Wassily Leontief’s Research Program: Science, Beliefs, Institutions
Abstract
Wassily Leontief met with decades of success for the development of input-output analysis, and yet he remained a staunch critic of the economics profession throughout his life. To understand his success, its limits, and the origins of his discontent, I separate the scientific activities of input-output from the system of belief built around it, and from the institutions set up to advance this research program. This leads to considering the interaction of Leontief’s research program with other research programs through these three poles: the scientific debate, the collision of belief systems about the world, and an institutional fight for funds and researchers. The end result is a picture of how Leontief managed to build a successful research program where the science led to beliefs about the world that were able to justify building institutions promoting input-output, in an environment of competition and cooperation.
Citation
Carret, Vincent. “Wassily Leontief’s Research Program: Science, Beliefs, Institutions” History of Political Economy. Forthcoming
A micro foundational episode of the early history of macroeconomics: a 1932 debate on Walrasian economics and multiple equilibria
Abstract
This paper documents an early fork in the development of macroeconomics, by examining a debate between the Dutch economists Jan Tinbergen and Johan Koopmans. In a 1932 paper, Tinbergen argued that two firms could be stuck in a “bad” equilibrium in the absence of a coordinated action to incrase employment. Koopmans replied with a paper demonstrating that multiple equilibria in an exchange economy could not be ranked on the basis of their productive efficiency. This debate contributed to a larger turn away from dynamising the general equilibrium model, towards the new field of macrodynamics, with long-ranging consequences for the field.
Citation
Assous, Michaël, and Vincent Carret. 2024. “A micro foundational episode of the early history of macroeconomics: a 1932 debate on Walrasian economics and multiple equilibria” European Journal of the History of Economic Thought. Forthcoming, April issue.
Moving Dynamics Beyond Business Cycles: Jan Tinbergen’s First Macrodynamic Model (1934-1936)
Abstract
As soon as 1932, Jan Tinbergen proposed an explanation of the Great Depression based on a specific treatment of unstable processes and multiple equilibria. After his involvement in the early meetings of the Econometric Society, he worked on different dynamic models accounting for this instability. In 1934, he built a macrodynamic model generating new types of economic movements that did not return to a stationary state. This led him in 1936 to consider the possibility of having two equilibria, with damped or self-sustained cycles around the high equilibrium and a collapse around the low equilibrium. Tinbergen saw these models, with reference to Irving Fisher’s 1933 paper, as a way to interpret the potential of a crisis to trigger the collapse of the economy. In the end, it turns out that Tinbergen managed to extend the perspective for the study of the business cycle mechanism to non cyclical behaviors which, strikingly, remains almost totally ignored in most histories of macroeconomics and econometrics.
Citation
Assous, Michaël, and Vincent Carret. 2023 “Moving Dynamics Beyond Business Cycles: Jan Tinbergen’s First Macrodynamic Model (1934-1936)” The European Journal of the History of Economic Thought. 30 (1): 117-131. link
Fluctuations and growth in Ragnar Frisch’s rocking horse model
Abstract
Ragnar Frisch’s famous “rocking horse” model has been the object of much praise and even controversy since its publication in 1933. This paper offers a new simulation of the model to show that there exists cyclical trajectories in the propagation mechanism. By building an analytical solution taking the same form as Frisch’s original solution, we can provide new insights into the ideas encapsulated in his model, in particular the fact that the author constructed a model combining cycles and growth. The exploration of Frisch’s formal construction of the model leads us to link his statistical work on the decomposition of time series with his economic insights on investment cycles, which both led to the 1933 model. We contrast Frisch’s approach to that of other econometricians who used similar equations, showing that their different mathematical solutions were the product of what they wanted to show with their models.
