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Jtirgen B a c k h a u s (ed.), Systemwandel und Reform in dstlichen Wirtschaften (System T r a n s i t i o n a n d R e f o r m in E a s t e r n E u r o p e a n E c o n o m i c s ) , M e t r o p o l i s - V e r l a g , M a r b u r g , 1991. P p . 366. H e r b e r t G i e r s c h (ed.), Towards a Market Economy in Central and Eastern Europe, S p r i n g e r - V e r l a g , Berlin, etc., 1991. P p . 168. DM 68,H a n s - J t i r g e n W a g e n e r (ed.), Anpassung durch Wandel. Evolution und Transformation yon Wirtschaftssystemen ( A d a p t i o n t h r o u g h T r a n s i t i o n . E v o l u t i o n a n d T r a n s f o r m a t i o n o f E c o n o m i c Systems), D u n c k e r a n d H u m b l o t , Berlin, 1991. P p . 337. D M 1 4 8 , Recently there has been a boost in literature on Eastern Europe. After initial euphoria about the political changes, the painfulness of economic transition became a more dominant theme. Backhaus, Giersch and Wagener all try to cope with the so far unchallenged task of transforming a centrally planned economy into a market economy. In this review, differences and similarities in the angles of incidence of these three books are highlighted. All three of them are collections of articles presented at conferences in the summer and autumn of 1990. Systemwandel und Reform in 6stlichen Wirtschaften, edited and introduced by Jtirgen Backhaus, consists of a collection of papers presented at the Arbeitskreis politische Okonomie, which took place in November 1990. The book of Herbert Giersch is a composition of articles prepared for a meeting organized by the Egon-Sohmen-Foundation, whereas Anpassung dutch Wandel: Zur Evolution und Transformation yon Wirtschaftssystemen, introduced and composed by Hans-Jtirgen Wagener, constitutes the reflection of ideas which came to the fore at the meeting of the Verein fiir Socialpolitik, held in the autumn of 1990. Giersch's work is the most pragmatic one; in the absence of a proper theory on economic transition, it is confined to an exchange of experiences by leading economists and politicians from Poland (Winiecki, Lutkowski), Czechoslovakia (Klaus), Hungary (Bauer), the Soviet Union (Zuev) and last but not least Germany (Giersch, Schmieding, Haustein and Willgerodt). In this volume, the different initial economic positions of the respective countries and the former GDR-area, as well as first (premature) evaluations of the implemented policies, are analysed. Special emphasis is given to West Germany's postwar policy as an example of successful transformation from a system dominated by Nazi legislation, which relied heavily on directive planning, rationing of consumer goods and a government foreign trade monopoly, into a free market system. As far as this historical parallel is concerned, the contribution of Schmieding is the most valuable. He elaborates the liberal reforms of June 1948, which paved the way for a growth spurt in West Germany that came to be known as the Wirtschaftswunder, and subsequently tries to formulate some lessons for Central and Eastern Europe. In order to avoid improperly high expectations, he also stresses important differences between the Nazi

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regime in Germany and the Soviet-type economies. Unfortunately, though, there is no recognition of a positive impact of Marshall aid in postwar West Germany. Contrary to Giersch, Wagener takes a far more theoretical stand, especially in the first two parts of the book. In his introduction, Wagener distinguishes between pragmatic and organic developments of economic institutions, terms that were originally coined by Menger. Institutional changes resulting from purposeful action, are called pragmatic development, whereas organic change does not reflect intended development, but comes out relatively autonomously. It is clear, and acknowledged by Wagener, that pragmatic and organic change are intertwined to a certain extent. Nevertheless, they underlie the distinction between evolution and transformation in the subtitle of the book and form the basis of the first two parts. The first part contains chapters on pragmatic institutional development (transformation), whereas the second part of the volume concentrates on the subject of organic change (evolution). The third part of Wagener's book more or less resembles Giersch's approach. It elaborates Germany's postwar (and interbellum) experiences. In this respect, Willgerodt deserves mention. In Giersch he wrote a chapter about recent German economic integration, whereas his contribution in Wagener touches upon the German reforms of 1948. His article in Wagener is far better thought-out and exceeds the general level of the contributions in Giersch on this subject. Wagener's book concludes with a part containing other case-studies on a variety of subjects, such as recent Yugoslavian economic policies, Chinese price reforms, and labour co-determination in Germany and the United States. Unfortunately, these studies do not easily fit into the theoretical framework as put forward by Wagener in his introductory chapter. Backhaus also tries to tackle the subject of economic transition in Eastern Europe mainly from a theoretical point of view. In arranging the several contributions, however, he is not as straightforward as Wagener. Backhaus depicts a so-called Sechsstufenplan, of which the general socio-economic points of departure, the political process of transition, the settlement of monetary freedom, the implementation of property rights, the social order and the labour market, and stabilization of public finances are the constituent elements. It goes without saying that these are important aspects of the system change in Eastern Europe, but it is not altogether clear as to what determines the limits and the sequence of the several stages. This criticism does not lead to the conclusion that the book is less worthwhile. The most interesting contribution is that by Pagano, in which property rights and institutional stability are being scrutinized. Pagano tries to combine the new institutionalist view, according to which ownership is endogenously determined by the characteristics of the resources which are used in organizations, with the radical inversion of this statement, i.e. property rights may influence the technology used by the firm and, in particular, the degree of asset specificity and the monitoring characteristics of the resources used by these organizations. His analysis boils down to the conclusion that the past history of the system may constrain the stability of the ownership system. Thus, there is no guarantee that efficient property rights automatically evolve. The high quality of this article is in marked contrast with Reich's contribution about the methodology of transition theory in the last part of Backhaus' volume. Reich states that the distinction between capitalist and socialist economies is wrongly described in terms of the alternative organizational systems, because both are essentially facing the same problem of the allocation of scarce resources. Thus, in his opinion, there is only one economic system, which is characterized by a division of labour and money values. Be this as it may, it gets really misty when

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it should explain the breakdown of the GDR as a necessary consequence of not having belonged to this one economic system. Seifert, the discussant of Reich's article, seems to have the same kind of objections. Apart from the fact that the three books diverge with respect to the search for theoretical underpinnings of transition, there are other differences. Of course, it is extremely tricky to generalize with regard to conference publications, but broadly speaking it is legitimized to characterize Backhaus more or less as a left-wing radical approach, Giersch as a purely liberal contribution, and Wagener as a neo-classical foundation of institutional economics. In Backhaus there are many articles involved with the risk of unequal developments in East and West (Panther), the improper methodology of neo-classical economics (Mondelears) and the wrong distinction between market and planned economies (for instance Reich, but also Mondelears and Nutzinger). The contributions in Giersch find a common denominator in the idea that markets under all possible circumstances do function more efficiently and, therefore, have to be installed as quickly as possible, regardless of costs in terms of a fall in production and unemployment. Haustein, in his contribution on reorganizing the former GDR, is an outspoken representative of this opinion. Wagener's work seems to be mainly involved with institutional change, which in traditional neo-classical terms cannot easily be dealt with, because it is thought to be a constant factor. Nonetheless, costs are involved in the building of institutions as well, and these can be treated in neo-classical terms. Examples of such an approach can be found especially in the first two parts. See e.g. the articles by Leopold and Eger on the explanation of institutional and judicial system changes, respectively. 'Und wenn dann der K o p f fiillt, sage ich: Hoppla!' are Brecht's famous words in the Dreigroschenoper. The head of the soviet-type economic system of Central and Eastern Europe has been chopped off, but the question how to move towards a free market economy remains open. The three books together make clear that there is no comprehensive theory with which we can analyse the process of transition. As such, all three of them contribute to the tremendous task of gathering insights in the process of economic change in general, and the transition of Central and Eastern Europe in particular. The above mentioned works show that it is out of the question to confine oneself to a simple 'Hoppla', for the general conclusions to be drawn from the three books as far as economic transformation in Eastern Europe is concerned, are the following. First of all, it is made clear that economic transformation is not purely a matter of economics, for it requires political decisions. Therefore, a theory on economic transition should endogenize political and, if possible at all, cultural questions. Secondly, initial circumstances in the countries may differ considerably and, therefore, require different policy treatments. In other words, historical events do not allow for a unilateral policy option. In this respect the article by Bauer in Giersch is very informative. It explains with regard to Hungarian experiences to which extent recent economic policy can be seen as a continuation or as a break from the New Economic Mechanism which started in 1968. Thirdly, markets do not arise spontaneously, that is to say, even if there is a general agreement that markets do function more efficiently than hierarchical decision-making, it is by no means sure that they will come about. See for instance Krug's contributions in Backhaus and Wagener. Herman Hoen

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Fragen zur Reform der DDR- Wirtschaft ( P r o b l e m s with Respect to the R e f o r m of the G D R E c o n o m y ) , Beihefte der K o n j u n k t u r politik, Zeitschrift fiir a n g e w a n d t e W i r t s c h a f t s f o r s c h u n g , H e f t 37, D u n c k e r a n d H u m b l o t , Berlin, 1990. Pp. 176. D M 9 4 , In this period of turbulent change, books on economic reforms in Eastern Europe that concentrate on actual changes in the economic system necessarily become outdated very rapidly. This applies afortiori to books on the former GDR, which is presently experiencing a crash transition to a market-type economy. This should be kept in mind assessing the book under review. Nevertheless, such a book can be valuable as an account of processes that took place in a specific period of time, as an account of thoughts at a specific stage of the reforms or as a more general analysis of transition processes. Fragen zur Reform der DDR- Wirtsehaft contains the papers and a summary of the general discussion of a conference by the Arbeitsgemeinschaft deutscher wirtschaftswissenschaftlicherForschungsinstitute, held in Bonn on February 12th 1990, i.e. a couple of months after the fall of the Berlin Wall when the German unification was not yet achieved, although it was no longer an unlikely event. Above all, the high East-West migration ('an asymmetrically integrated all-German labour market,' p. 69) is regarded in different papers as a factor enforcing an economic and institutional approach between the two Germanies. The high migration reduced the elbow room for both the GDR and the FRG. The book starts with two papers on economic reforms in the context of a more or less independent GDR. The first paper, by Christian Watrin, deals primarily with the shortcomings of the economic system in the GDR, the possibilities to solve them via market reforms and the dilemma of the speed of reform. This paper is in quite general terms while the remarks on the deficiencies are brief and well known. The paper therefore has more or less the character of a general introduction. The second paper by Doris Cornelsen deals more specifically - but mainly in headlines - with the reform discussion as it took place in the former GDR in academic circles, political parties and the government shortly before and after the fali of the Wall. It is informative with respect to this specific period, although it hardly evaluates the consistency or feasibility of the reform measures discussed. It is, however, of little value with respect to later developments. The problem of transformation is dealt with more systematically in the next three papers. As such, they can have a broader application. Especially the dilemma of a currency union with the DM versus a less intensive monetary cooperation with exchange rate flexibility as a possible buffer is brought to the fore. Horst Siebert concludes that even though the monetary overhang in the GDR was rather small (an important difference with other Central or East European countries), the second option was impossible because of the labour drain to the West. Reinhard Pohl, in his paper on the convertibility of the GDR Mark, presents a clear overview of the necessary conditions with respect to the economic order for currency reform. Moreover, he expresses an outspoken preference for a fixed exchange rate, although the height of this rate can only be roughly approximated. In fact, this preference is derived from a general preference for fixed exchange rates because currency volatility is not in the first place an indication of changed costs or purchasing parity. The possibility of restricted convertibility when staying outside a union with the DM introduces the risk of administratively distorted allocation of currency. Moreover, staying outside a currency union does not avoid the necessity of massive transfers from the FRG because of the migration problem.

