Economics of Planning 25: 179-190, 1992 9 1992 Kluwer Academic Publishers. Printed in the Netherlands.

Reviews SUBRATA GHATAK University of Leicester

Friedman and F.H. Hahn (eds.), Handbook of Monetary Economics, Vols. I & II, Amsterdam, New York and Oxford, North B.M.

Holland, 1990. pp. xxix + 724, xxix + 725-1311. D.fl. 250.00 HB: US$ 78.50 HB. ISBN0-444-88025-9, 0-444-88026-7.

These two Handbooks of Monetary Economics, edited by B. Friedman and F. Hahn, contain some excellent surveys and thought-provoking papers written by the leading experts who are well-known for their contributions to macro and monetary economics. At the outset, the editors point out: "Monetary economics has always represented a symbiosis, albeit at times an uncomfortable one, between a priori theorising and the development and exploitation of empirical evidence." This 'uncomfortable' symbiosis is reflected in the choice of twenty-three surveys which bring together diverse aspects of micro, macro and financial economics. It is acknowledged that monetary economics is difficult to accept within a complete general theory of equilibrium (elegantly developed by Arrow and Debreu) which collapses the future into the current period. The real problem lies in its inability to offer a sound theory of transaction costs as well as of 'missing markets'. Naturally, writers on monetary economics have often paid attention to empirical consistencies ("rather than axioms"); those who tried to theorise failed to deliver precision. Thus 'tensions' are clearly seen in a number of surveys which try to focus on models which assume no role for a representative agent in the lending or borrowing or in trading of debts. In Vol. I, Ostroy and Starr (Ch. 1) as well as Duffle (Ch. 3) discuss the explicit role of transaction costs. Duffle goes beyond the 'money in advance' condition and neatly links money into the general equilibrium theory. Hahn (in Ch. 2) is concerned with one result of the existence of transaction costs: 'the liquidity property of assets'. With transaction costs and continuous inter-temporal trading, uncertainties could diminish and an optimum plan should allow for the probability of a change in the asset portfolio. Benassy, in his stimulating paper, draws attention to imperfect competition and strategic interaction among agents in the long-run equilibrium. He then describes a 'non-Walrasian equilibrium theory' as a foundation for macroeconomics. Shubik gives a useful account of researches into a game-theoretic approach to monetary theory. Such analy-

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ses are deemed as important in our understanding of financial institutions and their instruments. In Part III, Orphanides and Solow present an extensive study of the canonical growth models and their alterations in the presence of money. They particularly emphasize the nature of investment when savers can choose different assets. The major problem in the analysis of Tobin/ Stein/Sidrauski type of monetary growth models lies in the absence of any unambiguously defined way of introducing money into models of the real economy, "especially those which feature durable productive assets as well. Models of a monetary economy without real capital cannot be taken seriously as vehicles for the study of money and growth" (p. 258). Ophanides and Solow then draw attention to the importance of a thorough analysis of the precautionary (rather than transaction) motive for holding money in the presence of risks and uncertainties to enhance our understanding of the role of money in economic growth. Brock, in the next chapter, demonstrates the use of the overlapping generations model (OG) in macroeconomics and its modifications to allow for transaction costs. It is now easy to see the method for transferring consumption from one period to the next. In Chapter 8, Goldfeld and Sichel offer a good survey of money demand which highlights the controversial nature of the issue. Here, the contributions of Hendry, Engle, Granger and others regarding causality, weak and strong exogeneity and simultaneity with regards to the principal arguments of the demand function (mainly income, prices, interest rates) have been noted. They state the case for modifying real GNP as the transaction measure as different parts of real GNP need different quantities of money to finance them. With greater deregulation of the financial system, the need for a better specification also merits attention. It is unfortunate that the authors pay little attention to the theoretical and empirical analyses of demand for money in developing countries or in the quantity-constrained economies of Eastern Europe, where the money-demand functions can include real consumption as an argument and investors mainly depend on self-finance due to the severity of credit constraints (see, e.g., Charemza, W. and S. Ghatak, 1990). Chapters 9 (by K. Brunner and A. Meltzer) and 10 (by L. Papademos and F. Modigliani) contain comprehensive documentation of different aspects of money supply, intermediation, various transmission mechanisms and instruments to control nominal income and their implications for the conduct of monetary policy. It transpires that, in an open economy, a major research topic is to study carefully the impact of monetary/credit aggregates as well as of the rate of exchange on nominal income. The other topic could be an in-depth analysis of Goodhart's law. In Chapters 11 (by Merton) and 12 (by Singleton) capital market theories and asset pricing models and empirical tests are well summarised. In

