1Leontief’s Input-Output (IO) model is concerned with the production of a basket of goods in economic systems of interdependent industries related through the exchange of such goods (Leontief, 1937a). The IO model is based on the concept of equilibrium, first as an accounting principle, since the bill of goods employed as inputs in every industry equals the market value of the produced output (each one produces one good) and, at the same time, each supplier’s income equals her production costs. The amount and value of each produced good are equal to its demand and every sector [2] makes null profits. Industries produce goods by means of produced (and non-produced) goods, in proportions determined by the technology used. One period later, a portion of that output (equal to or smaller than the total) re-enters the production sphere and the whole process is replicated. If quantitative proportions remain unchanged, so will prices (and vice versa). The economy follows a circular flow (Leontief, 1928), which is also an equilibrium model. Equilibrium in the second instance is also a result.

2Leontief’s writings are abundant, involving various subjects, ranging from economic theory (particularly in his earlier contributions) to applied exercises and essays (more abundant in later dates). Nevertheless, he rarely wrote about economic policy and was rather reserved with regards to extending motives of his applied works, which appeared as mere exercises of the IO model under different conditions. It is also known that Leontief worked with various government agencies in different countries, as well as in multilateral institutions (Noviello, 2013-2014). For example, he wrote extensively about the economic consequences of disarmament, mainly during the 1960s (see below), indicating his concern regarding the contemporary Cold War. He also wrote about the possible impacts of automation and computerisation of newer technologies on economic systems. Yet, his papers remain technical, using numerical results to demonstrate the feasibility of introducing new policies. It seems he was not arguing from a political stand, leaving that to others, to whom he provided quantitative measurements.

3This paper explores the concept of equilibrium on which the IO model is constructed, in contrast to some of Leontief’s contributions to economic policy discussion in three instances, in an effort to show how the author’s preoccupations evolved. First, a 1930s US government Relief Programme designed to address depression; second, his critical position with respect to Keynes’ theory of effective demand – which implies the need for economic policy – and third, some aspects of his contribution to the disarmament discussion since the 1940s.

1 – The circular flow [3]

4Leontief constructed three closely-related production models (1928, 1937a and 1944) in which every industry produces a homogeneous good, employing a homogeneous technology, and conversely, each good will be produced by one sector only. Industries exchange produced goods and buyers use them as inputs in their own productive processes, in proportions determined by the productive technology. Such relationships give way to technical coefficients that are a means to describe the interdependence between all the industries. Coefficients warrant the proportionality between inputs and outputs, so that the economic system can function in a decentralised fashion. Leontief (1927) quotes Cassel (1918) to define coefficients and considers fixed and variable coefficients alternately (like Walras, 1874), studying their effect on the circular flow (Leontief, 1928).

5The production process is repeated continuously in a circular flow, since a part (or the whole) of that output re-enters the productive sphere. Open systems also employ non-produced inputs. Both costs and outputs are associated with a price system, and therefore, the list of necessary goods to produce within one industry may also be regarded as its cost structure; its sum equals the income the producer will enjoy at output realisation in the market. The latter allows homogeneous firms (consolidated in industries) to purchase inputs and resume production. The model does not consider whether or not the system may grow, but in that case, every industry would expand at the same rate.

6In his equations of reproduction, Marx (1885) concluded that (among other causes), when productive sectors grow disproportionately, crises arise. This argument would also be used to explain the instability of the capitalist economy by the business cycle theory (e.g. Löwe, 1926). Leontief (1928), on the contrary, argues that relative prices result from the proportions in which commodities are exchanged and – thus – produced. He does not consider arising disproportions that the circular flow cannot deal with.

7Leontief (1928, 1937b, 1944) does not discuss the theory of value or the theory of distribution. In all three of his models productive factors are mere inputs, whose rewards are not an issue; they are just parts of production costs, while their unit prices are presumably set in the market. Inputs complement each another and – thus – are equally important in the production process; the absence of any one input makes production impossible. It is therefore difficult to justify that the value of a commodity is based on the use of any input in preference to any other. However, since “factors of production” – capital in particular – cannot be measured in a straightforward manner, marginal productivity is meaningless (Leontief, 1928, 1934a, 1937a), while the concept of scarcity is contradictory with a model of production of goods by means of produced commodities (Nivello, 2013-2014). Both ideas make Walrasian general equilibrium useless to “Leontievian” applied economics.

