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David F. Hendry and Mary S. Morgan ~eds.!, The Foundations of Econometric Analysis, Cambridge University Press, Cambridge, etc., 1995. Pp. xvi 1 558. £ 40.– This 550-page reader brings together some 45 contributions on the development of classical ~macro!econometric modelling by 30 different authors. The editors have included a couple of isolated works from the nineteenth century, but the greater number of entries has been culled from the great debates of the thirties and forties. When discussing general methodological questions of probability, simultaneity, or identification, most of the authors have macroeconomic issues like the business cycle or public policy in mind. There is also a fair amount of work on the properties of time series, which were of course the staple data of these early analyses. Altogether it is a worthy collection of the history of ideas leading up to the macroeconomic econometric modelling of the 1950s. The boundaries have been drawn firmly: there is nothing later than 1952, and there is nothing on early microeconometrics ~Engel curves or income distribution models!. Many contributions are classics ~or excerpts from classics!, but the editors have unearthed some unpublished memoranda, memorable book reviews, and gems by little known authors like Lehfeldt and Lenoir. But the major architects of econometric modelling dominate; among the authors represented more than once, Tinbergen is top of the bill with seven separate entries, with Frisch and Koopmans the runners-up. With the exception of three translations ~Lenoir, Wald, and Tinbergen! all contributions have been written in English. There is no work from Slutsky or Kondratief, no early Schumpeter nor any other scientific writing in German or French. It is of some interest to see the long struggle for clarification that finally resulted in the accepted paradigm of the 1950s. Many contributions have surprising vision at such an early date ~although at times this requires some forceful Hineininterpretierung!, but if one wants to understand, say, identification, a modern textbook offers greater help than, say, the early gropings of Lenoir. Experience shows that such difficult concepts become much easier to understand as they gain in acceptance and familiarity. I also found a number of the contributions dated, muddled and faulty. With hindsight this is easy to say and highly unfair to the authors; but it does raise the question whether such superseded views are instructive. They do teach, of course, that authoritative scientists can be mistaken, but is this enough? In view of their undoubted talents I found the editors’ introduction somewhat disappointing. Much of it is a summary of the contributions, although at times it is enlivened by modern replications of old analyses. While we hear that the two Workings are brothers, De Economist 145, 111–135, 1997.

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and the Wrights father and son, there is curiously little on the lives of the authors. Brief biographical notes would have added much to the reader’s appreciation of the various contributions. Surely it is of interest that both Tinbergen and Koopmans were trained as physicists, or that certain contributions were written at a very young age while others reflect long experience. Brief biographical notes might also solve the riddle why we have not heard more from Lehfeldt ~1914! and Lenoir ~1913!; Lenoir is believed to have been killed in action in the First World War, about Lehfeldt I do not know. 1 The book is quite big, somewhat unwieldy, and unsuitable for reading in bed or on the beach. J.S. Cramer

B. Thio, Nonlinear Dynamics and Unemployment Theory, P. Lang, Frankfurt am Main, 1994. Pp. 227. This book contains the substance of Boe Thio’s doctoral dissertation. It discusses two themes simultaneously. One theme pertains to the causes of unemployment. In the tradition of Malinvaud and Dre`ze, Thio looks in particular at the distinction between demanddeficient, capacity-deficient and technological unemployment. The other theme is the occurrence of various cyclical movements in the economy. In the tradition of Goodwin, Thio consistently tries to find stable limit cycles to describe cyclical movements. The dynamic patterns are then the result of mutually interdependent cycles with different periodicities. Finally, it is obvious that the distinction between causes of unemployment and the dynamic processes are interdependent: demand-deficient unemployment is typically of a short cyclical nature, whereas the more structural types of unemployment correspond to longer cycles. The book is of a theoretical nature. It contains six chapters of which the first is the introduction and the last a very brief summary. The second chapter, which has been published earlier as an article in this journal, is quite representative for the whole book. It presents an interesting model in which both short and long-run analysis is combined. It does this by combining two approaches to dynamic analysis. On the one hand the multiplier-accelerator model ~Hicks-Samuelson! and on the other the real Phillips curve, predator-prey approach ~Goodwin, Van der Ploeg!. The multiplier-accelerator model is refined in such a way that an explicit distinction is made between capital-widening investment, affecting capacity, and capital-deepening investment, affecting labour intensity. The former type of investment is related to the utilisation rate, whereas the latter type reacts to profitability. Profitability is determined by the wage-price system. In the wage-price system, price increases are positively related to the utilisation rate, whereas wage increases vary negatively with unemployment. The resulting dynamics show long-run cycles caused by changes in profitability and short-run cycles caused by changes 1 A. Desrosieres, La politique des grands nombres ~Editions de la de´couverte, Paris, 1993! has a different story: Lenoir, a civil servant in the statistical service, died in 1926 or 1927 in Hanoi where he was setting up a statistical service for French Indochina.

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in capacity utilisation. As a consequence, various causes for unemployment can be distinguished as well. Thio distinguishes between demand-deficient unemployment ~due to deficient capacity utilisation!, capacity unemployment ~a shortage of productive capacity! and technological unemployment ~too capital-intensive!. This approach to unemployment it closely related to the work of Malinvaud, Sneesens and Dre`ze, and Dre`ze and Bean, to which Thio frequently refers. A new element introduced by Thio is the explicit analysis of the dynamic implications. He shows how movements in unemployment are caused by the interplay of long-run and short-run cycles. The analysis of chapter 2 is taken up again in chapter 5. In that chapter the wage-price system is elaborated in two days. A permanent inflationary pressure is introduced due to competing claims of the wage and profit shares. Moreover, efficiency wages are introduced, which complicate the interaction between productivity and wages. And the accelerator system is also elaborated due to the introduction of a non-linear capacity adjustment principle. This capacity adjustment principle is introduced in chapter 4 in a demand-oriented growth model. The non-linearity of this adjustment causes cycles in the growth model – and makes a differential savings function unnecessary. The growth itself is caused by the accelerator: the growth rate of the desired capital stock is positively related to the warranted growth rate – which is an ad hoc assumption. The wage-price system is ignored in this model, as is the notion of capital deepening. On the other hand a monetary sector is included, and the interest rate is assumed to influence investment in capital widening. This leads to a damping influence from the monetary sector on the cyclical movements. The pure demand model of chapter 4 is complemented with an extended wage-price spiral in chapter 5, and capital deepening is distinguished separately. The complicated full model is analysed extensively, both analytically and by means of simulation examples. The dynamics show the interaction between the various cycles. And again the three types of unemployment can be distinguished. Whereas chapters 2, 4 and 5 can be related to each other, chapter 3 is an outlier. In chapters 2 and 5 the distinction between capital deepening and capital widening is important to explain unemployment. However, this assumes substitutability between capital and labour. In chapter 3 on the other hand a fixed coefficient technique is assumed ex post ~putty clay!. However, different sectors can have different techniques due to substitution possibilities ex ante. Thus, in the aggregate, substitution between labour and capital takes place due to sectoral shifts. Cyclical movements are caused by irreversibility of investment. Moreover, it is shown that similar movements in unemployment can be generated as in chapter 2. The book can be seen as an interesting contribution to the explanation of unemployment in the tradition of Malinvaud and Sneessens/Dre`ze because it spells out the dynamics of the system both in an analytical way and by means of simulation examples. Moreover, the mechanisms behind the various models are explained in an accessible way. This leads to a better understanding of the possible causes of unemployment, and in particular its persistence. However, it is a pity that the argument in the book is not presented according to a consistent pattern. As the author indicates himself, the different chapters are independently written articles. The analysis would have benefied if the quite intricate model of chapter 5 was fully explained by combining the analyses in the previous chapter. At present only

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few references to the results of the other chapters are made, which makes it difficult to disentangle the different causes of unemployment. An interesting aspect, from which the author shies away in his book, is the nature of the various cycles. Although he finds cycles of different periodicities, he is very reluctant to elaborate on their nature. For instance, although the cyclical-structural distinction is frequently mentioned, the nature and possible relevance of this distinction is not discussed at all. In the same vein, Thio is very ambivalent with respect to the phenomenon of long waves. Although his model can generate such waves, he definitely does not want to present his model as a possible explanation of long waves. And finally, he stays far away from a possible interaction between cycles and trends. Trends are always superimposed on his models, and cycles are relative to these trends. It would be interesting, however, to have the author’s view on the phenomenon of hysteresis which is frequently used as an important ingredient in the explanation of unemployment – be it through the lesser impact of long-term unemployment in wage formation, or through capacity shortage. Some comments on endogenous growth theory would also have been appropriate, in particular with the work of Aghion and Howitt, who also essentially analyse technological unemployment. An obvious open question remains of course the empirical relevance of the various mechanisms in the model and hence of the potential causes of unemployment. Personally I have the feeling that the sharp increase in unemployment in The Netherlands in the early eighties, and its persistence afterwards, cannot be explained as a coincidence of upswings in the three types of unemployment. I think hysteresis elements should be explicitly introduced for a plausible explanation. However, the proof of the pudding is in the eating. But it is not a fair criticism to the cook when he is working on an interesting recipe, mixing ingredients from different traditions in a promising way, that we cannot taste the pudding yet. Joan Muysken

