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F. T u l d e r a n d S. J a n s s e n , De prijs van de weg naar het recht (The I n f l u e n c e o f Price o n the Use of Legal Services), Stukwerk nr. 45, Sociaal en Cultureel P l a n b u r e a u , Rijswijk, 1988. P p . 157. A. K l i j n (with the assistance o f G. Paulides), Duurder recht, minder vraag? (The Price-elasticity o f the Use o f Legal Services), W O D C nr. 81, Staatsuitgeverij, T h e H a g u e , 1988. Because the services of a lawyer are believed to be essential to the effectuation of various legal rights (in particular, those associated with welfare and the regulatory state), and because the participation of a lawyer is believed to affect the course of litigation processes, the distribution of legal services has, since the beginning of the century, been a matter of recurrent concern, both political/social and social-scientific. In The Netherlands, as elsewhere, empirical research has long since established that there is a systematic correlation between income/wealth on the one hand and contact with lawyers on the other. The apparent inequality of 'access' to legal services has everywhere led to various forms of subsidized legal services for the poor. It has also formed the inspiration for a continuing interest in a number of social-scientific questions concerning legal services and their distribution: What is a 'legal problem' and how are various sorts of legal problems distributed in the population? What factors determine when a legal problem gets taken to a lawyer? What do lawyers actually do (what is the significance of a 'contact')? Like most research into the distribution of legal services, the most important Dutch research on the subject (Schuyt et al., 1976) focussed on the factor income/wealth and a number of possible explanations for its correlation with contact. What emerged, roughly speaking, was a J-shaped curve: the lowest and the highest income/wealth groups have relatively high rates of contact, the two middle groups a considerably lower rate. The authors concluded that it is not so much the 'economic' factor (income/wealth) as another factor (the 'organisation' of legal services) that is primarily responsible for inequality of contact. This conclusion can be criticized on a number of grounds (see Griffiths, 1977), among them that it takes no account of the pricecorrection in favor of the lowest groups resulting from governmental subsidization of legal services. Until very recently, research into the distribution of legal services ignored the price factor altogether. Two new Dutch studies focus for the first time on the price-elasticity of the demand for legal services. Both were inspired by recent changes in Dutch law which make subsidized legal services more expensive. 1 1 In the summaries which follow, I deal only with the findings relating to price- and incomeelasticity. Both studies also include findings concerning other aspects of the distribution of legal services. I likewise pass over the methodological strengths and weaknesses of the two studies; suffice to say that the results of Van Tulder and Janssens' research are weakened by the fact that their data are superficial and full of important gaps (which among other things forces them to rely on a number of rather dubious assumptions), whereas Klijn's more sophisticated datacollection suffers from serious problems of non-response and questionable representativity.
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Van Tulder and Janssen (see also Van Tulder and Janssen, 1987, for a summary) use data from two national random surveys in which questions were asked concerning the use of a variety of forms of legal service, together with exsiting data on incomes, the price of legal services, the number of cases of subsidized legal services, etc. Both synchronic and time-series analysis of this data, using a microeconomic model of litigant choice (in which the available budget, the cost of and the expected return on the use of a lawyer are the central variables), lead them to a relatively low 2 estimated price-elasticity of -0.2 to -0.3. The highest price-elasticity ( - 0.6) is found for the selfemployed and in debt-collection cases. In contrast, divorced persons and those receiving social welfare show no significant sensitivity to the price of legal services. (The income-elasticity of demand is, it should be noted, consistently higher than the priceelasticity - roughly double - with, of course, the opposite sign.) (pp. 61-62, 78, 82-86.) The J-shaped curve of contacts with lawyers can be explained in terms of the factors income and price. As a result of the way the Dutch system makes the degree of subsidy dependent upon income, the financial obstacle to seeking legal assistance is greatest for the group with an income in the middle-range (about f 34,000). The authors propose an alternative arrangement under which the chance that an individual chooses to use legal services should be equal for all income groups. 3 (pp. 64-65.) They suggest that measures directed at the organisation of the supply of legal services and at reducing the need therefor (e.g. by abolishing the requirement of representation in divorce cases) may be more effective than price measures in reducing the costs of the legal assistance system. (p. 98.) Klijn's research is more specifically directed at the effects of the recent changes in the subsidization system. His data derive from questionnaires returned by selected users of subsidized legal services (and those who rendered the services), approached at an early stage in their case, and from telephone interviews with the same persons 10 months later. Two populations are involved: one approached shortly before the changes in the system became effective, the other shortly thereafter. Klijn finds no indication that the recent price changes have affected the population of users of legal services or the character or seriousness of the problems presented. Nor does the way in which the problems are handled or the frequency of legal procedures appear to have been affected: it is the nature of the legal problem involved which consistently appears to be the dominant factor in this regard. (pp. 35-49.) Klijn finds a very low level of knowledge of the probable costs of legal assistance. Even the question of whether they had in fact paid part of the costs of their lawyer was apparently unclear to many people. It is in this light not surprising that the cost factor seems to play only a limited role in the decision about what to do with a legal problem. (pp. 3, 39, 53.) Klijn concludes that the price-elasticity of the demand for legal services is small. Like Van Tulder and Janssens, he suggests that regulation of the level of use (and of the resulting burden on legal services and judicial institutions) can better be accomplished by measures directed at the organisation of supply than by increasing the 2 This price-elasticity is comparable to that for family doctors and slightly lower that for food and clothing and for other subsidized services (musea, libraries). (pp. 91 ff.) 3 Theyalso calculate the consequencesfor the levels of use of legal services and of pubic expenditure therefore, of various alternatives to the present system. (pp. 95-99.)
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price of legal services. (pp. 58-62.) This emphasis on the importance of the organisation of legal services (in particular, the supposed inefficiency and inflexibility of delivery by lawyers in private practice) has been a consistent theme of Dutch sociology of law since Schuyt et al. (1976). Some comments
1.Van Tulder and Janssen illustrate the possibilities and limitations of a microeconomic approach to problems in the sociology of law. This approach is itself not new. On the whole one can say that microeconomic analysis, isofar as it has been applied to problems of choice, has not proven really revealing: neither the relevant variables nor their essential relationships to each other are any different, for example, in Klijn's more traditionally sociological approach than in Van Tulder and Janssen. At most, as here, the microeconomic approach is a useful technique for data analysis, with a beguiling 'cleanness' which tends to make one overlook how many variables of well-established importance (e.g. culture and social structure) are being ignored, how many (often dubious) assumptions are being made, how weak the empirical base of the operation really is, etc. Still, the proof of the pudding is in the eating; it will be interesting to see whether Van Tulder and Janssen's model is capable of accurately predicting future changes in the use and distribution of legal services. 2. The most important contribution of these two studies is in establishing the importance of the price factor in the distribution of legal services. The 'economic' explanation for the distribution of legal services has more to be said for it than Schuyt et al. (1976), ignoring the factor price, allowed. The conclusion of both studies, that within the context of the present system the sensitivity of the demand for legal services to price is low, needs to be read in light of the fact that the price differentials involved were quite small. 3. Klijn's findings concerning the low level of knowledge of the costs of litigation are not surprising, but they do raise a major problem for the microeconomic approach to litigant choice, since the implicit assumption of that approach is that litigants determine whether to approach a lawyer or not in light of the expected costs and returns of doing so. A mechanism other than a conscious cost-benefit analysis for translating short-term price information into behavioral choice, is not apparent. 4. The most important weakness of both studies is that they are so theory-poor. No reason more general than the current Dutch political concern with budget-control and maintenance of the welfare state is suggested for being interested in the relationship between price and the use of legal services. No use is made of the considerable literature on lawyers and the different sorts of roles they perform for different sorts of clients. Especially Van Tulder and Janssen make, in this respect, a rather naive impression when in connection with their preference for regulation of supply over price-regulation of demand they suggest (p. 98) that above an elementary (and equal) level, further additions of legal assistance on both sides do not significantly contribute to the justice and accuracy of the result (which, they presume, is the objective of government subsidization of legal assistance). Since, apart from divorce and related matters, all quantitatively important sorts of litigation are between individuals and organizations, this suggestion is of very limited relevance, quite apart from all its other peculiar features (e.g. the notion that the state is in a position to secure an equal investment on both sides; see also comment 6 below). 5. The most important gap in the data analyzed in these two reports concerns the con-
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tent of a 'contact' with a lawyer (Klijn's data are rather better in this respect, since they do reveal something about the actual handling of cases). It is well known that different sorts of clients, and different sorts of legal problems, get quite different treatment at the hands of lawyers (see, e.g., Macaulay, 1979). That the distribution of legal services (after correction by government intervention) is fairly equal and the price-elasticity of 'contacts' with lawyers rather low does not really tell us much, so long as what is delivered for a given 'price' can be so different. 6. The way in which both studies approach the policy consequences of their findings follows the current political debates in The Netherlands closely and uncritically. In particular, the policy relevance of the distribution of legal services is seen as a matter of equal distribution of a particular service to individuals, who make individual choices based largely on financial considerations. There is, however, much more to legal services than delivery of a (merit) good. Lawyers are an essential extension of the legal system, responsible for transmitting much of what individuals come to known about their legal rights and obligations; well-distributed legal services are thus important to the effectiveness of many legal provisions. Lawyers also dispose themselves or in interaction with the lawyer for the other party of a large number of cases which would otherwise clutter up the judicial system (cf. Verwoerd and Blankenburg, 1986). Treating legal services as a matter simply of individual consumption is as unrevealing - in social science and in public policy - as treating education or transportation in that way would be. The availability and functioning of such central social institutions have consequences for the society as a whole, and these cannot be reduced to the sum of individual cost/benefit analyses. J. Griffiths
REFERENCES Griffiths, John, 1977, 'The Distribution of Legal Services in the Netherlands,' British Journal of Law and Society, 4, pp. 260-286. Macaulay, Stewart, 1979, 'Lawyers and Consumer Protection Laws,' Law and Society Review, 14, pp. 115-171. Schuyt, Kees, Kees Groenendijk and Ben Sloot, 1976, De weg naar het recht. Deventer. Tulder, Frank van, and Sef Janssen, 1988, 'De prijsgevoeligheid van rechtshulp,' Justitt~le Verkenningen, 9, pp. 46-65. Verwoerd, J.R.A., and E.R. Blankenburg, 1986, 'Beroep op de rechter als laatste remedie?,' Nederlands Juristenblad, 33, pp. 1045-1052.