Citation
Carret, Vincent. “Fluctuations and growth in Ragnar Frisch’s rocking horse model.” Journal of the History of Economic Thought. 44 (4): 622-641. link
Rupture and continuity in the original divide between micro-dynamics and macro-dynamics
Abstract
In 1933, Ragnar Frisch introduced a distinction between micro-dynamics and macro-dynamics in his paper on “Propagation problems and impulse problems in dynamic economics.” His claim that he proposed the first macro-dynamic analysis and that micro-dynamic schemes were limited to the dynamics of specific markets or behaviors had a lasting impact on the field. But the introduction of this separation created a narrative hiding what had been done before and introduced a tension between the two approaches. By going back to the content of micro-dynamic analysis, we are led to two lines of research that were pursued during the 1920s and early 1930s: cobweb models and intertemporal optimization. A pivotal economist for going beyond micro-dynamics was Jan Tinbergen, who had contributed to both these approaches, and went beyond with new analytical tools. However, the idea of intertemporal optimization met with some opposition when it was scaled up to the whole economic system. This prompted Frisch to propose his new approach, which met with immediate success as more schemes were proposed. Tinbergen was himself one of the first converts to macro-dynamics, but the links between the two approaches and the new tensions created by their separation remained. This tension between the newly created categories can be viewed as a result of opposing views on causality, which were rooted in differing mathematical approaches, a point explicitly made by the next generation.
Citation
Carret, Vincent. 2022 “Rupture and continuity in the original divide between microdynamics and macrodynamics” The European Journal of the History of Economic Thought. 29 (6): 1146-1164. link
The importance of multiple equilibria for economic policy in Jan Tinbergen’s early works
Abstract
This article provides a comprehensive view of Tinbergen’s macrodynamic models developed during the 1930s and early 1940s, showing how the economist’s concerns evolved from problems of instability to the idea of reaching higher positions of equilibria. Tinbergen built these ideas in the framework of nonlinear models, which he used to shed a new light on several policy problems: wage changes, government expenditure and its relation to pump-priming, and the regulation of purchasing power. This work on multiple equilibria was complementary to the macroeconometric models developed in the late 1930s, where linearity was justified by the assumption of small shocks.
Citation
Assous, Michaël, and Vincent Carret. 2022 “The importance of multiple equilibria for economic policy in Jan Tinbergen’s early works” The European Journal of the History of Economic Thought. 29 (3): 455-479. link
Expectations and full employment. Hansen, Samuelson and Lange
Abstract
From the outset, expectations were a central part of the first business cycles and early growth models. In the 1940s, a third line of research emerged which questioned the capacity of an economy to reach full-employment equilibrium. Starting with Alvin Hansen [1938] and culminating with Oskar Lange [1944], the crux of the debate evolved from the existence of full employment equilibrium to the analysis of its stability, suggesting an increased role of expectations and finally challenging the economic system’s global stability. The present paper traces those debates through the contributions of Hansen, Paul Samuelson and Lange. Using archive materials, we show that while Samuelson’s analysis of instability remained implicit, his correspondence reveals that he encouraged Lange to examine it more carefully. Lange’s results are presented in his 1944 Monograph published by the Cowles Commission for Research in Economics. We point out that his contribution cannot be understood in isolation either from his exchanges with Samuelson or the way that Keynesian ideas were being interpreted in the United States. Finally, we emphasize the ambiguity of Samuelson’s view on instability and expectations.
Citation
Assous, Michaël, Olivier Bruno, Vincent Carret, and Muriel Dal-Pont Legrand. 2021. “Expectations and full employment. Hansen, Samuelson and Lange.” Revue d’économie politique 132 (3):511–30. link
(In)Stability at the Cowles Commission (1939–1948)
Abstract
Stability analysis touched off extensive discussions at the Cowles Commission between 1939 and 1948. Oskar Lange, later followed by Lawrence Klein and Don Patinkin, among others, advocated for a move from a static analysis aimed at proving the existence of a stationary equilibrium with unemployment towards a dynamic approach exploring stability properties of full employment equilibria. In presence of excess supply of goods and labour with flexible money wages and prices, the message was that macroeconomic pathologies are better regarded as disequilibrium dynamics when full employment equilibrium is unstable – Lange and Klein – or when it is stable – Patinkin. The objective of this paper is to examine this type of modelling and how it provided the basis of a specific political vision shared by most economists of the Cowles Commission in the 1940’s.
Citation
Assous, Michaël, and Vincent Carret. “(In)Stability at the Cowles Commission (1939–1948).” The European Journal of the History of Economic Thought 27 (4): 582–605. link.
