Leontief, Wassily 1905-1999
Wassily Leontief was born into an academic family on August 5, 1905, in Saint Petersburg, Russia. He earned his undergraduate degree from the University of Saint Petersburg. Upon completing his doctoral dissertation at the University of Berlin in 1928, Leontief started his professional life at the Institute of World Economics at the University of Kiel. He moved to the United States to work for the National Bureau of Economic Research in 1931 and then Harvard University in 1932. He served as the director of the Harvard University Research Project until 1973. Leontief left Harvard for New York University in 1975 to found the Institute for Economic Analysis. He was awarded the Nobel Prize in economic sciences in 1973.
Leontief ’s greatest achievement was the creation of a new area of economics, namely input-output analysis. In 1941 he published the classic Structure of American Economy, which laid the foundation for what is now known as a social accounting matrix. Such a matrix gives a snapshot of all transactions in an economy between and within producing sectors, households, factors of productions, institutions, and consumers at a level of disaggregation permissible by the availability of data.
Leontief was one of the first to discuss the issue of simultaneous estimation of demand and supply curves and the problems of identification. His work on aggregation and index numbers (1936) has also had a lasting impact. Leontief was one of the early contributors to the theory of aggregation in production relations (1947). He derived conditions under which one can identify structural mathematical relationships from reduced-form equations. His empirical research on the pattern of trade in the United States (1953) led to the well-known Leontief paradox. Later in life, he wrote on a number of diverse subjects, including the environment, population growth, automation, and defense.
The common thread in all his works was his love of general equilibrium analysis and his attempt to provide an empirical foundation to the theoretical work of the French economist Léon Walras (1834–1910). Leontief went well beyond that and brought the role of intermediate inputs to the forefront.
Input-output analysis was developed on the premise that different sectors of production in an economy are interconnected via production relations. One of the fundamental concepts in input-output analysis is the distinction between direct and indirect input requirements. This distinction led to the Leontief multiplier, which gives the total inputs required to produce a given level of final use as the sum of direct requirements and an infinite series (first round, second round, etc.) of indirect requirements. A sector can be more labor intensive (or, more polluting) than another in terms of the direct coefficient, but less so in terms of the total coefficient.
The Heckscher-Ohlin theorem on international trade suggests that a country should export goods that use more intensely the factor of production in which the country is relatively abundant; a country should import goods that use more intensely the factor of production in which the country is relatively less abundant. For example, China, which is relatively more abundant in labor, should export labor-intensive goods, whereas the United States, which has relatively more capital, should export capital-intensive goods. Using a 1947 input-output table for the United States, Leontief (1953) found an apparent contradiction between reality and the predictions of the Heckscher-Ohlin theorem. Leontief showed that the United States was apparently exporting labor-intensive goods. The Leontief paradox arises if one uses total coefficients (rather than the direct coefficients) in deriving labor and capital requirements. Direct coefficients are defined per unit of output, but the total coefficients are defined per unit of final use. Leontief made this distinction very clear. He lists the two as “requirements per million dollars of output” and “requirements per million dollars of final output.” He defined capital and labor requirements for competitive imports as those that would be required if the imports were replaced by domestic production. Leontief found that capital and labor (“man” years) per million dollars of U.S. exports in 1947 were 2,550,780 and 182,313 respectively (in U.S. dollars and 1947 prices). The corresponding figures for competitive imports were 3,091,339 and 170,004 respectively. Thus the capital-labor ratio for a million dollars worth of exports is smaller than the capital-labor ratio for a million dollars worth of competitive imports.
The similarity between the Marxian labor theory of value and input-output analysis has led some to speculate that Leontief was influenced by Karl Marx (Bailey 1994). Perhaps Leontief was influenced indirectly by Marx, but it is more likely that both Marx and Leontief had a common source of inspiration in the French physiocrat François Quesnay (1694–1774), who considered a three-way classification of the French economy—farmers, manufacturers, and landowners.
SEE ALSO Input-Output Matrix; Social Accounting Matrix
Bailey, R. E. 1994. A Voyage Round Economics: The New Palgrave Dictionaries of Economics, and Money, and Finance. Economic Journal 104: 660–675.
Leontief, Wassily. 1936. Composite Commodities and the Problem of Index Numbers. Econometrica 4 (1): 39–59.
Leontief, Wassily. 1941. The Structure of American Economy, 1919–1929: An Empirical Application of Equilibrium Analysis. Cambridge, MA: Harvard University Press.
Leontief, Wassily. 1947. Introduction to a Theory of the Internal Structure of Functional Relationships. Econometrica 15 (4): 361–373.