Francesco Giavazzi a n d Luigi S p a v e n t a (eds.), H i g h P u b l i c D eb t : The Italian Experience, 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. xv + 260. £ 2 5 . - The book contains the proceedings of the conference 'Surviving with High Public Debt: Lessons from the Italian Experience' held in June 1987 in Castelgandalfo, Italy. The conference did not focus on the causes of the growth of Italian public debt, but rather on the manner in which financial markets and the private sector have reacted to the debt
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explosion that has taken place. Six papers by Italian economists were presented and discussed. Among the discussants (two for each paper) were distinguished foreign economists, such as Rudiger Dornbusch, Stanley Fischer, John Flemming, Jeffrey Frankel and Patrick Minford. The comments fill about one-fifth of the book. In Chapter 1 ('Introduction: is there a public debt problem in Italy?'), Luigi Spaventa provides factual background of the Italian experience filled up with a discussion of some general issues of analysis (is there, or is there going to be a public debt problem in Italy?) and policy. Overall debt reached a level of 86°7o of GDP in 1986 and is expected to pass 100% soon. Meanwhile Italy's real growth rate on the whole has been slightly above the European average and the investment share in GDP is at about the European level. Spaventa's conclusion is that up to now Italy has not faced a true debt problem; but that it is, however, possible that the conditions for a problem to emerge are building up. In Chapter 2 ('The end of large public debts') Alberto Alesina examines past experiences with high public debt and evaluates the costs and benefits of different debt policies. In particular, non-defaulding, non-inflationary approaches (such as those followed in Great Britain, The United States and France after 1926) are compared with defaulding approaches (such as those of Germany, Italy and France in the first half of the 1920s). He concludes that the drastic remedies (ranging from repudiation to a wealth tax) are not applicable to today's Italy. Guido Tabellini, in Chapter 3 ('Monetary and fiscal policy coordination with a high public debt'), examines the developments of monetary policy and the institutional setting of the relationship between the Bank of Italy and the Treasury. Institutional reforms in the early 1980s have increased the autonomy of the Bank of Italy from the Treasury. The question is posed of whether there is any contradiction between these reforms and the goal of stabilizing public debt. Theoretical analysis suggests a negative answer. A regime with a dominant monetary policy (i.e. without an automatic link between fiscal deficits and money creation) gives credibility to a refusal to increase future debt monetization, and consequently strengthens the Treasury's incentives to pursue a more balanced fiscal policy. Empirical analysis conveys, however, that there is a lot of ambiguity in the institutional features that define the regime. Consequently, a coordinated accommodative monetary policy could damage the credibility of the Bank of Italy and a restrictive monetary policy could lack the credibility to induce the fiscal authority to bear the whole burden of stabilizing public debt. The author concludes that the current ambiguity of the Italian monetary regime should be removed. Otherwise a tight monetary policy (to establish credibility) will be accompanied by large fiscal deficits (based on the expectation of future debt monetization). The contribution of Marco Pagano in Chapter 4 ('The management of public debt and financial markets') deals with the question of whether it is possible to reduce the cost of debt by introducing suitable innovations in the working of the markets and especially in the menu of assets offered to the public. Current debt policy in Italy is characterized by debt issues with a rather short average maturity, massive indexation of the interest bill (_+ 9% of GDP) to short-term interest rates, use of monetary financing to the maximum extent allowed and very limited adoption of innovation (in methods of placement and menu of assets). The main innovation that Pagano suggests is to index debt to the inflation rate. This would sell at a premium, and so reduce the cost of debt, given the strong negative correlation between the real yield on equities and inflation and the decreasing degree of indexation of labor income and pensions. Moreover sizeable issues
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of long-term indexed bonds would help to lengthen the average duration of debt. Spaventa (in his comment) explains the monetary authorities' hostility to inflationindexation of public debt by pointing to their aversion to all forms of indexation, because these would represent 'a surrender to inflation.' It is politically very impractical to index financial assets while at the same time attempting to reduce wage indexation. Another argument may be the fear of the monetary authorities that lower nominal interest payments would induce a more relaxed attitude on the part of government with regard to other expenditures. There is one obvious counterargument. The issue of inflation-indexed (and foreign-dominated) bonds represents an implicit and binding commitment not to liquidate debt by inflation. The next paper, Chapter 5 ('Capital controls and public finance: the experience in Italy'), is by Alberto Giovannini. Part of the paper is devoted to an historical overview of the Italian experience with capital flight. The need to monetize large budget deficits forced Italian monetary authorities to maintain high rates of domestic credit growth relative to the rest of the world, causing allegedly destabilizing capital flight. This is often motivated by the attempt to reconcile the 'inconsistent trinity' of monetary policy independence (i.e. the ability to choose any steady-state rate of inflation), an exchange rate target (as in the EMS) and free capital mobility. The exchange rate target is justified by the 'imported discipline' argument. In the theoretical part of the paper the macroeconomic consequences of capital flight are investigated. One of the conclusions is that money demand increases with capital controls because the return on the alternative asset is lower in the presence of controls. The final Chapter 6 ('Public debt and households' demand for monetary assets in Italy: 1970 - 1986') by C. Andrea Bollino and Nicola Rossi elaborates an associated subject. The demand for monetary assets and short-term and floating rate government securities of the household sector is estimated using a utility function approach. The empirical results suggest that bank deposits show a sizable degree of substitution with respect to short-term and floating-rate government securities. Evidence points to a high degree of responsiveness of households to relative price signals. The (1986) level of total financial wealth and the structure of rate of return differentials would imply a further substitution away from bank deposits. The book presents a balanced mixture of theory and policy and it has a high quality standard. What is strictly missing is that in none of the papers are the proceeds of the borrowing activities related to the kind of expenditure that is financed by them. This is a really serious omission because it does, of course, make a difference whether these proceeds are used to finance transfers, consumption or investment activities. The book is of interest for everyone who worries about the consequences of high public debt. Not only for those interested in the Italian case. Most of the arguments also have their relevance for other countries. The reference to the past experience of many other countries contributes to this. Apart from those interested in public finance aspects those interested in financial markets can also turn the book to account. C.G.M. Sterks
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M a r g a r e t G a r r i t s e n de Vries, Balance o f P a y m e n t s A d j u s t m e n t , 1945 to 1986. The L M . F . Experience, I n t e r n a t i o n a l M o n e t a r y F u n d , W a s h i n g t o n , D . C . , 1987. Pp. xi + 336. $ 14.50 Margaret Garritsen de Vries was the International Monetary Fund's historian from 1973 to 1987. The numerous voluminous and extensively documented parts of the various Fund histories which she wrote or co-authored are well known. In 1986 she published a condensed history of the Fund, 1 in fact a series of revised earlier articles which, after a year was followed by the present volume. It focuses on the balance-ofpayments problems faced by the member countries of the IMF and the ways those countries and the Fund coped with them. Not surprisingly, the book is divided into two parts, the first one describing adjustment under the par value system and the second relating the events after the collapse of the Bretton Woods system in 1973. It is written in a detached, almost clinical style, as if the author were an outside observer (though with an intimate knowledge of what was going on at the Fund, of course). No attempt appears to have been made to defend the policies followed by the Fund. The emphasis is rather on highlighting the problems with which the Fund and its member countries saw themselves confronted at various times and on the Fund's responses to a changing environment, both in its analysis and in its policy. Criticisms of the Fund are not ignored, though. The author faithfully mentions them, and reports how Fund staff dealt with them. Disappointing results with adjustment programmes are not glossed over either, neither are the problems in developing an analytical framework for adjustment policy that takes sufficient account of the present-day characteristics of the world economy. Mrs. De Vries does not relate, however, how Peru, Jamaica and Tanzania fell out with the Fund at various stages. 'IMF riots' are no more than hinted at when she mentions that some critics were concerned that 'social unrest might follow' certain adjustment measures (p. 237). Does the din of real life stop at the doorsteps of the IMF archives? Against this, she makes it public that E.M. Bernstein resigned in 1958 at least partly because the then Managing Director, Per Jacobson, did not adopt his plans for solving the liquidity question (p. 85), whereas the official Fund history confines itself to mentioning that 'Mr. Bernstein resigned as Director of the Research Department, in order to become an economic consultant. ,2 From the point of view of the history of economic thought, as distinct from economic history and economic policy, it is interesting to see how Fund staff developed theoretical concepts to deal with real-world problems. Mrs. De Vries describes, e.g., how one of Mexico's numerous balance-of-payments crises, in this case the 1948 one, triggered thinking within the Fund's research department that ultimately led to the publication of S.S. Alexander's famous 1952 article on the absorption approach. The rise of the monetary approach as deployed by Fund staff is traced to a Fund mission to Mexico in 1955, headed by J.J. Polak. The approach had been introduced to the Fund already by Robert Triffin. Mrs. De Vries mentions that the Fund's approach resembles the Dutch monetary approach as expounded by M.W. Holtrop, but it is not made clear if the Fund was influenced by the Dutch approach in any way. She hastens to explain that a 1 M.G. de Vries, The IMF in a Changing Worm 1945-85, International Monetary Fund Washington, D.C., 1986. 2 J.K. Horsefield, TheInternationalMonetaryFund1945-1965, Vol. I: Chronicle, International Monetary Fund, Washington, D.C. 1969, p. 444.