Marc R. Tool, Pricing, Valuation and Systems; Essays in Neo-institutional Economics, Edward Elgar, Aldershot, 1995. Pp. 256. £ 49.95 This book contains a collection of papers written by Marc Tool as a response to what he sees as profound and disturbing trends and developments in the application of standard neo-classical theory to real economic problems. In other words, the aim of the book is to contribute to the development of an alternative economic theory. The proposed alternative approach is a neo-institutionalist one and deviates on virtually all fundamental points, like the purposes, scope and character of inquiry, from neo-classical theory. Part I gives the background to the rest of the book. First, a brief idea of the points of departure of the founders of neo-institutional economics is given. Next, the neo-institutionalist mode of inquiry is explained, i.e. the basic ideas of the neo-institutionalist research agenda as composed by Tool are described. Tool implicitly distinguishes between new and neo-institutionalists. Both groups are rather mixed and there is no consensus in economic literature about the exact classification, but to give an indication, the former sometimes is

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defined as consisting of economists who combine several neo-classical assumptions, for example the assumption that individuals want to maximize utility, with some institutional notions, like transaction costs. Neo-institutionalists also use institutional notions, but have hardly anything in common with neo-classical economists. They base their theory on the old institutionalists, among others Veblen, Commons, and Ayres. My major objection to part I is that Tool gives the impression that there are only two kinds of economists, namely neo-institutionalists and orthodox economists. The latter is a mixed group which for example includes neo-classical economists and new institutionalists. Given that both new and neo-institutionalists form mixed groups the distance between both of them does not have to be insuperable, as Tool seems to claim; some new institutionalists approach the neoinstitutional theory. By polarizing, he also suggests that either all or none of the neo-institutionalist ideas have to be accepted. This would be regrettable, because it is very likely that many ~institutional! economists agree with Tool on some or even many points, but probably only a few will accept all points. Increasing the gap between neo-institutionalists and other economists more than necessary may diminish attention for this interesting book. Part II discusses neo-institutional pricing, costing and social value theory and is the core of the book. It is difficult to comment briefly on this part, while still doing justice to the full content and complexity of the approach. Therefore, I limit this discussion to a few brief remarks on the two concepts mentioned in the title of the book: pricing and valuation. Tool defines prices as referring ‘to numerical value indicating the amount of funds that must be given up for a good or service’ ~p. 47! and pricing as referring ‘to behaviour and judgement that determine prices’ ~p. 47!. Concerning pricing he states that it is important to take into account that exchange takes place within a complex pattern of institutional arrangements. And next, that discretionary pricing is common in advanced industrial countries; especially powerful companies set their prices to serve a variety of individual and firm goals. Markup, cost-plus, target or similar pricing rules are likely to be used, which implies that the resulting prices are not equal to the ones which equilibrate supply and demand. Furthermore, prices are usually fixed. The major reasons for this is uncertainty. Companies do not have sufficient relevant information to make informed economic judgements. By keeping prices fixed they economize on information and transaction costs and additionally it gives the company some control over its own demand. These points are thoroughly explained, illustrated by examples, and references to empirical studies are given. In short I think this part of Tool’s theory will find most approval among economists. The discussion about valuation, however, is less straightforward. Tool claims that value criteria are necessary, because there are no equilibrium prices and the discretionary prices have to be judged ~he insists that social inquiry should be both positive and normative!. Note, that the discussion of valuation is not about the value of commodities. Tool addresses the values of commodities in his discussions about costs. His concepts of ~social, opportunity and pecuniary! costs deviate from the neo-classical ones. Tool’s valuation criteria refer to making judgements about economic developments and events, especially on pricing. The applied social valuation criterion is developed by Bush who in turn bases his criteria on Veblen. Two kinds of values are distinguished, instrumental values which arise from a ‘systematic application of knowledge of the problem solving process; they emerge from the process of inquiry into causal relationships’ ~pp. 74–75! and ceremonial values

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which arise from ‘those mores and folkways that incorporate status hierarchies and invidious distinctions as to the relative ‘‘worth’’ of various individuals or classes in community’ ~p. 74!. Next, the claim, very roughly, is that instrumental values are good and ceremonial ones are bad from a social point of view. Subsequently, it is good if instrumental values become more eminent and bad if ceremonial ones gain importance. However, even when these values are considered sensible, it is not very clear why exactly these values should be fundamental. This question becomes more prominent when a judgement is made on a more practical level. The instrumental values are then transposed into criteria of judgement which read as follows: ‘continuity of human life, non-invidiousness, recreating community, instrumental knowledge of value’ ~p. 110!. It is not explained why these specific criteria are chosen. Though he mentions that his valuation theory is pragmatic and operational – he indeed gives some indications of applications – it is not clear whether discussion about these criteria is supposed to exist. Part III concerns economic systems, how they evolve, how they should be studied and how this relates to transition economies. An economic system is regarded as a continuous social process and consequently, the neo-classical description of an economic system is considered as inadequate. This part of the book is rather brief, especially for such a complicated subject. As a result, the explanation of the elements of a neo-institutional theory of transition economies is somewhat general, but very useful in illustrating the differences of a neo-institutional and a neo-classical approach and it clearly demonstrates the deficiencies of the latter. Interesting is for example Tool’s claim that the use of the competitive model of neo-classical economists implies the use of normative criteria. In conclusion, the book offers many interesting points of view which are worth considering and which are explained in a clear way. Tool aims to contribute to the development of an alternative economic theory, which he indeed does. The book can be constructive for economists who are prepared to take a considerable distance from ~some of the! neo-classical principles. Elma van de Mortel

Dirk Pilat, The Economics of Rapid Growth, The Experience of Japan and Korea, Edward Elgar, Aldershot, 1994. Pp. xvi 1 334. £ 45.– Japan has managed to become an economic giant within a few decades, and Korea is one of those four small Asian economies that have grown so rapidly during the last three decades that they must become sort of giants. Many readers will hold this view and wonder what made this ‘miracle’ possible. In this book, Pilat documents the post-war growth performance of the Japanese and Korean economies and applies a careful growth accounting exercise to reveal the sources of growth. The two chapters that follow the introduction give short economic histories of Japan and Korea. In 1950 per capita income in Japan was only 14.5 percent of the US, in Korea even lower. According to the ‘catch-up’ hypothesis, such wide productivity gaps imply opportunities for high growth, provided that a social capability to assimilate foreign tech-

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nology is present. In the chapters, it is argued that, despite tendencies to isolation in both countries, social capability was strengthened by ~among other things! the widespread high levels of education in both countries. The main part of the book documents how Japan and Korea narrowed the gap with the US in the post-war period. GDP growth rates reached as high as 6.46% ~Japan, 1953– 1990! and 8.73% ~Korea, 1953–1990!. Growth accounts reveal that capital was the main source, explaining almost 45% of total growth in both countries. Pilat finds that total factor productivity growth in Korea is smaller than in Japan but still substantial. That Korea’s macroeconomic growth pattern differs substantially from that of Japan is revealed by the importance of ‘advances in knowledge,’ i.e. the growth accounting residual indicating real technological progress. This factor explains almost 25% of growth in Japan, but only 2.5% in Korea. Although this seems crucial in a comparison between Korea and Japan, Pilat reports this finding ~which is supported or even more pronounced in studies by Kim and Lau ~1994! and Young ~1995!! without looking for clear explanations. This in some sense reflects the basic weakness of the method of growth accounting: after documenting the sources of growth ~capital accumulation, labor input, improved allocation, etc.!, there is no obvious way how to proceed and how to explain the sources of growth. The book refers to the working of the financial system and incentives to save in relation to capital inputs, and it mentions education policies in relation to labor input. However, no attempt is made to quantify these factors or to establish close links. An important contribution of the book is the sectoral perspective. In chapters 6 and 7, Japanese and Korean productivity levels are calculated relative to the US. Purchasing power parity ratios are calculated based on the matching of industries in Japan ~Korea! and the US. The ‘industry of origin approach’ is applied which gives better results on productivity than the ‘expenditure-side approach’ which is applied in the well-known Summers and Heston data set. It turns out that sectoral differences are large ~e.g. in mining and agriculture productivity gaps with the US widened, while in machinery Japanese productivity has surpassed the US!. By documenting the sectoral pattern of the catch-up process, the book shows in which sectors rapid growth was possible, but not why especially in these sectors. New growth theories provide a number of reasons for cross-country growth differentials that might explain the experience of Japan, Korea and the US. Unfortunately, Pilat interprets the new growth literature unduly narrowly by focusing only on a production elasticiticy of capital that is larger than in conventional growth theory. More important is the role of the introduction of new goods and techniques, research and development, and knowledge spillovers. None of these factors are documented and no estimations were attempted in the book. Hence, it seems that the book concentrates too much on the ‘conventional’ macroeconomic and sectoral data. Similarly, no full advantage is taken of new trade theories, in which imperfect competition and strategic trade policy play an important role. The sectoral relative price levels in Japan and Korea vis-a`-vis the US calculated in chapter 9 are used to run four regressions ~the only econometric work in the book!, that link productivity growth, export growth and price levels. The new trade theories require trade, competitiveness ~which goes beyond price competition!, foreign direct investment, and policy to be taken as increasingly integrated.

