Baumol Inventors

American Economic Association
Economists as Innovators: Practical Products of Theoretical Research

Author(s): Gerald R. Faulhaber and William J. Baumol
Source: Journal of Economic Literature, Vol. 26, No. 2 (Jun., 1988), pp. 577-600
Published by: American Economic Association
Stable URL: http://www.jstor.org/stable/2726363
Accessed: 28-11-2016 19:45 UTC
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted
digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about
JSTOR, please contact support@jstor.org.
Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
http://about.jstor.org/terms
American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to
Journal of Economic Literature
This content downloaded from 177.104.36.45 on Mon, 28 Nov 2016 19:45:16 UTC
All use subject to http://about.jstor.org/terms
Journal of Economic Literature
Vol. XXVI (June 1988), pp. 577-600
Economists as Innovators: Practical

Products of Theoretical Research
By GERALD R. FAULHABER
The University of Pennsylvania
and
WILLIAM J. BAUMOL
Princeton University and New York University
The authors wish to thank (in alphabetical order) Gerard Adams,

Franklin Allen, Peter Capelli, Dermot Gately, Daniel Ingberman,
Michael F. Koehn, Almarin Phillips, David Romer, Anthony Saun-
ders, Sherill Shaffter, William Silber, Gordon Tullock, Dennis Yao,
Edward Zajac, and several anonymous referees for valuable sugges-
tions and comments. We should also like to thank Laura Murphy
and Ken Richards for their research assistance. The Fishman-David-
son Center for the Study of the Service Sector and the C. V. Starr
Center for Applied Economics provided support.
I. Introduction contributed materially to the dissemina-

tion of the inventions of others.
E CONOMISTS HAVE LONG recognized the We summarize the histories of some
importance of technological innova- innovations derived, at least in part, from
tion for economic growth and have stud- economics, among them marginal analy-
ied how basic research yields new con- sis, the use of net present value for capi-
cepts that can in turn lead to new or tal budgeting, peak-load pricing, econo-
improved devices or processes, and, ulti- metric forecasting, the portfolio selection
mately to marketable products and ser- model and the associated beta coefficient
vices; however, economists have gener- and duration analysis, the Black-Scholes
ally studied only such contributions of option pricing model, Ramsey pricing,
the physical sciences, overlooking the and the stand-alone cost test. We explic-
fact that economics itself has been the itly focus on innovations whose value to
source of a surprising number of inven- those who adopt them is the promise of
tions that are widely used by both private improvement in their own economic per-
industry and government agencies, as formance in coping with market forces.
well as a number that have largely been Space prevents us from considering a
ignored. In addition, economists have number of other inventions, including
577
578 Journal of Economic Literature, Vol. XXVI (June 1988)
linear and nonlinear programming, game the imperfection of their decisions. Yet
theory, and inventory analysis. strong believers in the market will be
skeptical, claiming that competition will
A. Economists: Inventors or Describers?
force firms and agents to do what is opti-
This achievement of the economic mal if they are not to be driven from
theorists may, paradoxically, constitute the market. Consequently, the discovery
evidence against the fundamental optimi- of a formula for discounting or peak-load
zation tenet of microeconomic theory. At pricing will not change behavior but
least some of the ideas we discuss merely describe it. An example that can
emerged from analyses based on the perhaps be used to test this view is dis-
premise of optimizing behavior in what counting, in the sense of reduction in
was intended as descriptive theory. As the principal of a debt in return for pay-
we know, much of the mainstream eco- ment before the due date, which goes
nomic theory assumes that economic back at least to the fourteenth century.
agents such as firms are successful opti- Clearly, this precedes by 600 years the
mizers, consciously or unconsciously introduction of the discounting formula
guided by the invisible hand. Competi- by Bohm-Bawerk and Fisher into main-
tion and survival of the fittest, it is sug- stream economics in the early twentieth
gested, may, in the long run, often give century, and the publication of accurate
management no choice. Economists discounting tables (Thomas Postlethwayt
seeking to describe what firms actually 1751) by 300 years. Would the fourteenth
do in practice discovered the optimiza- century Italian banker have changed the
tion results and techniques in question terms on which he discounted for early
in the course of their analysis; however, payment had he known the formula?
if in practice business had to learn these More to the point, did the New York
new techniques from economists, then banker circa 1965 make better decisions
the fundamental optimality premise of as a result of his use of the modern theory
economists' attempts to describe busi- than his fourteenth century counterpart?
ness behavior may need to be reevalu- In principle, the issue might be re-
ated. Their work can at best be a descrip- solved by testing for improved perfor-
tion of future business behavior, as mance by institutions which availed
technology is transferred from economic themselves of modern analysis tech-
theory to business. Perhaps in the pro- niques. Unfortunately, because ceteris
cess both business performance as well are never paribus, even careful study of
as the realism of economists' models have the terms of loans pre- and postformula
been improved. is unlikely to decide the question. Time
Yet, while we hope to shed some light rate of preference is merely one of sev-
on the effectiveness of the invisible hand eral influences that determine intertem-
in enforcing efficiency, neither the evi- poral terms of trade; others include ex-
dence presented here, nor perhaps any change rate risk, credit worthiness of the
other, may be able to provide a decisive debtor, and the local strength of Church
test of whether economists have been in- doctrine against usury. 1
ventors of new techniques, or have There are two strong arguments
merely described behavior in a ruthlessly
efficient market. Our evidence suggests, 1 Because religious doctrine permitted risk premi-
for example, that economists' formaliza- ums but not interest on "certain gain," interest pay-
ments were often disguised in this way, or were car-
tions of the discounting calculation or the ried on the books of the bank as "gifts" (Raymond
pricing of options helped firms reduce de Roover 1963, p. 11).
Faulhaber and Baumol: Economists as Innovators 579
against the extreme version of the view We accept the metaphor of the economy
that the market will always get it right. as computer in which self-interested ac-
First, if the market is always able to force tions by (or natural selection of) market
(surviving) firms to anticipate correctly participants, transmitted via prices and
(if implicitly) the behavior called for by quantities, force the economy to grope
as yet undiscovered principles of as yet toward efficiency. In the absence of ex-
unborn economists, why does it not work ternalities and related problems, it is pre-
in the case of engineers and physicists cisely this imperfect but relentless pur-
also unborn? A sixteenth century brass suit of private ends that moves the
works surely would have been able to market toward efficiency in serving the
outdistance its rivals if it had introducedgeneral welfare.
electrical power before they did, so that The process of deciding what actions
on such an extreme argument competi- to take is costly for participants, however,
tion should have forced its adoption. Of (our debt to Richard Nelson and Sidney
course, it did not happen. Such a claim Winter 1982 on this point is clear). In
for competitive forces would be far- well-arbitraged financial markets near-
fetched, to say the least. But then why efficient equilibrium may be obtained in
should we expect the sixteenth century a matter of seconds with instantly avail-
lender to act in anticipation of econo- able low-cost information. In markets in
mists' methods that were still 200 years which decision making is costly partici-
in the future, and to behave "optimally" pants may be guided to a greater extent
in their fiscal if not their production activ-
by traditional rules of thumb ("optimally
ities? imperfect decisions," in the phrase of
A more modest view of what market William Baumol and Richard Quandt)
forces should be expected to accomplish rather than by explicit optimizing formu-
is also implied by the fact that many busi- las; natural selection may take decades
ness firms today spend considerable to shake out inefficient players, and effi-
sums on the application of contributionsciency may dictate imperfect behavior to
by economists. If it were true that; the avoid excessive decision-making costs.
market always gets it right it would follow Certainly, in many real markets the disci-
that these expenditures must be an effi- pline of the invisible hand is far less ruth-
cient step in improving business deci- less and inefficiencies are tolerated far
sions, because otherwise firms would longer than theory might suggest. Eco-
gain a competitive advantage over their nomic innovations can increase the re-
rivals by avoiding these outlays. But then sponsiveness of sluggish markets to the
it must also follow that the economists' benefit of their adopters and to that of
contributions do change business behav- the economy as a whole and, by lowering
ior and do not merely explain or describe the marginal cost of accurate decisions,
it. they can make an optimally imperfect de-
Our own hypothesis is an intermediate cision approximate the ideal a bit more
one. We surmise that the market usually closely.
gets it approximately right-eventually.2
2 Gordon Tullock comments: ". . . it seems to me deficient with respect to economics than anything
that even with your modifications you take the perfect
else. After all, a group of businessmen who were
information assumption too seriously. Businessmen wealthy and presumably wanted to retain their health
have strong incentives to become well informed and for many generations went to be bled by doctors
certainly if you compare them with politicians. . . whenever they were ill. The problem was particularly
As a matter of fact, their information is frequently severe because the doctors didn't clean their knives
deficient. There is no reason why it should be less from patient to patient."
B. Optimality in the Decisions of may use economists' findings to help

