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Why should we study Leontief? – Developing Economics

What is at stake?

Let’s start with a story. A friend asked me what my favourite genre of fiction is. I replied: microeconomics. If you get the joke, you would be laughing. Otherwise, you would be wondering why I said that. Well, that’s the truth. Take any standard economics textbook, we find ourselves in the fictional worlds of ‘let’s assume there are two goods’ and ‘if we move from point A to B’. It is true and well understood that these assumptions and imaginations are meant to break down complex phenomena. However, this entry point of supply and demand curves with the endless possibilities of hypothetical scenarios is not the only way to study/introduce economics. In this regard, I put forth the relevance of studying Wassily Leontief’s work and argue that it adds pluralism to economics education at least in three aspects: 1) methodology (philosophical and mathematical approach), 2) the unit of analysis (micro to macro and in between), and 3) ideas at the margins (reading thinkers like Piero Sraffa and other classical political economists). Now we shall deal with these three themes individually.

Today, let’s not talk about change!

Leontief was highly critical of the dominance of mathematics in the economics field and his words from his presidential address at the eighty-third meeting of The American Economic Association, in 1970 are still relevant to an extent in today’s context:

“Professional journals have opened wide their pages to papers written in mathematical  language; colleges train aspiring young economists to use of this language; graduate schools require its knowledge and reward its use.” (Leontief 1971, p. 2)

One of the reasons behind these criticisms is the irrelevance and inadequacy of these mathematical models to real-world problems. The formal properties of these models are explained by a step-by-step derivation that often runs into several pages, but the empirical validity of the bizarre assumptions behind these modes is null.

Leontief was very critical of “implicit theorising”, mathematical models, and econometric analysis, and believed that economic analysis should be based on the observed facts of the economy.

“The shift from casual empiricism that dominates much of today’s econometric work to systematic large-scale factual analysis will not be easy. To start with, it will require a sharp increase in the annual appropriation for Federal Statistical Agencies.” (Leontief 1971, p. 5)

Students are introduced to economics with the hypothetical worlds of supply and demand curves and the use of calculus to study these changes and shifts is necessary. As Sraffa points out in the preface of his revolutionary book Production of Commodities by Means of Commodities (PCMC): “The marginal approach requires attention to be focused on change, for without change either in the scale of an industry or in the ‘proportions of the factors of the production’ there can be neither marginal product nor marginal cost.”  (Sraffa 1960, p. v)

And the subject matter is taught with the notions of supply and demand as if this is the only entry point to understanding the economic phenomenon and introducing economics to students. Further, needless to mention how this framework is accepted as universal truth, irrespective of the context, that students of economics rarely question its validity and relevance. In Aspromourgos’s words: “Indeed that representation of SAD [supply-and-demand curves] became so widely accepted that it came almost to be regarded as mere common sense that any economic fool would know and accept.” (Aspromourgos 2018, p. 2)

To sum up, by studying Leontief we add pluralism in methodology on two fronts viz. philosophical and mathematical. Philosophical in the sense that we become critical of the fact that marginalist economics relies on hypothetical scenarios and recognise that it’s possible to study economic phenomena without talking about change. In fact, scholars like Sraffa and Leontief help us understand alternative notions of demand and supply contributing to the holistic learning of the students. For instance, in the Spirit of Sraffa’s critique of marginalist theory, Krishna Bharadwaj builds an alternative approach that is “free from the need to employ marginal magnitudes and does not require hypothetical or potential changes to determine the resting position of the economic variables (Marcuzzo 2014, p. 49).” Further, to study the change in the set-up of marginalist economics, we are predominantly trained in a particular kind of mathematics which is calculus. However, once we give equal importance to other approaches like input-output analysis and the theoretical models developed by others like Sraffa and Marx, it is inevitable that we introduce students to alternative ways of thinking in mathematics along the lines of matrix algebra and other methods that don’t rely on calculus and optimization. Thus, adding pluralism to economics education on the mathematical front.