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monetary approach need not entail a monetarist view and that the Fund has not neglected the issues emphasized in the absorption and elasticities approaches. Other subjects make interesting reading as well, such as the aborted attempts by Messrs. Witteveen and De Larosi~re to introduce a substitution account, the disappointing development of the role of the SDR, the problems faced by the Fund in it surveillance of exchange rates and the involvement of the Fund in development problems. She suggests that the monetary authorities of the development member countries agreed to a liberalisation of the compensatory financing facility, along with the introduction of the second oil facility and the temporary enlargement of credit tranches in 1975 and 1976, at least partially because of a bad conscience for having rejected a link between SDR creation and development finance. It is a good thing that she shows that the Fund has been as tough on industrial members in need of assistance (Italy and the United Kingdom in 1976) as on developing countries. The narrative is enlivened by a few case studies. Though the book may not contain much that was not known already - the author draws mainly on published sources - some of the details are new and it is naturally handier to use than the official Fund histories, which do not go deeply into balance-ofpayments adjustment anyway. Besides, it brings the story up to the end of 1986 whilst the official histories have only progressed to 1978. It provides a worthwhile complement to more general studies of the international monetary system, such as Robert Solomon's well-known book, 3 and a useful background to studies with a narrower scope, such as Szfisz's recent monograph on Dutch monetary diplomacy. 4 It may also be rewarding to check more personally coloured recollections against Mrs. De Vries's rendering of events. It is telling, for instance, that Otmar Emminger relates with unconcealed abhorrence President Carter's 1977 and 1978 attempts to make the Germans pursue a more expansive fiscal policy, without so much as mentioning the July 1978 Bonn summit where such policies were agreed. 5 Mrs. De Vries not only mentions the Bonn summit, but also gives the relevant figures on the German public sector deficits (p. 157). For anyone interested in the post-war international monetary system, buying this book must be one of the best ways to spend $ 14.50. H. Visser
M a r g a r e t G a r r i t s e n de Vries, Balance o f Payments Adjustment, 1945 to 1986. The L M . F . Experience, I n t e r n a t i o n a l M o n e t a r y F u n d , W a s h i n g t o n , D . C . , 1987. pp. xi + 336. $ 14.50 This book must be seen in connection with the Histories of the Fund (three parts in 8 volumes), of which Margaret Garritsen de Vries is the main author (together with J. Keith Horsefield for the first part). The motive for writing the book to be reviewed here, is that the Fund's 'analyses, policies and experiences with balance of payments adjust-
3 R. Solomon, The International Monetary System, 1945-1976; An Insider's View, New York 1977. 4 A. Szfisz, Monetaire diplomatie, Leiden 1988. 5 O. Emminger, D-Mark, Dollar, Wdhrungskrisen, Stuttgart 1986, p. 374.
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ment are too rich to have been included in any depth in the multivolume published Histories of the Fund' (p. 5). Another reason for this separate book is that these Fund Histories up to now do not go beyond 1978. This fact has perhaps also something to do with the coverage of various periods in the adjustment book. The years 1945 till 1978 are described in 165 pages (7 chapters) whereas the years 1979 through 1986 need 115 pages (6 chapters). The latter pages can be regarded as a provisional history of the Fund for this period, though the author warns that the book is not a history of the Fund's conditionality (p. 2). It is a history of balance of payments adjustment, as seen from within the Fund. Opinions of outside experts are sometimes mentioned but the main sources are the numerous documents produced by the Fund as such or by the Managing Director and staff members of the I.M.F. Reports and statements by bodies closely connected with the Fund, like the Group of Ten and the Group of Twenty-Four, also play an important role, especially in the last 15 years or so. The main actors in the book are 'Fund officials.' When reading the book, one is impressed by the growing importance of the Fund in international monetary matters, an importance that has been threatened the last few years however by the meetings of the Groups of Five and of Seven. On other occasions I have mentioned the fact that in monetary matters there is more of a beginning of a world order than in other areas, such as the political arena. Mrs. De Vries, who made a distinguished career in the I.M.F., had a wealth of documents to consult and I admire much the way she leads the reader through the sometimes complicated monetary events and attitudes of the Fund. The book is well written and it contains many references to other documents, especially to the Fund Histories. Only rarely is a personal view expressed and the author follows the usual way of editing the annual reports of the Fund, i.e. by not criticising specific countries, but just mentioning broad groups of countries like the Latin American or African ones. One will not meet statements in the book such as 'Country X did not live up to the conditions of the stand-by arrangement in the field of public finance and exchange rate policy and because of that the adjustment of that country proved to be a failure.' Neither are specific members of the Executive Board mentioned as giving a certain opinion. The author does not go further than quoting the view of 'some' or 'other' Executive Directors. The more we approach the recent times, the more complicated the monetary world seems to be and the more important the role of the Fund becomes. Apart from adjustment v e r s u s financing, the Fund has to cope nowadays with factors like the exchange rates of the important countries, debt strategy, the growing interdependence of economies, the greater importance of now more liberalized capital movements for exchange rates, the far more volatile interest rates, the need for international coordination (who is to expand and who is to spend less), the larger role of innovations in the financial field and of private banks in balance of payments financing, the use of indicators and the greater importance of expectations, all these aspects being closely related as comes out very clearly in the book. When reading I sometimes wished that the simple purchasing power parity theory of exchange rates could be the guiding theory again! The last chapter, Chapter 14, 'Learning from History,' stresses that adjustment of external payments imbalances has always been difficult to achieve. 'Neither the system of fixed but adjustable exchange rates nor the floating rate system has made adjustment of payments imbalances easy' (p. 281) and in the present circumstances the difficulties are
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even bigger due to the growing interdependence of the economies, the difference in macroeconomic policies and the interaction of current account and capital account and the absence of an analytical framework for adjustment. But the author points out how the Fund is trying to help in various ways: the role of the World Economic Outlook has increased, an appropriate set of indicators is studied, 'a medium-term framework to assess the consistency and sustainability of members' policies' is used (p. 288) and the procedures for surveillance are made more effective. The reader gets the impression that an innovative spirit is surely present in the I.M.F. Before I come to a conclusion I have to note that a lengthy bibliography is added as well as a guide to further reading. Lists of recent stand-by arrangements, extended Fund facilities, drawings, purchases and repurchases and quotas are also produced. Taking into account that the adjustment problem is now the most important one for developing and industrial countries alike, it is easy to have a full account of the development of this problem in the post-war period, as seen through the eyes of 'Fund officials,' at hand. For the period of fixed exchange rates the Fund Histories provide a detailed account (but far more lengthy!) of all aspects, but for the roaring seventies and eighties this book is an excellent guide. H.W.J. Bosman
J. N i e h a n s , International Monetary Economics, J o h n s H o p k i n s U n i v e r s i t y Press, Baltimore, 1984. P p . xii + 340. $ 37.50 Niehans regards this book as the open-economy sequel to his Theory of Money. It is for that reason not surprising that it shows a strong emphasis on theory; institutional and historical matters are almost entirely excluded. Sometimes the author refers to a specific institutional setting, but only with the intention to illustrate the practical relevance of a particular model or outcome. The exposition is not based on a single core model. Each problem is discussed in terms of a model that expresses the essential points in an efficient way. The resulting bewildering variety of models that are employed cannot be blamed on the author. It is the inevitable consequence of the broad range of different policy-oriented subjects that international monetary economics encompasses - and which precisely gives it its specific fascination. In fact, in spite of this handicap, Niehans succeeds remarkably well in integrating the tools. By stressing the similarities with trade theory and the theory of money in particular, Niehans is able to demonstrate neatly the coherence of the various problems of international monetary economics. The book contains three parts. The first part discusses the interaction of money, prices, and exchange rates in the absence of capital flows. In reverse, the second part contains the analysis of international assets and capital flows. The third part considers monetary policy under floating exchange rates in open economies where trade and capital flows interact. The first part is divided into five chapters. Chapter 1 provides a compact but lucid summary of static real trade theory. Niehans defends the inclusion of this chapter by arguing that the prime determinants of the international flows of goods, services, and assets are real, nonmonetary, factors. A second consideration could have been that the connection of international asset diversification (discussed in Chapter 7) with interna-