Government Agencies guide rates toward greater efficiency in
its own self-interest.
Whatever one concludes about the
persuasiveness of the optimality model
C. What Our Evidence Indicates
as a representation of business behavior,
its standing as a description of the behav-
Our two goals are, first, to determine
ior of government agencies is surely more
how much economists have in fact con-
doubtful. Most government agencies are
tributed to the flow of innovation used
not subject to the competitive pressures
in business and government and, second,
of the market and are not forced to adopt
to judge what this evidence implies about
inventions in order to cope with such
the degree of validity of the standard op-
pressures. Governments are, however,
timization premise of microtheory. For
subject to political pressures, which can
both goals, our results are mixed.
lead to the introduction of innovations
Concerning the first of these-what
not for efficiency reasons but rather to
economists have contributed-the ob-
accommodate the desires of an interest
served examples appear to fall into four
group favored by the new method, or
general categories:
to provide the appearance of "fairness"
or "scientific" decision making to an es- a. cases in which economists provided
sentially political process. Therefore, we the actual invention and may have
focus our attention on agencies that regu- contributed to the innovation pro-
late the prices, entry, and exit of firms cess (e.g., econometric techniques,
in industries subject to market pressures, duration, beta, stand-alone cost);
because such agencies may not be b. cases in which economists helped
shielded entirely from market influences. in the innovation process, though
It is clearly true that in regulatory deci- the idea was initially contributed by
sions regarding prices, entry, and exit, others, with economists sometimes
the political process may impede effi- inadvertently reinventing it them-
ciency by offering agents with political selves (e.g., discounted present
power opportunities to pursue economic value, Ramsey pricing);4
rents; however, Gary Becker (1983) has c. cases in which economists provided
suggested that there are pressures mak- an optimality formula for a concept
ing for minimization of the costs entailed previously introduced by others in
in carrying out such a redistribution be- an imperfect and intuitive version
cause inefficient agencies may find rent (e.g., peak-load pricing);
seekers turning to other institutions in- d. cases in which economists acted pri-
stead. Inefficient pricing, for example, marily as disseminators of the ideas
can provide opportunities for profitable of others (e.g., marginal analysis).
"cream-skimming" entry, and so can
Here, we follow Schumpeter in distin-
cause profit-seeking firms to demand the
guishing between "invention" as the act
removal of barriers to entry, thereby
of generating a new idea and "innova-
threatening the comfortable status quo.
tion" as the steps entailed in its actual
Consequently, regulators may be forced
to encourage efficiency in rates in order
to minimize such threats to the regula- cient rate structures do indeed create demands for
entry, but that regulators are not necessarily driven
tory equilibrium.3 If so, the regulator
thereby to adjust rates to efficient levels.
'The bulk of Frank Ramsey's work was in mathe-
3 The history of telecommunications regulationmatics, though the eponymous contribution appeared
before the AT&T divestiture suggests that ineffi- in an economics paper.
adoption in practice. To qualify as a true forward interpretations are not entirely

innovation we require an application of persuasive.
theory to practice to entail a change in
the behavior of the participants in the D. Why the Differences in Speed of
market or regulatory process, presum- Adoption?
ably in response to self-interest.
In several instances the early and curi- We make no pretense of being able
ous origins of the inventions examined to explain conclusively why some inven-
here may be as surprising to readers as tions were put into practice so much
it was to us. But a number of the ideas more quickly than others. While the rela-
seem clearly to be the products of eco- tive merits of the inventions in question
nomic analysis, among them several that may have a role, we believe that there
are widely used in business or govern- are many elements that may influence
ment. the speed of their adoption.
The evidence relating to our second
goal, evaluation of the optimality prem- a. Decisions for which future pros-
ise, is even less straightforward. Of pects are critical. It turns out that
course, as was just noted, governmental the inventions put into use most
use of an economist's invention has no rapidly were related to methods for
unambiguous interpretation in this re- coping with an unknown future.
gard; however, even the business usage This is true of the tools of financial
story is complicated. We find a number analysis that will be discussed-
of inventions that firms have adopted tools for evaluation of risks and
quickly, widely (if not universally), and portfolio choice. It is also clearly
with apparent enthusiasm (e.g., econo- true of econometric forecasts. The
metric forecasting, beta, and duration future is what every business man-
analysis). Others have been resisted, agement knows to be unknown and
adopted if at all only after long delay and about which every decision maker
by only a portion of the pertinent firms is most eager for guidance. Deci-
(e.g., discounted present-value criterion sions for which estimates of the fu-
in investment decisions, the optimal ture are crucial contrast sharply
peak-load pricing formula, and conscious with decisions for which readily
use of marginal analysis in business deci- available knowledge may seem suf-
sions). ficient to permit acceptable (satis-
The fact that some of these inventions ficing) decisions without recourse to
have been embraced widely by private sophisticated tools. A hotel man-
enterprise can arguably be interpreted agement, for instance, may be able
to have two implications. First, because to use a rule of thumb to arrive at
it must have been self-interest that viable differences between high and
prompted acceptance of these ideas low season rates without ever hav-
whose adoption was not costless, it might ing heard of peak-load pricing for-
appear that the hypothesis that market mulas.
forces impose a near-universal regime of b. The strength of competitive pres-
near-optimal behavior can be rejected. sures. A second determinant of
Second, because other inventions* were speed of adoption may be the de-
resisted or rejected, they were not really gree of competitiveness. In arenas
as useful as economists believe them to such as financial markets where en-
be. try and exit are easy and competi-
Yet, as we argue next, these straight- tive pressures powerful and im-
mediate, the invisible hand may d. Fairness issues and governmental

enforce rapid adoption of effi- adoption. In cases where substan-
ciency enhancing innovations. After tial fairness issues arise, such as
all, that is what the theories of per- Pigouvian charges upon externali-
fect competition and of contestable ties, peak-period fares, and con-
markets teach. But they also teach gestion fees on automobiles, gov-
that many markets are far from ernment agencies are apt to
competitive or contestable, and in relegate economic efficiency to a
such markets the inertia of a com- secondary place. It has been ob-
placent management may delay the jected that higher fares at peak
adoption of any innovation, perhaps hours will fall disproportionately
indefinitely. It may be noted here upon less affluent workers who
that markets that are highly orga- cannot freely choose their travel
nized (e. g., capital markets) are time, and this has no doubt done
particularly likely to be subject much to inhibit the full use of this
to strong competitive pressures incentive device. Such reason-
and to be among the speediest ing can delay the adoption of
in taking up efficiency-enhancing measures that seems unfair, even
ideas. though the delay contributes
Signaling. Innovations may be in the long run to inefficiency,
adopted rapidly for reasons other and sometimes even to inequal-
than their promised direct contri- ity.
butions to efficiency. For example, e. Capacity to serve ancillary goals.
if government spending is believed Sometimes courts or regulatory
to be influenced by econometric agencies have been pressed to ac-
forecasts, a private firm may find cept economists' devices by attor-
it imperative to subscribe to such neys who felt that these devices
forecasts as a signal indicating prob- would serve the interests of their
able public sector behavior, even clients. Thus, in recent hearings be-
if the firm's management is very fore the Postal Rate Commission,
doubtful about the reliability of strict adherence to a Ramsey pric-
the forecasts themselves. Manage- ing rule was advocated by lawyers
ments may also acquire economists' representing large purchasers of
inventions as well as their services postal services whose demand elas-
simply to be able to report to share- ticities were high. Of course, adop-
holders, if their firm's performance tion of Ramsey pricing would favor
proves unsatisfactory, that manage- such large purchasers. Equally pre-
ment was acting on the best advice dictably, this was opposed by law-
available. Thus, innovations may be yers representing clients whose
carried out most quickly if they play elasticities were believed to be low,
a useful signaling role, even if their for whom Ramsey pricing would be
direct usefulness to management is unfavorable. We suspect, then, that
nil. Conversely, inventions that the speed of adoption of economists'
have little signal content or whose inventions by regulatory agencies
applications involve more subtlety depends upon the commitment of
than stockholders can be expected those whose self-interest would be
to understand can perhaps be ex- promoted by the acceptance of the
pected to languish. idea.
The preceding list of influences on the ?3 lls 3d [= 0.10 ?122.5.2 (3.5/12)]

