DE ECONOMIST 136, NR. 3, 1988

BOEKBESPREKINGEN - REVIEWS

S . E . G . Lea, R . M . T a r p y a n d P. Webley, The Individual in the Economy, A Survey of Economic Psychology, C a m b r i d g e University Press, C a m b r i d g e , etc., 1987. P p x x i i i + 6 2 7 . £ 39.50 Economics and psychology both deal with human behaviour. This common interest is obscured by the academic division of labour which may increase scientific productivity but decreases mutual understanding and interchange. Without exchange between the two specializations, productivity will be endangered. Therefore this careful study by three British psychologists deserves a warm welcome. Lea, Tarpy and Webley (hereafter LTW) compare the approaches and the research results of the two disciplines, in particular in those fields which are common to them: buying, saving, taxpaying, advertising. In about 600 pages the ideas of more than 2000 authors are reviewed. Though the book's subtitle reads A Survey of Economic Psychology, its content is rather broader than the endeavours at synthesis which usually come under that label. In fact, LTW suggest that we recognize the 'dual causation' of behaviour by which they mean that individual decisions affect the economy whilst the economy affects individual behaviour; they critizise some economic psychologists for being insufficiently aware of this dual connection. Katona, for instance, depends so heavily on the notion that attitudes contribute to economic growth that he loses sight of the way in which individuals are affected by the economy (p. 536). Another example: the data bases collected by the econometricians have been largely ignored by economists and psychologists. According to LTW the dual causation might prove to be a new paradigm and the authors hope it will guide new research. The book starts with a 33-page introduction to psychology for the benefit of economists - explaining attitudes, attribution, learning and motivation - a 22-page introduction to micro-economics (mainly about demand curves) and a 27-page introduction to macro-economics (the usual stuff, plus an unexpected 3 pages on personal income distribution - unexpected because no economist would associate personal distribution with macro-economics). The next chapter is on economic psychology. LTW stress the great variety of its methods: the laboratory approach, field observation, surveys, modelling, comparison between countries; and they plead for methodological pluralism. Chapter 5 is on rationality, a great stumbling block in the relations between economists and psychologists; LTW argue that the dichotomy between rational economics and an irrational psychology is sterile. It compels us to adopt a 'theory first' methodology instead of a 'data driven approach.' Instead they recommend cooperation in the field of human needs. After these preliminaries LTW devote five chapters to specific kinds of behaviour:

404

DE ECONOMIST 136, NR. 3, 1988

work, buying, saving, giving and gambling. They survey an enormous literature, look for theories, compare research results and come up with a great deal of useful but scattered information. Some of this will be new to economists. For instance, on page 195 we find diagrams showing 'demand curves' from experiments on rats, monkeys and pigeons. On the vertical axis are quantities obtained by these animals ('reinforcements') when they press levers in specially designed cages ('Skinner boxes'); the horizontal axis shows the number of actions the animal has to take which can be interpreted as a kind of price. The curves are downward sloping and that is what an economist would expect, even if he does not exactly understand what is meant by the quantities on the axes. Much more surprising is Herrnstein's 'matching law,' saying that rates of behaviour are proportional to rates of reinforcement. Rachlin, Kagel and Battalio noted the difference between his law and economic behaviour of human beings: in the latter case there are many reinforcers instead of one, so they extended the formula to an exponential one in order to incorporate substitution. LTW call this an interesting suggestion but do not see how we might derive demand equations from it. I bring up this example, which is only one among many, to illustrate that the tone of the book is often rather sceptical, but specialists and in particular economists may find information in it which is difficult to come by. That is also true for the chapters on saving, which contains much material on deferred gratification, and the chapter o n giving, which I found informative about altruYsm. The chapter called gambling indeed deals with various addictions but also with decision-making under uncertainty, which is a much broader subject and very close to the heart of modern micro-economists - they will be surprised to find one of their pet subjects under the heading of 'gambling.' After those five chapters on individual behaviour we are about halfway through the book and here the focus changes: LTW now deal with the economy a s a whole and how it affects the individual. The chapters are about taxation, money, adVertising, growing up, primitive economies, economic growth and token economies. This isthe other side of the 'dual approach,' recommended by the authors. Still, the d!chot0my is not very clear-cut, because these chapters, after explaining some of the basi~ macrO-economics of taxation, money, etc. return to the problem of ho w individual people decide. LTW discuss, for instance, the taxpayer's reactions as worker and consumer, but workers and consumers have also been dealt with in the first part of the book. The chapter on taxation also treats tax evasion and the psychology of tax resistance, so the overlap is only partial; yet the reader may well feel that there is some repetition and overlap. This is also true for one of the most interesting chapters, called 'Growing up in the economy' which rightly points out that economists usually ignore children and that 'economic man is an obstetric marvel. From the pages of economic journals he springs to life full blown' (Maital). This chapter explains developmental psychology in the spirit of Piaget. This is no doubt illuminative for most economists, if only for the overview of research results on child behaviour with respect to work, money, buying, etc. Piaget's main point is that thinking grows out of behaviour - a basic idea in modern cognitive theory and rather contrary to the approach to intentional behavior (make a plan first, then carry it out) which is common to naive economists. Yet the discussion of the Piaget and related views necessarily leads to some repetition of material dealt with in earlier chapters, for instance in the chapter on rationality, the chapters on buying, work, etc. The chapter on growth gives an overview of the various sociological approaches, relating norms and values and in particular religious beliefs to growth rates. It also discusses the McClelland theory of achievement. Here economics and psychology are admirably in-

BOEKBESPREKINGEN / REVIEWS

405

tertwined. The chapter on 'token economies' is actually about hospitals and prisons and stands rather apart from the rest of the book. This short review may give the reader a faint impression of the richness of this book, but also of its somewhat difficult structure. It contains a mass of material which is difficult to organize. The more fundamental reason for the slightly chaotic nature of this 600-page volume is that there is no basic theory underlying the psychological research. I think that LTW would agree to this; they are in favour of methodological pluralism. This easily leads to the enumeration of scattered research results, to short comments and a rush from hypothesis to hypothesis. Moreover, LTW often conclude that the research results of economists and psychologists are not consistent. Sometimes they are not even comparable. The reader is left in a somewhat bewildered mood. It is of course easy to critize LTW on details (I find for instance their discussion of economic justice rather unconvincing) and on 9missions (The Journal of Economic Psychology is lacking, which also means that Van Raay on attribution and Van Praag and Kapteyn on welfare are not among the 2000 authors). It would be unfair to harp on these details but there is one major point in the economist's view of the world that should be mentioned. Some of us have a general theory of behaviour which is applicable to businessmen and investors, but also to criminals, procreators, participants in riots, politicians and bureaucrats. They all optimize their own behaviour and, in doing so, optimize the outside Walrasian world. The invisible hand takes care of that. Everywhere indifference planes are tangential to transformation planes. This Grand View of Paretian optimality lends the micro-theory of behaviour its true splendour. The idea is very seductive. It brings structure and cohesion to the economist's hypothesis about behaviour. Even those economists who do not believe in Walrasian equilibrium and Paretian optimality may well be, somewhere in the back of their mind, influenced by the Grand View. We cannot understand their ideas on taxation (distorts the allocation), money (disturbs Walrasian markets), wages (should be flexible) criminal law (should be harsher) and prices (contain essential information about the outwide world) without having an inkling of this deeply rooted ideology. LTW rightly stress the necessity of the dual approach but they seem to have overlooked one element of it - the Grand View. To many neoclassical observers this is the very core of economics. I am not saying that psychologists should accept the notion that the world we happen to live in is a neoclassical one; I hope they shall criticize that notion. But therefore it should be recognized first. J. Pen