8The initial IO model (Leonief, 1937a) was focused on the interdependence of the various industries (parts), as constituents of the economic system. It is a closed system, in which the various types of final consumers (households, investors or capital goods consumers, and so on) are also “industries”, producing services, consumed by other suppliers. As a result, equilibrium is always warranted and there is no room for an analysis of effective demand failing to meet supply. The open IO model (Leontief, 1944) postulates equivalent equilibrium conditions. The data are the technical relationships between sectors and final demand variations will bring changes in the size of the economy, not in its proportions or in the equilibrium conditions. Circular flow is a flexible and strong base for understanding the functioning of the economic system.

9In the model, industries behave properly to ensure the system’s reproduction. There are no decision makers, and in any case, individual motivations become irrelevant. No questions are raised as to whether equilibrium results are desirable or whether alternative outcomes might exist. There is no central planner and there are no considerations on the social organisation that allows the economy to exist. Technologies are the keystone in sectoral interdependence and the latter to the working of the circular flow. The economy resembles an automatic machine. Economic policy cannot take place in such an environment.

2 – Helping the farmer

10In 1934 a group of academics at Harvard University published a manifesto with the aim of discussing the US government’s economic strategy for facing the economic crisis that began in 1929 (Brown, 1934). Samuelson (2015: 33) describes it as “… [a] ludicrous book by several Harvard professors …” It is in fact a collection of seven papers (each written by one author) and a collective introduction. Each essay is a comment on some aspect of a short-term Relief Programme that would eventually lead to the strategy known in the US history as the “New Deal”.

11The introduction describes the book as a guide to the ideas underlying the US economic policy that relied intensively on regulation and public intervention in various aspects. Among other statements, the authors claim they do not believe in the philosophy of XIX century individualism, but at the same time, they do not support the “progressive” positions that were fashionable at the time (socialist-oriented, perhaps?), and they also disapprove of the European fascist regimes. They state that they do not want to make a formal proposal for an alternative strategy; nevertheless, they also point out that, in their opinion, the Programme advocates contradictory and unsound propositions (Brown, 1934: IX-XII).

12Just to give a flavour of the manifesto, it is worth mentioning J. Schumpeter (1934), who leads the team and argues that depressions are concomitant to capitalism, just as booming periods are. Nothing can be done to avoid its cyclical trajectory; recovery follows depression, despite policies of any kind. If anything, depressions help to sustain long-term growth, destroying the old to allow the new. In a word, the manifesto (Brown, 1934) is adamantly opposed to government intervention in the economic system, while it reasserts the authors’ faith in market mechanisms.

13Elliot (1934) writes that the academics involved did not consider the actual conditions that prevailed in the economy before and after the 1929 crisis and – even less so – those that caused it, signifying that the economy was unable to recover by itself, and needed government intervention. Ahiakpor (2010) reviews the memorandum from a modern perspective and finds that yesteryear orthodox policy recommendations are similar to those in contemporary times, regardless of the historical circumstances surrounding actual economies in each period.

14W. Leontief (1934b) writes about the Relief Programme section that referred to rural economic problems. He begins with a description of US farmers’ conditions during the 1920s, when rural poverty was a major social and economic issue in the country. The paper examines the extended idea that agricultural overproduction was at the root of rural poverty; i.e., a larger than normal proportion of suppliers faced production costs that were higher than prices (Leontief, 1934b: 140-141). Farmers had been unable to follow the changing consumers’ preferences and continued to produce unwanted goods. Apparently demand had shifted from agricultural to manufactured goods, since incomes in the US had increased quickly in a short period of time. The paper also takes into account that rural enterprises at that time were largely conducted on a non-monetary basis, and it was thus uncommon to see them actually closing down, even when business was unfavourable. As a result, rural production decreased only slightly between 1930 and 1933, while industrial income shrank by almost half (Leontief, 1934b: 142-143). Most likely the demand for rural supplies also diminished severely and agricultural prices diminished much more than industrial ones.

15The farm cost structure was inelastic since the share of the fixed portion –interest payments and land rent- was quite significant in the total. According to Leontief, a mortgage relief policy or government credits would have been most appropriate and more effective than alternative measures, because they would have also been instrumental in addressing the matter of the banking system’s solvency, endangered by rural indebtedness (Leontief, 1934b: 144).