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The book is a rich source for ~the conventional type of! data. It documents the process of rapid growth in Japan and Korea in a very detailed way. It is to be hoped that others will exploit these data to test theories and hypotheses that enhance our understanding of the rapid growth in Asia. Sjak Smulders

REFERENCES Kim, J.-I. and L.J. Lau ~1994!, ‘The Sources of Economic Growth of the East Asian Newly Industrialized Countries,’ Journal of The Japanese and International Economies, 8, pp. 235–271. Young, A. ~1995!, ‘The Tyranny of Numbers: Confronting the Statistical Realities of the East Asian Growth Experience,’ Quarterly Journal of Economics, 110, pp. 641–680.

Myron J. Gordon, Finance, Investment and Macroeconomics, Edward Elgar, Aldershot, 1994. Pp. 213. £ 45.– I this book, Gordon attacks the standard neo-classical theory of investment, which he rejects on both empirical and theoretical grounds. As an alternative, the author presents a post-Keynesian theory of financing and investment, taking account of risk aversion and uncertainty about the future. The study is largely based on previous work by the author. The book consists of four parts. The first part starts with a general introduction, which describes the position of this study within the investment literature, followed by a discussion of neo-classical investment theory and Gordon’s post-Keynesian model. The second part of the book goes deeper into some aspects of the neo-classical model and its shortcomings and compares it with alternative approaches, while the third part offers an extensive discussion of the post-Keynesian theory. In the final part, which is somewhat separate from the rest of the book, Gordon applies his theory to the evolution of socio-economic systems. The most convincing part of Gordon’s criticism of the Neo-classical Theory of Finance and Investment ~NTFI! is his demonstration that it is based on five crucial assumptions, which can all be rejected. The NTFI that Gordon addresses here is the theory that emerged as a synthesis of pre-war neo-classical theory and the mainstream Keynesian model initiated by economists like Hicks, Samuelson, and Tobin, and which became generally accepted due to the theoretical foundation that was offered by the work of Modigliani and Miller ~MM! in the 1950s. Gordon’s attack is directed against two of the cornerstones of the NTFI: the well-known MM irrelevance propositions on capital structure and on dividend policy. The most critical of the other three necessary conditions underlying the NTFI is the assumption that a corporation’s investment opportunities are supposed to be independent of its history. Post-Keynesian economists have always forcefully rejected the Hicksian interpretation of the General Theory ~GT! and the subsequent neo-classical synthesis, and have focused on aspects in Keynes’ work that have been ignored by the mainstream. Gordon’s book can be placed in this tradition: the author considers his theory as post-Keynesian because ‘it

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solves a problem left unsolved by Keynes in a manner that is consistent with the fundamental thrust of his work, which is that investment and output are determined by demand’ ~p. 11!. The ‘problem’ that is meant here is that, in spite of the fact that Keynes demonstrated the inadequacy of the neo-classical investment theory ~GT, book IV!, he did not offer a satisfactory alternative. In the spirit of Keynes’ criticism, Gordon introduces uncertainty and risk aversion in investment decisions, without assuming that these elements can simply be dealt with by the addition of a risk premium, as is done in the MM approach. In this setting, corporations try to maximize the probability of long-run survival ~PLRS!, as this is in the interest of their managers. This is in contrast to the standard NTFI which, starting from the individual portfolio stockholder’s viewpoint, assumes that corporations maximize their current market value. Gordon considers the neo-classical approach to the principle-agent problem, which builds on the work of Jensen and Meckling in the 1970s, as a ‘trivialization’ of the issue. A crucial variable in Gordon’s model is the geometric mean of the growth rates of both net worth and the return on net worth. The geometric mean is always lower than the arithmetic mean; furthermore, the median growth rate converges to the geometric mean over time. Gordon argues that a stationary state is impossible, as it would require that the arithmetic growth rate goes to zero; this implies that the geometric growth rate may become negative, increasing the probability of bankruptcy. Given their objective of long-run survival, corporations are therefore subject to a growth imperative. Gordon shows that, in order to avoid bankruptcy ~i.e. to maximize the PLRS!, a corporation can do several things: restrict consumption and save as much as possible, persue monopoly power, or adjust its capital structure; because the arithmetic mean of the return on net worth, as well as its variance, are positively related to leverage, adjustments of the capital structure can be used to maximize the geometric mean rate. When the probability of bankruptcy becomes high ~because net worth is at a low level!, a so-called ‘go-for-broke’ policy may become optimal, which means that the firm borrows and invests as much as possible, only slightly augmenting the immediate probability of bankruptcy – which is already high anyway – but increasing its PLRS. In chapters 8 and 9, implications at the macroeconomic level are derived, building on the work of economists like Kalecki and Minsky. Simulations with the model that is developed in chapter 9, in which investment is motivated by long-run survival, indicate that the system does not converge to a stationary state. Gordon shows that a collapse of the ~closed! system can be prevented by increasing public debt and a high entry rate of new proprietors. Gordon has written an interesting and ambitious book that offers a rich approach to investment theory, capturing elements that standard theory ignores. Gordon rightly claims that his model corresponds more to reality than the NTFI, but this may be largely attributed to the fact that simply more of the ‘real world’ is taken as a point of departure. A drawback of this approach is, however, that it is often at the expense of transparency and consistency, and I do think that Gordon somewhat fails in this respect. A better structure would enhance the accessibility of the book, especially for those who are not very familiar with this literature. Nevertheless, in spite of all criticism that can be made, Gordon does raise a number of points that cannot be ignored. The author not only provides evidence that a corporation’s value depends on its financial policy, but also that the most accepted approach in the literature is not suitable – even as a theoretical starting point – to analyze

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these kinds of problems. Therefore, the book is an important contribution to the academic debate in the field of investment and finance. Jan Kakes

Richard C. Marston, International Financial Integration: A Study of Interest Differentials between the Major Industrial Countries, Cambridge University Press, Cambridge, etc., 1995. Pp. 197. $ 39.95 This study re-examines the linkage across the major financial markets of the Group of Five ~G-5! industrial countries: Britain, France, Germany, Japan, and the United States. Moreover, Professor Marston discusses many of the recent developments in the European Monetary System ~EMS! including the exchange crisis of September 1992. The study is divided into seven chapters. Each chapter basically starts with an overview of the existing literature. Then, the author reports and comments on his own empirical tests. This review will highlight some of the interesting results. After introducing the subject of study in chapter 1 ~‘Determinants of interest differentials: An introduction’!, chapter 2 entitled ‘The deregulation of national markets’ addresses the process of deregulation and innovation of national financial markets in the G-5 countries. The author examines the deregulation of the market for bank deposits and bank loans. Furthermore, the chapter is concerned with new innovations in financial markets ~Eurobonds, certificates of deposit, commercial paper, and swaps!. The author concludes that the deregulation has provided investors and borrowers competitive interest rates closely tied to interbank rates. I find the chapter a bit fragmented and not well structured, although one must admit that it is almost impossible to discuss all deregulation measures and innovations in one chapter. Chapter 3 entitled ‘The liberalization of national capital controls’ empirically investigates the effects of the elimination of capital controls by calculating means and standard deviations of closed and covered interest rate differentials for all G-5 countries. One may criticize that deviations may cancel out, so that reporting mean deviations instead of absolute deviations might be less insightful. In addition, I have some questions with respect to the calculations of the confidence interval containing 95% of the observations, where the author only reports one number. A particularly interesting case study in this chapter concerns the calculation of inward and outward arbitrage margins available to banks to quantify the effect of reserve requirements and Federal Deposit Insurance Fees ~note that Eurodollar deposits are exempt from such requirements!. In chapter 4 entitled ‘Nominal interest differentials’ the author examines the underlying causes of deviations from uncovered interest parity ~UIP! in the Eurocurrency market. Deviations from UIP may be either due to systemic forecast errors in predicting future exchange rates or time-varying risk premia demanded by risk averse investors. The author performs semi-strong form and latent variable tests to search for the most likely cause of UIP differentials in Euromarkets. Finally, the author uses Frankel and Froot’s survey data to examine the forecast errors and the risk premia directly without having to adopt the rational expectations assumption. Similar to other studies, this study is unable to resolve

