The archive.

Does eliminating successive monopoly mark-ups require merging the firms that impose them? Fritz Machlup and Martha Taber’s article separates the pricing case for vertical integration from technological economies and asks what independent firms can accomplish through contracts. The crucial distinction is concrete: bargaining over price alone differs from agreeing on both price and quantity. Where firms can negotiate the joint-profit-maximizing output, common ownership need not lower consumer prices further; where they cannot control quantities, the result may differ. By connecting economic models to firms’ actual capacity to bargain and commit, the authors clarify when integration can remove output restrictions—and why that gain does not settle the policy question. A merger that improves pricing within an existing monopoly structure may also make that structure harder to challenge.

Macroeconomic reasoning did not begin with Keynes: in this German-language essay Machlup runs the pedigree back through Quesnay, Ricardo, Cournot, Böhm-Bawerk, and Wicksell, then asks what really separates macro- from microtheory. Rejecting viewpoint and aggregation as the decisive test, he favors the absence of relative prices as the mark of a macro model, and insists that macro-relations like the consumption function rest on hidden micro-relations and unstable aggregations. He punctures the claims made for macrotheory's superiority, that it is more measurable, more dynamic, closer to policy, and warns against wringing causal conclusions from ex post identities. The firm of price theory, he reminds readers, is an ideal type, not a real enterprise. His verdict on the contest is deliberately anticlimactic: neither side wins, though microanalysis keeps a philosophical primacy.

Dennoch muß mein Urteil so lauten: kein Sieger und kein Unterlegener.

English translation: “Nevertheless my verdict must be as follows: neither victor nor vanquished.”

Einstein's definition of simultaneity, and Bridgman's attempt to turn it into a general rule that a concept means nothing more than the operations measuring it, set the stage for Machlup's defense of the unobservable. Physics itself, he shows, cannot do without freely invented constructs, from mass and inertial frames to Schrödinger's wave function, and neither can economics. Supply and demand curves, price, output, the industry are idealizations no statistic cleanly captures, muddied by heterogeneous goods, discounts, and quality changes; a model's weak fit with the data often indicts the data, not the model. Drawing on Menger's contrast of exact and empirical-realistic analysis, he defines a mental construct precisely and argues that a theory's concepts need not be realistic to be relevant, only its deduced consequences testable.

A mental construct is a concept designed for purposes of analytical reasoning that cannot be adequately defined or circumscribed in terms of observables or in terms of operations with recorded data derived from observation.

Does spending more on research simply buy more inventions? Machlup's answer is a patient no, or rather, much less than proportionately more. Inventive talent is scarce and its supply inelastic; drawing in extra researchers means paying rents to every incumbent and recruiting steadily less able hands, so marginal costs climb fast. Treating invention as an industry with a production function, he traces diminishing returns as more workers crowd a fixed stock of problems and knowledge, and catalogs ten reasons a swelling flow of raw ideas yields a rising share of rejects. The result is his four shrinkages, each thinning the passage from money spent to inventions actually put to work, a sober correction to any faith that funding alone accelerates technical progress.

These shrinkages are independent of one another; but they may add up with a vengeance.

Does restraining inflation impede economic growth—or protect its long-term prospects? In this review of Gottfried Bombach’s Festschrift for Erich Schneider, Fritz Machlup tests competing answers against distinctions that policy debate can easily obscure: high prices versus continually rising prices, temporary investment stimulus versus sustained growth, and desirable outcomes versus politically feasible measures. He welcomes the collection’s shared focus on inflation but challenges explanations invoking structural rigidities and arguments that assume stabilization must sacrifice growth. His scrutiny of wage policy is especially concrete: recommending stable wages is not the same as explaining how a democratic government could secure them. The review offers a compact encounter with rival accounts of inflation, sharpened by Machlup’s insistence that mechanisms, time horizons, and policy instruments be specified.

Mounting fear that the gold-exchange standard might buckle under an overhang of dollar claims frames this pedagogical survey of the leading blueprints for remaking the world's monetary order. Machlup sorts the proposals into five families—extending the gold-exchange standard, mutual central-bank assistance, centralized reserve creation, raising the price of gold, and freely flexible exchange rates—and weighs each against the charges of balance-of-payments strain, inadequate reserve growth, and fragility. He walks through the Keynes Clearing Union with its bancor, Triffin's plan to convert the IMF into a world central bank, and Maxwell Stamp's certificates for development aid, using balance-sheet T-accounts to separate genuine reserve creation from mere credit transfer. He declines to crown any single plan, offering analysis rather than verdict.

Gold and exchange reserves are needed only if exchange rates are not permitted to move to the level that would equilibrate the market at the moment.

