In response to:

The Company He Keeps from the March 19, 1964 issue

To the Editors:

Whatever the vices or virtues of General Motors, Mr. Bell’s complete ignorance of economic analysis has led him into error that even middling sophomores would avoid. In the first place it is a traduction of the so-called “pure” theory of capitalism to say that this theory is violated when a firm expands through retained earnings resulting in a conflict of interest between the investor and the corporation, in malallocation of resources, etc. Secondly, as economists have shown, whether or not it is in the interest of the stockholder (and of society) to have a dividend declared simply depends upon the productivity of these retained earnings relative to the market capitalization rate, the latter being the rate these funds would make outside the firm. Theoretically and empirically, it can be demonstrated that if the internal rate (the firm’s rate of return from using these retained earnings within the firm) is greater than the external rate, then the smaller the dividend payout the greater will be the value of the stockholders’ stock and his equity. The situation Mr. Bell describes would be true only if the GM internal rate was low. But by his own admission this rate is very high. All this is quite elementary and the interested reader may find this discussed in, e.g., Professor J. Fred Weston’s Managerial Finance (New York: Holt, Rinehart, and Winston, 1962), pp. 376 79.

Thirdly, Bell’s impressionistic comment on the Fisher, Griliches, Kaysen article “The Cost of Automobile Changes Since 1949” (and which has been published, Journal of Political Economy, October 1962) should be compared with the very necessary cautious conclusions of the authors themselves. From Mr. Bell’s scandal account who would have imagined that the author really conducted this study this way:

All in all, save for the understatement of costs involved and the possibility that such costs were not fully understood by car-buyers, the model changes of the last decade seem to have been largely those desired by the consuming public, at least until the last years of the horsepower race. Then on these grounds for believing that car owners (at the time of purchase) thought model changes were with the cost. The general presumption of consumer sovereignty thus implies that these model changes were worth the cost [p. 450].

Fourthly, there are many other errors in Bell’s “analysis,” but space forbids comment.

You have started a splendid adventure in the form of the Review. But how long it may survive such confusion and irresponsibility on the part of its reviewers is not very debatable. After all, in this world of specialization, one judges the quality of articles outside one’s area by the known quality of the reviews in his own area.

E. R. Kittrell

Associate Professor of Business Economics and Finance

Southern Illinois University

This Issue

April 30, 1964