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tional goods trade is highlighted by first reviewing the pure theory of international trade. In Chapter 2 the conversion is made from the model of barter to a monetary economy, providing the foundations of international monetary economics, though in the absence of interest-bearing debt and international capital flows and assuming perfectly flexible prices and fully employed production factors. Despite these simplifying assumptions, Niehans succeeds in this chapter to relate theory to some interesting historical episodes, resulting in explanations and policy advice. The purpose of Chapters 3, 4 and 5 is to demonstrate that during an adjustment process to full economic equilibrium the monetary, elasticity and expenditure approaches are to be considered as largely equivalent, rather than as rivals. It turns out, however, that this equivalency is associated with significant differences in emphasis on economic relations between the approaches and in the choice of simplifications. The approaches appear to possess comparative advantages against each other depending on the nature of the precise problem to be studied. In this way, it more or less turns out to be a forced equivalence, which consists of the mere feature that each approach can be formulated in a logically consistent setting. In part two foreign assets and capital flows move to the center of the stage, while commodity markets are in full equilibrium throughout. Chapter 6 assumes homogeneous financial assets and perfect international security arbitrage, whereas Chapter 7 takes account of the heterogeneous character of the broad spectrum of assets that exists in reality. A main theme of Chapter 6 is that purely financial transactions, no matter how large, do not have the power to produce net capital flows except inasmuch as they influence investment and saving. International yield arbitrage therefore does not affect the mobility of net capital flows. An instantaneous adjustment to yield differentials takes place through the valuation of existing assets. The true determinants of net international capital flows are the relative rentals of capital goods, so that the mobility of net capital flows depends on the speed of relative accumulation of real capital goods. This chapter is lucid and convincing, and results in the relevant policy advice that international capital flows cannot be controlled by interest rate differentials. As mentioned earlier, Chapter 7 displays the close correspondence between the analysis of international asset diversification and the pure theory of international trade. It shows that arbitrage adjusts the composition rather than the net stock of foreign assets and that the phenomenon of asset diversification requires the presence of exchange risk or inflation risk. The main conclusion of Chapters 8 and 9 on forward exchange and the Eurodollar market, respectively, is that the macroeconomic significance of these phenomena is usually overestimated. Niehans ends the latter subject with this, contestable, view that for an effective monetary policy for banks neither reserve requirements nor interest ceilings are necessary or even useful, though financial stability is undoubtedly also an objective of that policy. Chapter 10 analyses the determinants of capital flows employing a stock adjustment of heterogeneous financial assets, while highlighting aggregate capital flows. The third part of the book considers the effects of monetary policy in an open economy under floating exchange rates with interacting trade and capital flows. In this part the tools of the preceding parts are applied to policy analyses. In Chapter 11 the sequence of the effects of a one-time increase in the money supply on capital flows, exchange rates, output and prices is discussed. Niehans develops a neat general model of exchange rate dynamics. It forms the starting point of three submodels which are able
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to produce three well-known variants of overshooting. Subsequently, in Chapter 12 monetary policy is viewed in a more realistic way by introducing the backing which is always associated with an increase in money supply. It may consist of a purchase of domestic or foreign securities as well as gold purchases. Subsequently, the comparative advantages of these alternatives are investigated, resulting in a sketch of Mundell's assignment analysis. The analysis demonstrates quite forcefully that, in general, nonmonetary assets matter in determining the exchange rate; hence the exchange rate is not a purely monetary phenomenon. Chapter 13 addresses the question of what strategies a central bank should follow in its foreign-exchange operations under managed floating. Three strategies are discussed: reducing exchange-rate fluctuations, realising continuous purchasing-power parity, and using temporary exchange-rate ceilings to prevent massive deviations from that parity. The outcome is that 'leaning against the wind' and maintaining purchasing-power parity are not promising though, in my opinion, this conclusion is substantially undermined by Niehans' belief that speculation is largely a stabilising force and his rejection of bandwagon effects. The subject of Chapter 14 is the question under what circumstances a country should make use of the option to peg its currency to another currency. The author concludes that this choice is primarily a question of the elimination of the 'Phillips illusion' from national monetary policy. The purpose of the last chapter, Chapter 15, is to provide an integrated summary of the principles of central banking under floating exchange rates. In view of the opinion expressed in Chapter 13 it is not surprising that one of the main suggestions of Niehans is that the principal short-run contribution of the central bank is the promotion of a large and efficient foreignexchange market, rather than interventions in that market. As the foregoing has tried to express, Niehans has succeeded in writing a wideranging, rigorous and integrated survey of international monetary economics. The book may be very useful to get a deep insight in the theory of that field. This insight will however only be well-balanced if Niehans' strongly-expressed, liberal opinions will function as provocations for the reader to reconsider the content of his book from different perspectives. H. Jager
A l v i n E. R o t h (ed.), Laboratory Experimentation in Economics: Six Points of View, C a m b r i d g e U n i v e r s i t y Press, New Y o r k , 1987. P p . 219, £ 2 5 . - In the well-known textbook of Samuelson and Nordhaus it is said that experiments in economics are impossible (1983, p. 8). However, in the book edited by Roth, Kagel rightly observes that 'the common complaint [or excuse and defence, A. v.W.l among economists, that economics is not an experimental disciplince, is fast slipping by the wayside' (p. 163). The six contributions of eminent experimental economists in the book offer a pervasive proof of this claim. Rother (Chapter 1) introduces the book by stating that his 'purpose in organizing this volume and the conference that preceded it was to provide an opportunity for a number of 'veteran' experimental economists to discuss and compare their views . . . . each [contributor] speaks about a particular group of ex-
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periments, together these contributions convey a preliminary picture - a snapshot in time - of the shape of experimental economics' (p. 3). This is precisely what Roth's volume does excellently. Roth (Chapter 2) describes a series of experiments (i.e., binary lottery games) that seek to test aspects of the formal theory of bargaining. In particular, the experiments are designed to evaluate the decisive role that Nash's theory attributes to the preferences and risk attitudes of the bargainers. It turns out that the predictions of the formal theory are (qualitatively) quite robust. However, the results, besides, point to some new elements of a bargaining theory. For instance, it appears that a social aspect (i.e., the players' shared perceptions of the credibility of a bargaining position) cannot be missed. Moreover, it is noticed that many agreements are reached near the end of the time limit (the 'deadline' effect). Selten (Chapter 3) elaborates on the social aspects of bargaining. He introduces equity and power considerations in a game theoretic framework of bargaining in which players satisfice rather than maximize. An equity benchmark and a power constellation determine the bounds of the minimal acceptable payoffs to the bargainers. Moreover, the framework takes explicit notice of the tendency of people to focus on round numbers. On the basis of experimental evidence Selten concludes that the performance of the 'new' theory is superior to that of the 'old' one. Thaler (Chapter 4) is concerned with demonstrating that individual choice behavior more often than not violates the axioms underlying the expected utility theory. This is done with the help of the results of questionnaires (for example, Kahneman and Tversky 1979). By way of illustration 15 examples of violations are presented. For example, it appears that preference reversals are common practice, probabilistic judgments are inconsistent and biased and sunk costs do influence decision-making. Thaler concludes that 'although the power of economic theory [i:e., the maximizing postulate] is surely unsurpassed in social science, I believe that in some cases this tool becomes a handicap' (p. 127). Knez and Smith (Chapter 5) put forward arguments against Thaler by referring to the influence of market pressures on decision outcomes. They present experimental studies (of market auctions) which 'taken together appear to support the proposition that utility theory and demand theory do very poorly as cognitive calculating models of singlechoice decision behavior but relatively well in the learning-feedback environment of a repetitive market' (p. 132). In laboratory market experiments the repetition of transaction behavior induces market outcomes that are in line with the predictions of utility and demand theory. Fagel (Chapter 6) argues that animal experiments suggest that even animal behavior is largely in line with the predictions of economic theory. He points out that 'the abundant laboratory demonstrations that nonhumans typically have negatively sloped demand curves ... and behave 'correctly' in response to Slutsky compensated price and wage changes.., must be taken as evidence either that animals can engage in conscious forethought or that this need not be the mechanism underlying economizing behavior' (p. 161). Besides, Fagel convincingly takes the edge off the critique that animal experiments are of no relevance to understanding and explaining human behavior. Last but not least, Plott (Chapter 7) presents an interesting account of some examples of policy applications of experimental methods in economics. Economic laboratory experiments have been (and still are) used to (i) guide expost evaluation of decisions, (ii) demonstrate to policy makers ideas without resort to (often unpopular and unknown)