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Chapter 13, Shiller and McCulloch discuss the concepts, theories and empirical studies of the term structure of interest rates. In Vol. II we move to the arena where macro and monetary economics keep close company. The comprehensive surveys by O. Blanchard ('Why does money affect output? A Survey'), D. Jaffee and J. Stiglitz ('Credit Rationing'), M. Haliassos and J. Tobin ('The Macroeconomics of Government Finance'), B. McCallum ('Inflation'), Driffill, Mizon and Ulph ('Costs of Inflation'), Stan Fischer ('Rules vs. Discretion in Monetary Policy'), B. Friedman ('Targets and Instruments of Monetary Policy'), R. Dornbusch and A. Giovannini ('Monetary Policy in the Open Economy') and M. Woodford ('The Optimum Quantity of Money') will be much appreciated by readers. Specifically, I find Fischer's argument for using the gold standard as a method to resolve the traditional dilemma of rules vs. discretion interesting. However, recent developments in the gametheoretic literature (see, e.g., P. Levine, 1990, for a good survey) have substantially enhanced our understanding of this problem. As regards the open economy macroeconomic models, the problem here is that while one constraint is eased (a country's expenditure must equal its output), another additional variable must be known (the price of money with respect to foreign currency). The difference between output and spending of an economy will be reflected in capital outflows and inflows which will change assets and liabilities over time. Such changes could affect both the financial and the real sectors of the economy. Despite the wide coverage and inclusion of some very useful surveys, I have noted a few shortcomings. There is little discussion of monetary policy and credibility. Many aspects of the analysis of changes of monetary and credit institutions over the last two decades and their impact on financial intermediation have not received much attention. Not much has been said either about the growth of the banking and credit system and the way such a system shaped and innovated new instruments of monetary policy. The analysis of deregulation on the instruments of control merited greater consideration. The complete neglect of the role of money in promoting economic development is both surprising and disturbing. In this field, the omission of the seminal contributions by R. McKinnon (1973) and E. Shaw (1973) is rather strange. On a number of topics perhaps a more detailed discussion of the empirical issues (as mentioned by B. Friedman in his survey) would have been appreciated. More importantly, as in Pirandello's drama ('Six Characters in Search of an Author'), here many brilliant characters are looking for an author who could write a treatise on a unified foundation (4 la Arrow-Debreu) of monetary economics to show that money matters; it is just not a 'veil', and its functions affect the behaviour of the entire economy. Despite these minor criticisms, the two volumes may be regarded as invaluable additions to the literature. Teachers, research students and

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readers will be grateful to F. Hahn and B. Friedman as well as to North-Holland for providing such a comprehensive handbook.

References

Charemza, W.W.and Ghatak, S. (1990), 'Demand for moneyin a dual-currency,quantityconstrained economy: Hungaryand Poland, 1956-1985', Economic Journal, 100 (403), 1159-1172. Levine, Paul, (1990), 'Monetarypolicyand credibility'in T. Bandyopadhyayand S. Ghatak (eds.), Current Issues in Monetary Economics, WheatsheafPress, U.K. and Barnes and Noble, Savage, MD, U.S.A. McKinnon, R. (1973), Money and Capital in Economic Development, BrookingsInstitute, Washington DC. Shaw, E. (1973), FinancialDeepening in Economic Development, OxfordUniversityPress.

CATHERINE PRICE University of Leicester Dieter B6s, Privatization- A Theoretical Treatment, Clarendon Press Oxford, 1991. Attiat F. Ott and Keith Hartley (eds.), Privatization and Economic Efficiency, A Comparative Analysis o f Developed and Developing Countries, Edward Elgar, 1991.