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A comparison to the transformation of the West German war economy after 1945 which is also referred to in Pohl's paper, is the central theme of the paper by Dieter L6sch, including the dilemma of piecemeal transformation v e r s u s a Big Bang. The usefulness of this comparison is limited because in the FRG after the war the required micro-structure for a market economy still existed and the transformation took place in a totally different international environment. It indicates, however, that although transformation is a time-consuming process, the point of no return should be reached within a short period of time. The paper by Erich KlinkmiJller about structural (not to be interpreted in the sense of production or export structure) strengths and weaknesses of the currency area of the Mark presents, after a rather long-winded introduction, the inner-German migration as the central weakness. This is caused by other weaknesses: wage differentials, different consumption levels, insufficient economic organisation, and the judicial system. Labour discipline and skills are presented as the main structural strengths, which have, according to the author, not been destroyed by forty years of socialist planning (the author gives no further arguments to support this thesis) and could even enable the GDR to overtake other German regions in the not too distant future. In this respect, it is remarkable that a realistic M-DM 'exchange' rate should, according to KlinkmiJller, be much lower than the authors of other papers in the book estimate. The seventh paper by Horst Lambrecht consists of two more or less separate parts, in the first part the author gives an account of the results of a survey held in 1987 of the pattern of East-West economic cooperation of West German firms. It reveals a more intensive cooperation between East and West German firms than expected. Next, the paper deals with the problem of financing the transformation of the GDR economy: the FRG cannot have it all for free. The author's preference for a temporary maintenance of two separate economic areas makes an increased 'swing' in intra-German trade one of the possible financial instruments. The last paper, by Dieter Schumacher and Uta M6bius, concentrates on the Common Market's accessibility for the GDR before the 'Wende.' It is a largely descriptive paper about trade flows, factor contents of trade, trade policy and the effect of protection. It reveals that many existing quota were not fully utilized by the GDR. It does not refer, however, to the effect of the special treatment by the FRG (' 13th EC member'). As the authors rightly stress, the trade pattern before the 'Wende' is a poor indicator of future trade flows, because of the necessarily rigorous change in the production structure under market conditions and the expected wage increase. Coming back to the remarks made in the introduction of this review, the papers included in the book are of diverging value. I most appreciate the papers which treat the main aspects of transformation more or less systematically and those papers containing more factual information on the GDR economy at the time of writing. The book does not contain a surprising alternative to the solution of German unification finally chosen. E.H. van Leeuwen

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DE ECONOMIST 140, NR. 3, 1992 A. A s l u n d (ed.), Market Socialism or the Restoration of Capitalism?, 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., 1991. Pp. x + 2 1 5 . $49.50

The ten papers in this book were originally presented at the Fourth World Congress of Soviet and East European Studies at Harrogate, England in July 1990. They have been revised and updated to November 1990. There is also a short introduction by the editor, a well known Swedish specialist on the Soviet and East European economies. The book is divided into three sections. The first section consists of three papers on the political economy of transition. Brus discusses whether planning and the market are compatible. He argues that for this to be an interesting question, 'planning' must be defined along the lines of Kalecki's 1965 proposal. Nuti sketches a model of market socialism. He emphasises that this is a purely intellectual exercise, the exploration of a utopia, and is not relevant to the current transition in Eastern Europe. Fink puts forward some concrete proposals for economic policy in the transition period. The second section concerns the role of planning in Poland and Hungary (Adam), Soviet economic thought (Sutela), Soviet economic policymaking in 1989 and 1990 (Aslund) and the restructuring of the Soviet industrial ministries since 1985 (Fortescue). Aslund's paper is full of useful information about the various groups of people who temporarily influenced Soviet economic policy. He correctly concludes that Gorbachev's restructuring of the economic policy apparatus was largely destructive. Aslund quotes with approval (p. 108) a criticism of the conservative forces at the November 1989 economics conference. In retrospect I would say that the conservatives were right - the economy under Gorbachev functioned much worse than under Brezhnev. Also I am doubtful about the identification of Khanin as a liberal (p. 103). In an article published after this book went to press (Kommunist, 1991, no. 12) Khanin argued for an active government role in the economy. This interesting and useful chapter is marred by poor proof-reading. The third section concerns the effects ofperestroika. In a very competent discussion, Marnie argues that in the perestroika period there was no increase in unemployment, only an increase in the discussion of unemployment. Flakierski analyses the official Soviet data on income distribution. He draws attention to a variety of implications of the data. For example, it seems that the difference in incomes between manual and nonmanual employees fell sharply in the four decades after World War II and in the late 1980s it was smaller than in Western countries. He also draws attention to the large and grooving inter-republican inequalities. Dellenbrant compares living standards in Finland and Estonia. He argues that on the eve of World War II the two countries had roughly equal living standards but that in the late 1980s living standards in Estonia were only about 40% of those in Finland. This conclusion is plausible, but its statistical basis is weak. He presents a table (p. 199) according to which per capita incomes in Estonia in 1925-34 were almost double those of Finland! In the text he observes that these data must be considered 'uncertain' and that they 'overestimate the position of Estonia.' If they are so unreliable, why use them? As far as contemporary living standards are concerned, he bases his conclusion on one table (p. 204) showing the food purchasing power of wages in the two countries in 1983. The food purchasing power of wages is one indicator of relative living standards. It is not, however, on its own, an accurate indicator of relative consumption levels. To obtain those it is necessary to compare the relative

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(quality adjusted) quantities of all the goods and services consumed, as was done in the well known CIA comparison of relative consumption levels in the U.S.A. and U.S.S.R. and Birman's critique of it (cited by Dellenbrant). Dellenbrant argues that the current big difference in living standards emerged from the mid 1960s onwards. This is a plausible argument. However, he also argues that the cause of the discrepancy is 'the inability of the planning system' (p. 206). These two arguments are difficult to combine. In Estonia planning did not begin in the mid 1960s. It would only be a plausible explanation if the discrepancy began in 1945 and grew steadily larger. The editor and publishers are to be congratulated on the relatively short period between the Harrogate Congress and the publication of this book. Michael Ellman

S. P e j o v i c h , The Economics of Property Rights: Towards a Theory of Comparative Systems, K l u w e r A c a d e m i c P u b l i s h e r s , D o r d r e c h t , 1990. P p . x i v + 2 0 4 . $ 8 8 . A 'traditional' book on comparative economic systems deals with different models of economic systems: the 'ideal' models of the capitalist market economy, the socialist planned economy, the labour-managed market economy and some of their real world variants. Pejovich's book follows a similar line: after a very brief chapter about 'Scarcity, Institutions and Economic Behavior' and two chapters that deal with 'The Rise of Capitalism' and 'The Rise of Socialism,' part II (chapters 4-9) deals with 'The PrivateProperty Free-Market Economy,' part III (chapters 10-16) with 'The Soviet-Type Economy,' and part IV (chapters 17-19) with 'The Yugoslav-Type Economy.' However, whereas the part on the market economy concentrates on the efficiency characteristics of the 'ideal' model, the other parts primarily deal with the real world variants of the Soviet Union and Yugoslavia (and their not too favourable economic performance). Of the latter two countries not only is a brief institutional description given, but also a short historical overview which in the case of the Soviet Union, or Russia, even goes back to the 10th century Kievian state. As the title of the book under review suggests, it has been the intention of the author to deal primarily with the economics of property rights and to use this approach as a theoretical underpinning of the discipline of comparative economic systems. This has to do both with the problem of optimal institutional choice (or the comparison of different institutional settings, or of different economic systems) and - not unconnected to this - with the problem of institutional change (which is very relevant at the moment, given the far-reaching changes taking place in the (former) socialist countries). The book, however, does not give a comprehensive overview of the property rights approach. Apart from the (not very well defined) distinction between endogenous and exogenous change in chapter 1 which seems to promise some insight in the dynamics of economic systems (but in this respect the reader is already disappointed in the next chapter on the rise of capitalism), property rights are introduced only in part II within the framework of the (model of the) private property free-market economy. Not surprisingly, within this system 'both the right of ownership and contractual freedom generate incentives for utility-seeking individuals to identify, negotiate and execute contractual agreements

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that tend to maximize the extent of exchange or, in other words, tend to move resources to their highest-valued uses' (p. 42), i.e. towards the efficient allocation of resources. This may be hampered by positive transaction costs (but the institutions of capitalism encourage behaviotir that tends to reduce transaction costs, p. 39) and the attenuation of private property rights, e.g. because of government intervention. The denunciation, not only of the Soviet-type economy and the labour-managed economy, but also of codetermination can easily be derived from this. The already mentioned distinction between endogenous and exogenous change follows the same pattern, including an outspoken preference for the first type of change: endogenous change is defined as an evolutionary change in the prevailing institutional arrangements or the rules of the game which results from (utility-seeking) individuals or groups negotiating new contractual agreements as a response to changes in the set of social choices. 'Instead of adapting the rules of the game to the changing requirements of the game, exogenous changes adapt the game to the rules preferred by a specific interest group' (p. 5), i.e. above all by means of government regulation. However, this leaves aside the problem of power in contractual agreements. Moreover, the conditions for endogenous change may not be realized without exogenous change. In the transition from a planned economy to a market economy the government must dismantle the old planning system and create the conditions for a market economy as it has also done with respect to the rise and maintenance of capitalism. By the way, the major part of the chapter which deals with reforms of the soviet-type economy, here the Soviet Union, consists of an appendix in which two Hungarian and one Polish document on (proposed) economic reforms in these countries are reproduced, however with only a very brief introduction by the author. As there is no reference to the developments in Hungary and Poland in the main text, this appendix stands more or less on its own. To conclude, the theme of this book seems at first sight very interesting, especially against the background of institutional changes taking place at the moment in Eastern Europe, but while reading one gets rather disappointed. The expectations raised by the title are hardly satisfied, neither with respect to the economics of property rights, nor with respect to the comparison of economic systems. E.H. van Leeuwen

N. Spulber, Restructuring the Soviet Economy, U n i v e r s i t y of M i c h i g a n Press, A n n A r b o r , 1991. P p . 315. £25. This is a study of the Soviet economy in theperestroika period (especially 1987-90). It focusses on the scope, development and difficulties of restructuring the Soviet economy. The author is well known for his previous work on the Soviet economy, economic planning and socialist economies. The book is easy to read and accurate. A good feature is its combination of descriptive material about the Soviet economic system in the perestroika period with a discussion of relevant economic ideas. The author is well informed both about the working of the Soviet economy in the perestroika period and about Soviet economic thought. Unfortunately, like all books on the Soviet economy these days, the book was out of date on publication. Since it was completed, dramatic changes have taken place in the

