1932 - 1938: Wassily Leontief´s Early Papers.
Besides the Input-Output Model.
Fidel Aroche1
First Draft. Please do not quote
Abstract: W. Leontief moved to the U.S. in the early 1930’s with an offer to work at
the National Bureau of Economic Research (NBER) and would later accept a
position in Harvard University, where he would develop his 1936 and 1937
papers presenting the Input-Output model. At arrival at the U.S. however,
Leontief would publish a (large) number of papers dealing with various
other issues, mainly methodological and also theoretical. These articles are
interesting and useful for understanding the theoretical background and
Leontief’s preoccupations had at the time, which would also influence the
development of the IO model. This paper analyses a few of such early
papers, which appeared in journals nowadays included in JSTOR, searching
for possible connections and extension to the main creation of Leontief’s.
Fidel Aroche, e-mail: aroche@servidor.unam.mx, Postgrado, Facultad de Economía, UNAM, Av.
Universidad 3000, Ciudad Universitaria, 04510 México, D. F. MEXICO.
I am thankful to Adrián Hurtado for his assistance in the elaboration of this paper.
1
1
1932 - 1938: Wassily Leontief´s Early Papers. Besides the InputOutput Model.
In 1936 W. Leontief published an article, “Quantitative Input and Output Relations
in the Economic System of the United States” and in 1937 he published
“Interrelation of Prices, Output, Savings and Investment” both in the Review of
Economics and Statistics (Vol. 18 pp. 105-125 and Vol. 19 pp. 109-132
respectively), while being a professor at Harvard University. These papers present
what would become the Input-Output (IO) model, which would also be later
completed and extended. Besides these fundamental pieces, though W. Leontief
published also a number of articles along the 1930’s both in German and in English
which were not directly related to the IO model, but reveal the academic
discussions in which Leontief was involved at the time, as well as his interests on
other aspects of the profession.
Investigating these issues might be useful to understand the theoretical interests
Leontief held at the time he developed his IO model, which could also allow a more
thorough discussion on the grounds the model was developed. This paper
overviews those articles by W. Leontief that appeared during the decade of the
1930’s in English, stressing also the authors with whom Leontief maintains
discussions and the main ideas about.
1. - The published papers
Between 1932 and 1938 Leontief published the following papers in English in
nowadays journals included in JSTOR, chronologically organised:
1. A comment to the book Der Sinn des Monopols in der gegenwärtigen
Wirschaftsordnung by Erich Egner. Berlin: Paul Parey (1931). Published in
The Journal of Political Economy Vol. 40, No. 5 (October, 1932) pp. 714-716.
2
2. “The Use of Indifference Curves in the Analysis of Foreign Trade”, published
in The Quarterly Journal of Economics Vol. 47, No. 3 (May, 1933) pp. 493503.
3. “Pitfalls in the Construction of Demand and Supply Curves: A Reply”
published in The Quarterly Journal of Economics Vol . 48, No. 2 (February,
1934) pp. 355-361.
4. “More Pitfalls in the Construction of Demand and Supply Curves: A Final
Word” The Quarterly Journal of Economics Vol. 48, No. 2 (August, 1934) pp.
755-759.
5. “Interest on Capital and Distribution: A Problem in the Theory of Marginal
Productivity” published in The Quarterly Journal of Economics Vol . 48, No. 2
(November, 1934) pp. 147-161.
6. “Price-Quantity Variations in Business Cycles” published in the Review of
Economics and Statistics Vol. 17, No. 4 (May, 1935) pp. 21-27.
7. “Composite Commodities and the Problem of Index Numbers” published in
Econometrica Vol. 4 No. 1 (January, 1936) pp. 39-59.
8. “Stackelberg on Monopolistic Competition” published in The Journal of
Political Economy Vol. 44, No. 4 (August, 1936) pp. 554-559.
9. “The Fundamental Assumption of Mr. Keynes’ Monetary Theory of
Unemployment” published in The Quarterly Journal of Economics Vol . 51,
No. 1 (November, 1936) pp.192-197.