speed of adoption of economists' innova- or ?3 9s 3d {= [0.1/(1 + 0.1)] ?122.5.2
tions is nowhere near complete. This par- * [3.5/12]}? (This example is based on an
tial list is, however, enough to support actual transaction of the Tolomeis' Com-
two conclusions: first, that the rapidity pany of Siena in 1319, cited in de Roover
of adoption is not necessarily based exclu- 1953, p. 120.) In practice, many bankers
sively on the merits of the innovation, and merchants mistakenly used the for-
and second, that one should not be sur- mer method, and, we suspect, even
prised at the considerable heterogeneity failed to allow for compounding. A re-
of adoption delay that is found in prac- spected scholar published discount tables
tice, as we will now see. based on this erroneous method of calcu-
lation (John Harris 1736). In his Univer-
II. Economists' Innovations in Private sal Dictionary of Trade and Commerce,
Industry Postlethwayt (1751) rectified the error,
publishing correctly calculated discount
A. Capital Budgeting and Net Present
tables. This suggests that it may have
Value
taken the market some four centuries to
Let us begin our story with net pres- discipline at least some of its participants
ent value calculations, which have a tra- into efficient discounting. It is possible
dition in economics of almost a century. that in an earlier era the difference be-
Fourteenth century records confirm that tween the correct and the incorrect cal-
at least some discounting was practiced culation did not matter much because so
at that time. Italian merchants often pro- much uncertainty was involved, particu-
vided a discount (sconto) to a foreign cus- larly about the proper rate of interest.
tomer who paid his bill before its due Still, the correct calculation is not more
date, and the discount was calculated on difficult to carry out than the erroneous
the basis of the present value of the face one and must have been capable of effect-
amount of the bill at the future due date; ing substantially superior results at least
however, church opposition to usury was in some cases. In any event, today it is
quite strong, at least through the fif- difficult to imagine the lending depart-
teenth century (de Roover 1948b, pp. ment of any bank that does not know
53-54), and banks often resorted to sub- the discounting formula or does not use
terfuges such as arranged "gifts" in lieu it routinely and correctly.
of payment to debtors and the conceal- There is more to the story, at least in
ment of the interest in the rate of ex- the use of discounting in capital purchase
change in foreign transactions (de Roover decisions. Irving Fisher (1907) is gener-
1944, p. 402). Domestic bills typically ally taken to have been among the first
were not discounted until well into the to apply the principle of the discounting
seventeenth century when the practice of future cash flows in financial markets
was inaugurated by the London gold- to the broader issue posed by the cash
smiths (de Roover 1948a, p. 31). flows of any capital project, thus permit-
As late as the eighteenth century, how- ting evaluation of the project in terms
ever, there was some confusion over the of present value. Fisher's line of analysis
correct way to calculate these discounts was an idealized arbitrage argument with
for early payment. If a bill of ?122 5s which today's financial economists would
2d was paid three and a half months prior be quite comfortable: The net cash flows,
to maturity and the interest rate was 10 period by period, yielded by a new fac-
percent, should the discount have been tory should be evaluated in terms of an
identical stream of cash flows from a port- World War II the Harvard Business Re-
folio of financial assets traded in a securi- view never mentioned net present value
ties market. Fisher showed that the value as a managerial tool for use in capital bud-
of this portfolio equals the sum of the geting. Similarly, the widely used busi-
values of the investment's cash flows dis- ness school text Corporate Financial Pol-
counted at the market rate of interest, icy, by Harry Guthmann and Herbert
and argued that this value is an excellent Dougall (1948), does not discuss capital
approximation to values of traded securi- budgeting and mentions Irving Fisher's
ties in financial and futures markets. work only in a footnote on the theoretical
Fisher himself credited these ideas to treatment of the nature of interest and
John Rae (1834), although examination capital. The syllabus of the Wharton
of Rae's writings suggests that Fisher was School of Business course Finance 1B,
rather generous; however, it is true that "Corporation Finance," for the spring se-
the concepts and mathematics of net mester of 1954 does not include capital
present value had been worked out more budgeting as a topic. Attempts to apply
than 50 years before Bohm-Bawerk's and Fisher's work appear to have had little
Fisher's work. The discoveries belonged effect. In 1928, Principles of Valuation
to the school of German foresters who was published by two employees of the
dealt with the value of forestry land. U.S. Treasury Department whose thesis
Their work was intended to help authori- was that ". . .the basis of. . . valuation
ties decide whether to buy and how is . . . the present worth of future ex-
much to pay for private land to be turned pected income, . . . generally known as
into public forest. Their analysis was sur- the capitalization method" (John Grimes
prisingly sophisticated, even taking ac- and William Craigue 1928). Although the
count of the phasing of timber harvests authors showed how this method can be
and replanting costs. The definitive work applied to many practical business prob-
was published by Martin Faustmann lems, a reviewer for a trade publication
(1849), and Faustmann's formula is still characterized the book as a "treatise for
considered a foundation piece of classical the use of experts . . . and is no doubt
forestry analysis, not only for use in valu- intended only for their use. It is not a
ing forest land but for choosing forestry book for laymen" (Public Utilities Fort-
methods that maximize the land's value nightly 1929).
in present-value terms. Fisher was ap- During this period in which Irving
parently unaware of this earlier work,5Fisher's work was largely ignored by the
and indeed it had no influence on econo- business community, engineers were ac-
mists who had to wait half a century be- tive users of discounted present value.6
fore one of their number made the dis- In his well-documented history of engi-
covery independently. neering economics, Arthur Lesser (1969)
Although Fisher's writings carefully credits Alfred Wellington (1887), a civil
explain the theory and practice of net engineer, as the pioneer in the applica-
present value, the technique was appar- tion of the capitalization method to the
ently ignored by many practitioners. For economic design of railway structures;
example, from its founding in 1922 to however, it was probably John Fish
(1915), also a civil engineer, who first rec-
5 Fisher, like his predecessor Faustmann, was also
the unrecognized originator of at least one idea later
to become a much noted economic doctrine. He ap- 6 We are indebted to Professor Edward E. Zajac
pears (see Fisher 1926) to have described the Phillips of the University of Arizona for much of the material
curve clearly some 30 years before its popularization. on engineering economics, including the references.
ognized the applicability of discounted lated to new switching offices, the instal-
present value as a general criterion for lation of cables in new housing areas, and
investment choice. The field of engineer- construction of the new transcontinental
ing economy was brought to maturity by microwave routes for the burgeoning
Eugene L. Grant (1930), whose classic long-distance market. This volume very
textbook was used in the required engi- explicitly explained the calculation of the
neering economics course in many engi- present value of a stream of expendi-
neering schools. The book (now Grant, tures.
Ireson, and Leavenworth) is still in use, By the 1960s capital budgeting and the
in its seventh edition. Both Fish and net present value method for cash flows
Grant referred to Irving Fisher's work. were firmly entrenched in textbooks for
The discounted present value method both private and public managers (see,
was popularized by Joel Dean (1951), for example, Anthony Merrett and Allen
who unfortunately listed no one as a ref- Sykes 1963 and Stephen Marglin 1967).
erence, thus making it appear, according Practitioners, however, were cautious in
to Lesser, that he invented discounted adopting the "new" techniques. A survey
cash flow analysis. Nevertheless, he ex- by Lawrence Schall, Gary Sundem, and
tended the usual ideas of engineering William Geijsbeek (1978) found that
economics to include the supply and de- while more than half of their sample (56
mand for capital and the effects of capital percent) of large firms used net present
rationing. The impact of this book ap- value (or used it in risk-adjusted form),
pears to have been substantial; Lesser it was the only criterion in investment
credits it with bringing discounted pres- decisions for only 2 percent. Most firms
ent value analysis to the forefront of cor- in the sample employed it as one of sev-
porate finance. It was during the mid- eral criteria along with more primitive
to-late 1950s that the net present value standards such as payback period and av-
calculation in capital budgeting was erage rate of return, both of which were
adopted by many businesses, when it was used by more firms than the net present
"hailed as a new discovery of the 1950s" value criterion. Yet, citing an earlier sur-
according to A. S. Ashton (1962), who vey by Thomas Klammer (1972), the
deplored the "lack of communication authors conclude that there has been
between [sic] business executives, "increasing sophistication in capital bud-
accountants, and economists" repre- geting techniques" (p. 285).
sented by this 50-year lag (not realizing On balance, the evidence suggests that
that the lag since Faustmann's work was the invention of the net present value
more than twice as great). calculation has been disseminated among
Perhaps the preeminence of engineers practitioners rather slowly, and even to-
in public utilities, steeped in the engi- day its use is far from universal. Though
neering economics tradition, led to its a very old idea by the standards of today's
early adoption by the utilities, for which economist and thoroughly incorporated
postwar growth required rapid expansion into the capital budgeting methods of
of service and frequent capital budget- many large firms and public agencies, ex-
ing decisions. For example, the Ameri- plicit use of the net present value of the
can Telephone and Telegraph Co. pub- expected income stream of costs and
lished the first edition of Engineering yields associated with an investment is
Economy ("the Green Book') in 1952, still shunned completely by almost half
for use by its field personnel to aid them the large firms surveyed by Schall et al.
in making capital budgeting decisions re- 1978.
B. Peak-Load Pricing power and telephone. Throughout this

large body of work little or no mention
No survey of the inventions of eco- is made of potential applications to com-
nomics would be complete without con- petitive industries characterized by fixed
sidering peak-load pricing, recognized by inputs and nonstorability.
practitioners and economists alike as a In its chosen area of application, how-
contribution by theory to practical pric- ever, the economics of peak-load pricing
ing policy. Peak-load pricing refers to an appears to have had a substantial influ-
intertemporal pattern of prices for a non- ence upon regulatory commissions and
storable good or service such as electric- legislation concerned with the pricing of
ity or the use of a hotel room, which public utility services. Paul Joskow and
vary by time of day or season of the year, Roger Noll (1981) state that "in the litera-
the higher prices corresponding to peri- ture on monopoly pricing, the one great
ods in which the capacity of some fixed practical triumph of theory is the work
input is fully utilized. on peak-load (variable) pricing" (p. 17).
Modern writers such as Michael Crew By the late 1970s, they go on to say, "The
and Paul Kleindorfer (1986) trace the U. S. government has financed peak-load-
genealogy of peak-load pricing to Marcel pricing experiments in ten states, and in
Boiteux (1949) and Peter Steiner (1957). about twenty states time-of-day rates
Steiner's work led to further analysis by have been either ordered by regulators
the American economists Jack Hirsh- commissions [sic] or proposed by utility
leifer (1958) and Oliver Williamson companies" (p. 19). The Public Utility
(1966), who worked with the now-classic Regulatory Policies Act of 1978 encour-
Steiner model. That model deals with a aged the use of time-of-day and seasonal
single fixed input whose quantity cannot rates to achieve efficient use of resources
be varied over the demand cycle and a in electric power. Peak-load rates were
variable input whose quantity can be var- incorporated in the Tarif Vert of the
ied with demand. These two inputs are Electricite de France as early as the
taken to be combined via a fixed-propor- 1950s (Boiteux and Paul Stasi 1964).7 In
tions technique to produce the needed many of these cases, the economic re-
output. Thus, the maximum output (peak search on peak-load pricing was cited ex-
load) over the cycle determines the plicitly as justification for its use. The
amount of the fixed input required. But, evidence seems clear that this invention
during other (off-peak) periods some of of economists has strongly affected regu-
the fixed input's capacity is idle at any latory pricing practice.
viable price. The model was used to de- Nevertheless, whatever the effect of
rive rules for pricing in a way that modi- peak-load theory on modern regulatory
fies the intertemporal demand pattern so practice, peak-load pricing has long been
as to achieve an optimal use of all inputs, the practice in certain competitive indus-
fixed and variable. Literally dozens of ar- tries; it is only its application to regula-
ticles generalizing and applying this basic tion of utility rates that is apparently
model have appeared since these early new. Moreover, peak-load pricing was
papers (see Crew and Kleindorfer 1986 discovered by electric utility engineers
for a recent bibliography). almost a century ago, and was extensively
Virtually all of this literature focused
on pricing for efficient use of resources, 7 The French analysis incorporated concepts such
as stochastic demand and heterogeneous techniques
emphasizing the importance of its appli- in generation and distribution that did not appear
cation to public utilities such as electric in the American literature for another decade.
debated in industry forums until the be- station in New York in 1882 (this material
ginning of the twentieth century; it is is taken from William Hausman and John
not an invention of economists. Finally, Neufeld [1984a, 1984b]). A decade later,
economists' interest in peak-load pricing the British engineer John Hopkinson
for utilities predates both Steiner and (1892) proposed the idea that for nonstor-
Boiteux by 40 years; John M. Clark (1911) able items the firm should "charge more
is the earliest reference, and Raymond for carrying a person in the busy time
Bye (1926) constructed a model fully as than in the slack time, for it really costs
sophisticated as Steiner's. more to carry him" (p. 35). He went on
The focus of the literature on regulated to recommend a "fixed charge per quar-
industries conceals the fact that the peak- ter proportioned to the greatest rate of
load pricing model is much more broadly supply the customer will ever take, and
applicable. In fact, any industry subject a charge by meter for actual consump-
to nonstorable demand that varies in a tion" (p. 39). Hopkinson is thus credited
relatively repeated pattern and in which with the invention of the currently used
there is a (relatively) fixed input encoun- demand charge in electric power. His
ters the peak-load problem, whether it recipe, however, is inconsistent with
is regulated or not. A good example of modern analysis in that his peak charge
a competitive industry with these charac- is imposed on the customer's peak de-
teristics is the hotel/resort market, in mand, not the system peak. Neverthe-
which seasonality in demand is marked, less, a series of articles by Alfred Gib-
and prices often follow the seasonal (or bings (1894), another engineer, pointed
weekday/weekend) patterns. Nor is this out that the system peak, not the individ-
a new phenomenon; innkeepers of a hun- ual peak, is what determines the cost of
dred years ago priced their hotel rooms capacity. Gibbings concluded that some
with a fine eye to their particular seasonal form of time-of-day pricing was more
demand pattern. The Sea Grove House appropriate than Hopkinson's demand
of Cape May Point, New Jersey, adver- charge, and noted the availability of inex-
tised July and August prices 50 percent pensive time-of-day meters that could
higher than June rates for its 1880 season carry out such a scheme. All this evokes
(New York Times 1880), and in the same today's debates regarding the cost of me-
publication, the St. Nicholas Hotel in tering as an impediment to time-of-day
Manhattan offered tourists "special" (pre- electric power rates. During the 1890s
sumably lower) rates in summer. This the debate continued within the power
should not be surprising to economists; industry, and utilities differed in their
in a simple Steiner fixed-proportions practices. Detroit Edison, for example,
model with constant returns to scale, it gave lower rates to off-peak customers,
is easy to show that peak-load pricing is and Chicago Edison gave lower rates in
the competitive equilibrium; a variant of summer than in winter, at that time the
the argument in Gerald Faulhaber and peak season. By 1900, "interest in time-
Stephen Levinson (1981, pp. 1987-89) of-day rates clearly was on the wane
suffices to prove this. What is surprising according to Hausman and Neu-
is that the peak-load literature appears feld (1984a, p. 122), but industry study
to have ignored its obvious competitive groups continued to investigate the issue
counterpart. well into the second decade of this cen-
The birth of the electric power indus- tury. Gradually, however, the simplicity
try is generally dated from the establish- of the demand charge scheme attracted
ment of Thomas Edison's Pearl Street more utilities, and the desire of regulated
firms to present regulators with a united application, possibly because of preoccu-