16The government propounded reducing the output of the major farm products in significant proportions, so that prices would rise accordingly. Apparently the Programme recommended specific proportions for each product, but Leontief does not discuss how those amounts would be attained or whether such reductions would solve overproduction. However, he warns that results from those reductions would not be automatic and suggests that it would have been more effective to set prices, allowing quantities to adjust by themselves. This comment allows public intervention a more relevant role, but at the same time, Leontief does not believe that farmers would pay attention to prices when making decisions.

17The Programme foresaw that producers would receive compensations in line with the amount of land on which they would willingly curtail farming. Special taxes would finance the costs involved, transferring incomes to the agricultural sector; Leontief (1934b) states that such transfers are always inefficient, because the loss of income of one group is not identical to the gains of another. In sum, they would be a burden to the urban economy, both because of supply restrictions and because of the income transfers needed to finance them. Perhaps he did not think that poverty relief was well worth any effort.

18Leontief (1934b) points out that the various aspects of the US government’s Relief Programme, aimed at different sectors, were indeed interdependent in a similar manner the various parts of the economy. Therefore, the measures intended for one sector would have repercussions elsewhere, most probably bringing conflicting or unwanted results (an idea given no further justification). Besides, while the individual sub-programmes in question were intended to confront isolated emergencies, their effects might be long lasting and uncertain.

19The memorandum as a whole played a role in a discussion taking place in the US in the early 1930s on the dangers of public intervention in the economy. For some, regulation was a byword of central planning and any practise of this kind was (and still is) a synonym to communism. Leontief (1934b) – likewise his co-authors – expected that the economy would reach equilibrium by itself, i.e., it would not deviate from its circular flow equilibrium outcome. This was despite the fact that he acknowledges that rural producers did not behave in a Walrasian fashion, dismissing prices as irrelevant signals. If prices do not shape economic behaviour, it is clear that direct regulation is the only mechanism to resolve critical situations in the economy. Yet, Leontief disparages such a contradiction in order to defend the idea that, despite cyclical fluctuations, the capitalist system has no need for regulation of any kind.

3 – The Theory of Effective Demand

20During the 1930s and 1940s Leontief wrote extensively rejecting the relevance of Keynes’ General Theory, mainly on methodological grounds. He focused his criticism on the Keynesian labour supply and money demand functions, finding them to be false, which was sufficient reason to dismiss the entire theory of effective demand. It is easy to conclude that, from his point of view, Keynesian economic policy was not relevant either, but such an issue was not even mentioned.

21As already pointed out, Leontief (1936) examines Keynes’ theory of monetary unemployment of labour and observes that the latter abandons the neoclassical homogeneity assumption, according to which the supply and demand of any good remains unchanged if all prices increase or decrease in the same proportion (i.e., the supply and demand functions are homogeneous of zero degree); as a result, money is not neutral in the Keynesian system. In particular, the labour supply function fails to comply with such a condition, because workers include money wages in their utility functions and do not accept nominal reductions in their wages, even if prices diminish accordingly (Leontief, 1947). Therefore, unemployment is not involuntary as Keynes argues. Moreover, Leontief explains that the liquidity preference results from such utility functions, i.e., the Keynesian hoarding and speculative motives to demand money derive from the consumers’ preference for nominal incomes. He concludes that such postulates contrast with common sense of economic behaviour, based upon real wages and incomes.

22Further, Leontief (1947) observes that Keynes does not attack the consistency or the logical structure of neoclassical theory, but rather appeals to the realism of neoclassical assumptions. Accordingly, even if both the neoclassical and Keynesian theories accept the logical proof of the inexistence of involuntary unemployment, the latter challenges its empirical premises (Leontief, 1947: 232). He seems to be ready to consider that the assumptions on which theoretical models are constructed are not always functional in describing the real world, e.g., perhaps workers may be reluctant to accept nominal wage reductions. Leontief also states that Keynes confuses the existence of full employment as an assumption, when it is in fact a conclusion of neoclassical theory.