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whether UIP differentials in Euromarkets are due to either time-varying risk premia or systematic forecast errors. Unfortunately, in this chapter ~on p. 89!, I found a reference to Hodrick ~1992! which is missing at the end of the book. Chapter 5 entitled ‘Exchange rates and interest rates in the European Monetary System’ examines the effects of the EMS on exchange rate and interest rate behaviour in France, Germany, Italy, and The Netherlands. The chapter starts with a concise review of the target zone literature. The author then performs several tests of EMS credibility and deals with the EMS exchange crisis of September 1992. Evidence from regressions suggests that the EMS bands have failed to serve as a stabilizing force – corresponding to results of comparable studies. Finally, this chapter calculates profits from speculative positions during the EMS exchange crisis of September 1992. Chapter 6 entitled ‘Real interest differentials’ discusses real interest differentials which are decomposed into UIP differentials and deviations from purchasing power parity ~PPP!. The test performed are basically similar to those in chapter 4. The author, among others, concludes that real interest differentials with respect to the United States and Japan are very sensitive to the choice of the price index and that correlations of deviations from UIP and PPP are caused by exchange rate forecast errors. Finally, chapter 7 entitled ‘Progress toward international financial integration’ concludes that exchange rate fluctuations for the G-5 countries are here to stay. So differences in financing costs across currencies continue to pose problems for firms operating internationally. Hedging instruments such as interest rate and currency swaps can certainly reduce such costs, but cannot eliminate them. Professor Marston has shown his deep understanding of financial markets and exchange rate behaviour with many insightful empirical applications. The study is well written and illustrated with many figures and case studies. In summary, the study is highly recommended to both students and more experienced researches. Jan Lemmen

Reuven Glick and Michael M. Hutchison ~eds.!, Exchange Rate Policy and Interdependence, Perspectives from the Pacific Basin, Cambridge University Press, Cambridge, etc., 1994. Pp. 375. $ 54.95 This book is an interesting collection of fourteen papers. They were originally prepared for the Conference at the Federal Reserve Bank of San Francisco on 16–18 September, 1992. All but one are empirical studies on aspects of exchange rate management or financial market interdependence. Some are comparative studies, other papers focus on one country within the Pacific Basin. After the editors’ introduction, the book is divided into four parts. The first part deals with the extent of integration of the financial markets of the region. Menzie D. Chin and Jeffry A. Frankel examine several money market indicators, such as covered interest differentials ~for those countries in which forward markets exist! and absolute interest differentials. Charles Engel and John H. Rogers look at relative returns to equities. Both studies conclude that the degree of financial integration in the Pacific Basin countries is still limited, although in some aspects increasing. Michael P. Dooley and Donald J. Matthieson construct and use another measure of capital mobility, based on the demand for money. This leads to the conclusion that capital mobility in the region is high.

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The second part of the book is on the choice of exchange rate regimes. This part starts with a theoretical chapter by Stephen J. Turnovsky. He gives a thoughtful, ‘partial’ ~in his own words! review of models that can be used to analyze exchange rate policies. Other chapters in this section deal with exchange rate management in Australia and in New Zealand, and there is a paper comparing the extent of exchange rate targeting in the US, Canada, Australia, and New Zealand. I particularly liked Ramon Moreno’s ‘Exchange rate policy and insulation from external shocks: The cases of Korea and Taiwan.’ Both these countries had adjustable pegs ~to the dollar! in the 1970s, and managed floats ~to a basket of currencies! in the 1980s. This makes a comparison of these two periods particularly interesting. Moreno uses both simple graphs and a vector autoregression method to examine the relative impact of external and domestic shocks on the domestic price level. He concludes that the impact of external disturbances clearly decreased for Korea in the second period. For Taiwan there was evidence of greater insulation only in the short run ~one to four quarters after the external disturbance! but not in the longer run. Part 3 is on intervention and sterilization policies. The editors open this part with a chapter on ‘Monetary policy, intervention and exchange rates in Japan.’ Simple analysis of monetary indicators in the 1970s and 1980s points to foreign exchange intervention by the Bank of Japan. These results are confirmed by regression analysis and by a vector error correction modeling strategy. They conclude that the Bank of Japan follows an asymmetric strategy, in two ways: there is more intervention to prevent yen depreciation than against yen appreciation, and there is more sterilization of intervention in periods of yen appreciation than in periods of yen depreciation. Tsutomu Watanabe in the next chapter examines the signaling effect of foreign exchange intervention in Japan. He sets out two criteria to judge whether signaling is effective: monetary policy after the foreign exchange intervention must be in line with that intervention, and the intervention should not be anticipated. These criteria are worked out in a theoretical model. Graphs are used for the empirical analysis. They indicate that a purchase ~sale! of foreign currencies is followed by a reduction ~increase! in the discount rate of the Bank of Japan. From this Watanabe concludes that the first criterion holds. But in my view, this conclusion weighs heavily on his assumption that all intervention is sterilized. With respect to the second criterion, Watanabe shows that foreign exchange intervention is not so predictably asymmetric as Glick and Hutchison conclude in the previous chapter. In a period of general appreciation ~1986–1989! the Bank of Japan intervened against appreciation but not against depreciation. And in a period of depreciation ~1989–1992! the Bank intervened against depreciation, but not against appreciation. The third chapter in this section focusses on the effectiveness of sterilization in Korea. The two chapters in the fourth part deal with the possibility for a monetary union or yen bloc in the South East Asian part of the Pacific Basin. There proves to be little evidence for the coming up of such a bloc. By any standard, the Pacific region is important in the world economy, consisting of countries with very high growth rates. The region is particularly interesting for the subjects at hand: financial markets are becoming increasingly liberalized, and a wide variety of exchange rate mechanisms is and has been applied. All papers are well written, and they use many different statistical methods. Another positive aspect of the book is emphasis on policy. However, most chapters do not seem readily applicable for policymakers. Far-reaching assumptions are made, and ~as a result! in some cases the outcomes of the

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empirical investigations are contradictory. Some examples are given above. I think authors and editors could have devoted a little more attention to explaining these discrepancies. But on the whole, the book is a well elaborated example of the bits and pieces of empirical work, necessary to advance our understanding of what is happening in financial markets under increasing capital mobility. A. Geske Dijkstra

Claus Thomasberger ~ed.!, Europa¨ische Geldpolitik zwischen Marktzwa¨ngen und neuen institutionellen Regelungen; Zur politischen O } konomie der europa¨ischen Wa¨hrungsintegration ~European Monetary Policy between Market Forces and New Institutional Arrangements; On the Political Economy of the European Monetary Integration!, Metropolis, Marburg, 1995. Pp. 364. According to the editor’s introduction, the characteristic which makes the present book different from what is usually brought forward in the present debate about European monetary integration is that it questions the confidence in the integrating forces of open currency and other financial markets. This is done in eleven papers, which are grouped under four headings: I. The social, political and economic context of European monetary integration; II. The structure of the European Monetary System and the causes of the currency turbulence in 1992–1993; III. Chances and limitations of the European Monetary Union project; IV. Competition in the banking and financial system, currency competition and institutional innovations. In what follows I will try to illustrate the approach of the book by discussing a number of the papers – in fact, one from each part – after which I will draw some conclusions about the book. The first paper of the book, by Werner Polster and Klaus Voy, is devoted to the history of European monetary integration. The tenor of the paper is that international monetary systems like the worldwide Bretton Woods system of the postwar period and the European Monetary System ~EMS! in their actual functioning have a tendency to depart from the principles of symmetry and equality on which they were officially built. Due to inadequate institutions market forces make these systems develop into asymmetric anchor-currency systems. One of the remarkable things in this paper is that the process towards the European Monetary Union along the lines of the Maastricht Treaty is seen as a market process. This disregards the fact that the formulation of convergence criteria points to the need to add officially-determined constraints on national policies to the disciplinary forces of the market. In the second part there is a contribution by Heinz-Peter Spahn, who discusses the crisis of the EMS and the instability of the anchor-currency system. Among other things Spahn clearly analyses the possible conflict between the external and internal dimensions of the policy of the central bank of the anchor country and he shows how this element can be used to explain the crisis of the EMS.