front on rate design led to the demise pation with "fairness," as already men-
of peak-load pricing (Hausman and Neu- tioned.
feld 1984b, p. 29). Though modern economists may not
Quite early economists showed an in- have invented peak-load pricing, their
terest in public utility rates, beginning work seems to have been instrumental
with the work of Clark (1911) and George in spurring its adoption, principally
Watkins (1915), both of whom clearly rec- through the influence of their writings
ognized the importance of setting the on regulatory commissions and legisla-
price of output at the time of the system tors; however, the influence of this work
peak at its true long-run marginal cost. on practitioners in competitive industries
Steiner himself recognized both W. Ar- appears small. For example, the Ameri-
thur Lewis (1941) and Hendrick Hou- can Hotel and Motel Association (1952)
thakker (1951) as antecedents, but seems has long recommended to hotel manage-
to have missed the paper by Bye (1926), ment a quite simplistic cost-based pricing
which Richard Ault and Robert Ekelund formula that does not take into account
(1987) claim deals with all the issues con- either seasonality of demand or the fixed
sidered by Steiner, including the "shift- input of hotel space. Even future manag-
ing peak" case. Early regulatory econo- ers at hotel schools use texts (e.g., Clif-
mists appear to have understood these ford Fay and Richard Rhoads 1976) that
issues decades before Steiner brought recommend this approach. Quite recent
the problem into the mainstream of in- work by Avner Arbel and Shaul Ladany
dustrial organization literature. The dif- (1986), which uses peak-load pricing ex-
ference, perhaps, is that the early writ- plicitly in the context of the competitive
ings were ignored in the debate that had hotel/resort industry, is only now reach-
recently been concluded on time-of-day ing the literature.
rates in the emerging electric power in- Peak-load pricing, hailed as an exam-
dustry, whereas the later (and arguably ple of the practical application of new
duplicative) writings seemed to have economic theory, appears to be some-
started an entirely new debate in the thing a bit less. Although the effect of
same industry and on the same topic. economists' modern writings on the topic
While economists' arguments have on the behavior of regulatory commis-
again made time-of-day rates an issue for sions and public utilities appears to be
discussion in the electric power industry, important, this work is neither an econo-
its modern resurgence has had the most mists' invention nor is it new to industry.
effect in telecommunications, where
time-differentiated billing appeared to C. Contributions of Economic Theory
have been much easier to institute than to Finance
in electric power. Prices differentiated
by time of day and day of week have We turn, next, to economists' contri-
proliferated in telecommunications since butions to financial practice. In recent
the 1960s; however, the methods used years brokerage firms, investment banks,
to determine peak and off-peak prices and others concerned with corporate fi-
owe little to economists' formulas and nance have come to rely increasingly on
more to accountants' methods in allocat- analytical tools supplied by economic
ing capacity costs. In other areas of public theory. The Markowitz portfolio selec-
utility application, such as transportation model, the Sharpe beta coefficient,
tion, peak-load pricing has found little the Black-Scholes option pricing analyses
and the duration formula constitute One of the direct results of portfolio
prime examples. analysis and the beta approach is the
Portfolio Selection. In 1952 Harry emergence of index funds. An index
Markowitz published the first paper on fund, of course, is a portfolio weighted
portfolio selection. It involves a quadratic to replicate the behavior of the market
programming model which determines as closely as is practicable. Portfolio the-
the set of portfolios that maximize ex- ory suggests that in the long run it is
pected returns for each possible level of not possible to do better than that, at
risk as measured by the variance of the least not without inside information.
portfolio's returns. The portfolios can in- Option Pricing. The adoption of the
clude stocks, bonds, and cash. The pro- option pricing model, introduced by
spective utility of such an analysis to the Fischer Black and Myron Scholes (1973),
investment community seems clear. Soft- was even more rapid. The model calcu-
ware that carried out the Markowitz cal- lates the present value of a call option
culation became available soon after com- (which gives the purchaser the right to
puters began to proliferate; however, the purchase a specified number of shares
analysis had heavy data requirements be- of stock or some other asset at a specified
cause it used a full matrix of covariances price up to a specified terminal date) or
between every pair of securities in the of a put option (which gives the purchaser
entire set of assets that were candidates of the option the right to dispose of an
for inclusion in the optimal portfolios, asset on similar prespecified terms),
and this apparently served as a substan- thereby systematizing the price-setting
tial impediment to widespread adoption procedure. It also can be used to indicate
of the method. whether a given option is underpriced
Such problems induced William F. by the market (Black 1975). The present
Sharpe to design a simplified approach value of the option is expressed by the
to portfolio selection in 1964. Instead of Black-Scholes formula, which was de-
using their covariance in measuring the rived via probability theoretic calcula-
riskiness of a pair of assets, Sharpe pro- tions, as a function of the current price
posed to deal with the matter through of the asset, the variance of its rate of
each security's covariance with the mar- return, the riskless interest rate, the
ket portfolio. This is the famous capital length of time to expiration of the option,
asset pricing model in which a security's and the price at which the option may
covariance with the market, the beta be exercised, all on the assumption that
coefficient, serves as a portmanteau mea- the prices of the underlying stocks follow
sure of the security's risk. Today there a geometric Brownian motion process.
is hardly a firm dealing in securities that Though earlier writings have paved the
does not know about the beta or does way toward the formula it was only in
not gather statistics on this coefficient. 1973 that all the relevant elements had
Many stock market information services, been put together.
for example, Value Line, publish the Yet by 1981 a noted text, Principles
measured beta coefficients for all firms of Corporate Finance by Richard Brealey
they list. Clearly, the beta coefficient has and Stewart Myers, was able to report,
become a standard tool of professional "Every day dealers on the Chicago Board
and not so professional stock traders. Options Exchange use this formula to
Probably less than a decade was required make huge trades. The dealers are not,
for the transfer of this concept from the- for the most part, trained in the formula's
ory to practice. mathematical derivation; they just use a
specially programmed calculator or a set Samuelson (1945). But only in 1971,

of option tables to find the value of the more than three decades after its inven-
option" (p. 442). Black and several other tion, did the concept attract the attention
academics specializing in the subject of the business community. "Duration"
have accepted positions in the financial refers to the weighted average of the
community with incomes reported to be dates at which a stream of payments oc-
extremely high (by academic standards). curs.
The Black-Scholes model also has re- Thus, if the stream of payment extends
cently led to further analysis which un- from date zero to date T and s, is the
derlies the widely used application of share of the total payments (in dis-
portfolio insurance. The work of Hayne counted present value) at date t (so that
Leland (1980) and Mark Rubinstein Is, = 1), the stream's duration is defined
(1985) shows that portfolio managers can as
use the logic of options trading to limit