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theoretical constructs, (iii) shift the burden of proof in a policy debate, (iv) provide a decision-maker with new information, (v) operate as tools with which to study policy alternatives and (vi) supply data on economic problems with respect to which no historic information exists. Plott offers interesting inside information on the ways in which the interaction between economic experimentalists and policy-makers proceeds in practice. The book succeeds in providing 'an otherwise unavailable kind of window' (p. 3) on experimental economics. Armed with experimental questionnaires and laboratory methods economists can test much more than previously believed. However, one modification is in order. With the exception of Plott's contribution, the arguments in the book center upon the old debate on the 'rationality' of economic decision-makers. It appears that experimental economics too has not (yet) been able to offer definite answers to the questions involved. All the well-known arguments in defence of and in opposition to the maximizing principle pass in review (Van Witteloostuijn 1988). In particular, the adaptations of expected utility theory and 'as if' and 'natural selection' arguments receive attention. Therefore, here a moderate attitude is in order. As Kagel puts it, 'what we have not been able to do in these debates is to provide a once and for all test of optimizing versus nonoptimizing accounts of behavior. I doubt that such tests exist. What we can do is test particular optimizing versus nonoptimizing accounts' (p. 169). Arjen van Witteloostuijn
REFERENCES Kahneman, D. and A. Tversky, 'Prospect Theory: An Analysis of Decision Under Risk,' Econometrica, 47 (1979), pp. 263-291. Samuelson, P.A. and W.D. Nordhaus, Economics, 12th edition, New York, 1983. Witteloostuijn, A. van, 'Maximizing and Satisficing: Opposite or Equivalent Concepts?,' 1988, forthcoming in the Journal of Economic Psychology.
S o l o m o s S o l o m o u , Phases o f E c o n o m i c Growth, 1850-1973, C a m b r i d g e U n i v e r s i t y Press, C a m b r i d g e , 1987. Pp. 194. £ 2 5 . - Solomos Solomou has written a book in which he rejects just about everything there is to reject about the Kondratieff wave. He rejects the existence of a long wave in production in Britain, Germany, France, the United States, and in the world economy as a whole. He also rejects the existence of a long wave in prices, and the notion that major innovations follow a long-wave path. There is no long wave, in Solomou's view. He does not wish to create the impression that growth has been steady in the long run, but the variations we see should be described as 'irregular G-waves,' 'generated by factors which have not been discussed in the Kondratieff wave literature, such as differential growth across countries and the degree of 'relative backwardness' in the world economy' (p. 171). What is a 'G-wave'? It is a 'shocked Gerschenkronian catching-up wave' (p. 57), named by Solomou after Gerschenkron, who was the first to formalise a framework for
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modelling the characteristics of the growth path of the relatively backward economies. Thus the acceleration of growth after 1892 in Solomou's view was mainly the result of new countries joining the world growth league, rather than an upswing, following a Kondratieff downswing in the 1870s and 1880s. (Question: why did these countries 'join' after 1892, instead of being randomly dispersed over time?) For the postwar boom of 1950-1973 Solomou uses a curious type of reasoning: it falls in the time band of the Kondratieff wave upswing. But, he says, since I have rejected the long wave for the period before 1950, it cannot have existed after 1950. Hence, it can only be understood in 'unique historical terms' (p. 161), not even as an 'irregular G-wave'! Solomou's rejection of the long wave is based on a number of statistical tests on production, price, and innovation series. Other investigators before Solomou had already demonstrated that the Kondratieff wave fails to clear rigorous statistical tests. That is not so unexpected if one considers the many different unique historical events which have interfered with the long-run Schumpeterian process of growth acceleration and deceleration. I suspect that on similar grounds the shorter Juglar or business cycle can also be rejected, even though it has been with us for the last two hundred years. So rejection on statistical grounds will not convince those economists who see the Kondratieff wave as a useful framework for understanding the Schumpeterian growth process. Ultimately one's view of 'the way the world works' will not be determined by statistical tests, but by the confrontation of basic theoretical notions with the inevitably subjective interpretation of the many observable facts. Since these interpretations differ, neoclassical economists, Keynesian economists, monetarists, Schumpeterian economists and Marxist economists will, at any one time, happily live together. J.J. van Duijn
J.M. C o n r a d a n d C . W . Clark, Natural Resource Economics, Notes and Problems, C a m b r i d g e U n i v e r s i t y Press, C a m b r i d g e , 1987. P p . 228. £ 2 5 . - This book addresses itself to students and economists interested in the more technical literature in the field of natural resource economics and management. It will be especially useful to those who are unfamiliar with dynamical optimization and have only modest knowledge of renewable, exhaustible and environmental resources, as the text is amply supplemented with numerical examples while problems with answers are added to each chapter (51 in total). To more experienced readers it will not present new material, although some of the material on stochastic approaches to model building in the field may be interesting. But taking it all in all, not a very excessively high level of presentation is set forth. All basic issues are noted in a very concise way, with the emphasis placed more on the technical than on the conceptual notions. Few advanced topics are treated, these in a very incomplete way. The book consists of five chapters. In the first chapter the necessary tools for analyzing static and dynamic resource models are derived in a very short and intuitively clear way. Both discrete and continuous time dynamic optimization is treated. Also numerical and graphical techniques for solving practical problems are considered. The
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authors aim at an adequate treatment of mathematical tools that suffices readily for an application to simple problems. Students are supposed to acquire such practical skills and therefore many examples are given. The second chapter deals with the basic theory and the standard models of resource management. The subjects adressed are: lumped parameter growth functions, production and yield functions, management objectives, optimal steady state and approach path, common property, resource regulation and special topics viz. spawner-recruit models, and optimal investment. All these results mainly hail from fishery economics, which has always used many advanced modelling techniques, and in whose development Clark has played an important role. Finally the well-known Faustmann model of optimal forest rotation is shown. Other resources like ground-water, land and other animal species are not considered, while only minimal space is devoted to forestry management. Multi-use of resources is not mentioned either. The economics of fishery management would do better as a title to this chapter, although many results from 1980 on have not been incorporated, e.g. multispecies harvesting. In the third chapter the authors discuss the optimal depletion of exhaustible (nonrenewable) resources for the monopolistic and competitive industry cases, both with and without extraction costs. As a special topic the exploration and discovery in combination with extraction of an extractive resource is treated. Many interesting aspects are not considered here, e.g. recycling, intergenerational welfare, substitutes, uncertainty and information. The next chapter is devoted to environmental management, more specifically residuals management. A static equilibrium model of externality is analysed, while for a single residual dynamie aspects and spatial dispersion are considered. Of course it is not possible to incorporate in a chapter of 23 pages the many concepts, models and methods that have been addressed in the massive literature on pollution and environmental problems. The final chapter treats stochastic models in the resource field. Here a variety of approaches is systematically treated. First discrete time stochastic dynamic programming is introduced, which is used in stochastic versions of models presented in the second chapter. Other topics treated here are: groundwater management, learning, Bayesian updating, a search problem and irreversible development. A lot of different ideas and possible stochastic approaches to resource model building are brought together here, but the mathematics treatment is not set at a sophisticated level. For a reader with no knowledge of probabilistic models this chapter will anyway contain too many topics treated in too concise a manner. More references are given here than in the other chapters. Summing up, I find this book a self-contained introductory text that presents some of the models and technical problems in the field of resource economics. No extensive treatment is aimed at, but rather an exposition of how to apply mathematical techniques to problems is given. The book is rather unique in its presentation and aims and with the problems and solutions it may be of use as a supplementary text in teaching on resource economics. However, in my opinion it contains too many topics dealt with in too concise a manner. Jeroen van den Bergh
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Louis J. Z i m m e r m a n , Politieke economie van Plato tot Marx (Political E c o n o m y f r o m P l a t o to Marx), W o l t e r s - N o o r d h o f f , G r o n i n g e n , 1987. Pp. X I I + 416. Dfl. 9 5 , - 40 years ago Professor Zimmerman published a textbook on the history of economic thought which came out in several editions and translations. Anyone expecting his new book to be an updated and revised version of this very useful earlier book might be disappointed. It is definitely not; it can hardly even be used as textbook. Neither can it be called a monograph on any special topic in historical perspective although the author considers political economy to be the topic. 