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In his paper in part III Jan Kregel deals with the question what can be learned from the gold standard for the transition to a European Monetary Union. An interesting issue which is raised in this connection is what application of the U.S. Federal Reserve System to European monetary integration would mean. Kregel thinks that in the discussion about a future European central bank the example of the U.S. system is not always interpreted correctly in that the role of private banks in different parts of the country in maintaining a fixed ‘exchange rate’ between their liabilities is ignored. I doubt, however, whether the U.S. system can be applied within the framework of the present European Monetary System with the basket-ECU, as Kregel seems to suggest. One of the problems would be that not all currencies represented in the ECU participate in the Exchange Rate Mechanism ~ERM!, so that exchange rates between national currencies and the ECU will keep fluctuating, even apart from the possibility of fluctuations within the band of currencies which do participate in the ERM. In his concluding paper editor Claus Thomasberger discusses the future of European monetary integration. In line with the purport of other papers in the book he criticizes the anchor-currency system. He also deals with the problematic combination of freedom of foreign exchange markets and fixed exchange rates. His analysis of the latter problem is confusing in that it is based on the – unusual – idea that full currency convertibility logically would have to imply fixed exchange rates ~the author refers to the Funktionslogik offener Wa¨hrungsmarkte, p. 330!. For the future of European monetary relations Thomasberger is in favour of a multi-dimensional process of monetary integration with different arrangements for different EU countries. Overall, I think that the present book yields some interesting points of view. I doubt, however, whether for readers not used to reading German the book offers enough to make it worthwhile to take the necessary extra time and trouble. The book is certainly important by making clear that German views on European monetary integration are not necessarily views a` la the Bundesbank. G.J. Lanjouw

G.J. Lanjouw, Internationale handelsinstituties ~International Trade Institutions!, Reeks Bedrijfskundige Signalementen, Uitgeverij Academic Service en De Open Universiteit, Schoonhoven, 1995. Pp. 141. Dfl. 34,50 This book contains a review of the role of international trade organisations ~and some agreements! for international trade relations. International financial institutions are excluded by the author with the argument that these are analysed in a complementary book by Age F.P. Bakker ‘De internationale financie¨le instellingen’ ~The international financial institutions!. This book by Lanjouw contains 7 chapters ~and 3 annexes ~on abbreviations, publications and addresses of international institutions!!. In the introductory chapter the desirability of institutionalized economic cooperation is argued. The negative experiences in the thirties ~beggar-thy-neighbour policy! and the advantages of free international trade are important in this respect. In chapter 2 the General Agreement on Tariffs and Trade ~GATT!, the fundamentals of this agreement, the interna-

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tional negotiations within the GATT on the abolishment of trade restrictions and connected problems ~Kennedy, Tokio and Uruguay round! and the change into the World Trade Organisation ~WTO! in 1995 are considered. In chapter 3 the organisations and commissions in a UN context are described: the United Nations Conference on Trade and Development ~UNCTAD!, the relations between UNCTAD and the GATT, the role of the regional economic commissions, and the role of the UN with the multinationals. Chapter 4 is devoted to the Organisation for Economic Cooperation and Development ~OECD! with regard to trade policy, especially the trade relations with developing countries and the problems connected with the trade in agricultural products. In chapter 5 institutions and agreements relating to the international trade in commodities are described and analysed: the Organisation of Petroleum Exporting Countries ~OPEC!, International Commodity Agreements ~ICAs! and several Compensating Financing Facilities ~CFFs!. Regional economic integration is the core of chapter 6. There is a short history of the integration process in Europe resulting in the European Union ~EU! and its consequences for international trade. Furthermore the European Free Trade Association ~EFTA! and the North American Free Trade Agreement ~NAFTA! are discussed. In chapter 7 special institutions ~like the COMECOM! and problems ~East-West trade, countertrade! are considered. To write a book on international trade institutions, their origins, functions, developments and their significance today, within a narrow context is a rather difficult job, because organisations often have ~partially! the same purpose, the significance of institutions often changes through the years and the environment in which institutions have to operate often changes too. Ger Lanjouw has done this job well in my opinion. He has written a very readable book in the Dutch language that is very useful for students in international economic relations and for other people interested in economic cooperation between countries. Ger van Roij

William R. Keech, Economic Politics: The Costs of Democracy, Cambridge University Press, Cambridge, etc., 1995. Pp. 241. $ 14.95 In this book, the author investigates macroeconomic policymaking in order to explain the nature of democratic institutions. The book focuses on recent experiences in the United States and tries to assess the validity of two alternative views of democratic decisionmaking. In the first ‘traditional’ view, government is responsive. Democratic institutions produce efficient results, because they ensure both the accountability of public officials and the adequacy of government performance. In the other ‘public choice’ view, democracy leads to an accumulation of special privileges and protections from market competition as politicians are opportunistic, and because voters are naïve and myopically-oriented to the present. The author does not draw systematic comparisons with policy outcomes in other democracies and non-democratic alternatives. Instead, he conceptualizes the performance of democracy relative to ‘objectively desirable’ policies. When democratic policies deviate systematically from optimal policy stances, the gap is considered a ‘cost of democracy.’

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As there are no uncontested fundamentals against which to make his evaluations, the author tries to define the desirability of any policy result in terms of preferences, institutions and economic outcomes. Chapter 2 describes what macroeconomic theories have to say about feasible and desirable economic outcomes and the choice of instruments. The author reviews the main strands in contemporary macroeconomic theory and makes it clear that macroeconomists remain divided on the fundamental questions of whether or not the economy regulates itself and whether the proper macroeconomic role for public officials should be active or passive. Chapters 3 and 4 outline the most common models of routine politics in terms of macroeconomic issues. Chapter 3 on electoral cycles describes the political timing of economic outcomes in order to win elections. This part is mainly based on the original Nordhaus model. Keech also casually looks at empirical evidence which suggests that the evidence for the electoral cycle hypothesis is not overwelming. Chapter 4 deals with models of dual partisan competition to describe how preferences translate into outcomes. Attention is paid to Hibb’s statistical study of the differences in unemployment and income growth rates between the Democrats and the Republicans and Alesina’s modeling of the costs of bipartisan alternation in power. In Alesina’s model parties fail to converge on the position most preferred by the voters which results in a continuing alternation between the two polarized parties. This outcome is considered as a cost of democracy. Chapters 5 and 6 discuss sources of authority and review the arguments about what macroeconomic policy ought to achieve. Chapter 5 describes and analyzes goals for economic policy outcomes as defined in public law and derived by economic analysis. It is argued that there is no authoritative or uncontestable welfare function that is not defined as part of a political process, and subject to revision in such a process. Chapter 6 looks at voter preferences. Although, in a democracy, voters constitute the ultimate source of authority, their preferences are seldom clearly defined. Voters tolerate a wide variety of policies and outcomes, and politicians have considerable latitude for alternative choices. ‘Voters learn to want what they know that they can get.’ Chapters 7 and 8 deal with the institutions and procedures through which macroeconomic policy is made. Chapter 7 is about fiscal institutions and policies. The author concludes that formal institutions and the informal norms of fiscal policy have not provided adequate restraints against the temptation to let expenditures outpace revenues and to allow short-term perspectives to override the long view. Chapter 8 focuses on monetary institutions and policies. An important characteristic here is that central bankers, like federal judges, have been intentionally shielded from accountability ~through defeat in election or through impeachment! by their long terms. Chapter 9 draws all the various themes together into further reflections and conclusions about the costs of democracy. The book proves to be a defense of democratic institutions. There are costs of democracy, but some of these are inevitably part of the principal-agent character of representative government and the asymmetries of information between the electorate as principals and public officials as agents. Although some people associate democracy with redistribution of income, a large public sector, inflation and deficits, democracy is neither a necessary nor a sufficient condition for such phenomena to occur. However, there is some reason to believe that democratic processes can systematically obstruct the resolution of pathological situations such as hyperinflation or debt crises. There may also be relationships between alternative democratic systems and macroeconomic perform-

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ance. Roubini and Sachs ~1989! argued that political conditions affected the efforts to reverse the high budget deficits in the late 1970s. Grilli, Masciandaro, and Tabellini ~1991! found that governments with unstable debt growth tend to be short-lived coalition governments. Keech emphasises the importance of informal institutions or norms. The informal, unwritten norms regarding budget balance that prevailed before the 1960s were far more powerful in constraining deficits than the written rules of the Gramm-Rudman-Hollings Act. To summarise, the author presents a clear and well-written defense of democratic institutions. The central approach of the book – the search for the costs of democracy – provides an interesting frame of reference, although measuring these costs proves to be difficult. But what is to be expected? Although I was familiar with most of the content of the book, I enjoyed reading it. The book certainly is accessible to a nontechnical audience, but not without some special training in macroeconomics. It surveys macroeconomic theory and political science and it especially gives a good and open description of macroeconomic policymaking in the United States. I will certainly recommend the book for graduate students. C.G.M. Sterks