10. “Implicit Theorizing: A Methodological Criticism of the Neo-Cambridge
School” published in The Quarterly Journal of Economics Vol . 51, No. 2
(February, 1937) pp. 337-351.
11. “The Significance of Marxian Economics for Present-Day Economic Theory”
published in the American Economic Review Vol. 28, No. 1 Supplement,
Papers and Proceedings of the Fiftieth Annual Meeting of the American
Economic Association (March, 1938).
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Out of these eleven papers, in the first one, of 1932 Leontief signs as a member of
the National Bureau of Economic Research (NBER); from the second paper (of
1933) onwards he signs from Harvard University, although in the fifth paper,
“Price-Quantity Variations in Business Cycles”, Leontief mentions the NBER as the
place he started a research project conducting to this result. Papers number 1 and
7 are comments to books published in Germany and both refer to the analysis of
non competitive market structures. In the 1932 publication Leontief makes a
methodological analysis and underlines that German economics were at the time
opening new fields to the theory, while recovering some features of the older
economists, like Quesnay, seeking for the final causes and meanings –a
theolological vision- supported by a philosophy derived from Husserl and
Heidegger and following the methodological principles of earlier German
economists as Rodbertus and von Stein, an attitude that Leontief recognises to be
quite extended among German economists. So the author of the book in question,
Erich Egner, explains the rationality of monopolies in the “modern” capitalistic
economy, not only its behaviour as it had been dealt with to that date –presumably
in the Anglo Saxon literature. The rôle of a monopoly would be close to that of an
entrepreneur in Schumpeter’s theory of economic dynamics for which monopolies
are seen as beneficial for the strength of the national economy.
The comment on von Sackelber’s book Marktform und Gleichgewicht (Market
Structure and Equilibrium), published in Vienna in 1934 by J. Springer, appeared in
1936, when no English translation of the book was available; later on von
Stackelberg’s oligopoly models would become standard in text books on
microeconomics. In this comment Leontief also makes a thorough comment on the
methodology von Stackelberg employed in the book, devoted to explain the theory
of oligopolistic competition (called by Leontief “monopolistic”), including a critical
survey on the developments by other authors, from Cournot to their
contemporaries, J. Robinson and E. Chamberlin2. This is a text developed on strong
analytical foundations, although as many books of the time, do not present any
mathematical formulation in the main text, reserving those to appendices.
Robinson J. The Economics of Imperfect Competition. London: Macmillan and Co., Ltd., 1933 and
Chamberlin E. Theory of Monopolistic Competition. Cambridge(Mass.): Harvard U.P., 1933.
2
4
Paper No. 3 “Pitfalls in the Construction of Demand and Supply Curves: A Reply” is
in fact a part of a controversy Leontief held with Ragnar Frisch on the statistical
evidence and analysis of supply and demand functions; this paper followed a
booklet by Frisch "Pitfalls in the Statistical Construction of Demand and Supply
Curves"
(1933)
in
Veröffentlichungen
der
Frankfurter
Gesellschaft
fur
Konjukturforschung , edited by Eugen Altschul, Neue Folge Heft 5, Leipzig, Hans
Buske (39 pp.) where the latter criticizes a paper by Leontief (Ein Versuch zur
statischen Analyse von Angebot und Nachfrage or An Attempt for a Statistical
Analysis of Supply and Demand, in Welwirtschaftliches Archiv Vol. 30, No. 1, 1929)
that presents a method developed together with R. Schmidt to derive supply and
demand curves from empirical data on price and quantity variations. This paper
received a long comment by Elizabeth W. Giloboy (1931). The reply by Leontief is
tidy and thorough, analyzing every bit of Frisch’s argument to conclude that
Frisch’s work deserves his own observation to Leontief’s.