W . E . B a r n e t t a n d K.J. S i n g l e t o n (eds.), New Approaches to Monetary Economics, C a m b r i d g e U n i v e r s i t y Press, C a m b r i d g e , etc., 1987. Pp. V I I + 3 6 7 . £ 2 7 . 5 0 In the past fifteen years the quantity of new and exciting research in the area of monetary economics has been remarkable and has changed the field profoundly. This new line of monetary research covers both theoretical and empirical analysis and its continuing growth has been reflected in the literature. The present book offers a fine

406

DE ECONOMIST 136, NR. 3, 1988

example of this process, collecting 18 contributions first presented at a conference on new approaches to monetary economics. These new approaches concern five topics around which the monograph is organized. The first topic deals with transactions-motivated monetary holdings in general equilibrium. This part includes papers on monetary dynamics by Grossman, on a multiple means-of-payment model by Prescott, and on credit policy and the price level in a model by Prescott, and on credit policy and the price level in a cash-inadvance economy by Woodford. Using a general equilibrium framework Grossman derives several theorems on the impact of particular types of monetary policy on the real economic sector in the steady state. He illustrates this analysis with numerical simulations on the dynamics of his highly theoretical models. Prescott considers two technologies for making payments and shows that in the steady state bank drafts are used for large purchases and currency for small ones. Woodford employs an intertemporal equilibrium framework including the overlapping-generations model to show that open market policy can keep both the nominal and the real rate of interest low. The second topic is financial intermediation and includes two chapters. Bhattacharyya and Gale examine the role of a central bank in sharing risk across banks subject to privately observed liquidity shocks. The chapter written by Bernanke and Gertler is on banking and macroeconomic equilibrium and provides an analysis of the impact of financial intermediaries on aggregated economic activity, with an attempt to use the analytical results for understanding the effects of financial collapses, of banking regulation and the monetary transmission. Very topical is part III of this book, dealing as it does with monetary aggregation theory. This is an important subject which has undergone a revival with the resurgence of economic index number theory. Barnett, who introduced the use of index number theory into monetary theory, discusses the microeconomic foundation of monetary aggregation and thus provides an interesting and important contribution to aggregation theory. On the basis of Barnett's earlier work Serletis carries out separability tests to examine the broad-based Divisia monetary aggregate by comparing it with simple-sum aggregation. In the spirit of the Barnett approach Marquez uses the Divisia monetary aggregate to investigate the money demand in the USA with ample testing of the error properties and of currency substitution. An important conclusion of this research is that the assumption of a closed-economy demand for money specification is not appropriate, which indeed is a provocative result for the design of US monetary policy. The monetary index is also the focus of Hancock. Her objective is to determine whether monetary goods, i.e. financial assets and liabilities, can be aggregated on the supply side. Hancock's approach is the production function. The final chapter of part III is by Poterba and Rotemberg and studies household financial demand allowing the monetary assets to enter directly in the utility function. The empirical result is a consistent system of asset demand equations. P a r t IV deals with issues on aggregate fluctuations and includes three chapters whose common technical characteristic is a stochastic time series model orientation. Singleton analyses security prices and how prices are affected by trading rules o f nonspeculative traders. King and Plosser focus on the neoclassical real business cycle theory and the propagation mechanism. To measure this, King and Plosser propose a propagation ratio derived from the stochastic time series model underlying their empirical examination. The Lucas critique is investigated analytically by Sims using a well-articulated VAR model. His main conclusion is that accurate conditional pro-

BOEKBESPREKINGEN / REVIEWS

407

jections of the effects of policy do not necessarily hamper the effectiveness of economic policy. The final part of this book deals with theoretical issues in the foundations of monetary economics and macroeconomics with four chapters by Diamond and Yellin, McCallum, Wallace and Taylor. The spirit is neoclassical with advanced analytical tools and some of the topics may be associated with the optimal inflation rate, the overlapping-generations view, externalities of price rigidities and unsolved problems for monetary theory. On the whole, this collection of papers is interesting because of its variety and profound economic theoretical approach. Moreover, it is worth reading because it provides an exciting view of the rapidly changing character of modern monetary thinking and its close association with general economic theory. However, it does not offer quick and easy answers to the variety of difficult and intricate questions raised by possibly difficult theories. Therefore, the interested reader may certainly benefit from this collection of essays. M.M.G. Fase

J. F r a n k , The New Keynesian Economics, Unemployment, Search and Contracting, W h e a t s h e a f B o o k s L t d . , B r i g h t o n , 1986. P p . 283. Dfl. 41,55 Recently a new theoretical approach has emerged in macroeconomic theory. It can be referred to as real business cycle theory or more popularly as new Keynesian economics. Its advocates aim at developing a consistent explanation of fluctuations in output and employment as a whole, based on relative prices, forward-looking expectations and optimal individual decisions. However, the underlying microeconomic assumptions differ substantially from what is generally accepted and stress the existence of contracts in labour markets, imperfect competition and other limitations to trade. Consequently, the existence of real wage and price rigidities, simply put forward in the traditional Keynesian textbook analysis but properly derived for in the new approach, may give rise to demand-determined fluctuations in output and employment, spill-over effects and a well-defined role for fiscal and monetary policy. Jeff Frank's book provides us with an outstanding example of the abovementioned approach. It is very well written and highly accessible to students with only an undergraduate knowledge of macroeconomic theory. Yet the book does not avoid dealing with some difficult conceptual problems of search and (implicit) contracting theory, such as the enforceability of contracts, possible inefficiencies in search and contracting models, asymmetric information and different kinds of moral hazard problems. Another distinguishing feature of the book is its organization. The book is divided into two more or less self-contained parts. The first part discusses the chronological development of macroeconomic theory. Starting out with a study of the neoclassical and Keynesian labour market theories, followed by similar evaluations of the loanable funds market (the commodity market) and the money market, Frank developes two IS-LM models, one of a Monetarist and one of Keynesian variety. Part one concludes with an analysis of price and quantity adjustments in the context of the two models (i.e. the shape of the Phillips curve and its theoretical backing,