These two topical books are very different in their origin and approach, but achieve complementarity, helped by a contribution by B6s and Peters to the edited volume. Dieter B6s's book is a clear exposition of different models, liberally explained and illustrated by intuitive explanation, typical of B6s's work. He has divided the book into three parts - theoretical background, positive theory and normative theory, mirroring the structure of his comprehensive study, Public Enterprise Economics, published by North-Holland in 1986. The separation of the theoretical background is particularly valuable, dealing with the concepts in terms of economic concepts rather than starting with their development in practice, as is common, particularly in the U.K. where the principle often seems to be obscured by the experience. Here the r61e of privatization in both a micro and macro economic context is examined, and the fundamental privatization theory discussed and located in the principal-agent literature. This link between the theory developed in the United States and the much greater experience of privatization in Western countries is elegantly made without being forced. For the non-mathematical in particular this theoretical section is refreshingly free from equations, presenting the

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concepts in a form tractable to mathematical modelling, as the later chapters show, but preserving their intuitive and theoretical roots. Many of the ideas introduced in the first section are developed in the second and third parts, and this makes the presentation somewhat 'bitty' as the same idea occurs in different guises throughout the book. In the positive theory section the author presents a useful survey of the objectives of private and public firms and of the participant players in them. Of particular interest to British readers in this section is the development of Brs and Peters' own work on the nature of regulation, and the distortions which can appear both through the type of price cap which is set and the method of its determination. The rrle of base prices (as inherited from previously nationalised industries) would make an interesting addition, though one which is increasingly historic in the U.K. However the resetting of price caps is of vital interest, and B6s deals with this, and the little recognised distortion which arises from revenue weights, clearly. The final chapter in this section, privatization and market entry, also serves to underline the fundamental contradiction between encouraging competition and controlling incumbent firms, and some of the distortions which may result. The third section, normative theory, deals with the objectives of government, and models clearly the gains in managerial efficiency which may counteract loss in allocative efficiency where privatization leaves monopoly power with the privatised firm. There is also considerable discussion of partial privatization, or other forms of mixed private and public control of industries; this is not a familiar concept to U.K. readers who are used to either private or public control dominating to the exclusion of the other, even where there is joint ownership. However it is clearly important for other Western European countries and elsewhere, and provides a helpful framework within which to examine different objectives and their implementation. The optimal issue price is also examined in the context of welfare, and Feldstein's consideration of distributive factors included. This is a helpful model to consider what are often barely concealed political motiviations in determining particular issue prices and distributions. As its subtitle states this is primarily a theoretical book, based on the experiences of the phenomenon in Western Europe, and drawing extensively on theory developed in North America and Western Europe over the last decade. The origin of the present policies in the U.K. and the longer experience of its practice here mean that many examples are inevitably based on British experience. However, many of the chapters also examine aspects (like partial privatization) which preoccupy our European colleagues more. None of this rules out application to developing and formerly planned economies, but the general context of privatization is assumed to be a reasonably well developed market economy. The division of the book into sections does produce some fragmentation and

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repetition, but this is an inevitable result of B6s's presentation and is not detrimental to the explanation. The wider context of privatization, and its transplantation from Thatcher's Britain to parts (economically) South and East is addressed more directly in the volume published by Ott and Hartley. Like many edited collections this does not quite live up to its title of being a comparative analysis of developed and developing countries, since different authors are unable to achieve the integration available to a single author. However it is unusually well cross-referenced, and the themes are sufficiently similar to give the reader a sense of direction and unity. This arises both from the book's origins in joint transatlantic research, a conference at which papers were presented, and no doubt tireless and successfully invisible editorial work. The book is dedicated to the late Jack Wiseman, who contributed the final chapter, which though brief is an apt focus and conclusion. This book also has a tripartite structure, dividing contributions into those which develop the conceptual and analytical framework, case studies of developed countries and case studies of developing countries. The final section, privatization in the command economy, is different in kind. The conceptual and analytical framework contains a chapter by Dieter B6s and Wolfgang Peters in which the authors develop aspects which are also covered in B6s's own book. In particular they concentrate on the incentives for manager effort under public and private ownership, and distinguish the role of owner external control and manager effort when the owner is not fully informed about costs and effort. Their conclusion that government control produces lower efficiency seems to be rooted in bureaucrats being less well informed about the firm than shareholders; however appealing an assumption and attractive the implications, this does not seem to be self-evident, and may be counterintuitive where the government has been successful in encouraging share ownership widely and amongst inexperienced share holders. However, this is a comparatively minor irritation in an otherwise helpful chapter. But it is illustrative of problems throughout this volume, which are perhaps most obvious in the chapter which develops the conceptual framework. Here a familiar model which provides two axes to examine the effects of increasing competition and ownership change is extended to three dimensions by measuring the degree of control over the enterprise separately from its objectives. This is a useful innovation in considering privatization, particularly since the word has come to be such a general catch-all. However the chapter states a number of hypotheses, including one that states that private monopoly is superior to public monopoly, without justifying this, or examining the welfare context in the rigourous analysis which B6s presents. This is the most controversial of privatiza-