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economy of the (former) USSR. Hence this book is now mainly of historic interest and cannot be relied on as a good description of how the economy of the (former) USSR functions when this review appears. Spulber concentrates on official organisations, official policies and official doctrines. Hence he has little to say about the two main developments of the post-1988 period, the depression and the disintegration of the Soviet economic system. This book advocates the widespread view that the Soviet economic crisis of the late 1980s was primarily a systemic crisis and that it ultimately demonstrates that von Mises was right. I disagree. In my opinion, the disintegration of the Soviet economic system at the end of the 1980s was a contingent phenomenon in which the system, the environment and the policies pursued all played a part. Furthermore, I would suggest that the theoretical lesson to be learned is the one long ago formulated by the Soviet cyberneticlan Lerner, namely that in the control of large systems reliance on centralised control is harmful and in the long run non-viable. Michael Ellman

G u y S t a n d i n g (ed.), In Search o f Flexibility: The New Soviet Labour Market, I n t e r n a t i o n a l L a b o u r Office, G e n e v a , 1991. P p . 440. S f 4 5 , This book collects the papers that were discussed at a conference jointly organized by the ILO and the USSR State Committee for Labour and Social Affairs. This conference took place in Moscow in October 1990, and participants came from numerous regions and trades all over the Soviet Union as well as from several Western institutions. In his introduction Standing states that any conference on labour markets has to be selective with respect to the issues to be covered. For this conference the context was the draft law on employment. Nevertheless, the 19 contributions that constitute this volume describe a wide range of topics and the editor faced the impossible task to reduce all this work to the same denominator. He therefore limited himself to prepare the reader for the variety of subjects that is presented in this volume. A major part of the selection of articles is dedicated to the task of developing a legislative framework for the proper functioning of the labour market (chapters 2-6). This task is gigantic and the contributors clearly found it difficult to pinpoint the main problems: labour remuneration, economic democracy, employment policy, labour legislation, and labour mobility are only a few of the subjects that come to the fore. The authors also found it difficult to describe a strategy to solve these problems. Their contributions sum up a large number of problems, necessary requirements, developments and wishes. They can hardly be blamed. If anything, it becomes very clear from this book that neither the quantity of labour supply, nor its quality fit the demand for labour in an economy under reconstruction. The major task in the Soviet Union therefore seems to be to reallocate and re-train labour, while at the same time preventing the development of mass unemployment. Some of the topics that are indicated in the first part of the book are elaborated in other contributions. Chapters 7 and 8 are concise and interesting contributions that inform the reader on the regional differences in the Soviet Union and the recent pattern of urbanization. The discussion on the wage system, and its link to productivity is to be

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found in chapters 9-11. Employment policies and wage determination in the Soviet Union were not related to standard economic categories as productivity or sales. The position of the Soviet income earner was very different from that of his colleagues in the western economies, and their representatives in the trade union also performed a different role. This role is discussed in chapters 11-13. Other contributions concern the role of cooperatives in the Soviet economy (chapters 14-15), the Swedish experience (chapter 17), labour statistics (chapter 19). Although many chapters touch briefly upon the subject, chapter 16 systematically summarizes the problems and the tasks of training and retraining. The authors state that the current ties between science and vocational training are slogans rather than reality. This statement holds true for many other subjects in the book. The Soviet Union is changing its employment system. For help they look to the West. The Soviet authors have great difficulty in grasping the complicated system of checks and balances, and of system failures in western economies. Their long-standing isolation has given them a rather naive picture of capitalism. Although the editor in his introduction mentions frequent discussions on unemployment and the social security system at the conference itself, the papers hardly provide lipservice to these problems. They focus almost entirely on the improvement of labour market flexibility. Of course, this is the theme of the book, but the old system of (full) employment was in a way a social security system in itself. The search for flexibility is therefore at the same time an investigation of the social security system. The most comprehensive discussion on the related problems of social consensus and deregulation of the labour market is given by the editor himself in the penultimate chapter of the book (chapter 18). The book initiates the debate on labour market flexibility in the Soviet Union, and it is important to realize the scope of the problems in this respect. Hopefully it does not end with this one volume. It is necessary to go beyond the enumeration of all problems. The transition of the Soviet labour market requires in-depth analysis and comparative studies, and the getting together of international scientists and practitioners in the field of labour markets. Joop de Kort

E. D o m a r , Capitalism, Socialism and Serfdom, 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., 1989. This is a collection of 14 papers almost all of which have previously been published (the only exceptions are one whole paper and the appendix to another). A number of minor changes and additions have been made to the original texts. They are divided into four sections: economic systems, economic growth and productivity, Soviet economics, and slavery and serfdom. The papers on economic systems, while far-sighted at the time of original publication and still today entirely sensible, are no longer original, novel or very interesting. The section on economic growth and productivity mainly deals with growth accounting, in particular with the index of total factor productivity or residual. Domar demonstrates that the residual is equivalent to Leontief's index of structural change and hence shows

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how macroeconomic and input-output concepts are related. The section on Soviet economics includes a famous paper analysing Soviet collective farms as cooperatives. Domar generalised Ward's model to the case of any number of inputs and outputs and established that, contrary to Ward's findings, a perverse reaction by a cooperative to a rise in the price of a particular input was unlikely. As Domar himself points out in the preface the relevance of his paper to its ostensible subject, Soviet collective farms, is only marginal. The paper is, however, a classic contribution to the theory of cooperatives. The final section is concerned with the economics of slavery and serfdom. It developed the Nieboer-Kliuchevskii hypothesis of the origins of slavery or serfdom. This states that these institutions are caused by an abundance of land relative to labour. This makes it impossible to derive rent from ownership of land (it is not scarce). Hence if a state sector class (army officers or officials) is to derive an income (assuming that it is not possible to organise an adequate tax system) it will have to be from the ownership not of land but of labour. In the foreword Domar points out a number of limitations of his own argument. Another paper in this section analyses, and rejects, the notion that serfdom in Russia had become unprofitable for the masters prior to Emancipation. The final paper criticises the weak empirical basis of the much repeated assertion that the former Russian serfs were grossly overcharged for the land allotted to them by the Emancipation. It is useful to have these scattered papers by one of the founders of modern growth theory brought together in this easily accessible (and revised) form. The book contains much food for thought. It also testifies to the wide range of Domar's work. Michael Ellman

J. H u g h e s , Stalin, Siberia and the Crisis o f the New Economic Policy, 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., 1991. Pp. xiv + 260. $49.50 In January 1928 Stalin visited Siberia for just over two weeks. The purpose of his visit was to increase grain procurements in order to overcome the food crisis facing the country. In this he was successful, in the short run at any rate. Procurements rose sharply as a result of the measures he implemented. They included the application of criminal sanctions against farmers suspected of withholding grain from sale to the state, terror and arbitrary coercion. The use of these measures was a major step from the New Economic Policy (NEP) towards a revival of the methods of War Communism. It was also a major step in the evolution of Stalin's own ideas about the peasant problem. This book is a monograph on this visit, its background and consequences. It is both a contribution to the much discussed question of why in December 1929 the USSR 'suddenly' launched the policies of collectivisation, the 'liquidation of the kulaks as a class' and 'taking grain,' and also to the more academic question of the nature of the relations within the Soviet elite in the late 1920s. Although Stalin's visit is the central event in the book, the book consciously adopts a regional perspective, focussing not on the relationships between members of the central party elite but on the special features of Siberian development.

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The author has a good knowledge of the sources in Russian and English. It is a pity, however, that the book was published too early to take account of the recently published archival material on Stalin's Siberian visit (Izvestiya TsK KPSS 1991 nos 5,6 & 7). This well informed and interesting historical monograph will be useful to all those interested in the origins of Stalinism. Michael Ellman

Jozef M. v a n B r a b a n t , Remaking Eastern Europe - - On the Political E c o n o m y o f Transition, I n t e r n a t i o n a l Studies in E c o n o mics a n d E c o n o m e t r i c s , Vol. 23, Kluwer A c a d e m i c Publishers, Dordrecht, etc., 1990. Pp. 223. £ 5 7 . In the preface the author states that the present 'compact volume is meant as a modest contribution to the ongoing debate on how to transform in particular the radically reforming Eastern European economies into more productive sociopolitical organizations.' The main focus is on 'the economics of reform and east-west assistance.' In the introduction Van Brabant sketches the background against which the book was. written. He also tries to explain the meaning of 'political economy' in the book's title. He states that he does not wish to confine the study to the pure economics of the transition, since 'the latter is evolving in a convoluted international environment,' which, according to the author, means that 'there is ... a politics of the transition.' To me this does not clarify the author's interpretation of political economy. The introductory chapter also outlines the focus on the study. Somewhat surprisingly, this section concentrates on the role of the Council for Mutual Economic Assistance (CMEA), which is not quite in line with what was mentioned in the preface. Consistent with the redefined focus of the study the opening chapters deal with the CMEA. In chapter 1 the different roles of the CMEA are discussed and an overview of the importance of intra-CMEA relations is presented. In chapter 2 the recent history of attempts to reform the CMEA is presented. It is my impression that not all the material presented in these chapters is essential in the context of this book. In chapter 3, but also in other chapters, the author discusses the different types of Eastern European economies. He makes a distinction between CPEs (centrally planned economies), MPEs (modified planned economies), PETs (planned economies in transition) and RPEs (reformed planned economies). This distinction is based on the stage of the process of economic reform. It is not always clear, however, in what category the different countries should be placed. For instance, is Czechoslovakia an MPE or already a PET at the time the book was written? In chapter 4 the economics of transition are discussed. In this chapter quite some desiderata are formulated without it always being clear what the reasons behind them are. Sometimes it is not even clear what the author means. To give just one example, the author mentions the desirability of 'an autonomous central bank subject to societal oversight' (p. 79) without solving the seeming contradiction by making clear whether this would mean an independent central bank ~ la the German Bundesbank or rather a central bank like the Bank of England. Chapters 5 and 6 deal with various aspects of East-West assistance, among which the desirability of a new Marshall Plan for Eastern Europe. The author convincinglyargues

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that in the present situation assistance to Eastern Europe should be of a different nature than in the original Marshall Plan in that a new plan should concentrate on technical assistance. Chapter 7 is an interesting chapter on property rights and privatization, dealing, among other things, with alternative forms of privatization. Chapter 8 is rather heterogeneous, the title suggesting that it deals with East-West assistance, whereas the main subject of the chapter (again) is macro- and microeconomic aspects of reform. There is a short section on the sequencing of reforms, which is not very illuminating since the author does not take the trouble to explain the reasons behind the choices he makes. Chapter 9 is the most concrete part of the book. Here the author presents his proposal for remaking the CMEA and creating a Central European Payments Union (CEPU). Although there are good reasons for trying to maintain some kind of Eastern European economic cooperation, the author's proposal has a series of shortcomings (see Williamson (1991, pp. 32-35)) that will inhibit its realisation. In chapter 10 Van Brabant discusses the consequences of the transition in Eastern Europe for the global economy. It has an interesting section on possible consequences for developing countries. All in all, I find the present book disappointing. Its structure is not very clear, there are a lot of repetitions among chapters, and also within chapters the reader has problems following the main line of argument. I would have preferred an in-depth treatment of a limited number of issues to the approach of saying a little bit about everything which is done in this book. Another matter is that the language used by the author is rather complicated. For one thing, he likes to use adjectives, some of which are even superfluous (like in discriminatory trade preferences on p. 26). Van Brabant also likes to use rather unusual words, the meaning of which, in the context of the argument, is not always clear even after consulting a dictionary. G.J. Lanjouw

REFERENCE Williamson, J. (1991), 'The Economic Opening of Eastern Europe,' Policy Analyses in International Economics, No. 31, Institute for International Economics, Washington, D.C.