408

DE ECONOMIST 136, NR. 3, 1988

UV-analysis) because it is in the assumptions underlying adjustment processes that these models are different. The Keynesian model depends upon some ad hoc failures of the adjustment processes, whereas the neoclassical Monetarist approach simply assumes (price) flexibility in the economic system, but fails to explain the observed, sustained divergences in unemployment from the natural rate. Unless a sound microfoundation is supplemented to both models, a choice in favour of one of them cannot be made. This need for microfoundation is the core of the second part of the book. Search theory is developed to support the natural rate argument. Information problems are introduced to formulate 'Lucasian' business cycle theory. Next it is shown that the search labour market collapses if the model takes account of monopsony elements in actual labour markets, on the one hand, and the fact that on-the-job search is considered to be a far more effective way to find a new job, on the other. The only way to sustain a labour market is through explicit or implicit contracting arrangements, which provide a solid microfoundation to the Keynesian type of macroeconomic models. Optimal contracting arrangements between a worker and a firm successfully explain real wage rigidity and involuntary lay-offs as a response to adverse demand conditions. However, the optimal contract differs only in its rationing mechanism (quantity vs. price rationing), not in its outcome from the results obtained from a search model. The introduction of asymmetric information is necessary to derive inefficiently high unemployment rates from contracting arrangements. Still, this result is not very 'Keynesian' in nature, because only real wages are rigid and it is still possible that a real balance effect will eventually restore the full employment equilibrium in the economy. To prevent this possibility, Frank links the contracting model of the labour market up to a model of an imperfectly competitive commodity market. In this way he succeeds in explaining consistently the sustainability of 'equilibrium recessions.' Despite my enthusiasm for the book, I have two critical remarks to make. In the first place, there is an absence of any impact of behaviour in financial markets in the model and in the approach as a whole. Important issues in macroeconomic theory as for example the (relative) effectiveness of fiscal and monetary policy, the impact of wealth changes or the (non-)neutrality of money cannot be addressed properly in the context of the model. In the second place and related to the first remark, there is an absence of demand considerations. Aggregate demand is incorporated like 'manna from heaven, which is certainly not in line with Keynesian theory with its primary focus on demand as a whole and on its composition. H. van Ees

R o b e r t J. Barro, M a c r o e c o n o m i c s , 2 n d edition, J o h n Wiley & Sons, New York, etc., 1987. Pp. 608. £ 3 9 . - It is worthwhile - both for students and professional economists - to pay attention to Robert Barro's textbook for at least two reasons. First, Barro's approach differs from those presented in traditional textbooks. Second, the book is very often referred to in papers in economic journals. In the September 1987 issue of the Journal o f Monetary Economics five of the ten articles refer to it.

BOEKBESPREKINGEN / REVIEWS

409

Most textbooks on macroeconomics are characterised by a Keynesian bias. In this book Barro presents '... the market-clearing approach as a general method for analyzing real world problems. The stress on this approach means that the book is not a "balanced" treatment of alternative macroeconomic models' (p. iii). The book consists of six parts. The first part deals with the microeconomic foundations and the basic market-clearing model. With respect to the microeconomic foundations Barro argues that '... many basic courses in economics do not follow this general approach when dealing with macroeconomics. In fact, students could easily reach the conclusion that macroeconomics and microeconomics were two entirely distinct fields. A central theme of this book is that a more satisfactory macroeconomics emerges when it is linked to the underlying microeconomics' (p. 9). Unfortunately, there is hardly any discussion of the aggregation problem, probably one of the hardest to tackle in economics. Market clearing is, according to Barro, '... the natural macrocomplement to the microfoundations that underlie the model' (p. 11). There is, however, hardly any justification for this view. In part I the following model is derived. There are four markets: the commodity market (equation 1), the money market (equation 2), the bonds market and the labour market (equation 3). On the basis of Walras's Law the bonds market is not taken into account. Due to the intertemporal substitution effect of a change in the (nominal) interest rate (R) the supply of goods (ys) and the consumption demand for goods (C d) are a positive and a negative function, respectively of R. At this stage there are no investments and there is no inflation. Given R, the real wage rate (w/P) clears the labour market. Money (M) is neutral in the basic model.

ys (R, w/P, ...) = Cd(R, w/P,...) M = P . L ( R , Y, ...) N cl (w/P, ...)=N~(w/P,R .... )

(1) (2) (3)

Part II deals with inflation. Inflation is regarded as primarily a monetary phenomenon, but '... we should remember some important points. First, the analysis will not rule out effects of real disturbances, such as supply shocks, on the price level ... Second, we should view the expression, monetary phenomenon, as incorporating variables that influence the real demand for money ... Third, we would eventually like to know why monetary growth behaves differently in different countries and at different times' (p. 170). Inflation is incorporated in the basic model. In equations (1) and (3) the nominal interest rate is replaced by the real interest rate (r). Changes in the money growth rate cause a jump in the price level. There is no superneutrality, 'because the acceleration of money raises the inflation rate, it also raises the nominal interest rate, and thereby lowers the amount of real money demanded. The resulting fall in real cash balances is one real effectof the change in monetary behavior' (p. 201). In part III business fluctuations and economic growth are dealt with. Gross investment demand is the difference between the desired capital stock - which depends on r and the rate of depreciation - and the actual capital stock after depreciation. Equation (1) is expanded so as to include investment demand. If investment is strongly responsive to the real interest rate, then the bulk of variation in output - due to some temporary economic disturbance - shows up in investment demand. A temporary shock increases r, unless the decline in Capital's marginal product fully offsets it. In chapter 10 unemployment is explained by means of a model of job finding in which the reservation

410

DE ECONOMIST 136, NR. 3, 1988

wage is crucial. The natural rate of unemployment is reached if job separations balance job findings. This treatment is, however, not very convincing, because - as Barro acknowledges - it is possible that movements in and out of the labour force influence the natural rate. 'This ambiguity points out the fundamental problem of defining and measuring the concept of unemployment. In general, it is easier to define and measure employment than unemployment' (p. 264). In the final chapter of part III the consequences of the growth of the capital stock are discussed. In part IV government behaviour is introduced in the model. An additional unit of government purchases substitutes for a units of private consumption and also raises private production by fl units. Equation (1) therefore changes in two respects. First, government purchases are an additional demand for goods. Second, government purchases are included as an argument in ys and C a. A key distinction is made between temporary and permanent government "purchases. A temporary increase of purchases causes a higher level of output and an increase in the real interest rate, which will crowdout investment. If permanent purchases rise by 1 unit, then it is just as if real income for the aggregate of households had diminished by one unit. On net, an increase of permanent purchases by 1 unit leads to a decline of permanent private income by l-a-ft. The expansions of supply and demand turn out to be roughly equal. Therefore, a permanent increase will not raise the real interest rate. The model is illustrated by Barro's own work i.n this field. In chapter 13 taxes and transfers are introduced in the model. One new feature is that the real interest rate is replaced by the after-tax real interest rate in equation (1). Moreover, the tax rate is included in both the supply and demand parts of the equation. If combined with the adverse effects of higher taxation, a permanent increase in government purchases now has an ambiguous effect on output. In chapter 14 the debt neutrality hypothesis is explained. Deficit finance is interpreted as an intertemporal reallocation of taxes which does not alter the consumption possibilities of rational subjects, who will therefore not change their optimal consumption plans. Government's dis-saving is exactly matched by additional private sector saving, hence the interest rate will not change. Part V deals with the interactions between the monetary and the real sector. Banking panics and drastic reductions in the reserve requirements may have real effects due to the higher cost of intermediation. However, pure monetary disturbances - in the sense of changes in the monetary base - are neutral in the model. In chapter 16 the empirical evidence on the interplay between nominal and real variables is discussed. Barro concludes that 'At least in the long run, it is untrue that more inflation leads to a lower unemployment rate, or that to have low inflation a country must accept a high unemployment rate' (p. 460). However, there is some evidence that unexpected monetary changes after World War II have had a positive effect on economic activity. In chapter 17 this is explained by means of the concept of incomplete information. Although the approach is theoretically very attractive, its main drawback is that the costs of obtaining information on the stock of money and the general price level are so low that the difference between the local price and the general price level can be discovered very easily. Barro acknowledges this and concludes that '... the theory cannot explain major business contractions such as the Great Depression. But the theory may help to understand some aspects of mild recessions, such as those experienced since World War II' (p. 494). In chapter 18 the Keynesian theory of business fluctuations is discussed. Barro argues that consideration of this model is postponed, because '... the model cannot really be fully understood - and the distinctive features of it cannot be ap-

