Home > Uncategorized > Leontief on the dismal state of economics

Leontief on the dismal state of economics

from Lars Syll

Much of current academic teaching and research has been criticized for its lack of relevance, that is, of immediate practical impact … I submit that the consistently indifferent performance in practical applications is in fact a symptom of a fundamental imbalance in the present state of our discipline. The weak and all too slowly growing empirical foundation clearly cannot support the proliferating superstructure of pure, or should I say, speculative economic theory …

leontif_nobel_fullUncritical enthusiasm for mathematical formulation tends often to conceal the ephemeral substantive content of the argument behind the formidable front of algebraic signs … In the presentation of a new model, attention nowadays is usually centered on a step-by-step derivation of its formal properties. But if the author — or at least the referee who recommended the manuscript for publication — is technically competent, such mathematical manipulations, however long and intricate, can even without further checking be accepted as correct. Nevertheless, they are usually spelled out at great length. By the time it comes to interpretation of the substantive conclusions, the assumptions on which the model has been based are easily forgotten. But it is precisely the empirical validity of these assumptions on which the usefulness of the entire exercise depends.

What is really needed, in most cases, is a very difficult and seldom very neat assessment and verification of these assumptions in terms of observed facts. Here mathematics cannot help and because of this, the interest and enthusiasm of the model builder suddenly begins to flag: “If you do not like my set of assumptions, give me another and I will gladly make you another model; have your pick.” …

But shouldn’t this harsh judgment be suspended in the face of the impressive volume of econometric work? The answer is decidedly no. This work can be in general characterized as an attempt to compensate for the glaring weakness of the data base available to us by the widest possible use of more and more sophisticated statistical techniques. Alongside the mounting pile of elaborate theoretical models we see a fast-growing stock of equally intricate statistical tools. These are intended to stretch to the limit the meager supply of facts … Like the economic models they are supposed to implement, the validity of these statistical tools depends itself on the acceptance of certain convenient assumptions pertaining to stochastic properties of the phenomena which the particular models are intended to explain; assumptions that can be seldom verified.

Wassily Leontief

  1. patrick newman
    June 19, 2017 at 12:25 pm

    Advanced IT and the internet does provide an opportunity for obtaining knowledge of what is going on in the economy – wages paid, hours worked, sales achieved, production completed etc at relatively small cost (existing business systems simply aggregate data and send it government and local authorities for analysis and reporting). Models not necessarily involved or are used only with conclusive proof of their worth.

    • June 20, 2017 at 1:25 pm

      That is true. Its also true we could have world peace tomorrow if everyone decided to stop fighting. Or as US president LBJ said, we oculd have socialism tomorrow if we had the votes.

  2. June 19, 2017 at 2:16 pm

    As for Leontief and his Input Output analysis, we have to argue many aspects, for example, relations between theory and observables, invariance of input coefficients, and others.

    Please read Amanar Akhabbar’s paper below and my comments there. I have posted a dozen of rather long comments.

    Leontief and Samuelson on the Non-Substitution Theorem. Some Methodological Remarks
    https://www.researchgate.net/publication/299345929_Leontief_and_Samuelson_on_the_Non-Substitution_Theorem_Some_Methodological_Remarks

    • June 20, 2017 at 1:23 pm

      People don’t have time to read all these papers especially if they are debates from 50+ years ago. (i think this one is related to ricardian equivalence issue, and joan robinson, capital controversy).

      my extremely simplistic view is this all boils down to ‘an apple is not an orange’. in pure physics if one person has 4 apples, and another 4 oranges, at equilibrium each will have 2 of each. But that is not the way it works since people have different preferences for apples and oranges. Thats why in chemistry and statistical mec hanics they have the concept or term ‘chemical potential’ (in the ‘grand partition function’–which can also be phrased in graph theoretic terms. ) Not all chemicals, or fruits, are equal–you can’t just turn them into each other (unless you go down to nuclear physics and e=mc^2–then you can turn anything into anything if you have the time and energy. [E,t]>/=h bar. (time energy uncertainty principle, similar to hesienberg’s, in quantum theory)

      • June 20, 2017 at 5:17 pm

        Although my comments on Amanar Akhabbar’s paper are 50+ years old, the topic is quite new, because it is related to International Input Output Tables. You may be astonished to know that my comments are not yet complete. I have not written on International IO tables.