'Political economy' is a fuzzy concept. When it was superseded somewhere in the last quarter of the 19th century by 'economics', this, according to Zimmerman, meant at the same time the transition from a science of social and economic organisation to an abstract logic of allocating scarce resources. The former is characterized by historical realism, the latter tends to lose interest in practical problems. The book allegedly deals with theoretical currents with 'a higher content of reality' (p. 13). These currents seem to have ebbed away in the 1870's. In the epilogue 'Political economy exit' Zimmerman briefly explains why: during the classical period the well-to-do classes were among themselves in politics and in science. When in the 1870's the workers entered the scene, the fundamental consensus broke down and was substituted for by class struggle. Politics lost its attractiveness for the bourgeois scientist who retired into the fairy-land of logic. This was the end of political economy. It was not, of course, nor was this the beginning of abstract economics. The book does not make any attempt either, to prove the hypothesis. At the end of the opening chapter 'Economics - what is it really?' we know no more than the old: economics is what economists do. And they did at all times quite different things, which is amply shown by the book which happens, quite legitimately by the way, to end around 1870. After a second introductory chapter on theories of stages, three chapters cover the preclassical period: Biblical, Antiquity and the Middle ages in Chapter 3, the emerging nation states or mercantilism in Chapter 4 and the introduction of the idea of laissez faire in Chapter 5. Chapters 6 through 9 deal with the classical school whose political orientation is stressed by presenting in Chapter 7 its theory of distribution as its core. Adam Smith is treated as pre-classicist and Karl Marx as post-classicist. After a chapter on utopian socialism, Chapter 11 probes into Marxist socialism. The book closes with a brief chapter on the historical school. This dry overview gives the impression of a traditional textbook set-up. But, as was said earlier, the book is no textbook. It is a kind of summing-up of the lifelong occupation of Professor Zimmerman with political economy. It collects in a rather loosely ordered way his findings, insights, thoughts and afterthoughts - and valuations, for the author does not hide from the reader his sympathies and antipathies. These historical sketches try to draw attention to forgotten scholars, neglected ideas and unorthodox interpretations which are embedded in the established main current of economic thought. It is quite natural that the reader is charmed by unexpected hints and novel interpretations while he rather would like to argue where he thinks himself more at home. The formulations of Zimmerman are not only thought-provoking but sometimes also provocative. Adam Smith, not quite his favourite, is said to have developed no economic theories of his own which can be said with equal right - and equal irrelevance - of Marx and many others. But it is not true that there is no theorem associated with
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his name such as with that of Copernicus, Newton or Einstein (p. 144). The invisible hand theorem kept the profession busy for centuries to prove it. On the other hand, the author quite correctly stresses the continental contributions to the development of our science. The book is pleasant to read, which is rather something in economics. Many portraits and other illustrations try to give faces to bare names. It has to be regretted, however, that a nice and expensive edition like this did not get the final polishing it deserved. Misprints in the algebraic examples (on p. 223 and p. 226, for instance) or a wrong birthdate of Friedrich Engels together with his portrait on p. 322 will be recognized immediately by the careful reader. Footnotes at the end of the book are always cumbersome. But the reader will get rather annoyed when their numbering is blurred as in Chapters 4 and 7 and on pp. 376-7 left out entirely. Yet these shortcomings cannot destroy the impression of a quite amusing and interesting piece of reading. H.-J. Wagener
P . E . H a r t , Youth Unemployment in Great Britain, 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 , 1988. P p . x + 142. £ 19.50 Discussions about unemployment concentrate on three issues: comparison of unemployment rates, the dispersion of unemployment over the labour force and a search for causes and remedies, while everyone is looking abroad to find recipes. This book has a similar approach. It is of interest to the British, because it is a wellstructured, short and serious study containing the relevant opinions and figures, while comparisons with Germany and France are made. The foreigner looking abroad is particularly interested in the effects of Thatcher's economic policy, the regional northsouth differences and trade-unions' impact. The exaggeration of these expectations becomes obvious in reading this book, because the nature of the problems and the remedies in Britain and on the continent are not very different. Apart from this general characteristic, the study contains some interesting subjects. The labour supply of youngsters and of older (married) women, often working parttime, is considered as competitive, and the factors determining whether youngsters (especially girls) or women will be employed is investigated thoroughly. Not only the wages of both groups are investigated but also the tax and social security provisions, which are in favour of married women. Considerable attention is paid to the relative wages of youngsters. In some sense the importance of youth wages is reduced, just like in many OECD studies. On the other hand much emphasis is put on the relative pay of apprentices. The high British level of that pay (75% of adults) prevents employers from setting up apprenticeships, while the low German level (30-35%) stimulates apprenticeships. The long tradition and value attached in Germany to education and apprenticeship will be at least as important to explain the size and importance of apprenticeship in Germany as relative wages. Germany has also a long tradition of an outstanding position in machinery and equipment and in manufacturing, which requires high-skilled labour. The German apprenticeship system and the general educational system is superb, according to the author. In Germany the apprenticeship-system
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is heavily criticized, because of its rigid, inflexible character, producing narrow-eyed specialists, not suitable for modern production; this is also an exaggeration. The tendency to consider better education as the panacea for unemployment can be observed almost everywhere. Part of this concentration on education can be explained by the failure of other methods to attack unemployment and by the market and supplyside ideas, which suggest that well-trained and motivated persons cannot be unemployed. Although Hart is not at all an ardent adherent of this approach, the argument is prominent in his policy recommendations. Another reason may be that paradise is elsewhere. From managers of enterprises with plants in Britain and in The Netherlands (and elsewhere) I did not hear much complaints about the British skilllevel, but about the specific problems with trade unions. Such talks are not at all representative but they raise the question of the extent to which British trade unionism affects the prospects of young people. Hart mentions trade unions only with regard to wage councils (pp. 2, 22, 104), which prevented teenage wages from falling. Much more interesting is the analysis of local and regional differences in unemployment. On this basis the author is afraid that a general increase in demand would provoke wage and price increases in the 'good' sector of the economy in the South without much employment effects there, while the North would hardly benefit. So he proposes to increase demand for the unemployed in the inner cities, backward areas and in the public sector. As the effectiveness of such policies is often criticized, it is a pity that Hart gives no review of evaluations of such projects. The author writes on page 1: 'Youth unemployment is such a large part of aggregate unemployment and the two are so highly correlated, that ... any satisfactory explanation ... must refer ... to neo-classical, Keynesian and structuralist schools of thought.' So every subject is judged on basis of these theories, which provides a clear framework. As youth unemployment rose faster than unemployment, additional factors must be at work. So Hart puts much emphasis on the jobs open to youngsters, on demographic trends and to some extent on technological change, but neglects aggregate unemployment. However, if aggregate unemployment is so important, some explanation of this would be useful, in particular because the general employment situation could effect the nature of youth unemployment. Excess supply in labour markets is not favourable to new entrants, competing with experienced, disciplined workers, while voluntary mobility is low. If youngsters have been unemployed for several years, employers could consider this as a sign of incompetence. The book provides a reliable overview of the British youth unemployment situation and several interesting analytical methods. H. Jacobs
I g n a c y Sachs, D e v e l o p m e n t a n d P l a n n i n g (translated by Peter Fawcett), 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 , a n d M a i s o n des Sciences de l ' H o m m e , Paris, 1987. Pp. ix + 134. £ 19.50 Professor Ignacy Sachs has been a student and associate of the famous Polish economist Oscar Lange; since 1960 he has lived in France and is Professor at the Centre International de Recherche sur l'Environnement et le D~veloppement in Paris. Eleven of his arti-
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cles, written in the years 1978-1983, were brought together in book form in 1984 and have been translated in English, after some rewriting. In the Preface, Professor Sachs refers to his participation in the activities of the International Foundation for Alternative Development as one of his sources of inspiration. (Here the translator should have been more careful: the institution concerned is called the International Foundation for Development Alternatives, or IFDA). The theme and tenor of the book are best summarized in the author's own words, taken again from the Preface. 'The aim of this collection is to challenge a rigid, technocratic, economistic view of development planning and at the same time, more than ever, to claim a central role for a renovated and committed form of planning in the formulation of anti-crisis strategies. (...) The texts in this book are linked by the creation of a conceptual framework that can be used to analyse crises, signpost the developer's and planner's realm of thought and action, and above all shore up a constantly faltering social imagination. (...) The concepts of ecodevelopment and of developmental time-space should (...) help us to organise positive thinking that will lead to the elaboration of new styles of development.' (italics in original). In trying to sketch alternatives for present-day notions and directions of development in the First and the Third World, the author frequently refers to other writers oriented towards alternative approaches. The main text of 111 pages is accompanied by over 300 footnotes, many of them referring to more than one publication. As a compilation of ideas about a better (i.e. humane, progressive, substainable) social organization and economic order, Professor Sachs has produced a valuable 'resource book' covering the French and Anglo-Saxon literature in particular. It is in its nature as a collection of articles that the treatment of the subject matter is not well-integrated. Interesting topics or concepts are introduced in more than one article but hardly discussed in some depth. The author seems to be aware of this failure, and probably feels that the joint efforts of many more like-minded people will be needed in moulding his ideas into more concrete proposals. It is not easy to summarize in a few lines the hard core of the alternatives for today's socio-economic systems and institutions that Professor Sachs has in mind. Economic rationality has to be redefined and brought in harmony with the specific socio-cultural context of the region or country. Neglected but essential elements of this context are, among others, its environment and ecology, lifestyle and the use of time, the hidden economy (covering non-market phenomena such as tne domestic economy, as well as parallel markets), and the possible emergence of a 'Third System' (liberated civil society) next to the state and the organized market forces. The concept of endogenous development potential is to replace a mimetic and dependent GNP-growth orientation - in the developing countries but essentially in the West as well. Economists and other social scientists without much inclination to question established theories and policies will probably not be impressed by this book. Those having great worries about our ability to come to grips with the socio-economic problems of the world in which we find ourselves may positively appreciate this collection of articles, as food for thought rather than as a blueprint of a society to come. Since all too few economists address themselves to the more basic issues in our discipline, this publication in spite of its shortcomings - is a welcome reminder of the challenges that have to be faced. -