T
the downside risk of their holdings.
While the protection achieved is not per- D = I tsr.
t=O
fect, it can reduce the risk substantially.
The speed of adoption of this innovation This is easily shown to be the elasticity
is indicated in the following excerpt from of the present value of the stream of pay-
The Economist (1987): ments with respect to the discount factor,
(1 + i)-'. Hicks called it the "average
Portfolio insurance . . . sounds like the elusive
free lunch . . . [It] has convinced many Ameri- period" of the stream and Samuelson re-
can fund managers to protect at least part of ferred to it as the weighted average time
their assets. They have 11 times more money period. Hicks and Samuelson also
in protected funds than two years ago....
proved, independently, that if a portfolio
Mr. Hayne Leland and Mr. Mark Rubinstein,
consists of a stream of future receipts and
two American academics, started marketing
their brainchild in 1982 through their firm, Le- a stream of payments that are equal in
land O'Brien Rubinstein Associates. They are present value, then a small increase in
now the biggest portfolio insurers in America, interest rates will leave the value of the
with $22 billion in insured funds under manage-
portfolio unchanged if the durations of
ment.
the two streams are equal, it will raise
Duration. The analysis of decisions re- the value of the portfolio if the payments
lating to bonds offers an example involv- stream has the greater duration of the
ing a somewhat slower process of tech- two streams, and so on.
nology transfer from economic theory to Later work, notably that of Lawrence
business practice. "Duration" is a con- Fisher and Roman Weil (1971), extended
cept that goes back to a 1938 study by this theorem to show how duration can
Frederick Macaulay under the sponsor- be used in evaluating the riskiness (in
ship of the National Bureau of Economic terms of prospective interest rate
Research. It was independently reformu- changes) of a portfolio of securities with
lated by John R. Hicks (1939) and by Paul predetermined streams of payments or
receipts. It showed how the prices of
bonds with coupon rates below, equal
8 We are indebted to Sherill Shaffer of the Federal
Reserve Bank of New York for suggesting that we to, or above the interest rate will vary
use duration as one of our examples and for providing with the length of time to maturity, re-
the material on which this section is based. The his-
vealing somewhat surprising patterns
torical notes are based on Myron Grove (1974) and
George Bierwag, George Kaufman, and Alden Toevs that explained some curious behavior of
(1983). the time structure of bond prices that
had previously been treated as myster- D. Econometric Forecasting

ies.
Another transfer from economic re-
The relation of the uses of duration
search to business and government is in
to those of beta and of the Black-Scholes
the field of econometric forecasting.
formula readily suggests itself. Duration
Though hardly without its critics, the dif-
is employed both in the determination
fusion of econometric models and their
of appropriate bond prices and in assess-
forecasting results is certainly impres-
ment of their risk. Today, the concept
sive, at least in the private sector. Ac-
is widely used. Indeed, as Bierwag et
cording to one report, "Out of a small
al. (1983) put the matter, "Not since the
beginning, with five subscribing firms
introduction of beta in the 1960's has a
contributing $25 thousand in 1963, a sub-
single variable received as much atten-
stantial industry has grown, now running
tion from the investment community as
about $50 million in annual volume of
duration has." A NEXIS search of the
sales and some 1500-2000 subscriptions"
1986 issues of the American Banker up
(Wharton Econometric Forecasting Asso-
to the end of October found 25 articles
ciates 1979, p. 5). A more recent publi-
that contained discussions of duration,
cation concludes, "Econometrics has
some of them very substantial. They in-
thoroughy invaded, if not captured, the
clude assertions such as the following:
world of business. Most large corpora-
". . . duration technology, properly ap-
tions and banks use econometric fore-
plied, enables thrift institutions either to
casts. Many major firms have hired their
originate fixed-rate mortgages or buy
own econometricians and some are even
mortgage-backed securities . . ." (Oct.
building their own models" (Gerard Ad-
21, 1986), and the articles list bank re-
ams 1986, p. 74). Most large business
ports and continuous bond information
firms now subscribe to forecasts supplied
reports that routinely provide data on du-
by specialized firms such as Wharton
rations along with yields, coupon rates,
Econometric Forecasting Associates
and so on.
(which stemmed directly from the work
In sum, the beta concept, the Black-
of Lawrence Klein), Chase Econometrics
Scholes formula, and the duration con-
(associated with Michael Evans), and
cept are all ideas originating in the litera-
Data Resources Inc. (initially led by Otto
ture of theoretical economics that have
Eckstein), which was sold in 1979 for
been taken on enthusiastically by the
$105 million.
business community with lags ranging
Systematic work related to the econo-
from a very brief period to some 35 years.
metric theory of simultaneous equation
The diffusion of invention into practice
estimation probably grew from the writ-
has been particularly rapid in the area
ings of Ragnar Frisch between 1929 and
of financial economics, perhaps because
1938.10 Much of the subsequent work
competitive advantage in such markets
was done at the Cowles Commission,
yields quick returns.9
then located at the University of Chicago.
Koopmans in 1937 and Wald in 1940
9A cynic can argue, however, that if financial mar-
showed how hypotheses on the nature
kets operate like Keynesian "beauty contests," any
widely accepted analytic approach can become a of random disturbances in variables can
source of self-fulfilling prophecies. If enough people be formulated in probability terms. Cru-
believe that everyone believes some stock will be a
winner, then a winner it is likely to be. Is it not
possible that financial analyses are adopted as indica- 0 This account of the origins of simultaneous equa-
tors of what others are apt to believe, rather than tion estimation is based on Marschak's introduction
as measures of "intrinsic value"? to Tjalling Koopmans (1950, pp. 1-5).
cial contributions were provided by Haa- "the models grew rapidly in size and
velmo and by Mann and Wald, both in complexity from 20 to 30 equations for
1943, who showed how an economic si- early versions of the Wharton Model to
multaneous equation model could be 1500 equations for the current version
made into a statistical hypothesis by in- . ." (Adams 1986, p. 76).
cluding a random variable in each equa- Many businesses continue to spend
tion, and who provided the first estima- considerable amounts to obtain the re-
tion procedure available for use with such sulting forecasts, suggesting that the sub-
a system. This line of research, coupled scribing firms believe in the value of this
with the work of T. W. Anderson and invention for- their market performance,
L. Hurwicz in 1947 finally permitted sys- perhaps even indirectly to the extent that
tematic formulation of the analysis and the forecasts served as indicators of pro-
methods for dealing with the issue in the spective public policy. On the other
classic volume Statistical Inference in hand, skeptics have implied that such
Dynamic Economic Models (Koopmans forecasts are purchased by business man-
1950). agements as a means to legitimize their
Meanwhile, in the 1930s Jan Tinber- own intuitive predictions and to offer
gen had been considering experimental them protection from criticism in the
economic models for the League of Na- event things turn out badly.
tions. Soon after World War II Lawrence
E. Marginal Analysis
Klein, building upon the work of Tinber-
gen and the Cowles Commission re- Let us next examine the case of mar-
searchers, began his work (1946-50) on ginal analysis, remarkable because this
the construction and estimation of opera- analysis is so fundamental for neoclassical
tional forecasting models. The results of economics, while its explicit use by busi-
these early models were first presented ness and government has apparently
to business and government leaders in been very limited, at least until recently.
the 1950s at business outlook conferences Moreover, its history is instructive for
held at the University of Michigan. The us, because there is a more extensive lit-
Social Science Research Council and, erature on its actual influence than for
later, the Brookings Institution, contin- any other application of economics.
ued to sponsor the work that had be- These studies, at least taken at face value,
gun with the Klein-Goldberger model suggest that its influence has been mar-
through the 1950s and beyond. ginal.
At the same time, a model for business Economists, of course, cannot claim
applications was constructed at the paternity for marginal analysis, which is,
Wharton School funded by the Rockefel- after all, tantamount to the use of the
ler Foundation. As funding was expected differential calculus in economics. Adop-
to end in the 1960s, the Wharton fore- tion of the underlying reasoning to eco-
casting unit became receptive to the of- nomic issues came considerably later
fers of several major corporations to help than the seventeenth century origins of
in the construction of econometric fore- the underlying mathematical concept in
casting models, and Wharton Economet- the work of Newton and Leibniz, and it
rics was born. The other two major firms achieved general recognition among
specializing in econometric forecasting economists at the end of the nineteenth
were formed in the late 1960s. The use century; however, aside from academics,
of the electronic computer for economet- it has achieved some degree of recogni-
ric purposes became a routine matter; tion only in the last few decades and still
seems to meet determined resistance in in the application of marginal analysis.