BOEKBESPREKINGEN / REVIEWS

411

preciated - until the market-clearing analysis has been worked out. Thus, whatever one's ultimate judgment about the value of the Keynesian model, it is a great mistake to begin a study of macroeconomics with this model' (p. 15). Barro is rather critical with respect to the contracting approach. Although it can be used to rationalize the price adjustment relationship of the type usually found in a Keynesian model, '... stickiness in prices and wages no longer tends to generate Keynesian results. Rather than supporting the Keynesian model, the perspective of long-term contracting demonstrates that output and employment can be determined efficiently - as if prices and wages always adjusted to clear markets - even if prices and wages are sticky' (p. 527). Finally, part VI - which is by far the smallest part of the book - treats the international economy. This book deserves a broad audience, if only to discover what to disagree with. J. de Haan

P. Kriesler, Kalecki's Microanalysis, The D e v e l o p m e n t of Kalecki's A n a l y s i s o f P r i c i n g a n d D i s t r i b u t i o n , C a m b r i d g e U n i v e r sity Press, C a m b r i d g e / N e w York, 1987. P p . 129. £ 19.50

As the title of this book already indicates, Kriesler is concerned primarily with Kalecki's microanalysis and especially with the gradual development of this part of Kalecki's distribution theory from the original statement in 1938 to Kalecki's last publication on this matter in 1971. In a separate chapter attention is given to the interrelation of Kalecki's micro- and macroanalysis. The first chapter of this book expounds the division in Kalecki's distribution theory between a macrotheory that explains the determination of the level of aggregate profits and a microtheory that provides, through the use of the often criticized concept of the degree of monopoly, an explanation of the relative income distribution. In chapters 2 and 3 a brief account is given of some theoretical developments during the 1930's that are important for a good apprehension of Kalecki's work. Of particular interest are the development of the theory of imperfect competition and the historical roots of the degree of monopoly. The degree of monopoly, as defined by Lerner in 1934, is the excess of price over marginal costs divided by price. The development of Kalecki's microanalysis is, on good grounds, split into three periods. In the first period, 1938-39, Kalecki, with the emphasis on the individual firm and based on Lerner's degree of monopoly, for the first time publishes his distribution theory. In his publications in the period 1939-42, clearly under the influence of his stay in Oxford and Cambridge, he tries to incorporate recent theoretical developments regarding imperfect competition into his analysis. In the third period, 1943-71, Kalecki works on the refinement of his core concept of 1938-39. In the book these three periods are treated successively in chapters 4, 5 and 6. Kalecki's distribution theory is, as Kriesler clearly illustrates, based on a few important foundations. Constant average and marginal costs up to the level of full capacity utilization and the existence of excess capacity as day-to-day practice in the manufacturing sector are two of these foundations. The economy is divided into two subsectors: the

412

DE ECONOMIST 136, NR. 3, 1988

competitive raw materials sector and the manufacturing sector characterised by imperfect competition and cost-determined prices. These and other assumptions lead through aggregation to the well-known theorem that the share of labour income in national income is determined by the degree of monopoly and by the ratio of raw material costs to wage costs. Kriesler then points out some major difficulties in this early version of Kalecki's microanalysis. Though the analytical problems he mentions, such as the chosen method of aggregation and the lack of interdependencies between the individual firms, are certainly substantial, the author does not mention, until the appendix at the end of the book, the problems underlying the use of the concept of the degree of monopoly itself. Kalecki, especially in the earlier versions of his distribution theory, does not make quite clear whether he claims the degree of monopoly to be equal to the mark up, in which case the whole concept becomes merely a tautology, or whether the mark up is only a reflection of the degree of monopoly which is determined by all kinds of structural variables. Kriesler supports the view that the degree of monopoly is an e x a n t e , independent variable determining the pricing decisions of the firms and not v i c e versa. In his idea the tautology critique can not stand close scrutiny. It is a little unfortunate that the question whether the degree of monopoly is an independent or dependent variable is only dealt with in an appendix at the end of the book. Kalecki's attempts to incorporate different types 'of market imperfection, such as monopolistic competition and oligopoly, into his analysis are not very fruitful. Kriesler correctly classifies these attempts as a digression from his earlier work. In his 'Studies in Economic Dynamics' (1943) no further distinction is made by Kalecki between different market classifications. Chapter 6 focuses on the refining of Kalecki's original microanalysis. The book shows very explicitly that Kalecki still faces the above-mentioned analytical problems of his earlier analysis and doesn't quite succeed in resolving them. Especially his unsatisfactory definition of the concept of industry, on which much of his later analysis relies, remains One of the main problems in Kalecki's distribution theory. In the course of time the idea of his initial distribution theory, that the relative share of labour income is determined by the degree of monopoly and the ratio of raw material costs to wage costs, undergoes no fundamental change. The analysis in chapters 4, 5 and 6 constitutes the core of the book and gives a good impression of the evolution of Kalecki's work on distribution and pricing. The interrelation of micro- and macroanalysis is treated in chapter 7. According to Kriesler this interrelation is important in two respects. One function of the microanalysis is to explain inflexibilities in the income distribution in the light of changes in effective demand. Changes in microfactors, such as changes in the degree of monopoly, which alter the relative income distribution, will also through their effect on real wages influence employment and output. Kriesler concludes that the drawbacks of Kalecki's microanalysis, the aggregation problem and the concept of industry, are not crucial for Kalecki's macroanalysis. However, it seems to me that these drawbacks, including the ambiguity of the degree o f monopoly, lead to a macrotheory without a clear-cut (formal) microfoundation. In the last chapter, apart from a summary and some ideas for future research in the field of Kaleckian distribution theory, a survey is given of the relevant post-Keynesian literature which is greatly influenced by the work of Kalecki. Kriesler describes and criticizes the essentials of Kalecki's microanalysis in a way that is accessible to both the graduate student and the professional economist. Despite some

BOEKBESPREKINGEN / REVIEWS

413

minor critical remarks I can fully recommend this book to those interested in the foundations of post-Keynesian economics. Harry Garretsen