23According to that paper, Keynes’ considerations are not original, since they were already part of the business cycle and monetary theories, and thus Keynes’ criticism of the general equilibrium model is – at best – flimsy. Moreover, Keynes is identified with the New Cambridge School (Leontief, 1937b: 347), criticised on the grounds of a lack of methodological rigour, increasing the danger of error and fallacies (Leontief, 1937b: 339): When the Cambridge economists discuss their theories, they introduce new ad hoc arguments at every turn, hence they are able to demonstrate any idea, no matter how remote it might be from the initial arguments, as opposed to the general equilibrium followers, who build arguments axiomatically, from general postulates to theorems.

24Scott (1949) finds that “… he [Leontief] is concerned with evaluating the Keynesian assumptions and their effect upon classical doctrine … Professor Leontief asserts that the Keynesian theory is not more but less “general” than the classic theory … (p. 554). Scott (1949: 556) also states that rigid downward wages are in fact a result of Leontief’s own analysis; however, as widely recognised, lowering wages would not bring full employment in Keynes’ view, because incomes and demand would diminish, causing deflation and defeating the purpose of increasing the level of activity. Scott (1949: p. 568-569) agrees that the liquidity preference is central to Keynesian analysis. Nevertheless, in his eyes, Leontief confuses the velocity of circulation of money with the demand for it, because he does not abandon the quantitative theory.

25Leontief (1949) insists that the non-homogeneity condition of the labour supply function may be paired to the concept of money illusion, besides, “Considering the singularly elusive character of many of his theoretical formulations and the impressionistic nature of some of Keynes’ writing, I feel that simple quotations from The General Theory will be of little use in settling the present controversy…” (Leontief, 1949: 568). Even if there is no mention of economic policy in this controversy, it is evident that when the theory of effective demand is not considered to be valid in the “Leontievian” economy, a discussion on its policy implications is utterly unnecessary.

26A few decades later, Leontief (e.g. 1978, 1979 and 1983) recognises that involuntary unemployment may emerge in capitalist advanced economies as a result of technical change. Since the XIX century the capitalist competitive mechanism in developed countries drove fast technological change, allocating resources efficiently, raising incomes and improving factoral distribution. By the end of the XX century, however, the role of labour in productive processes had already lessened, with respect to the rest of inputs, and would continue on that same path, causing long- term technological unemployment of labour (Leontief, 1983: 405). No comments are made from the general equilibrium position with regards to price mechanisms or otherwise. Increasingly wealthier consumers shifted their expenditures towards services, which in turn, use computers and automated processes extensively, cancelling sources of employment and threatening the egalitarian income distribution. Not even lowering wages would bring full employment back, but the situation might be solved by reducing the working hours of individuals, whose incomes should not be reduced, by means of direct transfers (Leontief, 1978 and 1979). Alternatively, it would be desirable to see “… government actions, ranging in scope from unemployment relief to full-fledged “income policies” of the Swedish kind… While public works of the simplest kind might not contribute to the national income, neither will they diminish it …” (Leontief, 1983: 409). No detailed explanation of the exact meaning of such ideas is to be found in any of the three quoted papers, but – certainly – there is new room for economic policy in the new “Leontievian” economy.

27To the best of my knowledge, Leontief did not comment on other versions of the effective demand approach, such as Kalecki’s. He was rather enthusiastic about the axiomatic construction of the general equilibrium model, even if he did not share every neoclassical conclusion.

4 – Disarmament and its economic implications

28Leontief devoted considerable attention to the possibility of demilitarising the economy of the US, as well as that of the world. The earliest paper on the subject (Leontief, 1944) was prepared in response to a US government request (Pizano, 1991). On the one hand it considers the economic consequences of transforming the US economy from war to peace, and, on the other, it discusses the open version of the IO model for the first time; needless to say, this is the most widely used version of the model.

29When the war ended, military output would diminish and it would be necessary to shift at least a portion of the resources devoted to such production to civil use. Whether or not national income would change was a matter that depended on the industries to which factors and produced inputs were transferred, their technological needs and – most importantly – the industries’ interdependences, in comparison to the productive conditions of war production sectors. The paper was certainly seminal for the development of the IO model, but it was mainly presented as a methodological and numerical exercise. By the time this paper was written, the war’s outcome was already clear. However, the author does not express his opinion on the numerical results presented in detail. Instead, considerations on defence and public expenditure policies are reduced to numerical differences between the actual practices during the war and some possible peace conditions. In fact, I have not found references on Leontief’s position on the issue from a non-economist point of view at that time or a later date, even if merely as a citizen concerned about the war and its effects on peoples or persons. One can conclude that Leontief was expressing his desire towards total disarmament after the Second World War.

