin Mansfield, and Richard Murnane. Moses Abramovitz has been a source ofencouragement and good, substantive editorial advice, for which I am most grateful. The heterodox views are my own, although I share many of them with Sidney Winter.

In an innovative and provocative paper in this Review, Eugene Fama presents evidence which appears to be consistent with the joint hypothesis that the real rate of interest, ignoring taxes, is a constant and that the market for U.S. Treasury Bills is efficient in the sense of embodying rational expectations.' Those findings are strikingly at variance with a long list of previous studies which seemed to support the view that the real rate of interest varies over time and can be related to economic variables such as real output, monetary policy, and so forth.2 The methodologies which lead to these contradictory conclusions are quite different. Previous studies had followed the lead of Irving Fisher by relating nominal interest rates to distributed lags on past rates of inflation.3 These distributed lags are generally interpreted as approximations to the market's expected rate of inflation and thus any remaining variation is attributed to variation in the real rate.4 Fama's methodology, on the other hand, draws on the fact that the difference between the market interest rate and the subsequently observed rate of inflation, the ex post real interest rate, consists by definition of the ex ante real interest rate plus a pure forecasting error.5 The hypothesis of market efficiency implies that these forecasting errors must be serially random. Thus, observing ex post real rates is equivalent to observing ex ante real rates with random measurement error. These errors of course confound the problem of identifying variation in the ex ante real rate. In this paper, we will argue that the relative magnitude of these measurement errors is such that the tests carried out by Fama were not powerful enough to reject the joint hypothesis that the ex ante real rate is a constant and expectations are rational. More powerful tests which are presented in this paper using the same data do lead to rejection of that hypothesis. Of course, rejection