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tion statements - economists find it easy to agree that increasing competition will improve welfare because of its positive effect on both managerial and allocative efficiency. But the difficulties of potential loss of allocative efficiency is not addressed in this volume, and the proprivatization stance which results and is mirrored in other chapters, casts some limitations on the volume. The other substantive chapter in Section 1 avoids this bias and outlines the cost-benefit approach to privatization developed by Jones, Tandon and Vogelsang, which is particularly useful for countries who wish to assess the merits of privatization ab initio. It separates the gains according to particular circumstances, and distinguishes the values of the enterprise to different economic actors. Prepared for the World Bank it has clear applications to developing countries, where the method of cost-benefit analysis has the added advantage of familiarity. This is a most welcome link between the theory and its application, both in the volume and in the wider privatization debate. Case studies throughout the book avoid the usual difficulty of a poorly integrated set of experiences with no conceptual framework. In the developed countries they concentrate on the U.S. and the the U.K., but since there is little experience or relevance in the former, this is largely speculative. However the chapter makes a useful distinction between national and local public ownership, which is important in other countries. For the U.K. the chapters take a refreshingly different view, distinguishing between change of ownership, change in status and internal reorganisation. Since these three chapters are separately authored, many of the industries appear repeatedly as case studies, and here some more integration would have helped the reader. Nevertheless the issues are clearly presented, and the authors are honest where the analysis is inconclusive. While the U.K. chapters examine the effect of past privatization, the case studies of developing countries reflect the U.S. chapter in dealing with potential rather than realised changes. The introductory chapter reflects the initial model in assuming rather than demonstrating the desirability of privatization, and provides more rhetoric than evidence. Perhaps this reflects the author's experience as a policy adviser, but is disappointing for economists or decision makers seeking evidence. The case studies of Egypt and Jamaica are, in effect, studies of their public enterprises rather than of detailed plans for or experience of privatization. Nevertheless they are carefully documented and analysed, and provide a valuable background to the proposed changes. Ott's own description of Egypt is scrupulously fair, and refers clearly to the initial cuboid m o d e l - u s i n g to good effect her advantages as editor. Schumacher and Hutchinson's chapter on Jamaica is less measured, and does not, as they claim, "establish that the Jamaican economy must

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pursue an aggressive privatization strategy if it is to be revitalised." Rather it outlines the existing malaise, which is very different from demonstrating the appropriate solution. Some of these difficulties are tackled by Jack Wiseman in his final chapter on privatization in the command economy. He emphasises the necessary prerequisites for successful privatization- taken for granted in developed Western economies, but absent to varying degrees in developing and command economies. These include not only developed capital markets, but a clear view of property ownership and entitlements; politicians and economists ignore such factors at their peril, and even if they win an argument to privatize in principle, may find the implementation coerced by other interests and power groups. Wiseman presents the case lucidly, and makes it clear that privatization in such circumstances is a much more daunting task than in countries like the U.K. which has pioneered the policy. This final chapter underlines what may be lost in the elegance of models and case studies, but which both books emphasise in their own ways, that privatization raises far more questions than it answers. The less the economy corresponds to a free market Western m o d e l - i n whole or in p a r t - the more questions and difficulties are posed. Both these books are valuable to the student of privatization- the edited volume being more relevant to practitioners and those wishing to apply such policies to less developed or formerly command economies. Both are well written and (in one case) edited, and give a clear account of a field in which both theory and practice are advancing rapidly.

