factor. These in turn made it easier for companies to raise equity and to move fromthe debt cycle of the 1980s to the equity culture of the 1990s.

The book provides an interesting case study of one of `the epochal deals ofAmerican business history' (page 121): RJR-Nabisco. It benchmarks the perform-ance of RJR-Nabisco against its largest competitor, Philip Morris, thereby con-trolling for tobacco industry speci®c effects. While the market value of RJR leaptahead of Philip Morris at the time of the bid, it converged thereafter. Furthermore,while RJR-Nabisco laid off workers faster than its competitor, it failed to exceedPhilip Morris' productivity. What really took the brunt of the high level of leveragewas RJR-Nabiscos's capital spending which (as a percentage of sales) started offwell in excess of that at Philip Morris but declined rapidly after the deal. Theimplication of the case study is that leveraging failed to realise its supposedbene®ts.

The move to equity took the form of a mixture of IPOs and equity ®nancedmergers. In contrast to the leveraged buy-outs (LBOs) of the 1980s, the reverseLBOs of the 1990s displayed a respectable if unspectacular performance. In ad-dition, the authors view the combining and spinning off of equity in mergers as`socially benign activity among consenting adults' (page 286) with few ®nancialstability and monetary policy concerns. They are therefore much more comfort-able with the equity driven deals of the 1990s than their debt equivalents of the1980s.

While a set of fortuitous circumstances saved corporate America from the fulleffects of ®nancial collapse, the authors argue that policy makers should be vigilantto a resurgence of debt driven activity in the future. Should it materialise, theyargue that policy makers should respond promptly by restricting credit andavoiding excessive loan concentrations. But they also argue that pre-emptive actionshould be taken to discourage excessive leverage by neutralising the corporate taxadvantage of debt and reforming corporate governance to make managementmore accountable to shareholders rather than subject to tight ®nancial constraintsof leverage.

The book provides a vivid description of the stark contrast between US cor-porate ®nancing patterns in the last two decades of the century. The reason forthis remains something of a puzzle and while economists might have convincingstories to tell about both periods, they are vague about the timing, sequencing, andduration of either. In addition, while the merits of neutral tax systems and strongcorporate governance have been well rehearsed, it is not clear that they are directlyrelevant to capital structure cycles, which also pervaded earlier periods of UScorporate history when both corporate taxation and ownership were very differentfrom today.

C O L I N M A Y E R

SaõÈd Business School, University of Oxford

Labour Unions, Public Policy and Economic Growth. By PALOKANGAS (TAPIO). (Cam-bridge and New York: Cambridge University Press, 2000. Pp. xiv+237. £40.00hardback, US $64.95 hardback. ISBN 0 521 66323 7.)

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This book takes as it premise that `collective bargaining is still the main vehicle forlabour worldwide to negotiate wages, bene®ts, retirement policies, training andother terms of working with management in both the public and private sectors'.No data is offered to substantiate this assertion, and perhaps the inclusion of theword `still' hints at less than complete con®dence in the relevance of the class ofmodels developed in the book. Certainly in the United Kingdom, trade uniondensity has fallen since the 1970s, and is now of the order of 30%±35%, and onlyabout 20% in the private sector. In Europe, trade unions and collective bargainingare more important than in the United Kingdom; in the United States of Americathey are less so. In Asia and Africa, is collective bargaining really the main way inwhich wages are determined?

But this book is not really concerned with facts; its task is to develop the Nashbargaining model of union-®rm interaction and apply it to a range of policy issues,including tax policy, international trade, and economic growth. The central con-clusion drawn by the author is that collective bargaining, in the presence of marketfailure, is welfare enhancing.