The controversy however would continue in Ragnar Frisch’s reply “More Pitfalls in
Demand and Supply Curve Analysis” that appeared in The Quarterly Journal of
Economics Vol . 48, No. 4 (August, 1934), pp. 749-755. Where Frisch states that
Leontief is one example of the fact that the empirical analysis on the demand and
supply analysis is a field where mistakes and confusion thrives. Frisch claims that
data contradicts Leontief’s assumptions and method of analysis of the phenomena
in question; namely, that the shifts of the supply and demand curves are
independent, whereas in fact there was quite a lot of research on the correlation of
those. Assuming the inexistence of a fact (as Leontief seems to have done) is not
enough to validate a hypothesis. Later on, Frisch goes through the implication of
some of the conclusions Leontief reaches in the earlier paper. Finally, Frisch
concludes, Leontief’s paper did not bring any further valid result, besides that his
analysis is mistaken and fails to prove that Frisch’s work is incorrect (p. 755).
Leontief replies in the paper “More Pitfalls in Demand and Supply Curve Analysis:
A Final Word” in the same issue of The Quarterly Journal of Economics, Vol . 48, No.
4 (August, 1934), pp. 755-759; he begins to examine the theoretical implications of
the interdependence of the shifts of the supply and demand curves: the cases of
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pure demand or supply shifts would be impossible (p. 756). Moreover, Leontief
charges, Frisch fails to single out cases where empirical data contradicts his
hypothesis.
Jacob Marschak -at that time at the Universisty of Oxford- intervenes in the
discussion with “More Pitfalls in Demand and Supply Curve Analysis: Some
Comments” in the same issue of The Quarterly Journal of Economics, Vol . 48, No. 4
(August, 1934), pp. 759-766. Here Prof. Marschak begins by explaining the
theoretical environment in which this discussion took place. First of all the
statistical research on price theory was not as meticulous as the theoretical one,
then theoretical researchers had to adjust the data in order to isolate the different
sources of variations in the shape of the curves. Leontief attempted to derive
method to eliminate time-shifts assuming they are of random nature. Frisch
introduced notions to Leontief’s method which enabled him to develop E.
Working’s statements (1927) and simplify the latter method. Marschak continues
explaining Leontief’s method using Frisch’s terminology, finding the points of
controversy and the theoretical grounds of the discussion and although Marschak
acknowledges Leontief’s method value, but points out that the conclusions and
implications derived from the analysis are mistaken.
2. - Papers on applied research.
In 1933 Leontief published “The Use of Indifference Curves in the Analysis of
Foreign Trade” in the Quarterly Journal of Economics (Vol. 47 No. 3 pp. 493-503).
This article suggests ways to study international trade using indifference curves as
theoretical tools as “… had been used by Marshall, Edgeworth or Pareto” (p. 493).
The suggestion is advance theoretical discussion making use of such devices,
instead of numerical examples, which would be more cumbersome. Leontief
considers diagrams useful tools to disclose the relationships between national and
international equilibrium and shows how trade between two countries exchanging
two commodities can be plotted in a two-dimensional diagram and how
equilibrium is attained under different circumstances, including changing relative
prices and the terms of trade. The paper is written in a language and style that
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assumes the reader is familiar with indifference diagrams in the neoclassical
consumer theory, as well as with the neoclassical theory of international trade, so
much that there is no explanation of either. Knowledge of the former also assumes
familiarity with the theory of utility and demand in order to follow the argument, it
is also required that the reader has more than an elementary grasp on the
neoclassical production theory, which is assimilated to the indifference graph. In
the end of the article our author suggests ways to include in the analysis further
commodities and countries, capital movements and transfer problems and even
monetary aspects of international trade. All those extensions would be feasible
using indifference curves, changing or extending the dimensions of the diagrams.
Professor Leontief of Harvard University published the article “Price-Quantity
Variations in Business Cycles” in The Review of Economics and Statistics Vol. 17, No.
4, May, 1935, pp. 21-27. As we learn in the publication itself, this is a result of a
long research which he had started at the NBER and continued at Harvard
University under a grant by the Harvard University Committee on Research in the
Social Sciences to continue that project.