JOHN BONNER

University of Leicester

Bo Gustafsson (ed.), Power and Economic Institutions: Reinterpretations in Economic History, Aldershot, England, Edward Elgar Publishing Ltd, 1991, pp.xiv + 344, ISBN 1-85278-397-4.

Schumpeter argued that the distinguishing mark of a scientific economist, compared to those who merely "think, talk, and write about economics", was a command of certain techniques. Of the four fundamental fields of expertise he allowed-statistics, theory, economic sociology, and economic history-economic history was, in his judgement, the most important. Indeed, given the opportunity of starting afresh with his own specialism, Schumpeter would have chosen economic history, or so he claimed. The reasons he gave for this opinion are more interesting than the opinion itself. First, he saw the subject matter of economics as essentially a unique process in historic time. The study of economics

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should yield historic facts and a historic sense. Second, a historic report cannot be purely economic. It must reveal institutional constraints, the interaction between economic and non-economic factors, and the relative contributions of different social sciences. Third, most of the serious errors committed in economic analysis are due to a lack of historical experience. Schumpeter's conclusion was that economic analysis is always, to some extent, historically relative. But like many economists before and after him, he was very possessive. Economic history was to be part of economics. There is no place in his vision for an independent economic history, with its own theory, statistics, and sociology. Given that this collection essays by "leading economists and economic historians" has power and economic institutions in its title, and the relationship between economic theory and historical development as one of its constant themes, some surprise has to be expressed at the lack of any reference to Schumpeter's judgement about the importance of economic history. Even more fascinating is the discovery that the notices he does receive are almost identical. Bo Gustafsson, in a long and stimulating introduction, mentions Schumpeter's well-known position on the role of monopoly capitalists in generating dynamic efficiency; Amit Badhuri, in his analysis of economic power and productive efficiency in traditional agriculture, makes the same connection with the notion of dynamic efficiency in Marx as well as in Schumpeter; and William Lazonick, while tackling the role of organizations and markets in capitalist development, quotes him three times on capitalism as a dynamic or evolutionary process, Obviously, Capitalism, Socialism, and Democracy has had more influence than History of Economic Analysis. Elsewhere, Bo Gustafsson contributes a study of the rise and economic behaviour of medieval craft guilds; Stefano Fenoaltea writes about transaction costs, Whig history and the common fields; Maxine Berg returns to the debate about the origins of capitalist heirarchy; Lars Magnusson examines the contest for efficient property rights from the putting-out system to the modern factory; Stephen Marglin uses the tension between control and efficiency to try to further our understanding of capitalism; and All Johansson concludes the volume with an essay on Taylorism and the rise of organised labour in the United States and Sweden. As Professor Gustafsson points out, neoclassical economics developed characteristics that ruled out precisely the kind of historical and institutional influences which Schumpeter believed economic history had to offer. It concentrated on the abstract and individual 'economic' agent, only analysed exchange and market relationships, ignored conflict between groups and classes, treated institutional and organisational data as externally given, and applied a mechanical and physical model which relegated history to the descriptive and devalued all explanations based on path-dependent processes. Against the inheritance of Adam Smith, and to a lesser extent of John Stuart Mill, a pure 'science' of economics