Chapter 1 sets out the bargaining framework upon which the subsequentchapters are based. This consists of the Rubinstein game of alternating offers, theoutcome of which converges to the Nash bargaining solution (NBS) as the timebetween offers tends to zero. With these non-cooperative foundations out of theway, the NBS becomes the workhorse of the analysis. Chapter 2 applies the NBS ina variety of ways, exploring the monopoly union model, the right to manage, andpro®t sharing. It also develops a simple general equilibrium model of differenti-ated products in which each ®rm faces a single union. Taking the number ofunion/®rm pairs as a measure of the decentralisation of wage setting, this is usedto provide a theoretical explanation of the Calmfors-Drif®ll ®nding that `extremeswork best': an intermediate degree of centralisation produces higher wages and alower level of employment. Tapio Palokangas' explanation is that a small union (ina decentralised economy) is constrained by lack of market power and a highelasticity of labour demand; a large union fully internalises the macroeconomiceffects of its wage policy.

This line of argument is relatively straightforward, if not exactly novel, andprovides a reasonably simple explanation of an interesting empirical phenom-enon. Palokangas is on much weaker ground when he analyses the effects ofcollective bargaining on economic growth in Chapter 8. The model has two cat-egories of labour, skilled and unskilled; each union controls a sector which pro-duces a primary good and a variety of re®ned goods. In each sector the primarygood and the re®ned good are assembled to form a homogeneous ®nal good soldby oligopolists. Each sector has one union and one oligopolist who employs skilledand unskilled labour, produces a primary good and constructs new designs forre®ned goods by research; each sector also has a number of monopolists whoassemble their own variety of re®ned goods and use only the ®nal good as input.After the oligopolist has designed a product it sells the design to a monopolist whocompletes the product (without using labour) and sells it back to the oligopolist.The model implies that as the unions' bargaining power increases, the growth rateincreases. The explanation is that higher wages for unskilled labour reduces

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demand for unskilled and skilled labour; ®nal output falls and skilled labourmoves from production of ®nal output to research. The production of new designsincreases and the growth rate rises. This is certainly an intriguing result from asomewhat contorted model, but it is dif®cult to know how robust it is to variationsin the assumptions of the model; there is little discussion of why this particularspeci®cation was chosen. From a practical point of view, the suggestion that unionsshould be encouraged to demand higher wages for unskilled labour so that skilledlabour would suffer a wage fall and be displaced from the production of ®nalgoods to doing research would certainly meet with some scepticism by policymakers.

More generally, this book suffers from a number of drawbacks. Complete in-formation is assumed throughout; not only does this preclude some interestingbargaining issues, but it also means that some questions cannot be addressed, inparticular why certain kinds of wage and employment contracts can or cannot bewritten and enforced. On a deeper level, to understand the relationship between®rms and unions requires some account of why these institutions exist; insteadPalokangas takes as given that each union is effectively a monopoly supplier oflabour to a particular ®rm, with no attempt to understand how this relationshiparose in the ®rst place. Finally, the references appear very dated. Most are to booksor articles published in the 1980s, and to only a few published in the last decade,many of which are by Palokangas himself.

S I M O N C L A R K

University of Edinburgh

Adam Smith and Economic Science: A Methodological Reinterpretation. By PEIL (JAN).(Aldershot and Lyme, NH: Edward Elgar, 1999. Pp. xii+206. £49.95 hardback.ISBN 1 85898 919 1.)

The work was ®rst published in Dutch in 1995. This is a modi®ed version which hasbeen translated well. The author informs us that the references have not beenupdated although he does mention Jeffrey Young's recent work on economics as amoral science. There is, in fact, a very extensive bibliography but with some curiousomissions. Given the interest in the methodology of interpretation and the at-tempt to take into account some recent developments in literary theory, it issurprising that Vivienne Brown's Adam Smith's Discourse (1994) is not cited. Whilegiving welcome attention to the essay on Astronomy, where Smith offered his viewsas to the principles which lead and direct philosophical inquiry, Peil has very littleto say about the theory of communication (dialogue?) which Smith developed inhis lectures on Rhetoric.

In view of the ways in which Smith's economic analyses are handled, it should benoted that no mention is made of Amitai Etzioni's The Moral Dimension (1988) norof Allen Oakley's Classical Economic Man (1994). But there is a great deal ofmaterial here, which unfolds at a number of levels.

The ®rst major theme which runs throughout the study as a whole is, as thesub-title implies, broadly methodological. Peil rejects the `positivistic' approach,

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