The paper deals with the construction of supply and demand curves using
statistical data, in connection to the study of price and quantity variations.
Apparently at that time empirical and statistical price analysis was concerned with
finding the shapes of those functions, which seemed to work according to the
theory for agricultural commodities, but that was not so when applied to industrial
products. Leontief cites Professor Henry Ludwell Moore (but no exact quotation
appears in the text) who wrote among other books Economic Cycles: Their Law and
Cause, New York: The Macmillan Company (1914) and Forecasting the Yield & the
Price of Cotton, New York: The MacMillan Company (1917). Professor Moore had
been a student of Menger and Walras in Europe and attempted an empirical
examination of the marginalist propositions, particularly he tried to derive
statistically demand curves, as well as investigating the connections between
business cycles and equilibrium theory and in his 1929 Synthetic Economics
(1929), Moore attempted to estimate Walras’ general equilibrium system
(http://cepa.newschool.edu/het/profiles/moore.htm). Professor Moore concluded
7
that both general prices cycles (by virtue of agricultural supply) and the business
cycles were driven by rainfall cycles (Moore, 1914: p. 124).
Leontief acknowledges that in spite of theoretical expectations (from a partial
equilibrium viewpoint) that supply and demand are independent, all parts of the
economic system are interrelated3, as any theory on the business cycle would state
and thus as stated in footnote 3 (p. 21) any attempt to approach the analysis of a
particular market from a partial equilibrium perspective is doomed to failure.
Nevertheless the complexities of the general equilibrium model are such that it
would not be possible to fill the Walrasian supply and demand functions with
statistical data. Yet Leontief analyses the behaviour of price and quantity of cotton
and pig iron in the United States for a period raging from 1880 to 1923 and 1926
(for different variables) and comes to the conclusion that the price quantity
patterns of pig iron are connected with long “trend cycles”, while the cotton-textile
production had been independent of the general economic development trends, for
which the structural position of this industry changed.
Interestingly, one of the few authors that Leontief mentions and quotes extensively
is Arthur Burns, from whose book Production Trends in the United States since 1870
(National Bureau of Economic Research, New York, 1934) Leontief acknowledges
taking some data to carry on his analysis on the pig iron behaviour. Burns is one of
the academics in the US studying the business cycle at that time and would later
take public office (http://cepa.newschool.edu/het/profiles/burns.htm).
The third paper Leontief published in English between 1932 and 1938 dealing
with methodological criticism is “Composite Commodities and the Problem of
Index Numbers” in Econometrica Vol. 4 No. 1 (January, 1936) pp. 39-59. Here again
Leontief expresses his interest in the development of quantitative analysis in
economics, as well as his interest to study supply and demand functions. Besides
the problem of index numbers, this article deals mainly with the treatment of
composite commodities, which pose practical problems when they are
According to Marschak (1934), this is an assumption Leontief advances in the controversy with R.
Frisch on the construction of supply and demand curves.
3
8
encountered in empirical work and the construction of statistical databases, for
instance, those concerned with measuring quantities, prices and utility, among
others. Leontief begs the attention of the economists to these problems, which are
normally left to the statistician. Apparently at the time there was a vivid discussion
about index numbers and also at the NBER, the institution that housed Leontief at
arrival in the U.S., which was founded by Wesley C. Mitchell, an influential
researcher on the index number issues, as well as on the business cycle. The study
of price indices was therefore a prominent part of the measurement activities of
the Bureau (Benzhaf, 2004). Besides, index number contributions can also be
found in contemporary European publications as well; for example, John M. Keynes
includes a survey on the discussion on index numbers in Chapter VIII of his A
Treatise of Money. A Pure Theory of Money, first published in 1930; also G. Harbeler
produced in 1927 his Der Sinn der Index-Zahlen, Tübingen (The Meaning of the
Index-Number) and in 1935 “Composite Commodities and the Problem of Index
Numbers” by Hans Staehle appeared in the Review of Economic Studies (Vol. 2 No.