some arenas. Despite all this, several empirical stud-
No one can be certain just when mar- ies beginning in the 1930s (see, e.g., R.
ginal reasoning entered the economic lit- Hall and C. Hitch 1939, Richard Lester
erature, because hints of it are sure to 1946, R. Skinner 1970, and John Sizer
occur in any careful discussion of the 1971) reported that the business commu-
logic of optimal decision making. A good nity had little or no awareness of these
candidate for one of the earliest compre- tools, made no conscious and deliberate
hensive statements is the writings of Tur- use of them, and in some cases followed
got (1844), for ten years controller-gen- decision rules such as fixed markup pric-
eral (the nearest thing to prime minister) ing or "full cost" (allegedly average cost)
of France under Louis XVI. His writings, pricing which was in direct conflict with
associated with the work of the Physio- the precepts of marginal reasoning. Per-
crats, were widely known. In a striking haps some 75 percent of the manage-
piece probably written about 1768 he ments recently studied believed they
carefully laid out the view that increasing were practicing some form of full cost
quantities of other inputs used with a pricing. Some 25 percent of them were
given piece of land yield marginal returns following a rigid markup formula that
which may at first increase but subse- showed little or no variation from year
quently decline. He goes on to demon- to year or from product to product, thus,
strate, by simple arithmetic example, presumably, precluding any adaptation
that optimality requires diminishing and to variations in demand conditions.
not maximal marginal returns, thus Several writers (e.g., Fritz Machlup
showing his grasp of marginalist logic 1946 and Skinner 1970) have questioned
(1844, Vol. I, pp. 421-22). the obvious interpretation of these re-
Discussions of marginal analysis are sults. Thus, Professor Machlup cogently
found throughout von Thiunen's great pointed out that the management of a
work (1826), and of course it plays a cen- firm can approximate profit-maximizing
tral role throughout Cournot's landmark behavior without explicitly understand-
contribution to economics (1838). Some- ing the pertinent marginal principles just
where between 1870 and the mid-1890s as one can drive a car very well without
marginal reasoning became common- understanding the engineering princi-
place in economics with the work of ples of the internal combustion engine.
Walras, Menger, Jevons, Marshall, J. B. Yet, evidence suggesting that a signifi-
Clark, and others, who produced "the cant number of the firms studied used a
marginal revolution." Marginal cost pric- fixed markup, invariant with time and
ing as an efficiency requirement goes product, is almost certainly inconsistent
back at least to the turn of the century, with such an interpretation. More-
and the work of Pareto and Barone. Ex- over, the empirical evidence was later
amples of early application to railroad strengthened by simulations conducted
pricing occurred when several leading by Richard Cyert and James March 1963,
economists (see, e.g., Hadley 1886, Cas- and replicated by Baumol and Maco
sel 1900) pointed out that when marginal Stewart (1971), in which the actual prices
(incremental) cost is below average cost charged by department stores for several
it may, depending on marginal revenue, hundred items were reproduced, gener-
increase profit to reduce price below av- ally to within one penny, by fixed markup
erage cost. Thereby, they dealt correctly calculations. Of course, such a rule of
with one of the most recurrent issues thumb, or a somewhat more sophisti-
cated substitute for it, might indeed be Kingdom, Canada, France, Australia,
optimal if the cost of collecting the and New Zealand.
data, and calculating and administering If a regulated firm's production is char-
the economists' "optimal" prices, were acterized by scale economies so that it
judged to be larger than the additional must lose money if it sets the price of
profits contributed thereby. each of its products equal to its marginal
The evidence, then, is that most busi- cost, then financial feasibility requires
nesses as recently as the 1970s were not some departure from marginal cost
explicitly aware of the principles of mar- prices. Ramsey prices are the second-
ginal analysis a century after they had best Pareto-optimal prices that maximize
begun to achieve wide recognition welfare under the requirement that the
among economists. Moreover, for a sig- enterprise earn enough through those
nificant set of firms neither experience prices to recover its total costs. There is
nor competition seems to have led to be- a well-known mathematical formula that
havior approximating that called for by permits calculation of those prices from
the marginal precepts. data on marginal costs and the pertinent
demand elasticities.
The formula was first presented in 1927
III. Economists' Innovations in
in a seminal article by Frank Ramsey just
Regulatory Agencies
before his death at age 26. It then reap-
Our examples so far have included only peared in writings by Arthur Pigou 1928,
inventions that are deemed potentially Samuelson 1951, Boiteux 1951, 1956,
useful to private economic entities. We and others. For reasons that are not clear
have argued that the validity of the hy- the application to industry pricing re-
pothesis that economists have been in- mained virtually unknown to most of our
ventors of useful techniques (rather than discipline until the writings of Peter Dia-
mere reporters of optimizing behavior) mond and James Mirrlees (1971) and un-
rests on the extent to which participants til Baumol and David Bradford (1970)
in markets subject to competitive pres- succeeded in drawing economists' atten-
sures change their behavior when they tion to the application.
learn of such an invention. Our remain- Within perhaps five years the regula-
ing examples, in contrast, are pricing in- tory economics literature began to refer
ventions that have some prospect for use to Ramsey pricing almost casually, and
in regulated industries, and whose adop- it was even noticed in elementary text-
tion has been imposed principally by reg- books (see, for example, F. Michael
ulatory commissions. Scherer 1980, p. 484). More to the point,
it began to appear regularly in the
A. Ramsey Pricing records of the regulatory authorities and
the transcripts of antitrust trials. It has
Ramsey pricing is a clear example of been discussed before many courts, the
a principle that derives from the litera- Federal Communications Commission,
ture and has (recently) achieved a good the Postal Rate Commission, the Federal
deal of attention among government Energy Regulatory Commission, the In-
agencies. Indeed it casts its shadow on terstate Commerce Commission (ICC)
virtually every hearing on price regula- and before various regulatory agencies
tion by a federal agency in the United of the individual states. Its early presen-
States, and it has apparently arisen in tation at regulatory hearings elicited little
similar circumstances in the United response. One of the authors testified be-
fore the Federal Communications Com- by Constrained Market Pricing the Com-
mission in 1968 on the basic principles mission means, in brief:
of Ramsey pricing (Bell Exhibits 26A and
a. that any prices deemed adequately
26B, FCC Docket 18128), but the FCC
constrained by competition will be
ignored the concept.
deregulated;
Eventually, however, frequent reitera-
b. that other prices will be subject to
tion by economists in regulatory pro-
a floor and a ceiling, with a firm
ceedings and the profession's general
being free to set price anywhere be-
(but not perfectly complete) acceptance
tween these limits in accord with
of Ramsey pricing as the theoretically
demand conditions;
correct rule for regulation of the prices
c. that the floor on any price be the
of a multiproduct monopoly left an im-
marginal (or the average incremen-
pression upon regulators. Recently, in a
tal cost)" of the activity in question;
landmark decision (Interstate Commerce
d. that the ceiling require any price
Commission 1985), the ICC explicitly
(or any combination of prices for
adopted the Ramsey principle as a guide
any set of services of the firm) not
to its pricing policies, though with some
to exceed the corresponding 'stand-
reservations about its day-to-day applica-
alone cost.'
bility. As the decision put the matter:
Now, stand-alone cost is itself an exam-
'Ramsey pricing' is a widely recognized method
of differential pricing, that is, pricing in accor- ple of a recent contribution of economic
dance with demand. Under Ramsey pricing, theory to regulatory practice. What is the
each price or rate contains a mark-up about concept, its logic, and its history?
the long-run marginal cost of the product or The ICC decision describes the con-
service to cover a portion of the unattributable
cept in the following manner:
costs. The unattributable costs are allocated
among the purchasers or users in inverse rela- . . . [the] stand-alone cost (SAC) test . . . is
tion to their demand elasticity. Thus, in a mar- used to compute the rate a competitor in the
ket where shippers are very sensitive to price market-place would need to charge in serving
changes (a highly elastic market), the mark-up a captive shipper or a group of shippers who
would be smaller than in a market where ship- benefit from sharing joint and common costs.
pers are less price sensitive. The sum of the A rate level calculated by the SAC methodology
mark-ups equals the unattributable costs of an represents the theoretical maximum rate that
efficient producer.... a railroad could levy on shippers without sub-
stantial diversion of traffic to a hypothetical
Ramsey pricing is based on a mathematical for-
competing service. It is, in other words, a simu-
mula which requires both the marginal cost and
lated competitive price. (The competing service
the elasticity of demand to be quantified for
could be a shipper providing service for itself
every movement in the carrier's system. Thus,
or a third party competing with the incumbent
the amount of data and degree of analysis re-
railroad for traffic. In either case, the SAC rep-
quired seemed overwhelming. We concluded
resents the minimum cost of an alternative to
that while formal Ramsey pricing is useful as a
the service provided by the incumbent rail-
theoretical guideline, it is too difficult and bur-
road.)
densome for universal application... (pp.
8-9, footnotes omitted) Though the stand-alone criterion pre-
B. The Stand-alone Cost Test dates the literature on contestable mar-
kets, it is the latter that completes the
What, then, does the Commission
propose to do in lieu of rigid adherence " If a firm produces n products whose outputs are
to Ramsey guidelines? "As an alternative YI, Y2, , Yn, with total costs given by C(yj,
. . . , Yn); then the average incremental cost of, say,
to pure Ramsey pricing we propose 'Con- product 1 is [C(yl, Y2, . . , Yn) - C(O, Y2, . ,
strained Market Pricing'" (p. 9) where Yn)]/Yl (see John Panzar and Robert Willig 1977).
rationale for the criterion as a regulatory cently developed economic theory augments
instrument. The basic idea is that in an the classical economic model of 'pure competi-
fion' with a model which focuses on the entry
industry characterized by economies of
and exit from an industry as a measure of eco-
scale and scope, because marginal cost nomic efficiency. . . . The underlying premise
pricing is not viable, consumers are ap- is that a monopolist or oligopolist will behave
propriately protected in terms of pricing efficiently and competitively where there is a
if no price or combination of prices is threat of losing some or all of its markets to a
new entrant. In other words, contestable mar-
sufficiently high to make it profitable for
kets have competitive characteristics which pre-
a hypothetical efficient entrant to under- clude monopoly pricing. (p. 10)
take the supply of the combination of ser-
vices in question. When, in a market in It is noteworthy that in the summer
which entry is not in fact free, prices nev- of 1987 the Federal Communications
ertheless pass this hypothetical entrant Commission announced its intention to
test, consumers must obviously be re- apply to telephone rates an approach sim-
ceiving price benefits at least as great ilar to the ICC's railroad pricing princi-
as would have accrued to them had entry ples that have just been described.
barriers been totally absent. That, in es- Here, then, is a case in which an ana-
sence, is the logic of the stand-alone cost lytic device moved fairly quickly from the
test which requires prices to be such that theoretical literature to practice. The
no combination of the supplying services speed of transmission was hardly fortu-
yield revenues exceeding the stand-alone itous. It is another case in which self-
cost of those services-the cost of a hy- interest was the (appropriate) mover.
pothetical efficient entrant serving them The railroads, through their legal coun-
alone. sel, recognized early that in this case
The Tennessee Valley Authority appar- what was good for the regulated firms
ently was the first to use the idea of the happened to be good for society, and ac-
costs of alternate methods of supply of cordingly, mounted a well-organized and
individual services, which it employed effectively planned campaign to drive the
as a method of allocating fixed costs point home.
among various services supplied (see
Federal Power Commission 1949, pp. C. Marginal Analysis in Legislation
21-22, quoted in Alfred E. Kahn 1970).
The term stand-alone cost was first used Previously we discussed how busi-
in Faulhaber 1975, in which its role in ness generally has not used marginal
cross-subsidy analysis was made rigorous analysis in the conduct of its economic
by application of the theory of the core activities. In a curious contrast, marginal-
of cooperative games. The contestability ist principles have had an influence in
literature (Baumol, Panzar, and Willig the regulated sector of the economy,
1988) adopted the idea from Faulhaber, principally through legislation that im-
and showed explicitly that it constituted posed some form of marginal cost pricing.
a key element of a program of rate regula- The Staggers Rail Act of 1980, which un-
tion that, perhaps for the first time, was derlay railroad deregulation, and the
fully embedded in the logic of economic Public Utility Regulatory Policies Act of
analysis. 1978, which required electric utilities to
Much of this was recognized by the purchase power from cogenerators at
ICC, which stated in its decision: "avoidable cost," are examples. Because
The theory behind SAC is best explained by regulatory agencies had often imposed
the concept of 'contestable markets.' This re- some form of "'full cost" pricing require-
ments on the firms they regulate,'2 this ited. And the peak-load pricing formula,
legislation was presumably designed to an invention hailed as having great appli-
preclude such procedures and to substi- cation in industry, is not a modern econo-
tute a marginalist approach. While law- mists' invention at all. It has found appli-
yers for the regulated firms have advo- cation only in the limited area of
cated marginal pricing criteria for regulated industries, and in that applica-
regulation of utility rates where this pro- tion it is not new to the industry.
moted the interests of their enterprise, We have taken as our standard the cri-
it is not entirely clear whether the af- terion that to qualify as a true innovation
fected firms actually became systematic an application of theory to practice must
users of marginal analysis once intro- involve a change in behavior of partici-
duced to its teachings. Both authors of pants in the market or regulatory arena,
this paper have had extensive experience acting from self-interest. In some cases,
with regulated firms and can offer anec- such as peak-load pricing, we sought di-
dotal evidence indicating that some rect evidence of changes in behavior. In
learning has indeed occurred; however, other cases, such as forecasting, we pro-
we have no systematic studies to support vided indirect evidence: the fact that
this conclusion. firms have made substantial outlays on
products of the new techniques which
IV. Conclusion can be consistent with profit maximiza-
tion only if those techniques improve
Perhaps the most striking implication
their performance. While most of the re-
of the economists' practical inventions is
sults are suggestive rather than defini-
their number and variety. Indeed, space
tive, we do believe that the evidence is
precludes consideration of a number of
sufficiently strong to justify serious con-
others, including game theory, linear and
sideration of the contribution of our theo-
nonlinear programming, inventory analy-
retical knowledge not only to our own
sis, and others. On the other hand, the
understanding, but also to the object of
record of adoption of economists' inven-
our study: the operation of the economy.
tions is spotty. In some cases, new results
While market forces may eventually im-
from economic theory quickly entered
pose behavior consistent with the formal
into practice as market participants em-
solutions if they are clearly superior, the
ployed new techniques to maximize re-
process is imperfect and hardly in-
turns, as was true of the beta coefficient,
stantaneous. Moreover, the economists'
the Black-Scholes model, econometric
analyses themselves are clearly only
forecasting, and the stand-alone cost test.
approximations, making heavy use of ov-
In other cases, such as present value
ersimplications. This also weakens the
analysis for investment decisions, the dif-
market pressures for their adoption.
fusion has been rather slow, and is still
It may also be noted that even after
far from complete after 80 years. In still
adoption of the various economists' con-
other cases, such as the use of marginal
cepts those ideas may well be understood
analysis, adoption may still be very lim-
imperfectly by those who use them and
hence may be employed in a manner that
2This is not the place to review the intractable is less than optimal. Obviously, such con-
problems entailed in measuring the "full" (average) cepts should be used only where they
cost of a product in a multiproduct firm whose fixed really are appropriate, and with full at-
and common costs are substantial. Needless to say,
such difficulties have occupied considerable time of tention to their limitations. Finally, we
regulatory agencies and the courts. may note again that, at least in recent
years and in particular industries, gov- tion of Costs of Expansion of an Interconnected