Book
Economic (In)Stability - New Perspective on the History of Macroeconomics
Abstract
This book offers a fresh perspective on the early history of macroeconomics, by examining the macro-dynamic models developed from the late 1920s to the late 1940s, and their treatment of economic instability. It first explores the differences and similarities between the early mathematical business cycle models developed by Ragnar Frisch, Michal Kalecki, Jan Tinbergen and others, which were presented at meetings of the Econometric Society and discussed in private correspondence. By doing so, it demonstrates the diversity of models representing economic phenomena and especially economic crises and instability. Jan Tinbergen emerged as one of the most original and pivotal economists of this period, before becoming a leader of the macro-econometric movement, a role for which he is better known. His emphasis on economic policy was later mirrored in the United States in Paul Samuelson’s early work on business cycles analysis, which, drawing on Alvin Hansen, aimed at interpreting the 1937-1938 recession. The authors then show that the subsequent shift in Samuelson’s approach, from the study of business cycle trajectories to the comparison of equilibrium points, provided a response to the econometricians’ critique of early Keynesian models. In the early 1940s, Samuelson was able to link together the tools that had been developed by the econometricians and the economic content that was at the heart of the so-called Keynesian revolution. The problem then shifted from business cycle trajectories to the disequilibrium between economic aggregates, and the issues raised by the global stability of full employment equilibrium. This was addressed by Oskar Lange, who presented an analysis of market coordination failures, and Lawrence Klein, Samuelson’s first PhD student, who pursued empirical work in this direction.
Debt Diplomacy in the 1920s: the Case of the French and Hellenic War Debts
Abstract
In the aftermath of World War I, a financial war was fought on the battlegrounds of international organizations and financial diplomacy. While the League of Nations’ Economic and Financial Organization tried to ensure the reconstruction of Europe through guaranteed loans and financial reforms, the Great Powers who dominated the League tried to maintain their spheres of influence. The case of the French-Hellenic war debts illustrates those issues: in the 1920s, the Greeks were barred from international capital markets after years of wars and financial mismanagement. A mission was sent to Greece by the League to evaluate the reforms needed before backing the emission of a loan, with several French emissaries among the envoys. The French government subsequently tried to take advantage of the ratification process of the loan, by threatening to block its emission if the Greeks did not repay their war debts. The debt-diplomacy of the French government is an example of a two-level game: pushed to the brink on the domestic side by their own financial troubles and resentment over the German reparations, France sought to obtain an international victory through the process of European reconstruction. On the international scene, they were stymied by the extension of Anglo-American financial interests. The political process of the League shows how much economic problems were subordinate to political considerations, and how domestic and international levels were entangled in the financial diplomacy of the postwar reconstruction.
Citation
Carret, Vincent. “Debt Diplomacy in the 1920s: the Case of the French and Hellenic War Debts.” in Brandon Christensen (ed.), Reassessing Libertarian Foreign Policy: Interstate Federalism and the Anarchy of Westphalia. Palgrave, forthcoming link
Econometrics at Harvard
Abstract
The place of Harvard in the development of econometrics is assessed through the research of its faculty and the development of the courses they taught. Over the course of the century, as the content of econometrics was itself transformed, we find that the Harvard department of economics occupied a singular place in the econometric landscape. This idiosyncrasy was defined by large projects such as the Harvard barometer of the 1920s or the postwar development of input-output analysis, but also by the lack of common purpose that often characterized the work of its members. Through the storied halls of the university passed many of the best and brightest, but few were given the chance to pursue their projects durably, to the detriment of the constitution of a “Harvard econometrics.”
Citation
Carret, Vincent, and Michaël Assous. “Econometrics at Harvard.” Chapter to be published in the Palgrave Companion to Harvard Economics, ed. by R. Cord. October 30, 2021. link
Working Papers
Inflation, Price Controls and Compliance during the Korean War
Abstract
Price controls are generally regarded unfavorably by economists, who argue that they will lead to disruptions in production and the emergence of black markets. Using the archives of the Office of Price Stabilization, set up in the United States during the Korean War to enforce price controls, I test this hypothesis. Three results emerge. First, price controls did lead to a curtailment of the production of meat and widespread disruptions in 1951. Second, these regulations incentivized rent-seeking behavior and lobbying from meatpackers, bureaucrats and consumers. Third, most violations were benign, and arose from the widening scope of illegality consequent to the detailed regulation of prices. Overall, the perspective on price controls given by administrative archives is much more negative than what is generally recognized about the Korean experience.