3, June, pp. 163-188). This author published the book The International
Comparison of Food Costs. A study of Certain Problems Connected with the Making of
Index Numbers (International Labour Office Studies and Reports, Series N, No. 20,
1934), as well. Arthur Bowly, the professor of the London School of Economics
commented this publication in 1935 in The Economic Journal Vol. 45.
Leontief claims to have completed his paper earlier and communicated to
Schumpeter’s Discussion Group at Harvard University in the autumn of 1933; in
1935 it was presented at the meeting of the Econometric Society. Nevertheless in
the same footnote Leontief recognises that his paper is similar to that by H. Saehle,
(up to sharing the title). It is known that the latter was interested in the
comparison of standards of living between different social groups within one
country or between similar groups in different countries, as well as the relative
purchasing power of different currencies, among other subjects (Carré, 1961).
The index number discussion is related to the problem of maintaining the utility
fixed for a given individual (or individuals with identical tastes) under different
price regimes. Thus the index number can be written as a ratio of two expenditure
9
functions with identical utility level (u*) and different price levels (p1, p2): E1(p1,
u*)/E2(p2, u*).
This approach is attributed to Alexander Alexandrovich Konüs (Banzhaf, 2004),
who worked at the Institute of Conjuncture in Moscow, founded by Nikolai
Kondratief as a center for the study of business cycles in 1923, where also E.
Slustky worked for a while as well (Diewert, 1993). One of the problems
approached by the latter is also the effects on demand when prices change (Mas
Colell, Whinston and Green, 1993), although Slutsky’s problem is more complex,
since it might be about a change in relative prices, which also imply a change in
income and the index number problem is only concerned with changes in the
general price system. One of the assumptions in the theory is that demand is
homogeneous in prices: if they change, demand remains intact.
In the first sections of article Leontief remains close to Keynes’ survey on the
index number discussion (Keynes 1930) and later discusses the two formulas that
Keynes picks as “… theoretical and practically eligible for use in the measurement
of composite prices…” (p. 46); later on proceeds to analyse them critically, finding
their weaknesses and possible applications, as well as connections with other
theoretical and empirical discussions. Perhaps the interesting element in respect
to the purpose of this paper is noting the familiarity that Leontief shows to have
with the discussion and the thoroughness displayed to analyse the issues that
concern the piece of work.
Another piece of critical survey on other economists work is that developed in
“Implicit Theorizing: A Methodological Criticism of the Neo-Cambridge School”,
published in the Quarterly Journal of Economics Vol. 51 No. 2 (February, 1937) pp.
337-351. This is an interesting critical work against the theorizing method of the
Cambridge School of Economics, although Lionel Robbins from the University of
London is also mentioned as a practitioner of those methods that deserve such an
article of analysis4. First of all, Leontief states that a comparison between the NeoLionel Robbins published An Essay on the Nature and Significance of Economic Science. Macmillan
and Company Limited. London, in 1932.
4
10
Cambridge and the orthodox theory should be made on methodological grounds,
rather than on the discussion concerning theoretical issues, such as the equality
between savings and investment or the significance of the multiplier (p. 337). In
the end both schools of thought would agree on the phenomena to be studied:
economic reality of common experience, as well as on the point of departure and
the goals of analysis. Differences would lie on the intermediate path.
The correct research procedure should reduce the chances of inconsistency and
logical mistakes to the minimum. It is not, then a matter of picking “the correct”
evidence or the truth content of any theoretical statement, but rather the problem
is that of picking the right method of proof. The logical pattern of theoretical
analysis used by Cambridge economists is liable to increase the danger of
theoretical errors and fallacies (p. 339).