Jean-Pascal Be´nassy ~ed.!, Macroeconomics and Imperfect Competition, Edward Elgar, Aldershot, 1995. Pp. 498. This book is number 46 in the series ‘The International Library of Critical Writings in Economics’ published by Edward Elgar. It comprises a collection of 28 seminal articles on the macroeconomics of imperfect competition and has a short introduction by its editor, which explains the organization of the book and the criteria for selection of the articles. The publication conforms with the uniform format of all edited collections of articles in this series published by Edward Elgar. Each book in the series covers a major topic in economics. The fact that volume 46 promises 49 additional future titles suggests that there are many major topics in economics. I have some doubts whether this format is useful. 25 of the 28 articles in this volume have been published in top journals, which are readily available in most major economics faculty libraries ~no less than 8 articles are reprinted from the American Economic Review!. The introduction is too short to be of much additional value to the collection of papers. A good survey, e.g. in the Journal of Economic Literature, provides much more information on the subject. And for advanced courses in economics most teachers would prefer to select their own reading lists which may also contain recent unpublished papers ~e.g. NBER papers!. This collection is, loosely stated, about the explanation of macroeconomic imperfections by rigorous microeconomic theory, where the postulate of rational behaviour of individual economic agents is maintained. Hence, this theory tries to reconcile Keynesian macroeconomics, where price rigidities are simply postulated, with perfect allocation by the invisible hand in Walrasian macroeconomics. The first set of articles in the book investigates which assumptions in models of imperfect competition may account for rigidities and inefficiencies in the general equilibrium framework. The remaining articles in the book show how inefficiencies can occur in the context of partial equilibrium. In the second part of the

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book, the focus is on price rigidities on the goods market. Here, the article by Sweezy ~1939! on the kinked demand curve provides the oldest explanation of price rigidities in relation to imperfect competition. Other assumptions that may do the job relate to costly price changes, inventories, imperfect information, sticky prices and asset-pricing, and macroeconomic rationing. The third part of the book is on labour market imperfections. Here the behaviour of trade unions, wage indexation, implicit contracts, and the theories of efficiency wages and insider/outsider behaviour provide the major cases for the existence of other than perfect Walrasian equilibria under rational behaviour. It would be tempting in a review of such a collection of articles to mention topics or articles, which, in the opinion of the reviewer, should also have been included in the collection. In this case, however, such a search for omissions is not necessary because Be´nassy, in his introduction, supplies his own list of omitted topics. Yet, one of the major shortcomings of this literature is, as also noted by the author, that the whole list of alternative assumptions which may explain market imperfections have seldom been empirically tested ~with, perhaps, the exception of some labour market theories!. The major part of this body of knowledge consists of very sophisticated theoretical reasoning without assessment of the real causes of rigidities and coordination failures. In turn, what is displayed is a contest of intellectual gymnastics, where the judges award the highest prize to the model with those assumptions which remain closest to Walrasian purity but which, as yet, may explain imperfections. Anyhow, this contest did, at least, teach us the possible sources of imperfections. The question arises to what extent this body of knowledge will be used and extended in future economic research. The theory of this book relies on the microeconomic concept of a rational representative agent. However, nowadays modern macroeconomics is aware of the heterogeneity of behaviour at the microlevel, and hence of the aggregation problem which is called ‘the fallacy of composition.’ 1 Especially in the presence of idiosyncratic shocks, statements that are valid at the individual level can be distinct from those that apply to the aggregate. The literature collected in Be´nassy’s book is at risk of becoming obsolete due to this new development in macroeconomic theory, which is very much inspired by empirical observation. F.A.G. den Butter

P.P. Streeten, Thinking about Development, Cambridge University Press, Cambridge, etc., 1995. Pp. 409. £ 35.– These are the Reffaele Mattioli Lectures delivered by Paul Streeten in November 1991 at the Luigi Bocconi University in Milan. I must admit that until I read this book I had never heard either of the annual Reffaele Mattioli Lectures or of the Luigi Bocconi University, but Streeten’s lectures are part of a distinguished series on the history of economic thought. His predecessors include Kahn, Kindleberger, Peacock, and Modigliani. The book is a handsome volume, beautifully made and it even comes in a case. It not only contains the text of the lectures ~presumably much expanded after the event! but also the comments of five discussants ~including Jagdish Bhagwati and Michael Lipton! and Streeten’s R.J. Caballero, ‘A Fallacy of Composition,’ American Economic Review, 82 ~1992!, pp. 1279– 1292. 1

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response to them. In addition there is a fascinating autobiographical sketch and a long list ~34 pages! of Streeten’s publications. There is something of a Festschrift atmosphere about the book, with a lot of space devoted to honouring the lecturer. The book seems rather out of place in a series of the history of economic thought. While the first lecture is actually entitled ‘The Evolution of Development Thought,’ that topic gets little attention. Streeten’s main topic is the role of the state in the eradication of hunger and poverty in the world. But he never sticks to any one issue for very long. Indeed, the reader is treated to a discussion of a bewildering set of topics: poverty measures, energy policies, food aid, commodity price stabilization, distribution of food within the family, international coordination of environmental policies, the effect of regional integration on foreign investment, even ‘transnational cooperations and basic needs.’ Streeten has something to say on all of these ~and more! topics. He has interesting ideas and he writes very well, with many delightful references to history and literature. But with his attention spread so widely the result is disappointing. There is virtually no analysis in the lectures and while Streeten presents interesting policy proposals he argues the case for them only superficially. The first lecture tries to present ‘basic needs’ and ‘human development’ as logical steps ‘in the progress of development thinking’ rather than as fads or fashions. Since Streeten spends little time clarifying these famously vague concepts the attempt is not successful. The second lecture is on ‘global institutions for an interdependent world.’ Here Streeten offers three proposals. He suggests a new international agency which would recycle Japanese balance of payments surpluses to developing countries. This bond-financed agency sounds very much like the World Bank. Streeten, recognising this, somewhat lamely says that it would be good to have competing international agencies. He claims that there is a case for international commodity price stabilisation but does not elaborate on it. He proposes a progressive international income tax with automatic collection and disbursements tied to performance. The lecture has little to say about criticism concerning aid or the role of international institutions as agencies of restraint for developing countries. The third lecture is on direct private foreign investment in developing countries. Here Streeten argues ~uncontroversially! that discrimination against the informal sector should be removed. He would like to see a symbiotic relationship ~e.g. based on subcontracting! between large ~possibly foreign! firms and small, informal enterprises. Again, the treatment is superficial: there is no clear analysis of the problems which this proposal is supposed to address. The final lecture is on the role of state in development. Streeten objects to a minimalist state, pointing out ~in Lipton’s words! ‘that much more state action is needed in many developing countries to make markets work’ ~p. 313!. In one of the best parts of the book he investigates under what circumstances coalitions of rich and poor groups might emerge which would lead to pro-poor state action. Donor conditionality might help, but Streeten does not pursue the debate on its pros and cons very far. In this section the discussion of the political economy literature is outdated: Streeten seems to think that one either has to assume a Platonic guardian or a predatory state. The lecture ends with the statement that since ‘market success’ may be a problem ~e.g. famines an occur in competitive equilibrium! ‘@w#hat is needed then is fundamental structural change, a redistribution of assets and of access to power.’

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This lecture attracted obvious criticisms, Bhagwati pointing out that we need not be told by Streeten that there are good cases for state intervention and Lipton pointing out that the case against state action is more subtle than Streeten suggests. The book is interesting to read but, as I have indicated, in many ways disappointing. Remarkably, Streeten almost seems to take pride in not being rigorous. He actually ends the book on the note that he ‘would rather be accused of fuzziness than of reductionism,’ preferring ~with Sen! ‘to be vaguely right than to being precisely wrong’ ~p. 356!. The reference to Amartya Sen is ironic: as a ‘heterodox dissenter’ Sen has often been effective precisely because no one would dream of accusing him of fuzziness. By far the best part of the book is Lipton’s discussion ~pp. 331–333!, a very thoughtful commentary which anyone interested in development should read. Jan Willem Gunning