J. de H a a n a n d C . A . de K a m (eds.), Terugtredende overheid, realiteit ofretoriek? (Roiling Back the Frontiers o f the State: Reality or Rhetoric?), A c a d e m i c Service, S c h o o n h o v e n , 1991. Pp. 192. Dfl. 39,90 In the 1950s and 1960s, Keynesian macroeconomics and the econometric models based upon it became increasingly important to economic policymakers. In The Netherlands, socio-economic policy has become inconceivable without the extensive use of the models of the Central Planning Bureau. By fine tuning the national economy, govern-

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ment seemed to be able to guide society along the tortuous road leading to greater prosperity. This role of government did not remain confined to economic policy. More active policies were adopted in a growing number of other fields. Furthermore, society also demanded more and more from government. In this way, the welfare state reached its maturity. In The Netherlands the welfare state - and hence the public sector - developed in the context of the corporative economy: decision-making is often largely based on consultation between government and interest groups, mostly trade unions and organisations representing employers. In many cases, government does not stand above the parties but is itself a party and sometimes even a victim at their mercy. It is important to bear this in mind when considering how the frontiers of the state have been rolled back. In the early eighties the Dutch government announced and started the first of the 'major operations' as they subsequently came to be called. These 'major operations' concerned the reorganisation of the civil service, cuts of civil service staff, decentralisation, the reconsidering of government activities, deregulation and privatisation. Terugtredende overheid, realiteit o f retoriek? evaluates these operations. Each operation is analysed separately by experts with inside knowledge. The reorganisation o f the civil service was initially intended to improve public administration, and later to improve the management of central government. H.D. Tjeenk Willink, as a former government commissioner involved in this operation, concludes in the chapter jointly written with P.L. Hupe that its main result was the alteration of the atmosphere within the civil service. In a separate section, the authors draw special attention to the fact that the public service is not a monolithic entity but a collection of separate departments and pressure groups, each pursuing different interests. Looking into the future, they foresee that the rigidity of established interests will remain a major obstacle. Plans to cut civil service staff have also proved difficult to carry out. According to J. de Haan and C.A. de Kam staff has, on the whole, not been cut. Rather, its growth rate has been slowed down: in 1990 the public service share of the total workforce was 15 percent, 1 the same as in 1980. However, the editors do not mention that between 1987 (the peak year) and 1990, this share fell by one and a half percentage points, whereas it took from 1960 to 1987 to rise by four percentage points. De Haan and De Kam are not optimistic about the future, as they claim that there will be too little pressure to further cut civil service staff. They provide virtually no evidence for this thesis, and the thesis is questionable. Budgetary pressure persists, as well as pressure from Europe. Also, further cuts in civil service staff in the years to come are accomplished by the implementation of major efficiency improvements in central government, starting with the 1991 budget. The next issue is that of decentralisation. P.R. Heij of the Local Government Council2 and J.F. Schrijver of the Ministry of Home Affairs write that much has been set in motion but that in public administration change is a very slow process. They at1 It would have been preferable if the authors had measured the public service share of the workforce in terms of man-years rather than number of staff employed, in order to avoid distortions caused by part-time working and reductions in working hours. In The Netherlands these factors are more important in the public sector than in other sectors of the economy, 2 Raad voor het binnenlandsbestuur.

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tribute the limited effectiveness of this operation to the approach adopted and the lack of support at state level for efforts to decentralise. Here too, corporatist structures have played a role: interest groups represented by nationwide organisations have opposed decentralisation towards local government. Heij and Schrijver rightly observe that the on-going process of European integration will have a major impact on future decentralisation. Reconsideration of government activities is a 'technical rather than a political assessment of existing policy and the development of technical policy alternatives' writes C.J. Ruppert (Ministry of Finance). After an essentially descriptive analysis with the emphasis on budgetary savings, he concludes 'that this operation was a success during the 1980s.' Its strength lies in its ability to generate information about the efficiency of government production. As it will remain necessary for government to keep a critical eye on its expenditure in the 1990s, the prospects for continuation of the 'reconsideration operation' are favourable. Deregulation, aimed at reducing the quantity and complexity of government regulation, is discussed by H. de Ru (Professor of constitutional and administrative law at the Vrije Universiteit, Amsterdam). Adopting a somewhat cynical tone, he compares the Dutch experiences with those in the United States. One of the most characteristic differences is that in The Netherlands, deregulation has been approached in a far more centralised manner and that corporatist structures have hampered it. The author also notes that in The Netherlands there are virtually no incentives to evaluate existing policies. To my mind, the reconsideration of government activities provides a practical and successful alternative. The prospects for the future will largely be determined by European integration: 'deregulation will not be planned in The Hague but will be thrust upon it.' Finally, privatisation is analysed by E. Boneschansker (Institute for Research on Public Expenditure) and J. de Haan. They conclude that in The Netherlands privatisation has mainly taken the form of a transition to a more autonomous status, in terms of legal, organisational or economic criteria. The main objectives have been to strengthen the private sector, reduce the workload of government and cut budgets. The authors find that attempts to achieve these objectives have met with virtually no success; the main result has been a reduction in the civil service staff establishment. The individual treatment accorded to the various 'major operations' clarifies the presentation. Unfortunately the result is that the contributions are essentially unconnected. In their foreword, the editors state an overall opinion of the major operations: 'all too often ... it has been more a question of rhetoric than of reality.' Essential links between the articles are not clearly stated. Several authors make the point that the public service is not a monolith but a collection of conflicting interests, embedded in corporatist structures. Although De Haan and De Kam make it clear in their introduction that they are aware of this point - 'interest groups (...) are inclined to expect the government to provide everything' - it is not reflected in their overall judgment. Various chapters also point out that although the results achieved are hardly stunning, the 'major operations' have nonetheless changed political thinking significantly. The editors do not mention this. Finally, a very successful 'major operation' is not mentioned at all: the operation aimed at improving accounting and accounting procedures of central government and hence improving governments accountability. Although not directly spectacular in the public eye, the results of this operation are extremely relevant to democratic control of public administration. The constitutional right of parliament to authorize the govern-

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ment budget and the obligation of government to account for expenditures are essential elements of effective democratic decision-making. Generally speaking, the book contains clear analyses by experts who are closely involved with the fields concerned. The book also gives a thorough historical description of the 'major operations' and their backgrounds. This combination makes the book extremely relevant to those interested in public affairs. It is rather unfortunate that the editors seemed to overlook some important points in their foreword and introduction. R.P. Zevenbergen

Michael A. E i n h o r n (ed.), Price Caps and Incentive Regulation in Telecommunications, Kluwer A c a d e m i c Publishers, B o s t o n , Dordrecht, L o n d o n , 1991. P p . 244. Dfl. 1 1 5 , An interesting book with a misleading title - this I have to say first. Practitioners or people interested in telecommunications only may be a little bit disappointed: most of the eleven articles in this book are purely theoretical - to be precise: seven of them - article ten is 'in between' and only three (the articles five, six and nine) comprise empirical material, looking at real life. Nevertheless, some of the articles refer to telecommunication, others are purely theoretical and are applicable to any regulated firm in an industry. In Baron's (in any case) very interesting article I could find the word 'telecommunication' only three times: twice in the text and once in the title, whereas Vogelsang, for example, does not use it at all, like some other authors. Therefore, I would have preferred the title: 'Price caps and incentive regulation' which would have demonstrated from the beginning that this book is mainly a theoretical one and therefore interesting for all those people whose research field is the general theory of (de)regulation. This as a first general remark. Before I enter into the particulars of the articles I want to explain the term 'price caps' a little bit for all those potential readers who are not familiar with this term. It is well-known that regulatory authorities and their actions have an impact on nearly every form of economic activity, including profits, prices, outputs, standards and other mechanisms for altering the use of resources or some techniques for producing them. Very important are direct price controls and the direct or indirect control of profits. The regulatory form mostly chosen is rate-making. Rather than directly regulating profits the regulating board sets an acceptable rate-ofreturn on capital. In contrast to that we have regulatory approaches classified as social contracts (social contract regulation). This means the regulator first delimits a group of regulated services that will also be regulated in the future; then he stipulates a list of constraints that the utility must adhere to; in exchange for that the regulator agrees to deregulate other competitive or non-essential services of that utility. As long as no constraint is violated the price formation is totally unrestricted; if, for example, the firm becomes more efficient thereby reducing its costs it may hold the corresponding profits. Price cap regulation is a special case of such a social contract approach. Although there are different types of regulation we normally have the following: the price increases of monopolistically supplied goods must not be higher than the increase of the retail price index (RPI) minus a constant X, which is politically chosen and which is an estimate of the utility's differential productivity increase. In the U.K., where this constraint was

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proposed by Littlechild in the beginning of the eighties it became known as RPI-X. Such an index ceiling is adjusted over time to allow for cost inflation and precommitted rates of productivity improvement. But let us now go back to the contents of the book. It resulted from a one-day conference in 1987 where six papers were presented, four of which were accepted for publication in this volume. They were supplemented with seven others, probably invited papers. In the introduction Einhorn describes the traditional theory of cost-based regulation and its disadvantages, among other things: too much capital used (Averch-Johnson effect), no incentives to adopt cost-reducing innovations, misrepresentation of reported cost data and so on, but also on the regulator's side, substantial and also growing administrative costs. After that, Einhorn goes over to price cap regulation and first describes its practical consequences in the U.K. and the U.S. He then gives theoretical arguments for using price caps: every firm has an incentive to minimize costs, to adopt technical innovations; as no cost data are reported there is no incentive for misrepresentation, no Averch-Johnson effect, administrative costs may be lower than is the case with rate-making. Nevertheless, price caps pose a series of problems that still have to be tackled. Some of them are dealt with in this volume. In the first article, Vogelsang considers a process which can be interpreted as a blend of two former adjustment processes, developed by Finsinger and himself. It is a two-part tariff where the regulatory constraint is introduced as the fixed portion F t of this tariff. The firm maximizes the discounted stream of future profits. Depending on whether the number of consumers is fixed or variable, the process converges to marginal-cost prices or profit-constrained optimal two-part tariffs, respectively, which are equivalent to Ramsey prices. In chapter three Brennan demonstrates that capping the (Laspeyres) price index can be represented as a solution to the problem of a profit-maximizing monopolist, who must accept a given level of consumer welfare. In this solution he characterizes (marginal) price changes which do no reduce welfare. In reality, however, price changes are finite. The author discusses some of the problems which arise from those finite changes and also from changing demand over time. Baron, in the fourth article, extends earlier work on regulating monopolies: the regulator would like to base its pricing policy on marginal costs. These costs, however, are only known by the firm itself. Because of this imperfect information problem the regulator can only design a mechanism that includes a collection of pricing policies from which the firm can choose. Baron uses a twopart price structure with a price per unit Pt and a fixed charge T,; the aim of the regulator is to maximize the expected discounted sum of consumer surplus over a special horizon. He then scrutinizes optimal mechanisms with and without commitment and also considers the importance of commitment for investment of the firm which is assumed to take place in every period. The next two chapters deal with an important problem of price cap regulation: how to determine the expected rates of technical change in a regulated firm (in our constraint RPI-X, mentioned above, how to determine the X ?). Kwoka (chapter five) in a rather applied article discusses how the Federal Communications Commission (FCC) designed a productivity measure, using several different estimates for productivity changes, to regulate AT&T in the U.S.A. Kiss in chapter six hints at the problem of all the existing productivity measures of being a good approximation to the actual development of productivity. He gives his formula for the productivity gain component of the price cap formula, which does not eliminate but in any case reduces the problem of short-term fluctuations in productivity gains. After this more applied work, Linhart, Radner and Sinden come back to pure theory in chapter