Treating a schoolteacher's lecture, a corporate research memo, a television broadcast, and a patent application as outputs of a single vast industry, this survey builds the first full accounting of what Machlup calls knowledge production in America. He measures education, research and development, the communication media, information machines, and the professional services, then sorts every knowledge worker into transporter, transformer, processor, interpreter, analyzer, or original creator. The reckoning startles: total knowledge production reached roughly $136 billion in 1958, near 29 percent of adjusted GNP, while knowledge-producing occupations tripled their share of the labor force between 1900 and 1959. Along the way he argues that government itself produces knowledge when it frames and communicates rules, and that American schooling could be compressed into markedly fewer years.

The production of knowledge is an economic activity, an industry, if you like.

Can economists understand one another when a word like wealth, consumption, or competition shifts meaning from writer to writer? This slender essay answers that careful definition, though never a substitute for empirical research, is the precondition of coherent debate. Machlup traces a lineage of terminological housekeeping through Malthus, Nassau Senior, Richard Whately, and the quantitative pioneer Henry Moore, showing how each labored to strip ambiguity from the vocabulary of political economy. He endorses Senior's insistence that everyday terms be defined to match their ordinary educated use, while resisting Senior's extreme anti-empiricism. The result is a compact defense of semantic clarification as necessary but never sufficient: a discipline of language that clears the ground for knowledge without pretending to be knowledge itself.

Some people regard exercises in semantics as a waste of time. I consider them useful, if not indispensable, if we care to understand one another.

Paul Samuelson had argued that a theory resting on empirically false assumptions must be discarded; this short polemic answers that the rule would abolish theory as such, since every empirical test yokes a model to assumed occurrences. The sharpest thrust is turned against Samuelson himself. His celebrated factor-price equalization theorem, Machlup notes, derives illuminating conclusions from wildly unrealistic premises about countries, commodities, factors, and technology—precisely the abstract method Samuelson elsewhere condemns. Far from an embarrassment, that theorem exemplifies how strong simple cases point toward truths buried in complex situations. The essay thus enlists a leading formalist's finest work as evidence for the indispensability of unrealistic assumptions in economic reasoning.

What Samuelson does here is to reject all theory.

When Machlup rose to lecture at the University of Kiel's three-hundredth anniversary, he chose to turn the tools of economic calculation on higher education itself, in the German original preserved here. He confronts head-on the charge that pricing culture is materialistic, replying that the economist does not judge the intrinsic worth of universities but only makes explicit the valuations already buried in public budgets and private choices. Separating research, teaching, and learning, he shows that students bear the heaviest learning costs through fees and forgone earnings, cites Becker's estimates of private returns near ten to twelve percent, and then adds the external benefits to families, employers, and future generations. The social return on university capital, he calculates from American data, may reach twenty-four percent—roughly double the yield on industrial capital.

Ob die mit einer Million bezahlten Leistungen kulturelle oder materielle Werte darstellen, ist vom Gesichtspunkt der Rationalität gleichgültig.

English translation: “Whether the services paid for with a million represent cultural or material values is, from the standpoint of rationality, immaterial.”

European governments in the mid-1960s complained that the international monetary system compelled them to lend to America, piling up dollars they never wished to hold; de Gaulle charged that the dollar-exchange standard let the United States run up foreign debt almost for free. These two Wicksell Lectures test that grievance. In the first, Machlup weighs eight hypotheses for the persistent U.S. payments deficit—rejecting relative price inflation outright, crediting European devaluations and America's outsized transfer commitments—while insisting that a deficit is never a bare fact but an artifact of accounting convention. The second reconceives the holding of any foreign reserve, gold included, as an interest-free loan to the rest of the world without maturity, and compares fiduciary reserves, gold, and no reserves at all under freely flexible rates.

Receiving foreign currency implies foreign lending regardless of whether or not the recipient is conscious of his making a loan.

Two words—adjustment and financing—have been used in so many senses that the confusion hides genuine disagreement over what governments facing a payments imbalance should actually do. Machlup imposes order by carving out a third category. Real adjustment is narrowed to the classical mechanism of relative costs, prices, incomes, and resource allocation; financing is confined to short-term funds that tide over an imbalance; and between them sits what he names compensatory corrections—measures such as tariffs, subsidies, and lasting capital-flow shifts that reduce the need for adjustment without being either. The taxonomy carries a policy sting: because real adjustment is painful and financing a mere stopgap, authorities reach for corrective measures that so often fail through retaliation, offsetting trade effects, and induced import demand.

Rationing a scarce supply of foreign exchange under direct controls does not reduce the demand, but merely leaves part of it unsatisfied.