H. Linnemann
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P a u l Streeten (ed.), Beyond Adjustment, The Asian Experience, I n t e r n a t i o n a l M o n e t a r y F u n d , W a s h i n g t o n , D . C . 1988. P p . xii + 274. U S $ 1 5 . - International development policies are inhibited by waves of ideology and fashion. In the 1970s developing countries were advised (and supported) by development agencies to embark on all kinds of social and economic interventionist policies. These policies often formed administrative burdens and a drain on scarce resources. Around 1980, however, new dominant ideologies emerged in leading western countries, accompanied by major shifts in economic policies. Developing countries were affected by declining rates of economic growth in developed countries, slow growth of international trade, new trade restrictions, high interest rates and a decline in net capital inflows. Since then advocating adjustment has become the dominant fashion in the leading western countries, the IMF and the World Bank, and the developing countries are urged to abandon the interventionist policies of the 1970s. From this perspective the developed countries can be blamed for lack of continuity and co-ordination of international policies, and for exporting domestic economic and political problems. This view, which is prevalent in third world countries and among the dethroned fashion leaders of the 1970s, victimizes the developing countries. But it can be exaggerated and it easily leads us to forget that there is also another perspective. Economic growth implies structural change, and external and internal changes in the economy require continuously adjustments of economic policies. In this respect there are great differences' in performance among developing countries. Over the past decades some have been prudent, whereas others have taken risks that greatly jeopardized their self-reliance. Several developing countries have been able to cope quite well with the unfavourable change in the international environment; others have pursued unsustainable policies for too long and have stagnated. It is not surprising that creditors are unwilling to continue funding unsustainable balance of payment shortages. Thus credit is drying up unless adequate policy adjustments are made. On the other hand it is not surprising that countries resist external pressure for policy changes which usually affect vested interests and therefore may destabilize their political system. These countries complain about imposed conditionalities and related social consequences, whereas their creditors point at countries which have successfully adapted to changes in environment while maintaining growth. In recent years numerous seminars and conferences on adjustment have been organized. The present book contains papers and discussion notes of a seminar in December 1986, jointly sponsored by the IMF and the Indian Council for Research on International Economic Relations. The seminar focussed on the experiences of South and East Asian countries. Participating were scholars and senior officials from eleven Asian countries, and staff from the World Bank and the IMF. The introduction by Paul Streeten tries to identify what adjustment is and gives an explication of reasons for adjustment. In a nutshell the message is: 'growth' without 'adjustment' is not sustainable, and 'adjustment' without 'growth' lacks purpose (phrase used by Rangarajan). The first paper, written by members of the IMF staff, discusses the experiences of Bangladesh, India, Pakistan and Sri Lanka with the IMF extended facility for the period after 1979. The paper claims that the programmes were overall successes in India and Pakistan in promoting growth, moderating inflation and improving the balance of payments, but were only partly successful in Bangladesh and Sri
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Lanka. The disussant, however, questioned the IMF criteria for success and claimed that, in the case of Bangladesh, IMF's criteria had been unjustifiable and its policies harsh. Two papers portray Korea as an example of successful adjustment, but although impressive, its experiences may be of limited relevance to the South Asian countries. A paper comparing debt in Asian and Latin American countries shows important differences in kinds of debt and economic performance. The biggest difference is the rapid rise in the share of exports in GDP in East Asia. The other is that South Asian countries have a large share of long-term debt on concessional terms, whereas the Latin American countries have much debt on floating interest rates. The most interesting paper is by E. Ahmad, about trade regimes and export strategies. It contains empirical estimates for India of effective tax rates on exports by product group, and estimates of social returns by product group. Two papers are devoted to problems of public enterprises. Although it is easy to claim that public enterprises are inefficient, it is often difficult to find criteria for evaluation, and a political base for reform. The two final papers deal with flows of capital between developed and developing countries. One reviews the role of the international institutions, the other recommends policy co-ordination between the developed countries and recycling of Japan's surplusses to the developing countries. The summary of plenary discussions, which is included after the introduction, is weak and confusing. It fails to distinguish cases 'with and without' from cases 'before and after', it contains a chart published in 1987 (which can't have been discussed in 1986) with an explanatory text contending that '... adjustment should take the form of raising exports and reducing imports .... ' Apart from this the book is well-written. It concentrates on real issues and avoids ideological rhetoric. It is recommendable reading for those interested in international economic policies and development. It is a pity that a timely book like this was published with so much delay. Papers of another major IMF/World Bank symposium of February 1987 on related issues were published within that year. (Corbo, Vittorio, Morris Goldstein and Mohsin Khan, eds., GrowthOriented Adjustment Programs, IMF/The World Bank, Washington, 1987). C.L.J. van derMeer
Jacques H. Drbze, Essays On Economic Decisions under Uncertainty, C a m b r i d g e U n i v e r s i t y Press, C a m b r i d g e , etc., 1987. Pp. xxvii + 424. £ 2 5 . - 'The present book collects twenty papers on economic decisions by households, firms or policy makers ... (which) were written over the past 25 years ...' Thus writes Dr~ze in his foreword to the book under review. And then he states that there is the common thread running through most of them, to mention the elaboration of the newer approach to the concept of uncertainty in economics. Instead of (assumed known) probability distributions of economic variables directly, now the probability distribution of a set of mutual exclusive states of the environment - one of which will show up as the actual state in the future - is assumed known. Introduced by the statistician Savage and the economist Arrow in the early fifties this newer approach proved to fit quite naturally into the general equilibrium framework, as presented by Arrow and Debreu. Dr~ze felt
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compelled to make this fit more explicit in the various realms of economic decisionmaking: consumer-, producer- and public decisions are titles of chapters in his book. The author uses his foreword to state briefly what he thinks to he the important issues in his essays, and this is very interesting. Some of the essays have been published before in French and have not been noticed in the Anglo-Saxon economics world, although the ideas in those papers would have been very useful to that 'world' at the time of publishing. As such Dr~ze mentions his 'Willingness to Pay Approach,' already presented in a 1962 paper and now repeted in Chapter 8 (1981) (see pp. xx and Note 154). From the acknowledgements the reader can see that the essays are not printed in their historical order, but in some rational order. They have been grouped in 7 parts, covering General Theory of decision-making, Markets and Prices, the above-mentioned three types of decisions, Theory of the Firm, and Human Capital and Labour Contracts. Within each group e.g. review articles precede more specific treatments, more dearly related topics precede less related ones, etc.. It is quite impossible to do justice to the abundance of ideas and their scientific digestion in this rich book within the limits of a review such as this. So only a few remarks will be made here. One is about the method chosen by Dr~ze, another about the significance of information beside uncertainty in relation to the theory of decisionmaking, and the last about the book in total. Drbze takes his methodological stand in axiomatism, as is clear from the beginning. The title of his Chapter 1 is 'Axiomatic theories of choice ... etc.' These theories start from concepts such as events, acts, consequences, complemented by preferences in terms of expected utilities. With a praisworthy inclination to discuss the applicability of the results in economics he surveys the merits and the limits of the newer approach to uncertainty with respect to the economic subjects he has chosen in his various essays. So he is able to state conclusions with value for reality in the case of firms confronted with uncertainty in their demand. These conclusions relate to over- and undercapacity and the relation between prices and minimal average cost (see p. 232). But the author is also aware of the fact that only events that can be verified with interpersonal objectivity can be considered within the theory, which precludes the events with some 'moral hazard' dimension e.g. (see p. 18). In his foreword Dr6ze remarks that he felt in 1979 'that the main focus of research was shifting from the problems of exogenous or technological uncertainty considered in this book towards the more sophisticated problems of acquisition and dissemination of information.' He turned out to be right in that feeling and this makes some of the essays look somewhat dated, although he is also right in thinking that many issues in the book are yet of current interest. In fact Drbze had already published in 1960 on the significance of (additional) information for decision-making, but in French and of course not 25 years earlier. So in his Chapter 4 sophisticated games with incomplete and imperfect information do not figure, but a familiar bimatrix game accompanied with the remark that the getting of information may imply the giving away of information at the same time (see p. 109). Summarizing, I am confident that the readers of this book will enjoy very much the penetrating way in which Drbze has investigated and analysed in a period of about 25 years the problems connected with uncertainty in economic decision-making. The approach he purposefully has chosen sometimes leads to very complex formal models, and there are many mathematical appendices too. But using his own guidelines as offered in his foreword and accepting the characteristics as mentioned here the inspection of these