Edwin Mansfield, Innovation, Technology and the Economy, The Selected Essays of Edwin Mansfield, Economists of the Twentieth Century Series, Edward Elgar, Aldershot, 1995. Pp. 696. £ 80.– This publication, which consists of two volumes, contains a collection of 44 articles by an eminence grise in the field of technology and the economy: Edwin Mansfield. During his 40 years of experience he has studied a large number of aspects of technological change and economic development. His knowledge, as he claims in his introduction, was used by various policymakers in the United States, by the World Bank and various other national and international institutions. The organisation of the articles is merely topical. Each volume contains five topics, each consisting of a varying number of articles published earlier in distinguished periodicals. A bothersome point is that the topics in both volumes are organised in a rather unclear way. It seems strange to start with some articles on industrial innovation and then deal with industrial R&D. As companies first have to engage in R&D before they can innovate, the other way around would have been more logical. Then, the next topic goes into technological forecasting. Apparently, this is a step aside from the main course of the publication. The four articles within this topic rather deal with the problem of policymaking than with the problem of innovation. In the next topic Mansfield gets back to the main course by presenting his articles on the relation between technological change, economic growth and inflation. These articles discuss the macroeconomic importance of innovation, which – surprisingly – is also the subject of the first article of the first topic. Finally, the first volume ends with articles on market structure, firm size and their relation to technological change. These are aspects which would be interesting for policymakers. Therefore, a grouping of these articles with those of technological forecasting into a ‘technology policy’ topic would have been more appropriate. The peculiar organisation of topics continues in the second volume. The first topic here deals with the diffusion of industrial innovations. Then, the next topic contains six articles on international technology transfer, which is the international dimension of technology diffusion. The third goes into academic research. There does not seem to be any linkage

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with the previous two. As this type of research is more important for the creation of new technologies and innovation, these articles – there are only two – would fit better in the industrial R&D topic in the first volume. The fourth topic discusses public policies towards civilian technology. A combination of these articles with those on technology policy in the first volume, would have been more appropriate. The last topic in the second volume presents articles on intellectual property rights. This is an aspect which is of importance to the controlled diffusion of technology and would thus fit better in the first two topics of this volume. ‘Technology is the society’s pool of knowledge regarding the industrial arts’ Mansfield claims in his 1968 book on The Economics of Technological Change. Although the articles in the two volumes deal with a lot of aspects, some others are not covered. Mansfield’s work concentrates particularly on manufacturing: his work discusses industrial innovation in manufacturing enterprises. But nowadays, when the largest part of the American business sector consists of service industries, innovation in services cannot be neglected anymore. The pool of knowledge extends into services. Furthermore, Mansfield hardly pays attention to the organisation of activities as a source of innovation. Nowadays, it is well acknowledged that new managerial and organisational concepts also belong to the pool of knowledge. Mansfield does pay attention to the relation between technological change and the organisational structure of an enterprise, but he considers it a result of innovation, not a source. A compilation of a distinguished economist’s articles has one basic problem. Although it gives a good overview of the work of the economist, it does not present discussions and criticisms on the topics and aspects covered. This is also the case with these two volumes. Without doubt several economists have criticised Mansfield’s theories and empirical investigations. Hence, Mansfield’s scientific progress can only be measured when his subsequent articles on a certain topic or aspect are considered. In conclusion, the publication gives an excellent overview of the work of an outstanding and distinguished economist in the field of technological change and economic development. It can be highly recommended to anyone interested in the aspects of industrial innovation. However, the organisation of the articles is less logical and makes it difficult to recognise the quality of this publication. Robert L.A. Morsink

A. Marzola and F. Silva ~eds.! John Maynard Keynes, Language and Method, Edward Elgar, Aldershot, 1994. Pp. xv 1 247. £ 39.95 This volume is the result of a joint research programme among a number of Italian literary scholars and economists about the relationship between language and method in the writings of Keynes. Of the six contributors to the volume, Anna Carabelli is probably the most prominent one because of her book On Keynes’ Method ~1988!. Keynes certainly was a man who knew his way with words and its is fair to argue, as the present book does, that language and method are very much connected in Keynes’ work. The importance of rhetoric cannot only be discerned from the General Theory but also from many lesser known writings ~e.g. Essays in Persuasion!! or from his correspondence with fellow

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economists. Though Keynes is the focal point, the book also discusses on a more general level the usefulness of the rhetorical approach in economics as advocated by Deirdre McCloskey ~or Arjo Klamer for that matter!. Throughout the book McCloskey is criticized on a number of grounds ~see especially chapters 3 and 7 by Riccardo Bellofiore!. Most importantly, McCloskey’s ‘anti-methodological’ position is criticized as being self-refuting: ‘it is clear that McCloskey’s Rhetoric is subject to the same criticisms which he directs at the positivist Method. If his line of thought is correct, then it cannot but be applied to itself’ ~p. 87!. 1 The position taken in the book is that rhetoric matters but not to the extent, as McCloskey is assumed to be claiming, that it is superior to other methodological approaches or that it can circumvent fundamental methodological questions about what constitutes ‘good or bad’ economic research. Perhaps more so than with other so-called Great Economists words and theory are often inextricably linked in the case of Keynes. In this respect it is rather unfortunate that no mention whatsoever is made of the two recent Keynes biographies by Donald Moggridge and Robert Skidelsky, respectively. Both biographies offer a vast amount of material for anyone interested in the rhetorics of Keynes. The fact that the book consists of papers originally written in the late 1980s may explain this neglect but it also implies that the book is somewhat outdated. Even though the various authors display a substantial degree of knowledge about Keyens and rhetorics, the book does not ~despite its multi-disciplinary features! cover any new ground in my view. As far as Keynes’ method is concerned the book does by and large not go beyond, for instance, Carabelli ~1988!. In a similar vein, the reader who is at home in the literature on methodology is probably well aware of the various arguments pro and con McCloskey cum suis presented in the book. All in all, my feelings about this book are mixed. I liked the multi-disciplinary angle but I did find the outcome of the co-operation between the literary scholars and the economists somewhat disappointing. Harry Garretsen

Teun Jaspers, Joop Schippers, Jacques Siegers and Inge van Berkel ~eds.!, Working Policies?, Facts, Analyses and Policies Concerning Employment and Non-Participation in The Netherlands, WoltersNoordhoff, Groningen, 1995. Pp. 202. Dfl. 64,– This book contains the papers presented at the third SYSDEM workshop, held in Utrecht, The Netherlands, at the end of 1994. Theme of this workshop was the relationship between employment and the low participation of different groups in the Dutch society. The papers comprise general background information on the non-participation of these groups as well as analyses of specific topics, in particular labour market policies. The authors have various backgrounds, ranging from employee at the Dutch Central Bureau of Statis-

1

On this issue see, for instance, also K.D. Hoover, ‘Why Does Methodology Matter for Economics?,’ Economic Journal, 105 ~1995!, pp. 715–734, especially p. 719.

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tics to the Director General for Employment Policies of the Dutch Department of Social Affairs and Employment. The first paper investigates participation and non-participation in The Netherlands compared to other countries. Next, two chapters study the mismatch problem which in particular affects the low-educated at the lower end of the labour market. In the following papers, three salient developments of the Dutch labour market are discussed: the large number of disabled, the low participation of the elderly and the sharp rise of participation by women in The Netherlands. The last three papers refer to labour market policies in The Netherlands. The twopronged approach of the current Dutch government is explained and compared to the recommendations on employment policies by the European Commission. The final contribution questions the effectiveness of the various employment policies which were used since the beginning of the eighties. As a consequence the book ends with a pessimistic view regarding the solution of the unemployment problem in The Netherlands. This contribution seems to overlook the relatively good employment performance of The Netherlands since the mid-eighties, when compared to other European countries. For example, during the recent recession at the beginning of the nineties, Dutch employment did not fall, as was the case in other European countries, including the United Kingdom. This must be accredited to the macroeconomic and structural policies undertaken by subsequent Dutch governments in the recent past. Understandably, single clues for a definitive solution of the non-participation problem are not provided. In this respect, the book can be considered to support the policies of the current Dutch government, which pursues a mixture of policies, aiming at general employment growth by sound macroeconomic and structural economic policies, further redistribution of labour, and specific policies for the lower segment of the labour market. The latter also comprises a significant extension of subsidized labour financed by saved unemployment benefits. The book gives a good overview of various important labour market issues in The Netherlands, providing a lot of statistical information, investigating causes and possible solutions. So called ‘hard core’ economic solutions as labour market deregulation, lowering minimum wages, and increasing financial incentives are somewhat underexposed. This is partly explained by the background of the majority of the authors, having studied sociology or law or being employed at a faculty of law or sociology. The negative effects of such policies on social cohesion and social justice generally attract greater attention in such disciplines than in economics. Notwithstanding, it is remarkable that leading Dutch labour market economists like Theeuwes or Hartog are absent from the list of authors. Although the book is from recent date, on first sight it is already outdated on some points. For instance, the number of disabled is currently decreasing due to measures taken by the previous coalition government. Further, a new element in the policy debate is the supposed substitution process of the low-educated by higher educated workers. This aspect is absent in the book. However, the book shows that the increasing participation of ~better educated! women has gone together with a decreasing participation of men, expelling relatively old aged men, in majority low-educated, into the disability benefit system and pre-pension schemes. For a large part, this has not been a substitution process on the microlevel but on the macrolevel. At the same time, at the demand side of the labour market low paid employ-