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emerged triumphant from the marginal revolution. In spite of attempts to reverse the trend by exceptions like Alfred Marshall and Vilfredo Pareto, its exclusiveness has been the dominant fashion ever since. The result has been a long period of polarisation, with mainstream economic t h e o r y especially general equilibrium theory, economic history, and institutional, or neo-institutional and marxist economics, following their own ends and practices, in a state of mutual distrust and ignorance. On the few occassions when a dialogue has been attempted between economic historians and economists, the participants have generally agreed to disagree. Only recently have the economists been prepared to admit their errors. In one collection of essays, Robert Solow argued that both sides be prepared to work in a more capacious market of ideas, each recognising the contribution of their respective specialisms. Then, at least, economists might understand a little better the interaction of economic behaviour and other social institutions. But what would economic historians gain? Perhaps one answer can be found in Power and Economic Institutions. The extended debate about the role of the puttingout system, and of the factory firm, in the transition to capitalism, which is joined there by Maxine Berg, Lars Magnussson and Stephen Marglin, raises nearly every issue of immediate concern to economic historians, institutional economists, radical and marxist economists and historians. Technology, finance, markets, leadership, exploitation, hierarchy, and ideology, all have a bearing on the outcome. Yet economists have developed several interesting theories of their own about the nature of the firm and the entrepreneur. The very existence of the firm, as an island of collective organisation and heirarchy in a sea of private exchange and trading relationships, sets a challenge to market-orientated economists, who are taught to regard the former as inherently inefficient. Their responses could be of interest to economic historians puzzling over the firm's origins. Where economists and economic historians may still clash is over the use of evidence in the support of conclusions about the way things are thought to have happened. This volume is not very strong on Cliometrics or the New Economic History, in which econometric modelling is applied to the problems of historical interpretation. These alternative approaches are here alleged to have led to an emasculated view of the past. Strengths in the formation of scientifically meaningful hypotheses, and in empirical testing, have a tendency to ignore the historically relative nature of their conclusions. Abstraction and simplification mean abstraction from and simplification of social and cultural influences, to the detriment historically meaningful hypotheses. By contrast, it is doubtful whether economists who regard themselves as 'up-to-date' and 'computer literate' practitioners of their science, would regard the 'facts' cited in this volume as 'evidence' or 'proof' of anything. The difference is more than one of style, or even of techniques. There is an unresolved conflict about the

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purpose of study. Economics has moved a long way from the broad curriculum envisaged by Schumpeter.

D. D E A D M A N

University of Leicester

L.R. Klein (ed.), Comparative Performance of U.S. Econometric Models, Oxford University Press, 1991.

Many models of the U.S. economy are currently in active use. This edited volume provides a comparative study of eleven such models. These models vary in size from less than ten to over three hundred and fifty behavioral equations. Modelling groups participating in a series of seminars on model comparisons were asked to produce forecasts and simulations under common sets of assumptions or external shocks, and to do so by using their models in their usual fashion rather than being constrained in any way on model specification. The results accordingly should be useful not only to external users, but also to the model builders themselves. It is unfortunate that neither the vector autoregressive model of C.A. Sims nor the rational expectations model of J. Taylor receive detailed treatment (though Taylor's model is included in the model simulation experiments) as the models reflect a predominately Keynesian 'structural' econometric model philosophy. However, this common theoretical framework for modelling fails to result in similar predictions of the effects of monetary and fiscal policy by these models. Both external reviewers of the models (I. Visco and R.J. Shiller) make this point. The challenge to modellers is to identify those aspects over which their models differ significantly to explain these marked differences in model properties. As an example of the sort of analysis that could be performed, Visco looks at four of the models by deriving 'partial' reduced forms which can be compared, especially for the determinants of the price-wage and money demand sectors of the models. The results suggest that it is the differences in the parameter estimates and specifications of these two sectors that give rise to the general differences in the properties of these models. Detailed investigations of the IS-LM and AD-AS cores of three econometric models are provided by R.J. Green et al. in order to demonstrate the m~thodology of system reduction in which the basic features of a model are captured within a simpler model. These cores may then be used to consider why the models produce different results. Pairwise comparisons of models are given by R.E. Brinner and A.A. Hirsch and by R.C. Fair and L.S. Alexander, concentrating particularly

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on model specification and exogeneity assumptions as the principal sources of conflicting results. R.J. Shiller notes that despite the evident variation in the multiplier values exhibited by the models, the forecasts made are surprisingly similar. S.K. McNees indicates that it is through judgmental inputs on policy variables and ad hoc factors on the model forecasts that such convergence is achieved. Whether this reflects the use of common information external to that utilized within the models, or a tendency of forecasters to avoid being 'out on a limb' when compared to others is not known. While in general the chapters of this useful volume will be primarily of interest to specialists working in the areas of macroeconometric modelling and forecasting, two will be interest to a wider audience. F.G. Adams and J. Vial consider comparisons of macro models of developing countries, and E.P. Howrey illustrates the application of univariate and vector A R M A methods for monthly data to improve forecast accuracy for quarterly economic aggregates. This book repeats a similar exercise published in 1976. It is to be hoped that such research as is represented here will be continued, so that the next volume can report explicitly on whether the forecasting records of the groups shows improvement over time, and whether a combination of forecasts from the group's members represents an advance over the individual forecasts.