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seven: they describe a mechanism that, even in the presence of moral hazard and uncertainty about the success of actions to improve productivity, will work in such a way that the firm decreases its output prices over time. This is done in a sequential principalagent relationship, with the manager of the firm as agent and the regulator as principal. The main tool to increase productivity will be to reduce costs. This problem is also considered by Cabral and Riordan in chapter eight. They show that a marginal reduction in the price cap increases the firm's investment in cost reduction, first in a model with known costs and then by introducing cost uncertainty. In article nine by E. Noam we return to every-day practice and especially to telecommunications. Noam first surveys the post-divestiture trend of service quality in the telephone network of the American states and the U.S. as a whole. He then proposes an operational way to integrate quality performance with regulatory policy. In article ten Sibley, Heymann and Taylor and in article eleven Einhorn consider the problem of introducing new services and options. In chapter ten, the authors start with the (well-known) finding that introducing many twopart tariffs increases welfare as well as profits as there are more possibilities to choose from. They then present explicit calculations which demonstrate possibly high welfare gains. Einhorn considers a model where a firm, constrained to offer a special tariff, may also supply other tariffs as well. This will be done in most situations leading to benefits for the consumers and incentives for the firm. In the last article Monson and Larson consider the question how price cap regulation affects the incentives of a firm to engage in cost-reducing investment, something which was already dealt with in article eight by Cabral and Riordan. They obtain the results that switching from rate-of-return to price cap regulation leads to cost-reducing improvements in investment and that price ceiling constraints which will become more binding will normally lead to more marketing activities in the regulated firm. To summarize, an interesting book for theorists, a little less so for practitioners. As the different articles are self-contained, it will also be possible to read only parts of this book, an advantage for specialists. On the other hand, a layman in the field of regulation can also get a first impression of the theory of price caps. In order to really get to know this field, however, he has to read some elementary papers first. G. Tillmann

M . A . C r e w (ed.), Competition and the Regulation of Utilities, Kluwer A c a d e m i c P u b l i s h e r s , B o s t o n , D o r d r e c h t , L o n d o n , 1990. P p . 224. Dfl. 9 8 , This book is a result of two seminars held at Rutgers University in October 1989 and May 1990, entitled 'Competition and the Regulation of Utilities.' Traditionally, the idea of competition as a substitute for regulation was antithetical to the basic philosophy of utility regulation. The institution of regulation had developed in order to resolve the pricing or allocative inefficiency resulting from scale economies and natural monopoly. During the last two decades, the notion that, like oil and water, competition and regulation did not mix, has been abandoned. Firstly, there were increasing doubts whether regulation is always performed in the public interest; instead it might also be used as a device for cartel management. Secondly, it is recognized that regulation

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creates a number of regulatory-induced inefficiencies. Thirdly, it has been pointed out by the so-called 'contestability literature' that the pure existence of a natural monopoly (characterized by a sub-additive cost function) is not a sufficient argument for regulation, because potential entrants may substitute the lack of actual competitors. Thus, one might expect high efficiency gains from regulatory reform and deregulation. The paper 'The Law and Economics of Intra-LATA Competition: 1 + Issues and Access Charge Imputation,' by Sievers deals with the possibilities of competition in the territory within which the local telephone company carries calls. Crew and Crocker, 'Diversification and Regulated Monopoly,' and Larson, 'Predatory Pricing Safeguards and Telecommunications Regulation,' deal with the issue of regulating a multi-product firm which operates in both competitive and traditionally regulated markets. Whereas Crew and Crocker deal with the problem of cost allocation between regulated and nonregulated ventures, Larson deals with the issue of predatory pricing. The papers by Hillmann, Harris, and Jang and Norsworthy, while all relating to specific individual industries, also involve lessons for other regulated industries. Hillmann's paper, 'Oil Pipeline Rates: A Case for Yardstick Regulation,' deals with the role of competitive market prices as the yardstick for regulating oil pipelines. 'Telecommunications Service as a Strategic Industry: Implications for United States Public Policy' by Harris is concerned with the prospect and the reality of the displacement of the United States as the world leader in telecommunications. Jang and Norsworthy's examination of productivity in telecommunications equipment provides an estimation of the price index for semiconductors over the period 1978-86. The papers by Brennan, Crew and Frierman, and Crew and Zupan deal with proposals for regulatory reform. In his paper 'Entry and Welfare Loss in Regulated Industries' Brennan discusses how regulation might respond to entry. In 'Information Economics and New Forms of Regulation,' Crew and Frierman examine the contribution of information economics, particularly principal-agent theory, to regulatory economics. In 'Franchise Bidding for Public Utilities Revisited,' Crew and Zupan reexamine franchise bidding as a means of regulating utilities. Finally, Houstan's paper, 'Privatization of Electricity in the United States' deals with the privatization of federal electric power supply. The contents of this volume is idiosyncratic rather than comprehensive in its coverage of the problem of competition and regulation of utilities. While there is competitive entry into several traditional utility markets, regulation is considered far from dead; Thus, the focus of this book is on regulatory reform rather than on the possibilities of extensive deregulation. The volume can be recommended to advanced scholars in the economics of regulation with special interest in U.S. regulatory experiences. G. Knieps

D . J . K r a a n a n d R . J . in 't Veld (eds.), Environmental Protection: Public or Private Choice, K l u w e r A c a d e m i c P u b l i s h e r s , D o r d r e c h t , 1991. P p . v i i + 2 3 2 . Dfl. 1 5 0 , The publication of the book EnvironmentalProtection: Public orPrivate Choice shows that not only natural scientists and economists but political scientists too can contribute to the formulation of an effective and efficient environmental policy. This book, which

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contains contributions by scientists from the United States and The Netherlands, focuses on the process of collective decision-making and tries to analyze, by using a 'moderate public choice' approach, how decisions on environmental issues are taken. Seen from an economist's point of view one of the most interesting topics raised in the book is why (up till now) policymakers prefer direct regulation to economic instruments in environmental policy, despite the theoretical advantages of the latter. In a general way this question is addressed in the first part of the book, which deals with decision-making. Although in my view the surplus value of this part of the book compared to the 'standard' economic analyses of environmental problems is relatively modest, it gives some clues towards the answer to the formulated question. Theeuwes for instance mentions that one lesson to be learned from public choice theory is that policy-makers do not necessarily aim at realising Pareto-optimality and might be more interested in maximizing their budget or output. Moreover, in the case of environmental policy policymakers are faced with widely dispersed benefits and narrowly concentrated costs which hampers the strict application of the polluter-pays-principle (e.g. via regulatory taxes), unless those who benefit are organized in a comparable way to those who pay the price (Tullock, Van Mierlo and Nispen). In a very concrete way this notion is illustrated in the contribution of Dietz and Termeer. Their contribution forms part of the second and - as far as I am concerned most interesting part of the book which contains a number of case studies based on the Dutch situation. Dietz and Termeer try to explain the dominance of direct regulation in the case of the Dutch manure policy. Their contribution gives a clear insight in the interests at stake for the parties involved in the policymaking process. They describe how an 'agrobureaucratic complex in the sense of Galbraith' - consisting of farmers' organizations, the feedstuff industry and bureaucrats of the Ministry of Agriculture effectively holds back economic instruments (except subsidies) in Dutch manure policy. In 't Veld analyses in his contribution why the - in his view - potential perfection of the instrument of bill riding has contributed to its non-acceptance. His hypothesis is that whereas the ballot-box may show that individuals favour very strong environmental policies, after the translation of these abstract policies in concrete measures they nevertheless keep looking for ways to behave as flee-riders and sabotage the implemented measures. In his view 'an altruist and a free rider may live in one and the same body.' The implementation of bill riding would deprive individuals of the possibility to behave like a parasite, because of the technical perfection of this instrument. For that reason bill riding meets with a lot of resistance, according to In 't Veld. Notwithstanding this interesting explanation, in my view other factors at least contributed to the reserved public reaction to the proposals of bill riding. Bill riding is not the perfect instrument In 't Veld considers it to be. In particular it should be noted that bill riding, by differentiating 'prices' by time and place, is primarily directed at reducing congestion problems in the Randstad and less at the realisation of environmental goals. This latter aim requires a general use of the price instrument, preferably in an international context. The third part of the book addresses some of the institutional aspects of policy design. Several contributions stress that a purely restrictive, technocratic discussion on environmental policies should be avoided. Policymaking also has to deal with the influence of uncertainty a n d risk aversion on the policy outcome. Both markets and governments can fail. The effects of non-market failures could even be worse than those of market failures. According to Van Mierlo and Van Nispen some kind of publicprivate partnership could therefore offer a way out of these failures. The economic

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market is then substituted by a political market, on which compromises are sought by means of exchange and negotiations by political entrepreneurs. According to the authors a successful political entrepreneurship has to meet at least three conditions: - a sufficient number of potentially interested individuals must be willing to buy the services provided by the group and hence to join the group; - the political entrepreneur must have selective incentives to his disposal in order to lure new members into joining the group; - the net benefit must be positive for both, i.e. for the political entrepreneur providing the individual services to group members and for the group members as consumers of these individual services. With respect to the concept of political entrepreneurship Van Mierlo and Van Nispen make some interesting observations about recent developments in the Dutch political market. First of all, evidence has emerged that the traditional opposition between public and private sector is gradually going to be replaced by a policy network with a number of actors, e.g. individual firms, labour unions, consumer organizations, investment bankers and environmental organizations. Secondly, the authors point at the generation of new tools for environmental policy which enables agreement on (partial) solutions for environmental problems with hardly any government intervention. Reference is made to the 'bubble concept.' Van Mierlo and Van Nispen show great confidence in this instrument of tradeable property rights. Although I agree with the authors that '...the philosophy behind the bubble-concept is quite simple...' one should realize that the use of this instrument can be very complicated and it requires - unlike the authors' suggestion - without any doubt a clear role for the government. A third development on the political market is the growing awareness by policymakers that financial incentives and the instrument of legal liability of individual firms seem to be effective. Another important development, according to the authors, is the establishment of internal units to the environmental problems caused by the production process. Their explanation of this development ('...the failing enforcement and control of environmental policies towards business has caused firms to take their own responsibility') seems to me rather unconvincing and it neglects new policy initiatives towards possibly compulsory environmental auditing, the growing public awareness of the need for greener products and processes, and the economic benefits of auditing for individual firms (in terms of savings on energy and raw materials). Nevertheless, I agree with their conclusion that the movements described above can be substantially increased by a successful political entrepreneur. In my view E n v i r o n m e n t a l Protection: P u b l i c or Private Choice is a valuable first attempt to enhance insight in the functioning of environmental decision-making processes by using public choice theory. I therefore fully agree with the editors of the book who state in the preface that this effort deserves to be repeated and expanded. E. Oskam

