Wasily Leontif Demand Function Keynes

Wassily Leontief; Keynesianism, Leontief Demand and Function

Leontief has not always agreed with Cambridge views, however, and he has been particularly suspicious of the aggregative framework of Keynesian economics. Leontief took part in the debate in the 1930s which greeted the publication of the General Theory. His best-known objection to Keynes was expressed in an article entitled 'Implicit Theorising - a Methodological Criticism of the Neo-Cambridge School'. Leontief makes the same criticism of the Cambridge School of the 1930s, and of Keynes in particular, which Schumpeter made of Ricardo in a famous passage in his History of Economic Analysis:

his [Ricardo's] interest was in the clearcut result of direct, practical significance. In order to get this he cut that general system (of universal interdependence of all the elements in the economic system) to pieces, bundled up as large parts of it as possible, and put them into cold storage-so that as many things as possible should be frozen and 'given'. He then piled one simplifying assumption upon another until, having really settled everything by these assumptions, he was left with only a few aggregative variables between which, given these as­sumptions, he set up simple one-way relations so that, in the end, the derived results emerged almost as tautologies (quoted in Bliss 1975, p. 119).

Leontief argues that Cambridge economists make extensive use of what he calls implicit definitions of economic terms. 'Given any number of compatible fundamental postulates expressed in terms of ABC, we can make, without infringing upon rules of logic, any other statement concerning the same elements provided that we introduce into it at least one new term, X This is so because we can implicitly define X to make our statement compatible with the initial proposition. The theorist who argues in this way can accuse any critic of an inability to understand the correct meaning of the terms in which the theorem is defined. 'Scientific discussion degenerates into a comedy of errors and mistaken identities' (Leontief, 1966b, pp. 63, 64-5).

In Leontief's view, Keynes' economic writings give numerous examples of this methodologically unsound procedure. In par­ticular he condemns Keynes' implicit definition of aggregate supply and demand curves in terms which make them in­dependent of one another, so that a shift in one is not ac­companied by a shift in the other. Leontief's concern seems to be with the lack of an explicitly specified micro-foundation for the theory.

Leontief's criticism of Keynes was not limited to meth­odological issues. He also had theoretical doubts about the nature of the Keynesian underemployment equilibrium and at a prac­tical level he doubted the efficacy of simple Keynesian remedies in a complex and interdependent economy. In a post-war theoretical paper Leontief first casts doubt on Keynes' assumption of a supply curve for labour expressed in terms of money wages, preferring the orthodox assumption, based on traditional maxi­mising behaviour, that the supply of labour is a function of real wage rates. He goes on to question the Keynesian liquidity preference as a mechanism preventing the emergence of full employment through monetary expansion. He points out that liquidity preference must be zero in long-run equilibrium, because in the long run investors adjust their view of the normal inte­rest rate downwards. The existence of involuntary unemploy­ment must therefore be justified in terms of a dynamic argument incorporating the assumption of disequilibrium or temporary equilibrium (Leontief, 1966b, Chap. 8). These criticisms, voiced by Leontief in the 1940s, were subsequently developed in­dependently by later writers, such as Clower, who explicitly reinterpreted Keynes' work as an attempt to model disequilib­rium phenomena.