Charles P. Kindleberger, International Capital Movements, C a m bridge U n i v e r s i t y Press, C a m b r i d g e , 1987. Pp. 99. £ 1 5 . - In November 1985, Kindleberger gave the traditional 'Marshall Lectures' in Cambridge, of which this volume is an expanded vei~sion. It discusses many of the themes which have dominated the author's work over the past decades. It also gives a good impression of his approach to economics, which is based on the conviction that for the assessment of economic developments a feel for the data and a finely honed intuition as to how economies work are as vital as mathematical modelling and statistical testing. At least for those involved in economic policy making this is certainly true. The first three chapters deal with a diversity of often unrelated issues. The discussion is rather haphazard. However, Kindleberger's views of international financial intermediation and of the nature of financial crises are recurring themes. The fourth and final chapter is more focussed, reviewing current developments in world capital markets. On intermediation, the author revisits his classic 1966 Economist article, written with Despres and Salant. It argued that for the USA as the financial center, it was desirable to have a balance of payments deficit, as the USA should be expected to lend long-term abroad, while receiving short-term deposits, thus acting as a bank for the rest of the world. Though elegant and in a way illuminating, this view continues to carry the risk that it be used to explain away a too accommodative stance of monetary policy in the central country. Kindleberger draws repeatedly on his studies of the history and nature of financial crises. He has concluded that at the root there is often a 'dislocation,' an autonomous change that causes relative prices to change abruptly (i.e. an institutional change or a natural resource shock). Subsequently, new profit opportunities open up and a wave of (financial) investment occurs, with some investors overdoing it. Once expectations start to reverse and investors pull back, markets are in 'distress,' and a crisis may follow. This background adds weight to Kindleberger's warning (in the final chapter) on the risks inherent in the 'dislocations' that result from the present rapid pace of deregulation and financial innovation in world capital markets. Nevertheless, he shares the view that financial integration is desirable and in any case inevitable, given modern communication and information techniques. The threat that sudden collective shifts in opinion trigger massive international capital flows should be attenuated by the coordination of monetary and fiscal policies in order to prevent exaggerated movements in exchange rates (Kindleberger states - unfortunately without elaborating - that such coordination is more important than the prevention of protectionism). With relief he notes that the tide now seems to be turning finally, with new initiatives to stabilize exchange rates among the major countries. In fact, the author comes out firmly in favor of fixed exchange rates ('one world money'). It is indeed evident that efforts to reintroduce a measure of stability in the exchange rate system are very much needed. However, to adopt a truly fixed rate regime without a firm political framework to guarantee the re-

414

DE ECONOMIST 136, NR. 3, 1988

quired cooperation has the danger of 'locking the door and throwing the key away,' a favorite qualification of Kindleberger for rigid policy prescriptions. One wonders therefore whether Kindleberger is not too optimistic when he sees the EMS as a model for the world (and too pessimistic when he admits to 'harbor concern over the French recent practice of taking her surpluses in gold' - there is no such practice on record over the past twenty years). As might have been expected, Kindleberger has a lot to say. However, reading this book, one cannot but conclude that it lacks coherence and that the discussion is often spotty. Those interested in Kindleberger's views on the issues discussed in this book are therefore better referred to his International Money (1981) or Keynesianism vs Monetarism (1985), both volumes of collected essays. A.A. Scholten G . A . M a r z o u k , The Flow o f Funds and Monetary Policy in Australia, with S u p p l e m e n t ' N a t i o n a l I n c o m e a n d F l o w o f F u n d s A c c o u n t s : 1959-60 to 1983-84,' A u s t r a l i a n P r o f e s s i o n a l P u b l i c a tions, S y d n e y , J u n e 1987. P p . 228 + 70. This book was written primarily to stimulate discussion in Australia. The central theme is an examination of the causes of the high rate of inflation since the 1970s and the vigorous increase in real wages which, together with the high real rate of interest, resulted in a decrease in industrial profitability, a lower propensity to invest, stagnating growth, rising unemployment and a national savings deficit. Economic and financial developments are analysed on the basis of flow- of- funds accounts 'largely ignored during the years in which monetarism dominated economic policy.' The author notes that there was a stronger relationship between the implicit GDP deflator and a broadly defined money stock (M3, including savings at savings banks) than M1. Even stronger was the relationship with total borrowing by the non-financial sector, or the claims on it held by all financial institutions. Consequently, Marzouk views inflation in Australia as a monetary phenomenon that led to the wage push. Much attention is paid to the share of real transactions in lending to the non-financial sector, which dropped sharply over the years in favour of the acquisition of financial assets (credit inflation): Australia has become a paper economy! Marzouk writes 'that the main structural problems of Australia are related to this shift. This was fostered by a number of factors including the increase in wages coupled with tax avoidance and inflation hedging through excessive borrowing, which culminated in a gap between the rates of return on real production and those for financial investment' (pp. 36-37). Interesting paragraphs are devoted to the distortions in the financial sector caused by the tax system, which is soon to be revised. Another essential element relates to the relatively strongiy expanded non-bank financial institutions (NBFIs); unfortunately, practically no distinction is made between pension funds and institutions with liquid liabilities, such as building societies. The author regrets that the NBFIs were not brought within the scope of the central bank's monetary (and prudential) supervision. He regards M3 as a misleading indicator and an unsuccessful monetary target; he would prefer total lending on account of its close relationship with inflation and its predictability. He wishes to undo much of the deregulation

BOEKBESPREKINGEN / REVIEWS

415

of the banking system and the financial markets of the 1980s. It tends to push up interest rates. Moreover, the only instruments which are still available to the central bank are open-market policy in government securities (including bonds) and a prime asset ratio (minimum of 12%) which applies only to the banking system and is used as a prudential arrangement, but can be applied flexibly. On the other hand, the deregulation has led to the cessation of the banking system's automatic recourse to the central bank. Within the framework of a broad policy mix (fiscal policy, incomes policy and monetary policy), the author prefers the use of cash and liquidity reserves and interest rate regulations for all financial institutions, captive market rules and open-market operations in government bonds to help relieve the pressure on interest rates and the exchange rate and to cause the available finance to be used to a greater extent for real transactions. As the demand for money has been shown to be insensitive to interest rates, he advocates reviving direct credit restrictions, whose drawbacks are, in his view, exaggerated. Let me begin my comments by saying that, in explaining inflation and interest rates in Australia, the author does not make any real attempt to establish a connection with international developments (oil shocks). Furthermore, it is my impression that to some extent Marzouk has become a prisoner of his flow-of-funds analysis. Without denying a number of aspects of the paper economy, I hold that Marzouk shows insufficient awareness of the fact that, with rising inflation, the share of real transactions in total financial transactions will unavoidably decrease because of the wish of households to maintain their liquidity conditions (stock effect), without this necessarily meaning that real capital formation is stagnating. In my view, the study has a drawback in that, within the financial sector, little distinction is made between institutions with liquid liabilities and other institutions, such as the pension funds, and that the author affords insufficient insight into the balance sheet structure of the various categories of financial institutions, a factor which makes it difficult for the reader to assess Marzouk's proposals. The book as such has shortcomings in that the index is too brief and there is no list of abbreviations. It has been written for the home market rather than the export market. This does not, however, alter the fact that its pretension to be relevant for other market economies with deregulated financial markets is valid for some of the subjects touched upon in this review. A.J. van Straaten