I-O analysis: a must-visit on your route to macroeconomics from microeconomics

The core principle of Leontief’s economic analysis is the idea/concept of understanding the ‘economy as a whole’ and recognising the interdependence between different parts of the economy. And this understanding of inter-industrial relationships is at the heart of the theoretical model behind the input-output analysis. Further, the practical applications of the input-output analysis help us study the direct and indirect effects of changes in demand in one sector and their impact on employment levels in various sectors of the economy. In his recent textbook Macroeconomics: An Introduction, Thomas (2022) highlights the importance of understanding the economy through a ‘meso’ approach like the input-output analysis.

Leontief’s position on policy and planning is very different from other economists of his time. Leontief argues that the role of an economist is to point out the different consequences of the alternative policies instead of following a general objective welfare function that gives precise answers and restricts the elaboration of alternative scenarios. Therefore, Leontief views the input-output approach as the logical way to go about economic policy and planning as it brings detailed knowledge of the structural characteristics of different sectors of the economy.

Here, I would like to highlight that while Leontief endorses and highlights the relevance of a ‘meso’ approach in economic analysis. He rejects the aggregate analysis in totality along with a dismal tone towards inferential statistics and econometrics. And rejects conventional fiscal and monetary policies as they rely on a “rather sketchy aggregative description and analysis of the economic system” (Leontief 1976, p. 7; as cited in Carret 2022, p. 12).

Anybody who was concerned with the practical application of econometric analysis, I think, is conscious of the fact that in a large number of instances, these aggregative measures are not very useful. Particularly in connection with many problems of policy-making and of economic planning of any kind, aggregative concepts are very limited in their application, because in this type of question we have to deal with concrete, separate industries, with individual prices, or at least outputs and prices of small commodity groups. (Leontief, 1949b: 274; as cited in Carret 2022, p. 8)

Why did Keynes refuse to publish Leontief’s PhD thesis?

The cost of focusing too much on the methods and courses catered around the dominant approach of marginal analysis is that students have no idea about the other thinkers who contributed to economic thought. In this light it is important to engage with Leontief’s work for two reasons: 1) Leontief’s work was always downplayed from a theoretical perspective and 2) Leontief’s work has certain interesting similarities with the classical political economists and Sraffa.

Leontief maintained a prominent position among government institutions as the input-output analysis was widely used for policy making. However, as Carret (2022) argues, academic economists lost interest in Leontief’s work. At best, Leontief was seen as an empirical economist, undermining his theoretical contributions. Often his work is presented as a “very crude, though useful” (Gilibert 1998, p. 41) version of the general equilibrium. And whenever the result of his analysis was inconsistent with conventional theory, the result was labelled as a ‘paradox’. Leontief submitted a revised version of his PhD thesis to the Economic Journal and the editor (Keynes) rejected it. While we don’t know the exact reasons behind the rejection, it is interesting to note that, in his PhD thesis Leontief argues for the substitution of the principle of circular flow for that of homo economicus as the cornerstone of economic theory. Further, his originality was continually called into question. On one hand, in the English-speaking countries, the input-output analysis was considered irrelevant to mainstream economics, and on the other hand, in the German and Russian-speaking countries, input-output analysis was seen as a descendant of Soviet statisticians and Quesnay’s Tableau.

Often it is incorrectly believed that ‘neoclassical’ economics is an intellectual advance from the previous thinkers broadly under the camp of classical political economy. However, Sraffa rejects this view in his book PCMC (1960) and revives the essence of classical political economy in his economic theory. Leontief is closely connected to both early thinkers of classical political economy and Sraffa. It is well documented that 1) the input-output analysis has classical political economy roots (see Kurz and Salvadori (2000)), 2) the fundamentals of classical political economy and Leontief’s analysis have similarities and differences in interesting ways (see Pressman (1998)), and 3) Leontief’s and Sraffa’s early work have interesting connections (see Kurz and Salvadori (2006)) and the later Leontief deviates to deal with the practical issues of input-output analysis.