Apparently Leontief locates the most salient characteristic of the Cambridge
method of analysis on a peculiar use of definitions (p. 339). Leontief postulates the
importance of an axiomatic construction of the theory, deducting theorems from
basic postulates and definitions and warns against the introduction of new
concepts and definitions at intermediate stages of that construction process, unless
the analyst is skilful enough as to avoid formal inconsistencies and logical
mistakes. Often implicit definitions are introduced as well as implicit theorems
containing implicitly defined terms which are taken as solutions to the originally
posed problem, which is of course a mistake leading to false conclusions.
Apparently however, this is a common mistake, according to Leontief and the
practitioners that use implicit solutions seldom offer explicit interpretations of
those short-cut solutions.
On the contrary, Leontief states, within the orthodox theory framework all
definitions are explicit and unsolved problems cannot be hided (p. 344). It is thus
possible to study how theory advances from its basic foundations. The implicit
theories, however often offer propositions that have no relations whatsoever with
their theoretical bases.
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As an example of that short-cut reasoning Leontief proposes the concept of
“Corrected Units”, by Joan Robinson, in her Economics of Imperfect Competition
(1933) p. 332, which herself corrected in her article “Euler’s Theorem and the
Problem of Distribution” (1934). Another example of those implicit solutions is
Keynes’ (1936) definition of “labour units” and “wage units”, as well as “aggregate
demand” and “aggregate supply” in The General Theory of Employment, Interest and
Money. Richard Kahn defines also the “ideal output” in “Some Notes on Ideal
Output” (The Economic Journal Vol. 45 No. 177 pp. 1-35) assuming implicitly that
individuals show identical marginal utility for money and then proceeding with his
argument in such a way that the whole concept of “ideal output” is in Leontief’s
eyes, indefensible.
Hicks proposed the concept of “elasticity of substitution” in his Theory of Wages,
London: Macmillan, 1932, which caused a vivid controversy (Machlup, 1935) about
which Leontief refers the existence of over twenty published comments and papers
by eleven authors (both orthodox and from Cambridge) and the puzzlement of the
author before the proposed concept (Hicks, 1936)5. Hicks’, being a neoclassical
economist, is nevertheless a practitioner of the (English?) short-cut method of
analysis and when explaining himself in the latter paper, he continues to introduce
new implicit definitions.
At the end of the article Leontief attempts to make it clear that even if he chose
examples of this malpractice mainly from Cambridge economists, the error is not
exclusive of them, there is even the Austrian concept of “period of production” and
the Marxist one of “socially necessary labour”. These however, are occasional
lapses, rather than a major analytical weapon that has become in the hands of “... a
now conspicuous group of theorists ...” (p. 351).
Theoretical discussions
Hicks R.(1936) Distribution and Economic Progress in Review of Economic Studies Vol. 4 No. 1 October 1936
pp.
5
12
The article “Interest on Capital and Distribution: A Problem in the Theory of
Marginal Productivity” appeared in the Quarterly Journal of Economics Vol. 49, No.
1 (November, 1934) pp. 147-161; it aims at discussing the theory of marginal
productivity in relation to the rate of interest and distribution. The paper also
criticises the book Theory of Wages by Paul H. Douglas (1934), the co-author of the
well known Cobb-Douglas production function. Indeed, together with H. L. Moore
(see above), among others, Douglas worked on the statistical estimation of various
concepts of the neoclassical theory, in particular the marginal productivity theory,
out
of
which
he
would
formulate
the
commented
book
(http://cepa.newschool.edu/het/profiles/douglas.htm, Clark, 2008).
Leontief presents a meticulous discussion on the neoclassical theory of production
in a competitive environment and then concludes that on the one hand capital and
labour are factors of production, which can be measured in physical terms and on
the other, if “interest” and “wages”6 are their prices, these variables should equal
the factorial marginal productivity, as Douglas and the theory conclude. It is not
easy though to measure these production factors, as they are not homogeneous7.