G e o f f r y Jones, (Research by F r a n c e s Bostock, Grigori G e r e n s t e i n a n d J u d i t h Nichol), Banking of Empire in Iran; The History of The British Bank of the Middle East, V o l u m e 1, C a m b r i d g e U n i v e r s i t y Press, C a m b r i d g e , 1986. Pp. 418. £ 4 0 . - - ; Banking of Oil; The History of The British Bank of the Middle East, V o l u m e 2, C a m bridge U n i v e r s i t y Press, C a m b r i d g e , 1987. Pp. 359. £ 4 0 . - In the two volumes Jones depicts the history of The British Bank of the Middle East, which in 1960 became a member of the Hongkong Bank Group, the sponsor of this study. Volume 1 traces the Bank's history from its foundation in 1889 as The Imperial Bank of Persia, through the years it was the state bank (1889-1928), until 1952, when the Bank was withdrawn from Iran. The remarkable diversification of the Bank into the

416

DE ECONOMIST 136, NR. 3, 1988

Arabic world, being the first and only bank in Kuwait between 1941 and 1952, in Dubai between 1946 and 1963 and in Oman between 1948 and 1968, is examined in volume 2. The Imperial Bank was the end result of nearly two decades of negotiations, which were primarily directed toward a concession for the construction of railways in Persia. A Royal Charter made it a thoroughly British institution; its board, management, senior staff and banking method, all colourfully described by Jones, were solidly British. Yet the concession from the Persian government made it a national Persian institution, giving it a conflicting dual identity. Its growth before 1913 was not spectacular. Quite apart from surviving adverse global circumstances and self-imposed losses, the Bank faced the daunting task of introducing modern banking to Persia, which otherwise was not unfamiliar with the basic concepts of banking and interest. A great deal of banking business, including exchange, still eluded the Bank and was in the hands of indigenous Sarrafs, merchants, European trading firms and Russians. It was the two World Wars which led to periods of strong growth and good profits for the Bank. In the First World War - aside from large losses in 1915 - this growth stemmed largely from the Bank's role in financing British government requirements. Agent of Empire was, as Jones writes, a much more lucrative role than being a state bank. During the post-war years when the Bank benefited from the favourable exchange position acquired during the war, the Bank was under unprecedented pressure to follow official British policy. In 1928 the Persian government resolved the problem of The Imperial Bank's dual identity by creating its own state bank, Bank Melli. Together with the appearance of other foreign banks this meant the end of The Imperial Bank's apparent monopoly in Persia. The growth during the post-war years, the branch network reaching its peak in 1929 with 25 branches, in Iran, three in Iraq and one in India, was followed by a period of contraction and conflicts between the conservative Bank and the new Iran (since 1928 the official name of Persia). The Bank survived the 1930s only because of its Sterling investments income in London. The Second World War, with the Allied occupation from 1941 to 1945, brought some relief. As the British government's bank in Iran, The Imperial Bank found itself returned to the centre of economic decision making. However, after the war, in line with increasingly strong nationalist and anti-foreign sentiment, the functions of the Bank were reduced and transferred to the Bank Melli. In 1950 the Bank's business in Iran became loss-making, which led the Bank to leave Iran in 1952. By then the Bank was already strongly expanding throughout the Arabian Gulf. The foundations of this transformation into the Arabian world were laid with the help of British diplomacy by securing monopoly agreements in Kuwait (1941) and Dubai (1946) and by breaking the Eastern Bank's monopoly in Bahrain (1946). A monopoly of banking in Oman followed in 1948. After another period of commercial banking without restriction, and without competition from a powerful state-owned bank, the Bank was confronted in the 1950s with growing nationalism. However, thanks to a more pragmatic and flexible reaction than in the past the Bank grew alongside the region it served, profits consistently moving upwards. Nevertheless its heavy reliance on Kuwait, which provided 50% of total profits in the 1950s and 1960s, its seemingly undercapitalization and the deterioriating political condition in the Middle East prompted the Bank to merge with the Hong Kong Bank. During the 1960s the Bank began to experience a malaise which bore some similarities to its experience in the 1930s. The political developments, the increasing nationalism and the disappearance of British political influence in the Gulf, coupled with the arrival

BOEKBESPREKINGEN / REVIEWS

417

of a range of rival institutions and the fact that the isolation of the Gulf from world financial markets was swept away, raised the risks and difficulties of operating a British Bank in the Middle East in the 1960s and 1970s even higher than previously. Some branches were localized (Kuwait) or nationalized (Syria, Iraq, Aden, Lybia and Iran), others met growing competition and growing restriction or suffered strongly from political developments (Oman, Dubai, Morocco, India and Lebanon and Jordan). Nevertheless, thanks to the oil-boom the Bank's business grew at an unprecedented rate after 1966, the branch network expanding from 3l branches in 1966 to a peak of 79 branches in 1979. However, Jones concludes that the Bank's performance during the 1970s could have been better. It never saw most of the giant oil surpluses which flowed into the Gulf and which have been mainly handled by a few large American banks. The Bank's position as a Sterling bank was a handicap, but the Bank also seems to have remained for a little too long a retail bank largely concerned with import finance instead of meeting the growing demand for merchant and wholesale banking services. The final chapter of the second volume reflects on more general aspects of the Bank's experience since 1889. The performance of the Bank, the 1900s, 1920s, 1940s and 1950s being the most successful periods, can stand comparison fairly well with other British banks. However, the Bank was better at pioneering than in taking full advantage of a market once branches had been established. This conforms, according to Jones, to a pattern of British business overseas as a whole. Likewise, the Bank's past conservatism seems to be characteristic of British overseas banking. Probably the same applies to its wider range of activities, which were not, according to the prevailing view in the literature, restricted to short-term lending for finance in foreign trade and exchange banking, and which were not only concentrated on expatriate firms and communities. Moreover, it is argued that the Bank's fortunes were strongly and in a broad sense unavoidably dependent on the great historical movements of the twentieth century - the decline of European colonialism and the rise of nationalism in the Third World. Finally, Jones judges rather favourably the impact of the Bank on the Middle East, indicating its rather complementary and innovating role in the financial sector, its contribution to the monetisation of the economies and the mobilisation of local funds and finally, its educational role in Middle East development. Only its concentration on mainly shortterm trade credit, and its preference to finance its business from locally generated resources rather than capital imported from abroad, is questioned to be optimum behaviour from a development viewpoint, especially where Iran before 1952 is concerned. Although the Bank may have been a small fish in a large pool of British overseas banks, by pioneering modern banking it played an important role in the twentiethcentury economic history of several Middle East countries. It is particularly this role and the political, economic and financial decorum against which it has been depicted that make this history of considerable value to business history as well as to the history of banking in the Middle East. The history is based on a wide range of sources including the Bank's extensive historical archive and interviews with former members of the Bank's staff. Moreover, it includes chapters on the social history of British and resident staff of the Bank, which give a colourful illustration of the practical side of overseas banking. The approach of the two volumes differs considerably. The first volume has the character of a political history of banking. In the context of the Bank's development in Persia at the centre of Anglo-Russian diplomatic rivalry, it is full of tenuous negotia-

