166 ABSTRACTS, WESTERN ECONOMIC ASSOCIATION

BUSINESS THEORY: A N EVALUATION

BAYARD 0. WHEELER University of Washington

An evaluation of business theory, at the outset, is confronted with the semantic difficulties associated with the meaning of theory. Moreover, there does not exist “a theory” of business, in the same sense that a universal theory is nonexistent in other fields concerned with human behavior, such as economics or sociology.

A useful approach to theory, however, is implicit in the view of the concepts of theory as a continuum-from explanation, with limited hypotheses, at the lowest level to laws of a universal nature at the highest level. In between, are theoretical models which have varying degrees of predictive power supported by some empirical evidence, but still subject to disproof. Much of the emergent business theory of late years falls in this middle category.

The tardy development of “higher level” business theory is due principally to the late emergence of business administration as a discipline, and its status in science as a neglected, often rejected, offspring Df economics. Following the initial interest of economists in the study of trusts at the turn of this century, economists and other social scientists have found the business firm, its management, and decision making increasingly fruitful.

Many of the emergent theories of the business firm and its behavior draw heavily upon disciplines outside the fields of economics and business, including sociology, psychology, political science, law, anthropology, and mathematics. Each finds the business firm to be a fascinating and revealing institution for the testing of traditional theories and for reformulation of concepts covering individual and group behavior. As a result, the newer semantics of business includes terms and theories relating to such concepts as viability] homeostasis, rhochrematics, stimu- lation, system, and communication network.

Despite the optimistic trend in theories of the firm, there remain other areas of business research largely neglected] and in need of exploration. Existing theories of the growth of firms are largely incompatible and unrelated. There is a surpris- ing lack of information or theory concerning the “business system” in contrast to the economic system. Also, a macro-theory of business enterprise under capital- ism has yet to be developed.

In summary, the current “state of the arts” in business theory, on the whole, is very favorable. A virtual flood of hypotheses in various stages of testing is being superimposed upon accumulated theoretical concepts from traditional business research. This modern renaissance promises to add substantially to empirical studies of business enterprise in support of theoretical models - in the aggregate contributing to the emergence of a science of business.

CONTRACTIVE FEATURES OF RECENT FEDERAL RESERVE POLICY

PAUL SIMPSON University of Oregon

Since the end of 1961, the Federal Reserve System has pursued two goals, one to increase credit flows as a means of expanding domestic production, and one “to minimize the downward pressures on interest rates” (Policy Record, 1961) as a means of attracting funds from abroad. The policy was to increase supply of domestic credit and to increase demand for foreign credit. The claims to have carried out these opposing push-and-pull operations are of doubtful validity. The

ABSTRACTS, WESTERN ECONOMIC ASSOCIATION 167

public interest would be better served if the Federal Reserve officials had acknowl- edged the impossibility of promoting both ends.

A basic step was the raising of maximum rates on time and saving deposits effective January 1962. This action pulls by encouraging foreign time deposits and pushes by inducing the public to substitute time for demand deposits and thereby inducing banks to lend more in capital markets. Velocity and money ownership data suggest that the desired shifts in deposit ownership took place in 1962. Also, banks expanded lending in the mortgage and state and local security markets, but this was probably due more to demand factors than to supply fac- tors. Indeed it is not clear why banks should change lending policies, if time de- posits are basically the same as demand deposits.

The raising of maximum rates was also contractive. It encouraged depositors to transfer funds from less liquid assets into time deposits and thus to reduce the supply of long-term credit. Secondly, the spread between short- and long-term rates is a basic inducement to lending to households. A good correlation exists between growth in mortgage and consumer credit for six-month periods and the difference in yields of three-t.s-five-year US. securities and of mortgages, lagged six months. Thirdly, bank-promoted credit ease refers to credit flows induced by creation of low-yield assets.

A second push-and-pull device was to replace bills with longer term obliga- tions. This was expansive in its direct action, but contractive in that it encour- aged the public to hold short-term liquid assets.

Measurement of the amount of ease in bank credit is mainly by the money supply, since expansion of time deposits is alternative to expansion of other assets. The record suggests contraction from the end of 1961 to late 1962, and moderate expansion thereafter. Also, the replacement of gold with U.S. securities in Federal Reserve assets permits the public to lend or buy abroad while reducing U.S. security holdings. This is contractive.

FISCAL POLICIES FOR STEADY GROWTH

HAROLD SOMERS Unicwsity of California, Los Angeles

Current fiscal policy is directed toward three different objectives: to close the cyclical gap to reduce unemployment and ensure a high level of economic activity; to close the growth gap and thereby promote an adequate rate of increase of the output of goods and services; and to close the gap in the balance of payments to conserve the supply of gold. The main concern is with growth at a steady, al- though not necessarily a constant, rate. The tax cut of $1 l billion was designed accordingly.

Serious difficulties arise in trying to determine whether the tax cut will accom- plish its aims. Accurate estimates of the multiplier are not available; neither is the “multiplicand” - the amount that sets off the multiplier process - as readily determinable as the budget figures may imply. A given government expenditure or tax cut does not create an initial impact of equivalent amount. Nor is the “surplus” or “deficit” - whether in the administrative, cash, or national income budget - a reliable indicator of the initial impact: the nature of the expenditures and revenues must be examined in detail. The highly touted national income budget is also in serious danger of contributing to erroneous estimates of the im- pact of federal fiscal actions. It excludes transactions which affect the supply or liquidity of assets. The exclusion of loans and mortgage purchases by federal agencies, for instance, makes the national income budget inadequate for a study