        You may not know the recent development in Trade in Value Added (TiVA) analysis. Many papers are now written and will be written more in the near future. If there is no arguments that I made as comments to Amanar’s paper, it is a measurement without theory. All these analyses depend on the constancy of input coefficients. I am arguing how this constancy contention is rationalized.

        If you like, please read section 15 of my paper:
        A New Construction of Ricardian Theory of International Values
        http://link.springer.com/book/10.1007/978-981-10-0191-8

      • June 20, 2017 at 5:25 pm

        Sorry. I made a mistake. In the above post, I have indicated a book. The paper I wanted to point is the chapter 1 of the book.

        Chapter 1 The new theory of international values: an overview. You can find the draft version of the paper in my page in ResearchGate.

  3. June 19, 2017 at 2:38 pm

    Thank you as usual for this Lars.

    May I extend the logic to the American presidential election of 2016? Let me recall for readers that the Democratic candidate, Hillary Clinton wrapped herself in the “glow” of what then President Obama was grooming as his glowing economic legacy: a steady month by month record of job creation, a formally very low unemployment rate, low inflation: what more could citizen’s ask for?

    Yet as we know, the shock of November 2016 was that many voters, who already had sent a contra signal via the near success of Senator Bernie Sanders, weren’t buying the formal statistics. It being the summer, I won’t belabor the point, but a significant number of contributors to this organization’s RWER special editions on Trumponomics did a very good job of explaining the “underground” economic pain (I’m thinking of Stephanie Kelton and L. Randall Wray especially) hidden by the two often sited key indicators: how we were actually short about 20 million jobs if the normal growth projections from just before the financial crisis had continued; expectations had been tweaked…plus the debt levels, low minimum wage, frozen Social Security increases…and dramatic declines in net wealth for the middle and working class.)

    Now let me add some findings from a rural sociology and economics researcher at Penn State University, which I came across while reading the excellent postmortem on the “White Working Class” at the American Prospect magazine: here’s the direct link to the short, very readable paper by Professor Shannon M. Monnat:

    http://aese.psu.edu/directory/smm67/Election16.pdf

    For those in a hurry, here are the summary findings from the first page of the paper:

    “Trump over-performed the most in counties
    with the highest drug, alcohol and suicide
    mortality rates.
    Much of this relationship is accounted for by
    economic distress and the proportion of
    working-class residents.
    Trump performed best in counties with high
    economic distress and a large working class.
    Drug, alcohol and suicide mortality rates are
    higher in counties with more economic
    distress and a larger working class.
    Many of the counties with high mortality
    rates where Trump did the best have
    experienced significant employment losses in
    manufacturing over the past several decades.”

    All that pain hiding under the good statistics leads to the question, also implicitly posed by Lars: is Neoliberalism on its last legs?

    • June 20, 2017 at 1:32 pm

      I think that is correct—Pa, Ohio, West Va, maybe michigan, florida, and wisconisn. Modern poliical organizing may be less about ‘getting out the voter’, but rather figuring out ways to get people not to vote—-make it easier for people to buy drugs rather than cast a ballot. USA has ‘electoral college’ so you really only need 1 vote in Ohio to beat 5 -10 million votes in California. (That’s gauge invariance). ‘all men are created equal, but some are created more equal than others’. 1>1.

  4. Ed
    June 19, 2017 at 9:41 pm

    This is simple … sometimes the truth is simple.
    IMO, the main enabler of sizable asset price bubbles is keeping rarely seen the real price histories.
    http://showrealhist.com/yTRIAL.html

  5. June 20, 2017 at 7:56 am

    In the Presidential election of 1932 Hoover endorsed the “standard economic views” about the Great Depression as well as the libertarian view that government interference in the economic would destroy liberty. FDR had a different message. In one of his speeches, he asserted that the country had reached a point at which the relations between government and business must take a new tack. Roosevelt called for novel governmental methods to meet novel conditions. “A glance at the situation today,” he declared, “only too clearly indicates that equality of opportunity as we have known it no longer exists.” “As I see it,” he continued, “the task of government in its relation to business is to assist the development of an economic declaration of rights, an economic constitutional order.” FDR laid out the problems and his solutions in his inaugural address:

    Values have shrunken to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side; farmers find no markets for their produce; the savings of many years in thousands of families are gone.