418

DE ECONOMIST 136, NR. 3, 1988

tions, intricacies and international diplomacy, all described thoroughly and in great detail. By this the history has great importance for an understanding of the economic and political history of Iran in the first half of this century, and of Britain's diplomatic and economic relations with Iran. The second volume traces the path of the Bank as a straightforward British commercial bank operating in the Middle East and focuses more on banking. As the Bank, by pioneering modern banking in the Arabian Gulf, was at the centre of its transformation, this volume contributes largely to the understanding of the modern economic history of the Middle East and the British overseas banking in particular after the Second World War. As business history was probably the primary purpose of this project, the political and economic context has inevitably been painted with a broad brush. This is, however, only very seldom a disadvantage. One can, for instance, wonder whether too little attention is paid to the intriguing and topical question of the role of the Islamitic prohibition against taking interest by mentioning it only a few times briefly. A more general point is that the causality primarily runs, as one would expect from a business history, from economic development to the development of the bank. In particular the impact of the Bank on monetary economic development is only incidentally considered. Especially in the case of Iran, where the bank was the state bank with note-issuing authority for nearly forty years, but also for a number of Gulf states, this is somewhat unsatisfactory. It leaves the reader partly with the impression that the Bank hardly ever worried about the macroeconomic consequences of its actions, which at least during the Second World War was probably to the disadvantage of the financial situation in Iran. However, these are minor points compared to this outstanding and most readable contribution to banking and business history. W.C. Boeschoten F . J . ter H e i d e , Ordening en verdeling. Besluitvorming over sociaal-economisch beleid in Nederland 1949-1958 ( P l a n n i n g a n d D i s t r i b u t i o n . D e c i s i o n - M a k i n g o n S o c i o - E c o n o m i c P o l i c y in T h e N e t h e r l a n d s , 1949-1958), P u b l i s h e d b y K o k A g o r a , K a m p e n , 1986. P p . 380. Dfl. 49,50 The theme of this book, which was written as a doctoral thesis in the social sciences, is the development of socio-economic policies in The Netherlands in the period from 1949 to 1958. The period begins with the year 1949 because this was the last year of a study by P. Fortuyn (1981) on socio-economic policies in the years directly following the Second World War. Ter Heide wanted to continue Fortuyn's study. It was decided to close the period of study with 1958 as this was the last year of the long-standing government coalitions between the Katholieke Volkspartij (the Catholic People's Party - the KVP) and the Partij van de Arbeid (the Labour Party - the PvdA). The book focuses on the goals and instruments of socio-economic policies. It then makes a distinction between short-term and long-term policies, and highlights two further specific themes in each of these areas. The first theme is the issue of planning, i.e. should the private or the public sector play the most important role in the production process? The second theme is the issue of distribution, i.e. should a change be made in the existing distribution of incomes?

BOEKBESPREKINGEN / REVIEWS

419

The book describes the political situation and examines the political party cooperation in the Willem Drees governments, which were in office between 1948 and 1958. The developments within the parties are also discussed in detail, and the influence of recommendations made by employers' and employees' organisations is examined. Attention is also paid to the influence of the Central Planning Office and the Dutch Central Bank. This is followed by an examination of the influence of external conditions on the position of The Netherlands, in particular on political relationships and political decisionmaking. One of the specific issues dealt with is to what extent the KVP and the PvdA differed or agreed on the issues of planning and distribution. Can a particular trend be seen with regard to these differences and agreements over the period in question? And, if so, what influence did this trend have on political party cooperation? In the author's own words: to what extent does convergence or divergence on the issues of planning and distribution explain the success and failure of the coalition between the KVP and the PvdA? Initially - directly after the Second World War - there were considerable fundamental differences between the two parties which can be traced back to ideological differences in the 1920s and 1930s between the members of the confessional and the socialist parties. There were political discussions in the immediate post-war years on a number of proposals concerning the introduction of direct and detailed state control of the economy which would be a permanent element in the economic order. Due to changes in the relative strengths of the parties though, these proposals ultimately resulted in institutions that function best in an economic system that is governed by market forces and a set of general, predominantly indirect economic policy instruments. The author's main conclusions are as follows. At the beginning of the period in question there were no longer any fundamental differences between the KVP and the PvdA concerning economic policy, although there were differences of opinion on everyday pragmatic issues. The other potential coalition partners - the Protestant and liberal parties - were initially very hesistant about applying monetary and budgetary instruments for achieving the goals of short-term and long-term economic policies. In addition, the distribution of the seats meant that there was no realistic alternative for the KVP other than to form a coalition government with the PvdA. Differences of opinion gradually developed between these two parties, notably over the distribution of incomes, whereas the differences between the KVP and the Protestants and Liberals became less marked. This ultimately led to the break-up in 1958 of the K V P - P v d A coalition. The author describes these developments in great detail and gives a very thorough account of economic and political events in the years 1949 to 1958. Although the period in question is well portrayed, I do feel that the author has chosen a rather complicated structure for his book. He says himself that he gives both thematic accounts of shortterm and long-term politics and a chronological description of the period. For the purposes of short-term policy, the author has identified various sub-periods and devoted a chapter to each. The same applies to some aspects of long-term policy. However, many other aspects of long-term policy are described in a single chapter. In many cases summaries of varying length are given of particular sections or chapters of the book, but there is a lack of consistency in the method employed. Furthermore, the author sometimes introduces new facts and details in his conclusions which were not mentioned previously. All in all, it is rather difficult for the reader to grasp the thread running through the book. One remark relating more to content is that the book is purely descriptive. Several

420

DE ECONOMIST 136, NR. 3, 1988

more theoretical views, including those of Daalder, Lijphart and Daudt, are included briefly at the end of the book, but the author does not examine them in any detail. Their summary inclusion cannot be considered as being more than just a bonus for the reader. The book contains relatively long passages on the Cold War and the international background to East-West tensions, but their relation to the book's main themes is not explained clearly. In view of the importance the author places on budgetary policies in his more general discussions, I feel that in comparison to the frequent and sometimes detailed passages on tax policy, the book lacks an in-depth examination of budgetary expenditure. This lack is felt all the more keenly since the author explicitly states that one of the reasons for conducting this study was the current discussion on the desired size of the public sector. These criticisms do not detract from the conclusion that Ter Heide has written a commendable book, one that offers a good survey of decision-making on socio-economic policy in The Netherlands between 1949 and 1958. Precisely because he has brought so many details and facts together, an index should be included in the next edition of this book. J.K.T. Postma

