Wassily Leontief Planning

Wassily Leontief Planning

Leontief's analysis of the inadequacy of the Keynesian policy prescription leads us to an examination of his views on economic planning. Essentially Leontief has recognised that government fiscal intervention can be used to protect the economy from catastrophic recessions, but he regards it as inadequate to deal with inflation:

according to prevalent academic doctrine a proper combi­nation of fiscal and monetary policies should be capable of securing steady economic growth with reasonably full utilis­ation of productive capacities, high levels of employment and stable prices. After many years of trial in many countries and under a great variety of circumstances, practical experience with the application of this approach has proved disappointing. Neither the Keynesian nor the so-called mone­tarist prescription seems to work (Leontief, 1978, p. 73).

Leontief explains this by the inadequacy of three or four simple macro-economic-policy instruments to cope with the complexity of economic management in an advanced economy. As always he is concerned less with large macro-aggregates than with the shifting inter-relationships between the sectors of the economy.

Since the 1960s-and with increasing urgency in the harsher economic climate of the 1970s - Leontief has argued instead for the introduction of a system of national economic planning in the United States. The argument is made in terms of the failure of the market system to generate by itself an efficient allocation of resources. The market operates as a giant computer, grinding out solutions to the equations of the general equilibrium system by a process of trial and error. However, the errors in the passage to equilibrium (unemployment, unused capacity, etc.) are costly and can be eliminated by supplementing, not replacing, the market mechanism by a plan or projection for the development of the economy as a whole. The plan would thus be a consistent inter-sectoral projection of the economy which supplements in quanti­tative terms the price information provided by the market. A system of rolling plans would operate, with annual recompu-tation of the five-year projection in the light of new data.

Not surprisingly the technique Leontief recommends for making the projection is the input-output model. Leontief pointed out in an early essay on planning in the Harvard Business Review that corporations make independent estimates of the size of their future markets, but these estimates are inevitably wrong because firms lack the necessary data. He described it as a frustrating and costly guessing game (Leontief, 1966a, p. 6). On the other hand, a plan compiled centrally using input-output techniques would trace the direct and indirect effects of one sector on another and produce a consistent forecast. The actual construction of the plan would be in the hands of a non-political agency loosely connected with the executive branch of the United States Federal Government with regional offices in each state. The planning board would be supplied with data by govern­ment statistical services, whose operations would have to be seriously overhauled to provide the planners with the necessary data.

Leontief further proposes that planning be integrated with the democratic political process through the construction of ar­ticulated and consistent alternative scenarios for the development of the economy. The ideas of politicians would be translated into alternative plans which would be publicly discussed and voted on by the electorate or adopted by legislative wrangling and political log-rolling. Implementation of the plan would be achieved by the market, assisted where necessary by government regulatory action. Inasmuch as the plan adopted would be internally consistent it would form the basis of firms' expectations, and be self-fulfilling. This mechanism would be supplemented by select­ive government intervention and regulation. The government's own adherence to its part of the plan would itself have a profound impact on the private sector. Leontief believes that if industry is put in a tunnel with a light at the end of it (i.e. the opportunity of profit) it will move in the desired direction.

There is some overlap between Leontief's proposals and the system of indicative planning operating in some Western countries, such as France or Norway. Indeed, part of Leontief's argument about the self-fulfilling nature of a consistent inter-sectoral plan is strongly reminiscent of the view of indicative planning as a form of'generalised market research' expounded by Pierre Masse, the French planning commissioner of the early sixties. (Leontief's proposal differs from French practice, however, by the incorporation of more democratic choice between alternative plans.) The French experience has not been entirely happy, however, and the problems of getting private enterprise - or even the government itself - to abide by the plan have been acute. Leontief's views on this point seem too sanguine.

Leontief has played an important role in the debate in the United States on economic planning. With Leonard Woodcock of the auto workers' union he was co-chairman of the Initiative Committee for National Planning. In the Congress, legislation was proposed by Senators Humphrey and Javits which would have created an Economic Planning Board and a Council on Economic Planning. Leontief himself had reservations about the form of the legislation, which in his view concentrated too much on the elimination of unemployment and too little on planning the structural shifts which will inevitably take place as a result of technological advance. The principal impact of the planning system would thus be on a structural rather than demand-deficient or Keynesian unemployment. However much of the momentum behind the movement for national economic plan­ning in the US has now been dissipated, although the economic problems that planning is intended to mitigate have become even more severe. Leontief now believes that the economy will have to go through further crises before the need for planning is recognised.

Leontief's views on other social and economic systems than capitalism have to be inferred from his occasional writings or from asides in papers devoted to other topics. He regards Marx as an important precursor of much modern economic analysis, particularly of the business cycle. His assessment of the tradi­tional system of central planning, as practised in the USSR for example, is unfavourable; the planning methods used are rudimentary, the institutional structure is rigid and the system lacks an incentive to replace the profit motive. Leontief takes a more favourable view of a reformed socialist economy such as Hungary, which does harness the profit motive within the framework of socialist ownership. He has also given a favourable evaluation of economic developments in the less-advanced social­ist economies of Cuba and China. In the case of the latter he was able to compare the economy at the time of his visit in 1973 with the widespread misery and abject poverty prevailing at the time of his earlier visit in the 1920s. He approved in particular of the Chinese concentration on agricultural development (Leontief, 1973). His remarks on Cuba were more ambivalent. Whilst obviously sympathetic to the regime, he regarded its economic difficulties in the early 1970s as an inevitable consequence of its excessive reliance on moral as opposed to material incentives (Leontief, 1971).

These final paragraphs have taken us some distance from Leontief's technical contributions to economics. However, one thread which runs through all Leontief's work is a conviction that economics is a practical subject. He does not underrate theory -indeed his own contributions to theory are considerable - but argues that economics is ultimately justified by its ability to explain and then perhaps change the world. His own political views have led him to favour particular kinds of economic and social change, but the methods he has developed need not be directed towards those ends.9 His primary concern has been with developing usable models of the economy which can be im­plemented with real data. It is this preoccupation which through­out his professional life has separated him from most con­temporary economists. He has always acted on the principle expressed in the passage from Quesnay which he chose to introduce his first book: 'dans la recherche pour la verite par le calcul, toute la certitude est dans l'evidence des donnees'.