Then, Leontief wonders about what capital is and, as later on many other theorists
have concluded, Leontief states that this is not a precise concept, as it includes first
of all fixed capital and in a wider concept, at which Douglas dwells: capital should
include intermediate inputs as well, but then, why would it not include the wage
fund, whence labour should naturally be paid “wages”, while, the wage fund, as a
part of capital, should earn interest (p. 149). Such remuneration is not included in
either Douglas’ nor Clark’s production functions -Leontief notices. The production
function determines labour productivity and either that equals wages or wagefund interest, but not both. Further, if the marginal productivity of capital
determines interest, the price of machinery remains unexplained, because the
wage-fund has been excluded from capital. Thus the whole theory of interest is not
acceptable and more, Douglas’ position is not clear in this respect.
Leontief however offers a solution that “... emerges from the writings of Jevons,
Bohm-Bawerk, Wicksel and their successors... the problem in hand can be
Quotation marks in the original
The controversies on the nature of capital have been extensive and have had various origins (see
Robinson J., 1953; Sraffa, 1926, Monza, 19)
6
7
13
narrowed down to the question: how does a firm adjust itself to a given rate of
interest?” (p. 150). Leontief suggest to approach the issue from the perspective of
production, which is a transforming process that takes time and where labour, raw
materials and machinery enter in a constant stream. Time must be taken into
account in the production function and the entrepreneur must advance lump sums
before starting production. Then Leontief agrees with Frank W. Taussig, who
attempted to include the theory of the wages fund within mainstream economics,
and who also proposed that the relative prices of production factors are equal to
their discounted marginal productivities. Moreover, the interest rate is
proportional to the marginal time productivities of the factors “discounted” by the
values of the current expenditures for each factor. Nevertheless, if production time
is constant, the marginal productivity of the turnover periods of each factor
becomes senseless and, for two factors, there will be at least three unknowns: the
price for each factor and the interest rate. Then a distinction between the prices
and the interest rate is not possible, unless a capital supply function was
obtainable.
In Douglas’ theory, however, it would seem the turnover of the wage fund is
infinitely fast and thus its interest rate is null or, alternatively, as time factors are
constant, time derivatives become zero. In any case, according to this author, time
does not influence production, and does not accept the existence of a wages fund.
Thus, Leontief reminds the reader, Douglas differs from Jevons, Bohm-Bawerk,
Wicksell and also from Marx and Mill. More important, Leontief concludes Douglas’
theory is unrealistic, even if he claims to derive it from statistical evidence.
In November 1936 Leontief published “The Fundamental Assumption of Mr
Keynes’ Monetary Theory of Unemployment” in the Quarterly Journal of Economics
(Vol. 51 No. 1 pp. 192-197), commenting on Keynes’ The General Theory of
Employment, Interest and Money, that appeared in February. This paper’s purpose
is to examine a few basic assumptions that make Keynes’ theory divergent with
that referred to by Leontief as the “orthodox classical” scheme”, which incidentally
seems to know quite deeply. The main difference between those, we read in the
first paragraph, resides in the shape of the labour supply, which by all means,
14
involves a more general theoretical discussion. Leontief proceeds to examine the
meaning of the discussion posed by Keynes to conclude that there are a number of
open questions unanswered in the General Theory (pp. 196 and 197).
Leontief reminds the reader about the orthodox assumption that the system is
homogeneous of degree zero in prices, that is, if all prices (the price vector) are
multiplied by some number (scalar), every real individual supply and demand for
any commodity remains unchanged. According to Leontief, Keynes does not seem
to accept this assumption, together with that of instantaneous and frictionless
adjustment process of the economic system when any monetary phenomena
happens; while the latter appears to be reasonable to Leontief and is not really
accepted by orthodox theorists, the former assumptions has further consequences
in Keynes’ analysis, because money is no longer a neutral factor and its quantity
becomes an argument in every supply and demand function. In short, if money
supply fails to be that of equilibrium, unemployment and disequilibrium appear in
other markets. Thus Keynes postulates a monetary theory of unemployment as a
result of the non-homogeneity condition. Leontief clearly stands from the
quantitative monetary theory and therefore is at odds with the conclusions of The
General Theory; the disagreement goes further, though.