30Further contributions regarding the effects of disarmament on the economy include Leontief and Hoffenberg (1961) and Leontief, Morgan, Polenske and Simpson (1965). Both papers discuss the effects on the US economy from reorienting defence public expenditures towards private and public consumption in the context of the Cold War. The first paper presents a sectoral analysis at a national level; the second discusses sectoral results by region (groups of states in one country). Another issue is that of the transition from one regime to another. In order to transform productive processes oriented toward military demand and to satisfy a different kind of consumption, extensive investment would be needed, but in addition, the government should intervene in order to prevent GDP fluctuations or sectoral disproportions. Both papers are very technical and useful for understanding the IO model and some possible applications; i.e., arguments are mainly concerned with numerical results. The possible motivations of the US government to change policies are not even mentioned, and discussions on the adopted assumptions are related, at best, to the construction of scenarios. These papers do not indicate the authors’ possible motivations for writing them. Nevertheless, results indicate that welfare would not be affected negatively under certain conditions and that it would even be possible to improve it. Again, one can expect that Leontief was in favour of changing defence and economic policies.

31Whether disarmament might be unilateral or multilateral is examined in another technical paper (Leontief, 1964). The drive of developed countries to curtail their military expenditures in order to increase aid and investment flows to underdeveloped countries is not mentioned. There is a technical presentation of the methods employed in the investigation, as well as a presentation of the numerical results. Political – or otherwise – implications of such radical change in the functioning of the international system are not considered. To the best of my knowledge, Leontief did not write a great deal on development issues either. Specifically, his applied papers are more concerned with structural economics in the developed world. Nevertheless, in this paper he quantifies the effects of both disarmament and increasing aid to underdeveloped areas. In both cases, according to his results, welfare may improve, based on a number of assumptions.

32Concerning aid to underdeveloped countries, Leontief (1965) determines the amount of resources necessary to increase the rate of growth in underdeveloped areas and finds that growth of the international economy would also rise as a result, improving the world’s welfare. On the contrary, some authors, such as Hayek (1945) and Bauer (1972), writing on development theory – definitively – from a general equilibrium perspective and – also – from a standpoint somewhat detached from applied economics, disagreed on the benefits of foreign aid for underdeveloped economies, which is characterised as a form of State intervention in the economy and a threat to individual freedom, with undesirable consequences on welfare for both richer and poorer countries.

Final remarks

33W. Leontief is very much concerned with the development of economic theory and its analytical instruments, in order to understand how economic systems function. In that sense, he is an applied economist; he is not, however, interested in economic policy discussions, even if – as it is well known – he worked closely with governments and national (from various countries) or international agencies.

34In Leontief’s view, economic theory should be constructed from axioms to theorems, which can be proved using mathematical and logical instruments. He is also convinced that the capitalist economy is essentially stable; he constructs equilibrium models that allow regarding the economy as a system of interdependent parts. There is no room for endogenous agents observing deviating behaviours or exogenous agents of any kind. In his earlier papers he is closely linked to this view, while later in life, he seems to be ready to accept that the economy functions somewhat differently. He did not, however, revise his theoretical contributions.

35It is interesting that his papers – even those more closely linked to practical issues- are so technically oriented, lacking any political flavour. For example, his “Helping the Farmer” paper clearly deals with issues that largely extend beyond pure economics, since generalised rural poverty involves so many aspects of other social sciences, and perhaps the best part of US government policy to fight depression in the 1930s involved political issues: Something had to be done, beyond understanding the problem or offering equilibrium remarks.

36The lack of political or philosophical considerations when dealing with disarmament and resource transfers to poorer countries has also been mentioned. We can be reassured of Leontief’s sympathy for these issues, after revising his numerical results.

37Finally, it seems that Leontief’s intellectual attitudes differ greatly from Keynes and the Neo Cambridge School of economics. The latter discuss ways to solve economic problems; economic policy is a set of tools for changing reality. Younger Leontief is more interested in understanding economic systems, detached from creating policy instruments. Older Leontief discusses theory not extensively and not as passionately, but his understanding of the economy allows him to offer ways to embrace more desirable situations, such as a disarmed world.