To sum up, it is important to engage with Leontief’s work to understand why his contributions are ignored in academic space. Furthermore, by reading classical political economists, Leontief, and Sraffa, I believe that we add pluralism to the economic curriculum in an interesting way. Especially given that the entry points of Sraffa and Leontief, and the fundamentals of classical political economy are often in opposition to the dominant marginalist economic thought.

Towards a more pluralistic economics curriculum

A recent report, Pluralism in Economics Education, by Rethinking Economics India Network (REIN 2022) highlights the hegemony of ‘neoclassical’ economics in economics curriculum in India and proposes that a multiplicity of schools of thought is required to make the economic discipline more diverse. To this end, studying Leontief will add pluralism to economics education in India along the lines of the method, meso approach, and representation. Given the diversity of the Indian economy, the meso approach adopted in input-output analysis will be helpful in regional studies and policy making in line with the ‘structural’ features of the local economies.

To conclude, we do not have to be as dismissive of mainstream economics as Leontief. As students of economics, in the spirit of pluralism, it is important to have a holistic understanding of economic theory and that requires us to consciously break free from the shackles of marginalist perspectives. To this end, with all due respect to Leontief’s interest in economics discipline and economics education, the best we could do is to engage with Leontief’s work and understand the relevance of the input-output analysis and the reasons behind Leontief’s reluctance to see any point in inferential statistics and econometrics.

References

Carret, V. (2022). Understanding the Bitterness of Wassily Leontief: Intention and Reception of Input-Output Techniques, 1940s-1950s. Center for the History of Political Economy at Duke University Working Paper Series (2022).

Gilibert, G. (1998). Leontief, Wassily. In H. Kurz., & N. Salvadori (Eds.), The Elgar companion to classical economics (pp. 40-4). Cheltenham: Edward Elgar.

Kurz, H. D., & Salvadori, N. (2000). Classical Roots of input-output analysis: A short account of its long prehistory. Economic Systems Research, 12(2), 153-179.

Kurz, H., & Salvadori, N. (2006). Input–output analysis from a wider perspective: a comparison of the early works of Leontief and Sraffa. Economic Systems Research, 18(4), 373-390.

Leontief, W. (1971). Theoretical assumptions and non-observed facts. American Economic Review, 61(1), 1-7.

Leontief, W. (1991) The economy as a circular flow, Structural Change and Economic Dynamics, 2, 1991, pp. 177–212. English translation of parts of Leontief (1928) with an introduction by P. A. Samuelson.

Marcuzzo, M. C. (2014). On alternative notions of change and choice: Krishna Bharadwaj’s legacy. Cambridge journal of economics, 38(1), 49-62.

Pressman, S. (1998). Input-Output Analysis. In H. Kurz., & N. Salvadori (Eds.), The Elgar companion to classical economics (pp. 415-18). Cheltenham: Edward Elgar.

Rethinking Economics India Network, 2022. Pluralism in economics education: A review of undergraduate programmes in India. Curriculum Reform Project. New Delhi.

Sraffa, P. (1960). Production of commodities by means of commodities (Vol. 1). Cambridge: Cambridge University Press.

Thomas, A. M. (2021). Macroeconomics: an introduction. Cambridge University Press.

Tony Aspromourgos (2018): What Is Supply-and-Demand? The Marshallian Cross Versus Classical Economics, Review of Political Economy, DOI:10.1080/09538259.2018.1537646    

Thair Ahmad is a Teaching Fellow at Krea University, India. He finished his bachelor’s and master’s in economics at Azim Premji University, India. His areas of interest include history of economic thought, economic history, and development economics. He loves to tweet (thair_econ) about economics and politics.

Acknowledgements: Thank you to Alex Thomas, Ashwath R, and Nancy Devpura for their feedback and comments on this blog post..




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