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This is a convincing and - for the power elite - provocative book. It is the story of Goudriaan during the period 1938-1945 while he was president of The Netherlands Railway Company, the Nederlandse Spoorwegen (NS), at that time confronted with new market challenges through the entry of new modes of competitive transportation. It was also the period of heavy budgetary cuts and attempts to reduce subsidies to stateowned enterprises such as the NS. In view of this goal and of Goudriaan's 10 year career as a practical businessman at Philips in Eindhoven, the Dutch government asked him to head the NS in Utrecht. As Van der Zwan's meticulously written historical account of that period shows, he was not welcome and the outbreak of the Second World War restored the bureaucracy of the pre-1938 period. Goudriaan gave up his NS position in 1945. The book is interesting for at least two reasons. Firstly, because of Van der Zwan's attempt to study the Goudriaan case with the aid of analytical instruments taken from the theory of organisation and modern market theory. Secondly, because Goudriaan is an interesting Personality both as a business economist and man of creative abilities. Van der Zwan's main thesis is that expertise and competence are necessary but not sufficient for survival if that person does not belong to the power elite. This is a provocative hypothesis. My only criticism would be that Van der Zwan's emphasis on a Particular episode in Goudriaan's life seems to ignore that Goudriaan has been more than president of the NS. Nevertheless, a fascinating book! M.M.G. Fase

Barry E. Carter, International Economic Sanctions: Improving the Haphazard U.S. Legal Regime, 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., 1988. Pp. x i v + 2 9 0 . $39.50 Both popular and scientific interest in economic sanctions as an instrument of foreign policy has increased since the mid 1980s. This is not just a consequence of wellpublicized cases, such as the 1990 U.N. sanctions against the Iraqi invasion of Kuwait or the 1991 EC sanctions that were aimed at ending the civil war in Yugoslavia. Attention was also drawn to economic sanctions because boycotts and embargos have shown to be effective both in terms of economic damage done and in terms of political impact. The U.S. sanctions against Nicaragua and Poland, the Soviet sanctions against Lithuania and the U.N. sanctions against Iraq and South Africa, all seem to have had a positive political pay-off for the sender countries in the 1990s. Indeed, the U.N. sanctions against Iraq have shown that the achievements of political unity that is a necessary condition for a forceful embargo can be a matter of days. Also, in the case of Iraq, economic warfare has not been easy to circumvent (Van Bergeijk (1991, pp. 71-80)). All in all, recent experience contradicts the traditional economic arguments against economic sanctions in general. Moreover, it is to be expected that sanctions will play an increasingly important role in the world system, both as a punitive instrument in Presi-

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dent Bush's New World Order and as a means to enforce international environmental protection conventions. Barry Carter wrote International Economic Sanctions at a time when it was quite generally believed that economic sanctions were ineffective instruments of foreign policy. Both the choice of his subject and the manner in which he treats this topic show a keen eye for the potential utility of this economic instrument. The book offers a qualitative non-technical treatment of the subject, it is well-written and accessible for a broad audience. Carter's aim is to provide a,comprehensive analysis of U.S. laws to impose economic sanctions for non-economic foreign policy reasons. The study is interesting for the non-American non-lawyer because (i) the United States is increasingly resorting to economic pressure as an important tool of its foreign policy, (ii) the United States applies economic sanctions most often and (iii) Carter provides a very useful catalogue of the full range of possible economic incentives and disincentives. I do not, however, think that many readers will find the U.S. President's haphazard authority very interesting, although one cannot but agree with his conclusion that constructive changes in U.S. laws are necessary. Most interesting, Carter's proposals aim at limiting the instances when sanctions can be implemented. At the same time he wants to increase flexibility, both with respect to the choice of instruments and the speed of implementation. Indeed, as econometric analysis of the Hufbauer and Schott (1985) data base has shown (Van Bergeijk (1989)), flexibility in implementation will increase the success rate of economic sanctions. A strong case could be made to limit the government's power to implement economic sanctions. Carter is right when he wonders (p. 3): '(...) if the President's authority to impose import sanctions were expanded, would U.S. domestic industry pressure the President to use the new laws for protectionistic purposes? Would the U.S. steel industry discover human right violations in South-Korea or Taiwan and seek a ban on steel imports from those countries?' Next to the danger of increased protectionism one cannot but observe that diplomatic measures such as expulsion of diplomatic personnel, recalling of ambassadors, etc. are often not contemplated before economic sanctions are opted for. Obviously, it could pay to consider these political alternatives more seriously. So on both accounts, Carter's proposals could - if generally applied - improve the usefulness and appropriateness of economic sanctions as an instrument of foreign policy. Peter van Bergeijk REFERENCES Bergeijk, P.A.G. van, 'Success and Failure of Economic Sanctions,' Kyklos, XVI (1989), pp. 385-404. Bergeijk, P.A.G. van, Handel, politiek & handelspolitiek, Den Haag, 1991. Hufbauer, G.C. and J.J. Schott, Economic Sanctions Reconsidered. History and Current Policy, Institute for International Economics, Washington D.C., 1985. 1 Rozemond (1988) offers an analysis, which may be useful for Dutch readers of De Economist.

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Rozemond, S. (ed.), Economische sancties, Nederlands Instituutvoor Internationale Betrekkingen 'Clingendael,' Den Haag, 1988.

Miroslav N. Jovanovi6, I n t e r n a t i o n a l E c o n o m i c I n t e g r a t i o n , Routledge, L o n d o n a n d New York, 1991. Pp. xxiv + 302. £ 4 5 . Books like this were mainly written and published at the begining of the process of international economic integration. At that time we were interested in the pros and cons of this development and were particularly looking for an answer to the question if it was worthwhile. Needed was a theory and, if possible, its quantification. In the meantime, many experiences have become available. Does it still make sense to reconsider the theory of international economic integration, given the fact that we are - at any rate in Europe - so far advanced in this direction that the process cannot be rolled back? Jovanovi6 is clearly of the opinion that such an analysis is still worthwhile, if only because systematization is always important, regardless of the fact that reality has taken its own course. It appears that the resurrection of this theory makes us sadder and wiser. This will be touched upon after a brief indication of the contents of the book. International economic integration is defined by the author as a regional phenomenon, so that there is always an outside world. He classifies his subject in types of integration with increasing impact, from a preferential trade agreement to a total economic union, with five intermediate forms in between, of which a customs union and a common market are the most important. The difference between these intermediate cases relates to the integration of the factor markets, which is excluded from the customs union and included in the common market. His analysis is traditional, in the sense that the static approach - the movement along curves - is dealt with first and the dynamic approach - the shifting of curves themselves - is second. The policy measures which accompany the process of integration are in his frame of thinking dependent on the goal of liberalizing economic relations within the region in question. He separately discusses monetary policy, fiscal policy, industrial policy, regional policy and social policy, mainly on the basis of experiences in the European Community. This is the point where we have become wiser, because this evidence was not yet available in the aforementioned publications ex ante. The author makes no sharp distinction between harmonization and unification of economic policy. His concept of harmonization more or less covers the whole of policy measures aiming at economic integration. Why have we also become sadder? Because in the author's opinion experience has shown that the quantitative effects of international economic integration cannot be measured. The phenomenon and the explaining theory are for this purpose too complex. This agnosticism underlines the restricted significance of this study, viz. no more than the inventorization of our thinking on the subject. This aim is clearly achieved, thanks also to the impressive bibliography and the useful index. But it is too tempting to suppress all comments. In the first place, his definition of international economic integration, as he himself states, stands in the tradition of Viner's theory of customs unions, with its trade creation and trade diversion effects. Therefore, integration in his opinion always has to be seen as a second-best solution. So it is not incidental that Richard G. Lipsey wrote the foreword. Thinking along these lines, it must be deemed rather curious that worldwide

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economic co-operation in the field of liberalization is not international economic integration in the sense of Jovanovid, because then the regional aspect is lacking. So the GATT and its activities do not fit in his theory, strictly speaking. Also, it may to some extent be deplored that he only uses a loose definition of policy harmonization, as was stated before. In this way, he lacks the opportunity to formulate a more systematic view on the building of integration policy, e.g. along the lines of Tinbergen's theory of optimal centralization. In the third place, his view on integration policy as a phenomenon that is derived from the liberalization goals appears to be too narrow. In this way he cannot account for an important subject of European economic policy, viz. the common agricultural policy of the European Community. This policy cannot be explained completely from the pressures towards internal liberalization. On the contrary, the high level of administered minimum prices restricts competition between member states instead of promoting it. He sidetracks this omission by not mentioning the common agricultural policy at all, but that does not seem satisfactory. On the other hand, almost nobody is quite happy with this policy, in the present circumstances, so that abandoning the theory perhaps indicates a situation that might become true in the future. F. Hartog

REFERENCE J. Tinbergen, Centralization and Decentralization in Economic Policy, Amsterdam, 1954.

I . M . F . , Determinants and Systematic Consequences o f International Capital Flows, Occasional P a p e r 77, W a s h i n g t o n , 199l. P p . v i i + 94. $ 1 0 . This study consists of four parts. The first part deals with Determinants and Systematic Consequences of International Capital Flows. Four trends have characterized capital flows during the 1970s and 1980s. First there has been a sharp expansion in the scale of net and gross capital flows among the industrial countries. Second, there has been a growing integration of international capital markets. The degree of integration is captured better by rate-of-return differentials than by the scale of capital flows. This is because international capital markets can respond to a shock in one country not only through capital flows but also through changes in asset price s . The evidence on the integration of financial markets is mixed; although covered interest parity holds quite closely by now in the Euromarkets, real interest rate spreads have remained significantly large. Third, private rather than official capital flows has been the principal source of financing the historically large current account imbalances of the industrial countries in the 1970s and 1980s. Fourth, after borrowing heavily from international banks in the 1970s, many indebted developing countries found their access to international financial markets sharply curtailed in the 1970s and 1980s. It has turned out to be very difficult to find stable empirical relationships between capital flows and so called 'fundamentals.' As a result, in most econometric models financial linkage is modeled through assets price linkages that are the outcome of arbitrage between markets rather than the capital flows themselves.