R i c h a r d L. G o r d o n , Worm Coal; Economics, Policies and Prospects, C a m b r i d g e U n i v e r s i t y Press, C a m b r i d g e , 1987. Pp . xvi + 145, B i b l i o g r a p h y a n d Index. £ 2 5 . - Professor Gordon of the Department of Mineral Economics at Pennsylvania State University - in the original heartland of American coal - is one of the very few economists whose central interests in the energy sector go back to before the first oil price shock of 1973. Indeed, in 1973 he was already the chairman of the Council of Economics of the American Institute of Mining, Metallurgical and Petroleum Engineers. The lengthy concern of this book's author with the energy industry in general, and with the coal industry in particular, is more than a matter of biographical detail: it is fundamental to the success of this short book in so effectively presenting an economist's view of the world coal industry in its proper perspective; and in providing a clear and persuasive analysis of national coal policies and prospects in all the world's main producing areas - with the notable (and deliberate) omission of India. Gordon dismisses the Indian coal industry in two lines (p. 3) as 'problem plagued and able to compete only domestically': a judgement which may well prove incorrect within the next five to ten years in the context of the now not impossible Indian 'economic miracle.' This much, however, the author may be readily forgiven. Elsewhere in the book one is first taken systematically and readably through the essence of the economics of a depleting (though plentiful) resource and presented with the necessary facts on coal use and on coal production and trade - and all in less than the first 50 pages. Thereafter there are four chapters (each of 10 to 15 pages) on the coal industries of the main producing regions: with each of the short chapters highlighting the strong regional contrasts in the trends, problems and prospects for the industry. In this respect one notes

BOEKBESPREKINGEN / REVIEWS

421

the author's pessimism about, and his strictures on, the coal industry in Western Europe (Chapter 7, The State and Coal - the West European Case). Subsequently, one can compare the situation here with the opportunities for expansion of coal production and exports from low-cost, coal-rich areas in countries such as Australia, Colombia and Canada. Surprisingly, he is less optimistic concerning South African coal - but not, as one would have expected from familiarity in Europe with the international trade repercussions of that country's racial policies, for political reasons, but because of 'the tendency to regulation' of the industry by the South African government (p. 101): a second judgement by Gordon that also seems likely to be overtaken by events in the nottoo-distant future. Finally there are two chapters on 'Prospects' and 'Conclusions' in which the previous 100-plus pages of description and analysis are distilled into the basic essentials which surround the contemporary coal market - notably the contrasting present views on the outlook for the supply and price of oil to which the prospects for coal, Gordon argues, must be related. I would not disagree with this main conclusion, but would add a caveat of rapidly increasing significance, viz. the potential role of natural gas, in all the world's major energy markets (except possibly the United States), as a competitor for coal, especially for power generation for which natural gas has both technological and environmental advantages over coal which are of major economic importance. To complete his study, which though modest in size - and thus, of necessity, in depth of treatment - is eminently scholarly in style, Richard Gordon provides, as one would expect, both a detailed and accurate index, and a bibliography. The latter offers the reader persuaded by the book to go further into the study of the coal market a comprehensive and widely-ranging list of the literature on the industry. All in all, a book which can be highly recommended both for its content and its clarity, and for its persistent emphasis on the economic fundamentals of a commodity. In this the analysis compares favourably with many recent studies which have been highly politicised, both nationally and internationally. P.R. Odell

H. A b r o m e i t , British Stee# An Industry between the State and the Private Sector, Berg P u b l i s h e r s , L e a m i n g t o n S p a / H a m b u r g / N e w York, 1986. P p . 328. £ 2 t . 9 5 The book reports a case study on the British Steel Corporation (BSC). The study is focussed ~on the political aspects of the decision-making process as the differentia specifica of public enterprises. The basic approach is the agency theory. This theory shows how the behaviour of corporations responds to the demands of various groups that have a stake in the corporation. The crucial feature of public enterprises is, according to Dr. Abromeit, this influence exerted by participants from outside the firm. She therefore explores the role of government, competitors and customers in the decisionmaking process of the BSC. The most interesting feature of the book is that attention is not restricted to formal channels of influence but that it is extended to informal processes in decision-making. To clarify the importance of informal channels, the author interviewed public and private managers as well as civil servants.

422

DE ECONOMIST 136, NR. 3, 1988

In the first part of her study, the general characteristics of public enterprises are reviewed. There are three central aspects: the operational aspect of public decisionmaking, the consequences of the triangular relationship between government, public sector and private firms. Finally, the special attitudes of public managers are emphasised. Since this is a case study, the bulk of the book is devoted to the special case of British Steel. Abromeit describes the BSC as hardly controllable. The government cannot obtain the necessary information, so the principal has to rely on the agent for precisely that information he needs in order to control him. Targets set by the government are easily evaded because the management can hide behind social goals, disrupting government interferences or disappointing economic climate in general. Besides, the government can hardly use the threat of replacement to encourage better management. As a result, the BSC is said to be operating more or less independently, unconcerned about government. Appointing civil servants to the boards does not mitigate the problem of control. They either lack the necessary expertise or they become 'house-trained' and act as representatives of the boards rather then of the government. Since Abromeit subscribes to the view that British Steel is a public utility, she insists that BSC should become less autonomous. This is a controversial view, since most economists stress no more than the need for more freedom for the management of public enterprises (see e.g. Levy, 1987). A second aspect, which is thoroughly discussed, concerns the consequences of the hybrid structure in the steel sector. When an industry is only partly nationalised, there will always be a tendency towards cooperation between public and private firms. It is disputable whether this is a process of privatisation of the BSC or of nationalisation of the private sector. Through joint ventures, private firms gain access to public money and therefore fall under ministerial control. This is called 'cold nationalisation.' However, not seldom the public sector sells profitable divisions to the private sector (back-door denationalisation), as in the case of 'Phoenix' (pp. 235-241). Through jointly held corporations, the distinction between public and private firms becomes less clear. Private steel companies can avoid bankruptcy by means of access to public money and the government looses control over parts of the BSC. So the public sector is enlarged but controllability is weakened. The solution to the problem of control of the hybrid structure can be found in the privatisation of the viable parts of the BSC. Finally, the 'heavy stuff' (blast furnaces and rolling mills), will remain a public utility provided by a public enterprise. 'IT]he level of capital required could not possibly be found by private investors in a comparatively small and economically weak country' (p. 249). But even if only the heavy stuff remains public, the tendency to set up cooperations (hybrids) between the public firm and private suppliers or customers will, according to the author, still have to be avoided. The book is valuable for public sector economists, since it offers abundant information on the formal and informal process of decision-making in the case of the BSC. Although BSC has already received a lot of attention, the interviews with civil servants and managers of public and private firms add a useful insight in the informal processes of decision-making. Of course, some of her conclusions are disputable, for instance her opinion that weak government control is a matter of inability. It might rather be caused by a government unwilling to control. Therefore more information on the political importance of the BSC would be valuable.

BOEKBESPREKINGEN / REVIEWS

423

Even though a lot of information is presented, the book reads well. The book is also well produced. Perhaps it should have reproduced her questionnaire and a classification of the answers. A. Schout

REFERENCE Levy, B., 1987, 'A Theory of Public Enterprise Behavior,' Journal o f Economic Behavior and Organization, 8, pp. 75-96.