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essays will be a rewarding and even stimulating business for economists with some formal interest. G.F. Pikkemaat
T . F . Bewley (ed.), Advances in Econometrics, V o l u m e s I & II, C a m b r i d g e U n i v e r s i t y Press, C a m b r i d g e , 1987. Vol. I. Pp. 313. £ 27.50. Vol. II. Pp. 259. £ 27.50 These two volumes contain invited papers with a focus on econometrics delivered at the Fifth World Congress of the Econometric Society held at M.I.T. in August 1985. The first volume contains surveys of important recent advances in econometric theory and techniques. The second volume includes reviews which focus more on econometric methodology and applications. The content of the volumes can be briefly summarized as follows. The cluster of papers by H. White and A. Holly is concerned with specification testing in econometric models. H. White presents a unified theory of specification testing based on moments estimators that covers many existing tests for model (mis)specification and includes tests based on the likelihood principle. The test statistic generally corresponds to the value of R 2 of an auxiliary regression. Therefore, it can be implemented in a straightforward way. Holly's overview is concerned with the derivation of the asymptotic properties of specification tests in the presence of nuisance parameters in nonlinear models, mainly in the likelihood framework. H.J. Bierens reviews the asymptotic properties of a kernel estimator proposed in the statistical literature on nonparametric estimation of unknown (systems of) regression functions for continuous, independently identically distributed random variables, for the discrete and mixed cases and for time series regressions. The advantage of these methods is that the functional form of the models need not be specified. The interpretation of the results however becomes difficult in models with more than two regressors. A.R. Gallant discusses the asymptotic properties of nonlinear least squares methods to estimate the unknown functional form of an econometric model using a semi-parametric approach, i.e. estimate a truncated expansion of the underlying functional form. The next two chapters are devoted to models with rational expectations. L. Broze and A. Szafarz analyze solutions of linear rational expectations models, discuss the nonuniqueness of the solutions for examples from the literature and generalize the results to multivariate rational expectations models. L.R. Hansen deduces the stochastic process of asset prices in intertemporal models in which consumers have preferences that can be aggregated and in which there is a complete set of competitive markets for date- and state-contingent commodities. The approach yields testable implications from highly structured theoretical models for time series on asset prices. The last two chapters of Volume I are concerned with the Kalman filter with applications to parameter estimation of rational expectations models and forecasting presented by R.F. Engle and M.W. Watson and to structural time series models, continuous-time and nonlinear models by A.C. Harvey. The first three chapters of Volume II are devoted to econometric methodology. Two of them are Bayesian in spirit. E.E. Learner advocates the use of extensive sensitivity
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analysis to investigate the dependence of the posterior distribution (i. e. the results of the statistical analysis) on the choice of the prior distribution. D.F. Hendry's chapter focusses on econometric model evaluation, more specifically on the different evaluation criteria a model has to satisfy before its use is justified. The model should be congruent with the various information sources, data, theory, and results for rival models. C.A. Sim's aim is to develop standards for research that distinguish conclusions the data firmly establish from those that depend on (arbitrary) a p r i o r i restrictions imposed on the model and explicitly recognize the uncertainty about the models. The chapter by M.A. King discusses the nature of the conditions required on the preference orderings in order to draw welfare conclusions from econometric models of household responses to taxes, whereas F. Hayashi surveys recent empirical work on tests for the liquidity constraint on intertemporal consumer behavior. A. Deaton addresses the question of whether empirical evidence from time series on aggregate consumption and labor supply is consistent with theoretical life cycle models of consumption. The next topic is intertemporal substitution between consumption and hours of work in microeconomic models of life cycle allocation. T.E. McCurdy outlines the implications of life cycle theory, in particular of corner solutions for both individual and aggregated specifications of labor supply. S.J. Nickell looks at the short-run behavior of labor supply, more specifically he looks for empirical evidence that individuals change their year-to-year supply to labor in response to year-to-year shifts in the real wage. The last topic is concerned with applied general equilibrium modeling. J. Waelbroeck reviews problems and issues in classical and fix-price general equilibrium models, whereas J. Whalley's chapter focusses on an important area of application of general equilibrium techniques, i.e. general equilibruim systems designed for tax policy evaluation. With the publication of these volumes, the material of the invited symposia is made available to a large audience. It is very useful to have outstanding scholars review the recent significant contributions in their field. The topics covered in the volumes have indeed received much attention recently, though many other topics both on methods and applications could have been considered. Also a good balance between theory and applied work has been reached. Not only is the variety of topics covered in these two volumes large, but the degree of formalization and sophistication varies and different methodologies are presented too. The chapters on econometric methods are fairly technical. But in general, the chapters are well written. The chapters on rational expectations, the Kalman filter and the chapters of Volume II should be more easily accessible to a broader audience. Three types of methodologies are propagated. First, the chapters on nonparametric and semiparametric regressions and Sims attempt at 'Making Economics more Credible' advocate the use of methods that do not restrict the data in revealing the structure of the underlying generating process. Second, the contributions to economic theory recommend the use of theoretical and other a p r i o r i information to interpret empirical evidence. The chapters on specificiation testing, on methodology by Learner and by Hendry are also concerned with more structured models and recommend testing, sensitivity analysis and evaluation of the hypotheses derived from theory and other sources. The third type of methodology underlies the current practice of general equilibrium modeling, where little attention is paid to empirical model evaluation and testing. It is unfortunate that the differences, the pros and cons of the various methodologies are not discussed in the volumes. Authors of companion papers often do not refer to
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each other. Also the contributions of the discussants at the conference, who often tried to put the chapters in a broader context and compared them with each other, have not been included. To conclude, in my opinion, the invited lectures at the Econometric Society World Meeting and their subsequent publication have been successful and should be continued in the future. The inclusion of a general introduction with hints to the reader and of the contributions by the discussants would have been most valuable. F.C. Palm
H . A . Buhl, A Neo-Classical Theory of Distribution and Wealth, L e c t u r e N o t e s 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, no. 262, S p r i n g e r Verlag, Berlin, etc., 1986. P p . 146. D M 3 5 , - The subject of this little monograph is the influence of the distribution of capital and income on economic growth and wealth. The study is based on a variant of the wellknown neo-classical growth model. In this model Buhl replaces a number of equilibrium relations by one-period lags (disequilibrium relations). Because on the one hand all results heavily depend on the choice of this model and, on the other, Buhl does not explain why his specific growth model serves as a starting-point, it is very difficult to interpret the various findings of his study. We have the impression that the choice by Buhl for a certain type of growth model (section 3) can only be motivated by the fact that certain mathematical methods can be applied. In a very systematic, but also rather technical way, Buhl discusses seven types of regimes in which the distribution of capital and income can be analyzed. All outcomes are obtained by the application of specific results from the theory of dynamic programming. These results are inserted into the framework of a differential game between workers and capitalists. When a particular regime is analyzed, e.g. 'the non-cooperative case of capitalists controlling investment and workers controlling saving,' a solution is obtained in a strictly formal way. Buhl hardly explains his findings for the mathematical layman. Summarizing, the study of Buhl is of interest for specialists in the field of mathematics and mathematical economics. Our opinion is that his findings are based on a model and on methods which are too specific in order to be of importance for the general audience. Th. Junius