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The second part deals with 'Systematic Financial Risk in Payment Systems.' The volume of payments transactions has risen sharply. A key issue now being addressed by the authorities in a number of countries is whether existing institutional arrangements need to be modified in order to limit the liquidity and credit risks that have arisen from these increases. One source of concern has been the growth of netting arrangements. In net periodic settlement systems, payment instructions are accumulated by the clearinghouse over a period of time, and only net debits and credits are entered into the settlement accounts of the members at the end of the settlement period. Under a regime of settlement finality, any payments instruction received by the clearing-house will be executed no matter whether the bank sending the message defaults. If settlement finality does not exist, the payment instruction will not be executed if the bank defaults, and all the receipts and payments of the defaulting bank will be deleted. The result of this can be that other banks suddenly turn out to have large net debit positions. Several measures to limit this systematic risk are discussed. Foreign Direct Investment is discussed in the third part. It concludes that at present there is no unique and widely accepted theory of foreign direct investment. No single hypothesis is sufficiently supported to cause the others to be rejected. However, theories derived from the industrial organization approach seems to provide the best explanation for cross-country, intra-industry investment. The final part deals with capital flight in developing countries. The study argues that two forms of risk have caused capital flight: risk of expropriation and risk of losses arising from inflation or large exchange rate devaluations. The simultaneous occurrence of large inflows of foreign capital and large capital flight from developing countries during the 1970s and early 1980s reflected the difference in perceptions of domestic residents and foreign lenders. Since the emergence of the debt crisis the differences have been reduced, which led to a decline of capital inflows and a continuation of capital flight. The policies with the greatest chance of stopping capital flight are those that decrease the risk of holding domestic assets. Therefore, sound macroeconomic policies are recommended to stop or reverse capital flight. This book provides a good overview of the present state of the art of theories dealing with capital flows. Moreover, it contains a lot of figures, presented in 25 tables and 4 charts. It is worth reading for anyone interested in international economics. Bas Bakker

L a m b e r t v a n der L a a n , Spatial Labour Markets in The Netherlands, R o t t e r d a m , 1991. Pp. 253. Dfl 4 5 , In this P h . D . thesis, the causal structure of the regional labour markets in The Netherlands is analyzed. The focus of this study is both on the regional differentiation between labour markets and the relationship between labour market elements (for example, the degree of regulation). This so-called 'spatially-integrated' approach is used to reveal the underlying causes of the regional differences in labour market performance. For this purpose, the author accurately constructs a quantitative causal model of the regional labour market structure, which is based on elements originating from different labour market theories. I agree with the author that the use of different orthodox theories for building a coherent 'heterodox' model is a fruitful method, because the observed struc-

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ture of the regional labour market is probably a result of effects related to different theories. The building blocks of the heterodox model are introduced via an extensive discussion of the alternative views on the causal aspects of spatial labour markets in chapters 4 and 5. The preceding chapters concentrate on the context of this research, namely (1) an overview of spatial labour market research in The Netherlands, which is 'rather fragmentary' according to the author, (2) a theoretical view of the region, based on the idea that the region is a reflection of a specific complex of activities, and (3) a quantitative and qualitative description of the regional differences on the Dutch labour market. In fact, the latter issue - presented in chapter 3 - stresses the problem of this study. Chapter 3 clearly shows that there are considerable differences in the structure and development of the regional labour markets in The Netherlands. This is done by classifying the 40 Corop-regions in six clusters (e.g., central-urban). However, these six coherent labour market areas are not used in the heterodox model. This choice seems to have been made in order to maintain a sufficient degree of freedom in the analysis. The specification of the heterodox model is discussed in chapter 6. Various labour market theories are used to select the determinants of regional labour demand and supply. An important issue here is whether the market situation can be considered as homogeneous or heterogeneous. The author shows that labour flows between different industrial sectors are high, so the conclusion is drawn that 'no clear submarkets can be distinguished' (p. 110). I am, however, not sure whether this conclusion would also arise if mobility between occupational groups was studied. Next, the theoretical factors are classified into groups related to the production process, regulation and social environmental circumstances. In this respect, it is somewhat surprising that the factors stemming from the institutional and neo-marxistic view are still included, because these theories describe - according to the author - a heterogeneous market situation. The model is completed by the inclusion of the spatial adjustment mechanisms of migration and commuting. This is followed by the operationalization of the model for which the author has collected data from various sources. The analysis of the heterodox model is carried out on the basis of a specific pathanalytic approach (Latent Variable Partial Least Squares). Van der Laan clearly presents how the final model is derived in a number of analytical steps. After selecting the relevant variables and specifying the relations between the latent variables (such as regulation and the production process), the author chooses the best model from two alternatives. In the first one, demand is directly or indirectly determined by supply, while in the second the relationships are reversed (i. e., a causal model of labour supply). Consequently, complicated simultaneous models can be avoided. Moreover, it offers the opportunity to use the selected model for causal prediction in a later phase. It appears that - on the basis of appropriate statistical tests - the supply driven model turns out to be the optimal model. The results show that labour demand can be explained by the degree of regulation of demand the character of the production process, labour supply and in- and outgoing commuting. Nevertheless, it seems to me that - from a theoretical point of view - regional labour demand influences ingoing commuting instead of the other way around. In chapter 8, a reduced-form model for regional labour demand is derived from the optimal model. This model is used for prediction purposes from which it can be con-

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cluded that the model explains the regional variation rather well. The empirical part of this study is concluded with a solid discussion of the main results. The hypotheses stated by the author are all plausible and well-argued. I conclude that this book offers much insight into the structural differences of regional labour markets in The Netherlands. Moreover, the book shows how ideas from different disciplines (economics and regional geography) can be combined to develop a sophisticated theoretical framework for empirical analysis of the regional labour market structure. Finally, the author interprets his empirical results in a more comprehensive regional theoretical framework in which the focus is on the interdependency between social economic development and the 'regional arena' (while the historical influences are also taken into account). An interesting result of Van der Laan's successful attempt to relate his finding to developments observed in the real world is that the level of urbanization still influences the character of the regional labour market. C. Gorter

K. T r o m p e r t , WerkloosheM, een bedrl~jfseconomisehe benadering ( U n e m p l o y m e n t , A Business A d m i n i s t r a t i o n A p p r o a c h ) , E b u r o n , Delft, 1991. P p . 425. Dfl. 89,50 In presenting a careful analysis of the concept of profit Trompert tries to show the necessity of a strict monetary interpretation of macroeconomic concepts such as savings, investments and income for Keynes to prove the inevitability of involuntary unemployment in a market economy. The book consists of four parts: Money (I), Investments (II), Profits (III) and Conclusions (IV). Part I deals with the theory of Keynes and contains extensive expositions of his most important concepts. The main problem the author deals with concerns the question whether the investment impulse would be big enough to compensate the voluminous savings leakage. Trompert stresses the fact that Keynes wrongly interpreted savings, income and profits as concepts of the real sphere, while a monetary approach would be necessary. Part II deals with investments and in particular the relationship between investments and profits. At first an exposition is given under the conditions of constant prices and wages and labour time. Thereafter an analysis of the profit-investment relationship is given under conditions of variable prices, wages and labour time. The method used is a presentation of a large number of numerical examples. One important conclusion is that a period of rising prices is' more favourable for investors to 'recycle' the money which leaked out of circulation as a result of high levels of savings from consumers a n d / o r producers. This leads Trompert to conclude that unemployment is not inevitable in a market economy. Part III goes into detail with respect to a series of interpretations concerning the concept of profit. The difference between nominalism and substantialism is stressed, not only with respect to profits, but also when regarding the implications for concepts such as capital, wealth, investment and depreciation. All these expositions are made to explain that some interpretations of the profit concept are better suited for the explanation of unemployment than others. But the author's conclusions are not clear about this central theme.

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So the integration of business administration theory with macroeconomic theory fails to come about. While the author's intention was to improve Keynes' theory of involuntary unemployment by arguing that a strict monetary interpretation of savings, income and profits is a necessary element, he ends up refuting the perceived theory of Keynes. I hope my reproduction is accurate. An important problem with this book is the loose connection between analysis and conclusions. I'm afraid that the central thesis of the book has shifted during the writing process. Starting off with the intention to prove that the monetary approach ought to be considered as necessary in a (Keynesian) theory of unemployment, Trompert discovers a positive relation between inflation and investments, leading him to refute the inevitability of unemployment in a market economy. However, the necessity of a monetary approach to understand the inflationinvestment relationship remains unclear. I will end with a remark on the theory of Keynes as I see it. Keynes tried to show the absence of automatic stabilizers in a market economy once it is in a situation of severe depression. Keynes developed an argument for the phenomenon of sticky prices, and in particular for downward stickiness of the interest rate. This means that there are no incentives for subjects to change their behaviour, leading to a long sustained situation of levels of effective demand and investment that are too low. Although the problem also needs a specification of the monetary sphere (besides of course a specification of the real sphere), Trompert has not persuasively argued the necessity of a monetary interpretation of the principal macroeconomic concepts. P.K. Keizer

Carl Chiarella, The Elements o f a Nonlinear Theory o f Economic Dynamics, Lecture Notes in E c o n o m i c s a n d M a t h e m a t i c a l Systems, Vol. 343, Springer-Verlag, Berlin, etc., 1990. Pp. x + 149, 61 Figs. Softcover D M 3 9 , This book provides a useful survey of methods for the analysis of nonlinear dynamic models and shows how these can be applied to economic models. The main methods that are used are the method of averaging and the method of centre manifold theory. They are qualitative and geometric, as revived by Poincar6 and Liapunov. The applications cover mostly old-fashioned endogenous cycle models associated with the names of Nicholas Kaldor, Richard Goodwin and others, although some of the applications allow for the government budget constraint as well. Chapter 2 surveys mathematical results on nonlinear dynamics such as the Hopf bifurcation theorem, the Poincar6-Bendixon criterion and the Hartman-Olech theorem. The problem is that these results are never explicitly stated and afortiori never proved. The reader is thus not clear under precisely which conditions the results are meant to hold. For example, no distinction is made between subcritical and supercritical Hopf bifurcations. Chapter 2 provides a fairly clear exposition of the classical method of averaging, which (given that you know that there is a limit cycle) gives information on the stability and determinants of limit cycles, and of relaxation oscillations. Chapter 2 also shows that the centre manifold theorem may be used to decouple higherdimensional nonlinear systems. Chapter 3 uses these results to look at some old-fashioned cycle theories such as