    More important, a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return. Only a foolish optimist can deny the dark realities of the moment. These conditions, he went on, were not the result of material failures or the lack of nature’s bounty; they were the result of mental and moral failure, of greed and incompetence. But the nation was on the verge of a new restoration of ethics in which “mere monetary profit” would be replaced by higher values. “The money changers have fled from their high seats in the temple of our civilization.” Yet new moral values would not be enough. “This Nation asks for action, and action now.” The chief task was to put people to work, which could be done in part by government itself, “treating the task as we would treat the emergency of a war.”

    Later in the Depression many “ordinary” people said thanks for FDR’s words. And his actions. But what really impressed them was that FDR “cared” about them. Something they had not felt ever in their lives from government. Trump, knowingly or not spread this same message; that he cared for the suffering coal miners, the out of work truck drivers, the thousands who used to work in auto plants, steel mills, and in construction but now these jobs are moved out of the country or taken by immigrants. That most of what Trump said were lies and that he had no real plan to deal with these issues was less important to these people than the fact that Trump convinced them he cared about them. No economist saw or understood this. No economist could see or understand it. Their theories and mathematical models stood in the way of such sight and understanding. This explains the results of the Penn State study and of why many of Trump’s supporters refuse to dessert him even in the face of his lying, lack of action, and insulting speeches and policy. They believe he cares about them. Some might say this proves Trump is a better huckster than anyone thought. I lay it at the feet of his tutor, Roy Cohn. A devil-may-care-as-long-as-it-gets-a-headline attitude was Cohn’s trademark in life. Trump, in our time, has made it his. Cohn’s careful manipulation of negative attention is something that Trump noticed immediately when the two met in 1973. Trump uses it for everything from denigrating and attacking those who investigate or sue him to changing public debate to shifting hatred around. Watch any video of the hearings of the House Un-American Activities Committee chaired by Joseph McCarthy to see Cohn in action. Except that today the general mood of the country is a lot more cynical than it was in 1950.

    • June 20, 2017 at 4:02 pm

      Ken:

      Great comment, no surprise there. FDR’s speech to the Commonwealth Club in – wait now – San Francisco – on September 23, 1932 – during the fall campaign, then, provided a lot of the context for what followed in the first 100 days, and for the Second Bill of Rights in the State of the Union Address in 1944.

      I believe that if the American left, progressives, including economists who feel comfortable with that label, are ever to forge a consensus “platform” or vision statement, across the many distinct forms of consciousness that make up that Progressive left and therefore form the core of the Democratic Party, setting aside Wall Street and Silicon Valley for the moment, they must include at least three of the rights from this Second Bill of Rights: to a job, health care and decent housing…and maybe more…I could include vigorous anti-trust from those eight 1944 rights as well…(it was # 4…)

      This is a basic starting point for the material basis for a decent life – our own “right to life” stance – FDR called it the “right to live,” but I’ve updated it. (Thanks to Cass Sunstein’s 2004 book “The Second Bill of Rights: FDR’s Unfinished Revolution and Why We Need it Now more than Ever.” It’s too bad Sunstein subsequently ran away from that work, is still too market worshipful in terms of means of implementation. He didn’t get the job he did in the Obama administration to implement the Second Bill; his job was to make sure the left did not over-regulate business.)

