Academic journal article The American Journal of Economics and Sociology

Finding New Wine in Old Bottles: What Historians Must Do When Leontief Coefficients Are No Longer the Designated Drivers of Economics

Academic journal article The American Journal of Economics and Sociology

Finding New Wine in Old Bottles: What Historians Must Do When Leontief Coefficients Are No Longer the Designated Drivers of Economics

Article excerpt

I

Brute Facts Antiseptically Free of Institutional Context

In 1951, Nobel Laureate Wassily Leontief put his finger on what was wrong with economics. It had remained a "deductive system resting upon a static set of premises," when what was needed was an economics that would "combine economic facts and theory." The new economics would be called "interindustry" or "input-output" analysis (Leontief 1966: 14). According to Leontief it is easy to "compute the complete table of input requirements at any given level of output, provided we know its input ratios." These input ratios could be calculated from "engineering data on process design and operating procedure" (ibid., 24-26). For Leontief and, I suspect, a large number of economists in 1951, the technological facts dependent only on the chemical and physical laws of nature--what I shall call "Leontief coefficients"--were indisputable. It would take so many units of coke to produce a ton of pig iron whether or not there was a human being alive on earth to witness that transformation. The Leontief coefficients were the bedrock of subsequent economic analysis. They were analogous to what the philosopher John R. Searle has termed "brute facts" (Searle 1995: 27). These brute facts about production (unlike the "institutional facts" I shall discuss later on in this lecture) do not depend for their existence on human speech or human ritual. For the same reason the tree will make a sound in the forest even if no one were there to listen, the coke will smelt the iron into steel even if no one is there to comprehend the spectacle (ibid.).

A few years later, another distinguished economist of the post-war period, Francis M. Bator, demonstrated his commitment to an alternative version of "the neo-Walrasian research program" by preparing a concise review of what he called the "simple analytics" of welfare maximization. The review appeared in the American Economic Review in 1957 (Bator 1957). Unlike Leontief, Bator allowed for substitution among the factors of production and hence for variable input ratios. The degree of variation, or the elasticity of factor substitution, was still regulated by certain brute facts about technology, however. These brute facts were part of the state of the art of current technology, which was assumed to change slowly and to be less obviously dependent on market incentives. Bator nicely summarized the three necessary equilibrium conditions that all rational economic systems had to satisfy if social welfare were to be at a maximum (ibid.). Although Bator's three equilibrium conditions by themselves did not completely solve the problem of maximizing social welfare, they did reappear as part of the final maximum-welfare solution once the so-called Bergsonian social welfare function had been defined. The three equilibrium conditions were also used as a "scientific" justification for government intervention in market settings. Bator made it clear that these conditions were "antiseptically independent of institutional context" (ibid.).

II

Brute Facts and the Austrian School

Not all economists were enamored with the neoWalrasian research program. According to several authorities, the modern Austrian school moved in other directions and rejected general equilibrium for a "market process" approach (Vaughn 1994). Still, despite methodological disagreements, modern Austrians joined with the neoWalrasians on at least the one point that I wish to emphasize in this paper: Austrians accepted the priority of brute facts about production in the form of "the given technological background conditions" that inform economic analysis. The Austrian economists generally agreed with Leontief and the other neoWalrasians that the brute facts of technology set objective limits on the outcomes available to any economic system. Indeed, it was the Austrian Gottfried Haberler who succeeded in organizing the fledgling field of international economics around the concept of the "production possibilities" frontier, which itself became a favorite expository device among text book writers (Haberler 1936). …

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