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Kaldor's and Go0dwin's nonlinear multiplier-accelerator models. There is also a discussion of a nonlinear accelerator with saturation. Chapter 4 takes an IS-LM model with an explicit government budget constraint and a fixed capital stock (a version of the Blinder-Solow model) and points out that, even though bond-financed deficits can be locally unstable, they may well lead to stable limit cycles. The mechanism which achieves this result relies on an output lag and the introduction of a Kaldorian nonlinear investment mechanism. Presumably, other kinds of nonlinearity can yield limit cycles as well. Although the model allows for counter-cyclical ('leaning against the wind') rules for government spending, it does not allow government spending to be cut back when government debt explodes. This is a pity, because this would seem the economic mechanism by which the Blinder-Solow instability problem is resolved and in which the present-value budget constraint (solvency) of the government is ensured. Chapter 5 extends the famous Goodwin model of economic growth and conflict over the functional distribution of income; the first model to have perpetual business cycles around trajectories of balanced growth, to allow growth in real wages to depend on a weighted average of employment rates rather than on the current employment rate. From a mathematical point of view such an extension is sensible, because, as is wellknown, the basic Goodwin model is structurally unstable so that small parameter perturbations yield qualitatively different solutions. The H o p f bifurcation theorem suggests that the extension leads to stable limit cycles which are structurally stable. The book claims that this extension is in line with Keynes' ideas, but surely this cannot be true as Keynes was concerned with nominal not real wages. Extensions to allow for nominal wage rigidity also lead to stable limit cycles as has been shown by Meghnad Desai and myself. In fact, recent developments in labour economics suggest that hysteresis is important, so that growth in wages should depend on the change and not on the integral of employment rates! Hence, the economics of chapter 5 is a bit doubtful. Chapter 6 postulates a nonlinear cobweb model with adaptive expectations in discrete time and demonstrates that chaos occurs when the supply of goods is a sufficiently nonlinear function of the expected price. The economics of why the supply function should display such nonlinearities depends on diminishing returns in production. Chapter 7 is concerned with nonlinear perfect-foresight models. Linear perfectforesight models in continuous time should satisfy the saddlepoint property: the number of eigenvalues with negative real parts should equal the number of predetermined state variables (e.g., the capital stock) and the number of eigenvalues with positive real parts should equal the number of non-predetermined state variables (e.g., the price level in classical models). For example, the price level in the Sargent-Wallace model depends on a weighted average of all future money supplies. Without this saddlepoint property perfect-foresight models would, in my view, not make much sense. However, the author sees it as a dynamic instability 'problem' which can be solved in a nonlinear context. The point is that you can then get stable limit cycles in continuous-time perfectforesight models or chaos and erratic dynamics in first-order discrete time perfectforesight models. In a sense these models then loose their forward-looking property, so that, for example, the price level no longer depends on future money supplies. The author would, however, argue that this provides a critique of the very strong assumption of rational expectations. Especially when chaos arises it is easy to side with the author, as it is quite unrealistic to assume that agents can form rational expectations in such environments. Hence, chapter 7 should be read as a critique of rational expectations rather than as developing models which can be used for policy analysis.

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There are two shortcomings in this volume. The first is that the recent theory of bifurcations and erratic dynamics does not get a full mathematical treatment. For example, the mathematics of chaos - think of Smale's horseshoe construction - or the strange attractors in the Lorenz-equations receive almost no attention. This is a pity, because Benhabib and later Grandmont have made a lot of progress in the applications of chaos to economic models and have been more precise about mathematical details. There is no discussion of catastrophe theory or the geometry of fractals either. The second shortcoming is that the economic applications are rather dated and sometimes flawed. This might have been understandable ten years ago, but the last five or ten years there has been a surge of applications to modern economic models such as the overlapping generations model or the optimal multisectoral growth model with capital. Despite these two shortcomings, the book is of considerable use to those who wish to study the classical method ol~ analysing nonlinear dynamic systems and I can definitely recommend the book to these people. Rick van der Ploeg

J. Barkley Rosser, From Catastrophe to Chaos: A General Theory o f Economic Discontinuities, Kluwer, Dordrecht, 1991. Pp. x i + 4 0 2 . Dfl. 1 3 5 , The above book can be considered a fundamental reference in dynamic economic analysis since it reviews many recent approaches that allow for discontinuities, such as chaos theory, catastrophe theories, synergetics, and fractal geometry with reference to economic phenomena. The book consists of 17 chapters, a sample of which will be briefly discussed here. The first two chapters are strongly connected, and draw attention to the dualism between continuity and discontinuity, by arguing that 'if quantum mechanics is true, reality is fundamentally discrete at a microscopic level' (p. 3). In this simultaneously continuous and discontinuous world, bifurcation theory - comprehending catastrophe and chaos theory - is the major approach to dynamic discontinuities within mathematics. Consequently, Rosser supports the view that discontinuity theory is the unifying framework in which different approaches such as catastrophe theory, chaos theory, fractal geometry and synergetic theory can be reconciled. The author explores the mathematical roads to catastrophe as well as chaos. In this context, Rosser - by maintaining an agnostic position - underlines two interesting controversies; the first is related to the relationships between strange attractors and chaos theory, in other words, the question whether there is a strict dependence between these two phenomena. The second one is more 'philosophical', since it discusses whether the world is fundamentally structurally stable (following Thorn) or essentially irregular (following Mandelbrot). It should be noted here that a further controversy emerging from both previous ones is unmentioned, rig. whether strange attractors (meaning sensitivity to initial conditions) need a fractal structure. Holden and Muhamad (1986) - on the basis of Grebogi et al. (1984) - argue that 'chaotic attractors need not have a fractal structure and attractors with a fractal structure need to be chaotic' (p. 19). Consequently, the term 'fractal attractor' used by Rosser (p. 18) should be used with some caution. Interesting reviews can be found in chapters 6 and 7, which deal with catastrophe

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theory and chaos theory, respectively. In chapter 6 we find that fold and cusp catastrophe can model business cycles; furthermore, hysteresis effects can explain structural changes in the labour market. Chaos theory modelling macroeconomic fluctuations is the topic of chapter 7. Consequently, the possibility of endogenous cycles is shown in a multiplicity of macromodels referring essentially to business cycles. This chapter also contains a good discussion on the question whether chaos really exists. In this context Rosser analyzes Brock's works which examine the possibilities of chaos in time series. Chapters 9, 10 and 11 review models of discontinuity with reference to urban and regional evolution. Particularly in chapter 9 attention is paid to the phenomenon of agglomeration by considering as a starting point the model of Papageorgiou and Smith in 'which the switch from deglomeration outweighing agglomeration effects to just the opposite occurs at a bifurcation point where the dynamic system becomes unstable' (Rosser, p. 152). Rosser shows how many other models in the literature depicting instability (e.g., models developed by Isard, Anas, Weidlich and Haag, Leonardi and Casti) can be compared from the purpose of showing agglomeration as the driving force for urban formation. In the second part of chapter 9 Rosser explores the alternative concept of long distance trade as the driving factor of growing cities. In this context he shows how the models of Mees, Dendrinos and Andersson can be interpreted in the Thorn-type catastrophe framework. The synthesis of the two approaches is provided by technological change incorporated in Nijkamp's models, which appears to be the common key in both approaches. Here also the possibility of discontinuous changes and patterns of growth followed by decline is shown. Chapter 10 presents discontinuities in intra-urban systems. Rosser reviews here the well-known works by the Leeds school (Wilson) comparing them with the Brussels School (Prigogine et al.). Furthermore he looks into the possibility of urban cycles by considering Dendrinos' 'ecological approach' as well as all series of models analyzing static and dynamic boundary discontinuities. This review is interesting, although unfortunately another fundamental approach is missing, i.e. the compartmental analysis (see, e.g. De Palma and Lefevre, 1987) embedding the Markovian approach in the linear and nonlinear case. In this context work pertaining to master equations in populations and industrial development (see e.g., Wedlich and Haag, 1983) should be mentioned too. Furthermore, a unifying framework for these models is missing, i.e., the role of logit models in all these approaches, since a logit form (and a logistic one in its dynamic version) appears to be the analytical structure which could reconduct the models of Wilson's School, Allen's School, Dendrinos' School and Haag's School in a synthetic form. Since the possibility of chaotic dynamics has recently been shown in dynamic logic models (see e.g. Nijkamp and Reggiani, 1990 and Dendrinos and Sonis, 1990), the appearance of instability and chaos under certain conditions clearly emerges in all the above-mentioned models. This latter evidence also covers the following models illustrated in chapter 11: a) the model by Allen and Sanglier on population; b) the model by Dendrinos on relative stocks in regions; c) the model by Rosser on population (displaying fractal characters). In chapter 11 the discussion on the synergetic approach by Haken operating on the slaving principle is also presented with reference to Haken's view of the world as essentially stable. In this debate (is the world stable or unstable?) it would have been interesting to examine the perspective offered by Beckmann and Puu emerging from their model on market areas, described at the beginning of chapter 11.

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The well-known seminal models of May and Lotka-Volterra are shown in chapter 13, while an epidemiological model studied by May and Anderson is also presented. Rather appealing in this chapter is the discussion on complexity and stability in multispecies ecosystems, where many scientists working on this topic are presented. However, it would have been appropriate in this framework to have a sketch of niche theory (see, e.g., Pianka, 1978) and its impact on the complexity/stability network problem. Chapters 15 and 16 are more concerned with discontinuities, in particular in finance. Here the argument is used that random walk models appear to outperform most structural models of exchange rates based on macroeconomic variables; thus the possibility of the existence of speculative bubbles in foreign exchange markets is discussed with reference to the scientific literature involved. Rosser concludes this chapter by stressing the vast uncertainty regarding exchange rates and consequently the importance of understanding the behaviour of our increasingly integrated world economy. In chapter 16 Rosser explores the literature concerning the world economy. Some concepts as the immiserization thesis, imperialism theory, and the two world economic theories are discussed. It would have been interesting in this chapter to test the two dynamic models presented (viz. the dualistic dynamics and the dollar demand) by means of empirical data; moreover, new reflections on such theoretical models would have been in place here, e.g., whether a chaos model can be applied to the historical evolution of the dollar or whether a catastrophe model could be applied to some historical revolution (using the available data). In the final chapter Rosser discusses the question whether economic discontinuity is a good thing, as well as 'our confusion' about it, as shown by the fact that we simultaneously attack the neo-classical edifice whereas we also rely upon it. Finally, he underlines the possibility (or not) of catastrophic bifurcations, chaotic dynamics, or sudden transformations in each economy by concluding that 'in a world of constant change and turmoil anything is possible.' In short, despite the lack of new original contributions by the author, the present book is appealing for the variety of themes treated with reference to the different scientific standpoints of the great many economists involved. It constitutes a valuable integration of the various aspects in economics (micro, macro, capital theory, urban and regional economics, etc.) approached by means of the common key of mathematics and discontinuity. Aura Reggiani

REFERENCES Dendrinos, D.S. and M. Sonis, 'Signature of Chaos: Rules in Sequences of Spatial Stock Size Distribution for Discrete Relative Dynamics,' Occasional Paper Series on Socio-Spatial Dynamics, 1 (1990), pp. 57-73. De Palma, A. and C. L6fevre, 'The Theory of Deterministic and Stochastic Compartmental Models and its Applications,' in: Bertuglia et al. (eds.), Urban Systems: Contemporary Approaches to Modelling, London, 1987, pp. 490-540. Gregobi, C., E. Ott, S. Pelikan and J.A. Yorke, 'Strange Attractors that Are not Chaotic,' Physica - D, 13 (1984), pp. 261-268.

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Holden, A.V. and M.A. Muhamad, 'A Graphical Zoo of Strange and Peculiar Attractors,' in: A.V. Holden (ed.), Chaos, Manchester, 1986, pp. 15-35. Nijkamp, A. and A. Reggiani, 'Logit Models and Chaotic Behaviour: A New Perspective,' Environment and Planning A, 1190, pp. 1455-1467. Pianka, E.R., Evolutionary Ecology, New York, 1978. Weidlich, W. and G. Haag, Concepts and Models of a Quantitative Sociology, Berlin, 1983.