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ment has been destroyed in manufacturing industries, while employment in service sectors has been growing steadily. The characteristics of these jobs probably better matched the educational levels and types of new entrants to the labour market than of those who had become unemployed in shrinking manufacturing sectors. O.J.C. Cornielje

Elizabeth Vallance, Business Ethics at Work, Cambridge University Press, Cambridge, etc., 1995. Pp. 191. $ 16.95 This well-written book is intended as an introduction for students of business, commerce and management studies. The author’s objective is to write on business ethics ‘at work.’ She does not wish to add to the list of books about business ethics as such; in no way. Her aim is to elaborate on how this discipline ‘works’ in practice. She wants to offer a book on practical ethics, designed for managers as an instrument for their business. As has been underlined in the foreword, the book looks at business ethics from the perspective of the business practitioner, but with the rigour of the moral philosopher. The tendency thus far should have been to look at moral philosophy’s classical theories – in this context the authors more specifically enumerates Kantian deontology and Utilitarian rationalism – to provide a framework for investigation. However, the theories just mentioned primarily deal with personal ethics, they do not directly address the kind of ethical problem that arise within a business context. Mrs. Vallance intends to offer a rather more focused framework, starting with and emerging from the nature and aims of business itself. In the opinion of many people there should be a certain amount of doubt about the appropriateness of introducing ethical categories in the language of business. Between business and ethics, as between economics and ethics, a dichotomy should exist. The dividing line which has been indicated in the book as the Machiavellian line tries to drive a wedge between moral and other forms of activity. It could imply that some things never have an ethical dimension: business, for example, which might be supposed to be driven by other criteria, in which ethical standards should have no place. However, this is not her opinion. To express her view, Mrs. Vallance point out that the commercial world has always claimed a ‘business ethic,’ in the sense of a way of operating, which is considered acceptable within that context. ‘My word is my bond,’ was the basis of commercial dealings. But this business ethic was, according to Mrs. Vallance, ‘a way of operating,’ not ‘an aim as such.’ Business does not try to realize ethical, social or cultural targets. The raison d’eˆtre of business should be to produce goods and services which people need. To quote the authors: ... ‘business, as defined by its purpose, is involved in maximising long-term owner value.’ What are the terms of reference of the discipline business ethics? According to Mrs. Wallance, it assumes that business people will accept the general principle that an ethical framework of some kind has relevance for business. Ethics as such provides no answers; however, it does offer the structures and frameworks within which problems can be examined. In her opinion, the task of business ethics is not to justify certain activities. Business ethics should not prescribe what has to be done in our life and work. Its task is to

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answer the question in what way its basic principles and values influence our life and work. Values and principles should not be applied ‘on’ certain situations, but ‘in’ certain situations. The author is not an adherent of situation-ethics, but an advocate of ethics-insituation. Specific issues in economic life which are relevant for business ethics and which are elaborated in the book are, among other things: advertising, environment, and corporate government. In this context no casuistry is applied concerning ethical problems resulting from these issues; rather, emphasis is the importance of the social context in terms of which all information about the world is given and received, so that an ethical framework can be developed for business. Finally, the author underlines the necessity of the ethical audit, which will contribute to business articulating its ethical priorities, aware of its successes and shortcomings, and which will allow feedback and continuous improvement. But, before the audit can proceed, the values of the business have to be made clear. A mission statement may be a possible starting point in the identification of ethical values. The final background requirement for an ethical audit is the identification of the major stakeholders in the business. Consequently, besides the ~formal! offering of a framework, business ethics should also procure the ~material! content to this ethical framework: ‘justice’ and ‘decency’ are issues in this regard. Answering the question: ‘Can there be a ’’global ethic’’?,’ the author claims there is a connection between our perception of the world and the way in which we make decisions in the world. The ethical attitude and personal integrity of the stakeholders are essential components in drawing up the ethical values of business. And this can be achieved by constantly auditing the relationship between theory and practice. The proposition that it may be worthwhile to make sure there is a court of appeal or that one has the right to go to a designated person, an ombudsman, who will deal with concerns of this type, is the last subject of this instructive book which is well worth reading. A. Kouwenhoven

DE ECONOMIST 145, NO. 1, 1997

UIT DE ECONOMIST VAN 1897

FROM DE ECONOMIST IN 1897

Behoort de Zuiderzee te worden drooggemaakt? ~...! De droogmaking zou ~...! vooral in den tegenwoordigen tijd, velen zeer gelegen komen. Er is, naar aannemers beweren, behoefte aan werk. In de laatste 30 jaren zijn omvangrijke werken van openbaar nut tot stand gebracht. Alle plaatsen van beteekenis zijn door een uitgebreid spoorwegnet onderling verbonden; voor het vervoer te water zijn nieuwe wegen gemaakt; en onze groote steden zijn om te voldoen aan den aanwas van bevolking belangrijk uitgelegd en voorzien van allerlei inrichtingen, die de moderne tijd eischt. Op deze periode van buitengewone bedrijvigheid is een tijdperk van betrekkelijke kalmte gevolgd. Nieuwe werken van beteekenis zijn niet ondernomen, en al dreigen dientengevolge nu niet – zooals een geestdriftig voorstander van de droogmaking, de Delftsche hoogleeraar Telders in eene door de Zuiderzee-Vereeniging uitgegeven rede oordeelde – ‘duizenden in den lande, industrieelen en fabrikanten, ingenieurs en opzichters, aannemers en werkbazen, ambachtslieden en rijswerkers, schippers en machinisten, arbeiders en polderjongens, die te zamen een groot kapitaal van kennis en arbeidsvermogen vertegenwoordigen tot de w e r k l o o z e n te behooren,’ het is aanneembaar dat enkele takken van bedrijf en klassen van arbeiders van dien toestand den terugslag ondervinden. De droogmaking van de Zuiderzee zou verlevendiging aanbrengen, en dit bijkomstig voordeel, dat niet als de vruchten van den Zuiderzeebodem eerst over jaren zou worden genoten, doch reeds door het

Should the Zuiderzee be reclaimed? ~...! The reclamation would ~...! especially in these times be very convenient for many. There is, according to contractors, a need for work. During the past 30 years extensive public projects have been completed. All important places have been linked together by an extensive railway network; new sailing routes have been created for transport by water; and our big cities, in order to accomodate the increase in population, have been significantly expanded and provided with all sorts of facilities which modern times demand. This period of extraordinary activity has been followed by a time of relative calm. No new projects of significance have been undertaken, and although there is now no resulting threat – as an enthusiastic advocate of the reclamation, Delft’s Professor Telders, claimed in a speech published by the Zuiderzee Society – that ‘thousands in the nation, industrialists and manufacturers, engineers and superintendents, contractors and foremen, craftsmen and osier reveters, skippers and mechanics, laborers and poldermen, who together represent an enormous capital of knowledge and working power, will join the unemployed,’ it is plausible that some branches of industry and classes of laborers will experience the backlash of the decline. The reclamation of the Zuiderzee would bring a revival, and this fortuitous occurrence, whose fruits, unlike those of the Zuiderzee bed which are enjoyed only years later, would already be reaped by the contemporary generation, is, according to all accounts, highly valued by many. That

De Economist 145, 137–138, 1997.

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tegenwoordig geslacht onmiddellijk zou worden geoogst, wordt, naar zich laat verklaren, door velen hoog gewaardeerd. Dat de arbeidsvraag, die de uitvoering der onderneming in het leven zou roepen, voornamelijk de richting der nationale productie eenigszins zou wijzigen, doch haar waarschijnlijk weinig zou verhoogen; dat de arbeiders, die aan en voor de inpoldering zullen worden te werk gesteld, bij het uitblijven daarvan niet ledig langs heeren straten zullen slenteren; en dat de betere prijzen, die enkele ondernemers voor hunne voortbrengselen hopen te bedingen, uit de openbare kas zullen worden betaald, wordt meestal nauwelijks in aanmerking genomen. F.S. van Nierop, De afsluiting en droogmaking van de Zuiderzee van een economisch standpunt beschouwd, blz. 89/92/ 93.

the labor demand, which the execution of the endeavor would give rise to, would mainly and only slightly affect the orientation of national production and would likely increase it only little; that the laborers, who will be put to work on and for the reclamation, in its absence will not wander aimlessly along the roadside; and that the higher prices, which some entrepreneurs hope to obtain for their products, will be paid for out of public finances, is hardly ever taken into account. F.S. van Nierop, The Closing and Reclamation of the Zuiderzee Considered from an Economic Point of View, pp. 89/92/93 ~translated by Richard Gigengack!.