Leontief let the reader learn that he considers Keynes’ analysis on the labour
supply as unsatisfactory as is his method of analysis and that of attack the
orthodox theory: “… The most effective way of disputing their (orthodox) theory
would be that of discrediting these initial assumptions. Mr Keynes has not resorted
to this method of attack but has attempted to show directly that the contested
postulate (the homogeneity condition) itself is at variance with facts… The nonhomogeneity of the labor (sic) supply function would be proven if, under these
conditions and in absence of friction and time lags, the amount of labor (sic)
employed would change (…) with the variation of the price level … No
demonstration of this kind is given in the pages of the General Theory of
Unemployment … Mr Keynes’ assault upon the fundamental assumption of the
“orthodox” economic theory seems to have missed the target.” (p. 196). The attack
15
against the novel book continues for another page and concludes in page 197 that
“… it appears that Mr. Keynes’ case has yet to be proven.”
The final article by Leontief surveyed in this paper is “The Significance of Marxian
Economics for Present-Day Economic Theory” included in The American Economic
Review Vol. 28 No. 1, Supplement, Papers and Proceedings of the Fiftieth Annual
Meeting of the American Economic Association pp. 1-9 in March 1938. This is a
somewhat surprising publication since most of the previous ones published in the
1930’s by W. Leontief relate to the neoclassical school of thought, even if they
might be critical of some positions. In any case, our author in the paper in question
shows a thorough understanding of the works by Marx and values them as a
source of methodological learning, although, once again, our author is rather
critical towards Marx from a rather neoclassical position.
The paper begins with Marx’s charge of fetishism to the “vulgar” or neoclassical
economists in respect to the orthodox theory of prices. This theory, however,
Leontief argues, is in accordance with the agents’ (consumers and producers)
perception of the price and markets mechanisms “... He (the theorists) explains
their (agents’) actions in terms of their own beliefs and fetishes.” (p. 2)
Nevertheless, Leontief reminds that there are other issues in the (neoclassical)
theory that explain phenomena assuming the ignorance of the individuals
involved. However the important question concerns the meaning of fetishism. That
question however is left open in the paper, but it is suggested that Marx’s
objections to include conscious reactions of individual entrepreneurs and
households to explain prices should be taken as erroneous.
Leontief would nevertheless rescue Marx’s theory of crisis and his explanation of
the business cycles. This is based on the theory of underinvestment and the law of
falling rate of profits on the one hand and on the theory of underconsumption, on
the other. Yet Leontief praises the Marxian schemes of capital reproduction as the
keystone of the relevance of this author for the “modern” theory.
16
Leontief fails to quote, but seems to recall Löewe’s explanation of the cycle (Löewe,
1926) as well as the contributions of the Kiel school that have been characterised
as “structural theories of growth and the business cycle”, according to which the
relationships between economic sectors and their changes give rise to growth and
cycles (http: cepa.newschool.edu/het/school/kiel.htm). Leontief argues that the
complexity and the non linearity of the economic system make it impossible to
decompose any commodity into its constituent parts along a time succession of
stages as suggested by Bohm-Bawerk.
According to Leontief, perhaps the most salient feature of Marx’s theory however,
is its ability to analyse the capitalist economy and predict its future. Together with
Lange (1935), Leontief reminds the reader that such ability stems from the
methodology employed, which includes the use of raw data and observation of
facts. That comprises the institutional or historical environment in which
phenomena happen, as well as the interrelations between theoretical propositions.
As opposed to “modern economic theory”, which is often a derivative from other
author’s propositions and theories, Marxian theory in the hands of its originator is
about theorizing form direct observation of facts and characters. It is then most
informative about capitalism than other approaches. In a word, the strength of the
Marxian economics lies thus in its realistic empirical knowledge of the capitalist
system. Nevertheless Leontief is not ready to adopt it as the guiding theoretical
framework.
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