In 1973 Wassily Leontief, the Russian-born U.S. economist, received the Nobel Prize in economic sciences "for the development of the input-output method and for its application to important economic problems." Input-output analysis belongs to that branch of economics pioneered by nineteenth century French economist, Leon Walras. This branch of economics is known as general equilibrium theory, focusing on examining the interdependence of economic forces representing the economy as a whole. The first major practical policy applications of Leontief's input-output analysis were made by the U.S. Bureau of Labor Statistics, first in 1939 and then again in 1947. His model was used to predict how total and partial sector employment in the United States would change as the economy of the United States shifted from peace to war and back again.
Wassily Leontief was born in St. Petersburg, Russia, in August of 1906. His father, Wassily Sr., was also an economist. The years of Leontief's childhood were at a time of great social and political upheaval in Russia. He was eight years old when World War I (1914–1918) began and he experienced firsthand the turmoil of the Russian revolution. In 1921 he entered the University of Leningrad (known as St. Petersburg prior to the Russian revolution), where he studied philosophy, sociology, and economics. He graduated in 1925, continuing his education afterwards at the University of Berlin, in Germany. In 1928, at age 22, he received his doctorate in economics.
After graduating he spent a year in Nanking, China, as an economic adviser to the Chinese Ministry of Railroads. In 1931 Leontief emigrated to the United States, coming to America during the Great Depression (1929–1939), where he joined the National Bureau of Economics Research. In 1932 he married the poet Estelle Marks.
In 1931 Leontief began a long tenure as an instructor of economics at prestigious Harvard University. He was promoted to a full professor in 1946. Two years later he founded the Harvard Economic Research Project, a center for what he called "input-output analysis." He directed this project until its closing in 1973.
Leontief had published his first paper on input-output analysis in 1936. His early work was analytical but not mathematical. He criticized attempts to apply advanced mathematical theories to explain world economic problems. Instead, he believed theories were only useful if they could be implemented and observed. He amplified this view with the publication of his first book in 1941, The Structure of the American Economy, 1919–1929: An Empirical Application of Equilibrium Analysis. The very basic thinking of this book described his method of analyzing economic input and output, the basis of his reputation as an outstanding economic innovator. Input-output method is now a standard economic projection tool used in countries and corporations around the world.
His system came slowly to a world crippled by a Great Depression, but as World War II (1939–1945) began, there was new interest in testing the applications of Leontief's analysis. It was applied first by the U.S. Bureau of Labor Statistics, which examined the Leontief model for predicting how employment changes in the country would change the overall economy. By 1957, in less than 10 years, Leontief's method had become a basic ingredient in the national accounting systems of most countries in the world, both capitalist and socialist.
The input-output system developed by Leontief focuses on the fact that economic relationships involving complex interdependence came to represent a picture of the economy as a whole. Prior to Leontief, the field of economics studied mainstream economics focusing only on a few variables. For example, an economist might have looked at how a tax on imported oil might effect the demand for gasoline, while ignoring how the same tax might effect the steel industry. A partial analysis led to seriously misleading conclusions, especially if the industry or changes being studied were expansive.
Leontief's brilliant contribution to economics, the heart of his input-output method, involved a multiple transactions table, dividing the economy into many sectors. Essentially, by increasing the number of sectors being scrutinized and by cross-referencing them on a grid, Leontief was able to come up with the "Leontief inverse," revealing what each sector being studied required to produce one additional dollar's worth of output.
The economic significance of Leontief's method was threefold. First, improvements in international data collection had improved enormously in recent decades because Leontief's system required enormous specific data. Thus the examination of this data revealed the workings of any economy in great detail, far more than in the past. Finally, once demands for goods were specified or projected into the future, Leontief's system could be used for policy analysis. Therefore, the Leontief analysis showed both directly and indirectly what each sector of the economy needed in input in order to increase economic output.
The Leontief system improved as data-gathering improved with the use of computers. He was able to increase the number of economic sectors he studied, because the computer had made the sorting of complex data feasible to analyze.
Input-output analysis had become an essential technique in most economic planning and government budgeting, both internationally and nationally. Leontief's success in applying the input-output model of economic analysis resulted largely from his outstanding ability as a general economist. He was interested in several fields: international trade, monopoly issues, and econometrics—the measuring of the specific strength of an economy. Leontief opposed theorizing about economics, and instead said: "What counts is the relevance of the basic material premises, the capability to exploit effectively all factual data at hand, and to identify promising directions." Leontief's practical and empirical approach, causing modern economics to be ever more scientific, had put him clearly in a class as a major contributor to twentieth century economic science.
Wassily Leontief died in February 1999, at the age of 92.
Fisher, Franklin M., and Karl Shell. Economic Analysis of Production Price Indexes. Cambridge: Cambridge University Press, 1998.
Harmston, Floyd K., and Richard E. Land. Application of an Input-Output Framework to a Community Economic System. Columbia: University of Missouri Press, 1967.
Koehler, Gary J., Andrew B. Whinston, and Gordon P. Wright. Optimization Over Leontief Substitution Systems. Amsterdam: North Holland Pub., Co., 1975.