System of Production and Distribution of Electric-
ernment regulation has served as a cata- ity," in Marginal cost pricing in practice. Ed.:
lyst, encouraging the adoption of econo- JAMES NELSON. Englewood Cliffs, NJ: Prentice-
mists' contributions. It is not clear what Hall, 1964.
BREALEY, RICHARD AND MYERS, STEWART. Principles
this implies about the value of the contri- of corporate finance. NY: McGraw-Hill, 1981.
butions in question. BYE, RAYMOND TAYLOR. "The Nature and Fundamen-
tal Elements of Costs," Quart. J. Econ., Nov. 1926,
REFERENCES
41 (4), pp. 30-62.
ADAMS, F. GERARD. The businessforecasting revolu- CASSEL, GUSTAV. "The Principles of Railway Rates
tion: Nation, industry, firm. NY: Oxford U. Press, for Passengers," Int. Econ. Pap., 6. Eds.: ALLEN
1986. PEACOCK ET AL. London: Macmillan, 1956, pp.
AMERICAN HOTEL AND MOTEL AsSOCIATION. The Hu- 126-47. Trans. from Archiv fur eisenbahnwessen.
bertformulafor evaluating rate structures of hotel 1900.
rooms. NY, 1952. CLARK, JOHN MAURICE. "Rates for Public Utilities,"
AMERICAN TELEPHONE AND TELEGRAPH Co., INC. En- Amer. Econ. Rev., Sept. 1911, 1(3), pp. 473-87.
gineering economy. 1st ed. NY, 1952. COURNOT, ANTOINE AUGUSTIN. Recherches sur les
ARBEL, AVNER AND LADANY, SHAUL P. "Optimal Ho- principes mathematiques de la theorie des ri-
tel Room Pricing." Working Paper No. 86-01. Cor- chesses. Paris: Chez L. Hachette, 1838.
nell School of Hotel Administration, 1986. CREW, MICHAEL A. AND KLEINDORFER, PAUL R. The
ASHTON, A. S. "Investment Planning by Private En- economics of public utility regulation. Cambridge,
terprise," Lloyds Bank Rev., Oct. 1962, 66, pp. MA: MIT Press, 1986.
23-29. CYERT, RICHARD AND MARCH, JAMES G. A behavioral
AULT, RICHARD W. AND EKELUND, ROBERT B. "The theory of thefirm. Englewood Cliffs, NJ: Prentice-
Problem of Unnecessary Originality in Econom- Hall, 1963.
ics," Southern Econ. J., Jan. 1987, 53(3), pp. 650- DEAN, JOEL. Capital budgeting. NY: Columbia U.
61. Press, 1951.
BAUMOL, WILLIAM J. AND BRADFORD, DAVID F. "Op- DE ROOVER, RAYMOND. "Early Accounting Problems
timal Departures from Marginal Cost Pricing," of Foreign Exchange," Accounting Rev., Oct.
Amer. Econ. Rev., June 1970, 60(3), pp. 265-83. 1944, 19(4), pp. 381-407.
BAUMOL, WILLIAM J.; PANZAR, JOHN C. AND WILLIG, . The Medici bank: Its organization, manage-
ROBERT D. Contestable markets and the theory ment, operations, and decline. NY: New York U.
of industry structure. 2nd ed. San Diego: Har- Press, 1948a.
court, Brace, Jovanovich, 1988. . Money, banking and credit in mediaeval
BAUMOL, WILLIAM J. AND STEWART, MACO. "On the Bruges. Cambridge, MA: The Mediaeval Academy
Behavioral Theory of the Firm," in The corporate of America, 1948b.
economy. Eds.: ROBIN MARRIS AND ADRIAN WOODS. . L'Evolution de la lettre de change XIVe-
London: Macmillan, 1971, pp. 118-43. XVIIIe siecles. Paris: Librairie Armand Colin,
BECKER, GARY. "A Theory of Competition among 1953.
Pressure Groups for Political Influence," Quart. . The rise and decline of the Medici bank
J. Econ., Aug. 1983, 98(3). pp. 371-400. 1397-1494. Cambridge, MA: Harvard U. Press,
BIERWAG, GEORGE O.; KAUFMAN, GEORGE G. AND 1963.
TOEVS, ALDEN. "Duration: Its Development and DIAMOND, PETER A. AND MIRRLEES, JAMES A. "Opti-
Use in Bond Portfolio Management," Financial An- mal Taxation and Public Production II: Tax Rules,
alysts J., July/Aug. 1983, 39(4), pp. 15-35. "Amer. Econ. Rev., June 1971, 61(3), pp. 261-
BLACK, FISCHER. "Fact and Fantasy in the Use of 78.
Options," Financial Analysts J., July/Aug. 1975, The Economist, "Protective Medicine But No
31(4), pp. 36-41, 61-72. Cure," May 16-22, 1987, p. 85.
BLACK, FISHER AND SCHOLES, MYRON. "The Pricing FAULHABER, GERALD R. "Cross-Subsidization: Pric-
of Options and Corporate Liabilities," J. Polit. ing in Public Enterprise," Amer. Econ. Rev., Dec.
Econ., May/June 1973, 81(3), pp. 637-54. 1975, 65(5), pp. 966-77.
BOITEUX, MARCEL. "La tarification des demandes en FAULHABER, GERALD R. AND LEVINSON, STEPHEN B.
point: Application de la th6orie de la vente au couit "Subsidy Free Prices and Anonymous Equity,"
marginal," Revue generale de l'electricite, Aug. Amer. Econ. Rev., Dec. 1981, 71(5), pp. 1083-
1949, 58, pp. 321-40; translated as "Peak Loading 91.
Pricing," J. Bus., Apr. 1960, 33(2), pp. 157-79. FAUSTMANN, MARTIN. "Calculation of the Value
. "Le 'revenu distribuable' et les pertes 6cono- Which Forest Land and Immature Stands Possess
miques," Econometrica, Apr. 1951, 19, pp. 112- for Forestry," Allgemaine forst- und jagd-zeitung,
33. 15 Dec. 1849, pp. 441-55, in Martin Faustmann
"Suir la gestion des monopoles publics as- and the evolution of discounted cash flow. Trans.:
treints a l'6quilibre budg6taire," Econometrica, W. Linnard. Commonwealth Forestry Institute Pa-
Jan. 1956, 24, pp. 22-40. per No. 42, U. of Oxford, 1968.
BOITEUX, MARCEL AND STASI, PAUL "The Determina- FAY, CLIFFORD R.; RHOADS, RICHARD C. AND ROSEN-
BLATT, ROBERT L. Managerial accounting for the in public regulation. Ed.: GARY FROMM. Cam-
hospitality service industry. 2nd ed. Dubuque, IA: bridge, MA: MIT Press, 1981, pp. 1-65.
W. C. Brown, 1976. KAHN, ALFRED E. The economics of regulation. Vols.
FEDERAL POWER COMMISSION. Report on review of I, II. NY: Wiley, 1970, 1971.
allocations of costs of the multiple-purpose water KLAMMER, THOMAS. "Empirical Evidence of the
control system in the Tennessee River basin. Wash- Adoption of Sophisticated Capital Budgeting Tech-
ington, DC: Mar. 23, 1949. niques, " J. Bus., July 1972, 45(3), pp. 387-97.
FISH, JOHN CHARLES LOUNSBURY. Engineering eco- KOOPMANS, TJALLING C., ed. Statistical inference in
nomics. 1st ed. NY: McGraw-Hill, 1915. dynamic economic models. NY: Wiley, 1950.
FISHER, IRVING. The rate of interest. NY: Macmillan, LELAND, HAYNE E. "Who Should Buy Portfolio In-
1907. surance?" J. Finance, May 1980, 35(2), pp. 581-
. "A Statistical Relation Between Unemploy- 94.
ment and Price Changes," Int. Lab. Rev., June LESSER, ARTHUR, JR. "Engineering Economy in the
1926, 13(6), pp. 785-92. United States in Retrospect-An Analysis," Eng.
FISHER, LAWRENCE AND WEIL, ROMAN L. "Coping Econ., Jan.-Feb. 1969, 14(2), pp. 109-15.
with the Risk of Interest Rate Fluctuations: Re- LESTER, RICHARD A. "Shortcomings of Marginal Anal-
turns to Bondholders from Naive and Optimal ysis for Wage-Employment Problems," Amer.
Strategies," J. Bus., Oct. 1971, 44(4), pp. 408- Econ. Rev., Mar. 1946, 36(1), pp. 63-82.