      It can be, especially on the right to a job, as creative as we can imagine, to include not only L. Randall Wray’s “Job Guarantee” as an integral part of Modern Monetary Theory, which, he has made clear, doesn’t preclude also other programs: a green jobs CCC or WPA, and subsets of those programs which might have more training and higher skill and pay levels that a $15.00 per hour baseline: like teacher aides and child care workers. In addition, there are countless job waiting in ecologically aware ag: sequestering CO2 in the form of what we plant, where, and for other ends…(the CCC did it for other reasons)

      What’s fascinating about the background and content of FDR’s most substantive speeches, is how engaged he was to explain how he was in reworking the major assumptions both of American political life and the economics profession’s obsessions with 19th century and Roaring ’20s “laissez-faire,” which had, ironically, and cruelly, in FDR’s view, crushed individualism in it’s name, brought the whole edifice down around everyone’s heads.

      In Sunstein’s handling – and other author’s differ in their interpretation of where to place FDR on the political spectrum… Harvey J. Kaye, for example, in “the Fight for the Four Freedoms,” places him further to the left, you might say FDR used some social democratic means to attempt to better achieve some very traditional and conservative American individualist values.

      Today, just thinking of the fragments of the left, there are three additional dimensions which complicate updating FDR’s Second Bill of Rights vision and the Commonwealth speech context: the environmental crisis, feminism and gender rights perspectives, and the issues raised by Black Lives Matter. If you don’t think this is a more difficult task today – especially without a stark new economic crisis (as opposed to the slow, long simmering one that boiled over in Nov. of 2016) – consider that the Clinton’s think tank, the Center for American Progress, proposed a limited “jobs guarantee” program at their “Ideas Conference” on May 16, 2017 – only to have most speakers and panelists run away from, pay lip service references to, or oppose entirely as a top priority. (Not to mention that those of us who have been pushing for this direction for a decade or more weren’t consulted, much less invited.)

      Consider then this panel discussion from the components of the “New Democratic” party as a reminder of how far “progressives” have drifted from any common understanding of political economy, placing it a remote, if not locked closet (irony intended), voices striving to be heard amidst other adult discussions taking place in the living room where the organization of the economy is assumed and never discussed: https://www.youtube.com/watch?v=nDLjma-vOxQ

      And then watch how the supposed economics panel also, with just one exception, Senator Merkley (D, OR), run away from what I first thought was a breach in Neoliberalism’s labor market commandments: thou shall not intervene except to work longer for less for greater productivity (and surplus value?)…https://www.youtube.com/watch?v=HRrgMYl9itY

      If any of the major new directions represented in much of the work here at the WEA are to see the light of the policy day, look for them in the struggles among progressives to shape a common platform (another glimpse at the People’s Summit this June in Cleveland) ; Labor’s surprise in Great Britain shows the way…and I’ve outlined some of the daunting hurdles…

  6. June 20, 2017 at 12:34 pm

    I read some oold papers on leontief’s I-O analyses. I thought that was basically ‘the way to go’—or half of it. He had the data; other people tried to come up with models for long time dynamics. (Similarily, in biology, Darwin had the data— ‘field biology’—looking at flora and fauna. Decades later, R Fisher and S Wright came up with the theory(variants of the fokker-planck/diffusion equation; and Lotka-Volterra looked at the ecological theory).

    To me the central problem 0f economics is there is no definition of it that is generally accepted. I learned my economics mostly by reading journals —old and new. Some of them (eg J EcTh , some JEBO,, econometrica) are m re like math/physics journals; others are more like economic history (AJES, JEI..) or environemental activism (Ecolgical Economics). I think most people woukld say economics is what is in AER, JPE, and one other one–i rarely go to libraries now so i forget the titles; also maybe Ec J (UK) . (Review of income an d wealth had alot of data; J Economic Geography was a mix of theory and data).

    To me economics is basically about jobs and money—things i try to avoid thinking about or dealing with. (Often I’d rather starve and freeze to death, and sometimes i get close).
    (I wouldnt mind a guaranteed job 24/7/365… Maybe i could get paidd to watch youtube and record my dreams.)

    In my area there is a sort of divide—one half of people want things like community gardens, solar energy, economic co-ops and communal living, multicultual communities and bike lanes, veganism or vegetarianism, wilderness areas. …

    Others want luxury condos, hedge funds, bigger highways, a restaruant on mars, self-driving cars, 10,000 cable channels and killer apps and robots, and everyone white, blond , and thin who live forever.

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