31. LEWIS, W. ARTHUR. "The Two-Part Tariff," Econo-
GIBBINGS, ARTHUR H. "The Various Methods of mica, N.S., Aug. 1941, 8, pp. 249-70.
Charging the Public for Electricity from a Central MACAULAY, FREDERICK R. Some theoretical problems
Station," The Electrical Review, July 27, 1894, pp. suggested by the movements of interest rates, bond
96-97, 125-27, 157-59. yields, and stock prices in the United States since
GRANT, EUGENE L. Principles of engineering econ- 1856. NY: NBER, 1938.
omy. NY: The Ronald Press, 1930. MACHLUP, FRITZ. "Marginal Analysis and Empirical
GRIMES, JOHN A. AND CRAIGUE, WILLIAM H. Princi- Research," Amer. Econ. Rev., Sept. 1946, 36(4),
ples of valuation. NY: Prentice-Hall, 1928. pp. 519-54.
GROVE, MYRON A. "On 'Duration' and the Optimal MARGLIN, STEPHEN A. Public investment criteria.
Maturity Structure of the Balance Sheet," Bell J. London: Allen & Unwin, 1967.
Econ., Autumn 1974, 5(2), pp. 696-709. MARKOWITZ, HARRY, "Portfolio Selection," J. Fi-
GUTHMANN, HARRY G. AND DOUGALL, HERBERT E. nance, Mar. 1952, 7(1), pp. 77-91.
Corporate financial policy. 2nd ed. NY: Prentice- MERRETT, ANTHONY J. AND SYKES, ALLEN. Thefinance
Hall, 1948. and analysis of capital projects. London: Long-
HADLEY, ARTHUR TWINING. Railroad transportation, mans, 1963.
its history and its laws. NY: G. P. Putnam, 1886. NELSON, RICHARD R. AND WINTER, SIDNEY G. An
HALL, ROBERT AND HITCH, C. J., "Price Theory and evolutionary theory of economic change. Cam-
Business Behavior," Oxford Econ. Pap., May 1939, bridge, MA: Harvard U. Press, 1982.
2, pp. 12-45. New York Times, Boarding and Lodging Classified
HARRIS, JOHN. Lexicon technicum: Or an universal Advertisements, July 3, 1880.
English dictionary of arts and sciences. London: PANZAR, JOHN C. AND WILLIG, ROBERT D. "Free En-
private printing, 1736. try and the Sustainability of Natural Monopoly,"
HAUSMAN, WILLIAM J. AND NEUFELD, JOHN L. "Time- BellJ. Econ., Spring 1977, 8(2), pp. 1-22.
of-Day Pricing in the U.S. Electric Power Industry PIGOU, ARTHUR C. A study in publicfinance. London:
at the Turn of the Century," RAND J. Econ., Macmillan, 1928.
Spring 1984a, 15(1), pp. 116-26. POSTLETHWAYT, MALACHY. Universal dictionary of
. "The First Great Electricity Pricing De- trade and commerce. London: John and Paul Knap-
bate," Public Utilities Fortnightly, June 21, 1984b, ton, 1751.
113(13), pp. 25-30. Public Utilities Fortnightly, "A Mathematical Analy-
HICKS, JOHN R. Value and capital. Oxford: Clarendon sis of the Principles of Valuation" (book review),
Press, 1939. July 25, 1929, 4(2), pp. 116-17.
HIRSHLEIFER, JACK. "Peak Loads and Efficient Pric- RAE, JOHN. "Statement of Some New Principles on
ing: Comment," Quart. J. Econ., Aug. 1958, 72(3), the Subject of Political Economy, Exposing the
pp. 451-62. Fallacies of the System of Free Trade, and Some
HOPKINSON, JOHN. "The Cost of Electric Supply," Doctrines Maintained in the 'Wealth of Nations,'"
Transactions of the Junior Engineering Society, 1834; subsequently republished as The sociological
1892, pp. 33-46. theory of capital. NY: Macmillan, 1905.
HOUTHAKKER, HENDRIK S. "Electricity Tariffs in The-RAMSEY, FRANK. "A Contribution to the Theory of
ory and Practice," Econ. J., Mar. 1951, 61(1), pp. Taxation," Econ. J., Mar. 1927, 37, pp. 47-61.
1-25. RUBINSTEIN, MARK. "Alternative Paths to Portfolio
INTERSTATE COMMERCE COMMISSION. "Coal rate Insurance," Fin. Analysts J., July/Aug. 1985, 41 (4),
guidelines, nationwide." Ex parte No. 347 (Sub- pp. 42-52.
No. 1), decided Aug. 3, 1985. SAMUELSON, PAUL A. "The Effect of Interest Rate
JOSKOW, PAUL L. AND NOLL, ROGER C. "Regulation Increases on the Banking System," Amer. Econ.
in Theory and Practice: An Overview," in Studies Rev., Mar. 1945, 35(1), pp. 16-27.
. "Theory of Optimal Taxation," 1951 (unpub- ing," Quart. J. Econ., Nov. 1957, 71(4), pp. 585-
lished). 610.
SCHALL, LAWRENCE D.; SUNDEM, GARY L. AND VON THUNEN, JOHANN HEINRICH. Der isolierte staat
GEIJSBEEK, WILLIAM R. "Survey and Analysis of in beziehung auf landwertschaft und nationaloko-
Capital Budgeting Methods," J. Finance, Mar. nomie. Hamburg: Perthes, 1826.
1978, 33(1), pp. 281-87. TURGOT, ANNE ROBERT JACQUES. Oeuvres de Turgot,
SCHERER, F. MICHAEL. Industrial market structure new ed., Paris: Guillaumin, 1844.
and economic perfornance. 2nd ed., Chicago: WATKINS, GEORGE P. "A Third Factor in the Variation
Rand McNally, 1980. of Productivity: The Load Factor," Amer. Econ.
SHARPE, WILLIAM F. "Capital Asset Prices: A Theory Rev., Dec. 1915, 5(4), pp. 753-86.
of Market Equilibrium Under Conditions of Risk," WELLINGTON, ARTHUR M. The economic theory of
J. Finance, Sept. 1964, 19, pp. 425-42. the location of railways. NY: Wiley, 1887.
SIZER, JOHN. "Note on 'The Determination of Selling WHARTON ECONOMETRIC FORECASTING ASSOCIATES,
Prices,' "J. Ind. Econ., Nov. 1971, 20(1), pp. 85- INC. "A Brief History and Overview," (unpub-
89. lished) 1979.
SKINNER, R. C. "The Determination of Selling WILLIAMSON, OLIVER E. "Peak Load Pricing and Op-
Pi-ces," J. Ind. Econ., July 1970, 18(3), pp. 201- timal Capacity Under Indivisibility Constraints,"
17. Amer. Econ. Rev., Sept. 1966, 56(4), pp. 810-
STEINER, PETER 0. "Peak Loads and Efficient Pric- 27.

Baumol Inventors

Hochgeladen von

Dokumentinformationen

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Baumol Inventors

Hochgeladen von

Copyright:

Verfügbare Formate

American Economic Association

Economists as Innovators: Practical Products of Theoretical Research

Economists as Innovators: Practical

The authors wish to thank (in alphabetical order) Gerard Adams,

I. Introduction contributed materially to the dissemina-

B. Optimality in the Decisions of may use economists' findings to help

adoption in practice. To qualify as a true forward interpretations are not entirely

mediate, the invisible hand may d. Fairness issues and governmental

The preceding list of influences on the ?3 lls 3d [= 0.10 ?122.5.2 (3.5/12)]

B. Peak-Load Pricing power and telephone. Throughout this

firms to present regulators with a united application, possibly because of preoccu-

specially programmed calculator or a set Samuelson (1945). But only in 1971,

use the logic of options trading to limit

had previously been treated as myster- D. Econometric Forecasting

seems to meet determined resistance in in the application of marginal analysis.

years and in particular industries, gov- tion of Costs of Expansion of an Interconnected

Das könnte Ihnen auch gefallen