Distribution of Power and Ordered Competition in the European Coal and Steel Community
Abstract
In the early 1950s, the drive to find a practical solution to European antagonisms led to the construction of the first Common Market at the European scale, between Belgium, France, Germany, Italy, Luxembourg and the Netherlands. At the heart of the Coal and Steel Community, was the idea that shared economic interests would prevent the occurrence of new wars. The institutions created for this purpose led to a new distribution of powers between member states, firms and a supranational power that was tasked to prevent discrimination and organize exchanges between the six countries. By examining the jurisprudence and administrative regulations produced from the early 1950s to the early 1960s, I distinguish between three types of rules grounded in different approaches to competition. This analysis gives a new meaning to the idea of “ordered competition,” and the sources of inspiration behind the construction of Europe.
Investment Planning and the Input-Output Model in Postwar Europe
Abstract
As economic planners sought to rebuild Europe in the unstable postwar period, economic expertise was called upon to help in the drawing of national budgets and to inform economic and planning policies. A tool that circulated from academia to economic administrations was the input-output framework that had been developed by Wassily Leontief since the 1930s. As Leontief came into contact with other economists and with the goals of economic administrations, his framework was repurposed to give answers to the questions of economic planners. Statisticians and economists in Western Europe worked to integrate the input-output framework with the developing national accounts. Looking at their work with a particular focus on investment and development policies, I bring new insights on the role of experts, by showing that the input-output model had little impact on the actual coordination of economic policies.
Jacques Rueff, Friedrich Hayek, and the Emergence of Economic Order: the Case of the European Coal and Steel Community
Abstract
The argument of this paper is that Jacques Rueff and F.A. Hayek can be made to have a constructive dialogue that informs our understanding of how both authors approached such issues as the role of government in society and the meaning of spontaneous order. Through an analysis of their uses of the price mechanism as an ordering principle, and an examination of how they both moved towards a legal-institutional approach to understand the world, the common elements in their systems are brought out and fitted in a longer liberal tradition concerned not only with the meaning of competition, but with the conditions fostering the emergence of social order in the midst of individual chaos. Rueff’s involvement in the construction of the European Coal and Steel Community gives an interesting application of their systems to a concrete experiment in creating a rational economic order in postwar Europe. The examination of the case law of the Court of Justice of the Community demonstrates how much the principle of competition was subordinate to a political ideal of peace relying on limiting governments to prevent wars, a mechanism at the center of both Hayek’s and Rueff’s systems.
Jan Tinbergen and J. G. Koopmans on Multiple Equilibria and Coordination Failures
Abstract
In a 1932 policy paper, the Dutch economist Jan Tinbergen suggested that there could be two stable equilibria in a model with two firms acting in two sectors, with one of the equilibria having more production and employment. Arguing on the basis of a diagram that firms could not get out of the “bad” equilibrium on their own, he suggested that this justified government interventions to increase employment. While he referred to the general equilibrium systems of Walras and Cassel, he did not present a fully worked out model but referred to the unpublished study of one J. G. Koopmans. The latter was spurred by Tinbergen’s reference to publish his ideas on the problem of multiple equilibria. In his three-part paper, he underlined that a Walrasian system could not show Tinbergen’s coordination problem, because there could be no unemployment at an equilibrium point in a Walrasian model. The examples he presented, with three equilibria, showed that they could not be ordered. After this exchange, Tinbergen moved away from Walrasian multiple equilibria, and abandoned the general equilibrium approach to economic modeling in favor of the macrodynamic approach that was developed at the same time by Ragnar Frisch and Michal Kalecki.
Debt Diplomacy in the 1920s: the Case of the French and Hellenic War Debts
Abstract
In the aftermath of World War I, a financial war was fought on the battlegrounds of international organizations and financial diplomacy. While the League of Nations’ Economic and Financial Organization tried to ensure the reconstruction of Europe through guaranteed loans and financial reforms, the Great Powers who dominated the League tried to maintain their spheres of influence. The case of the French-Hellenic war debts illustrates those issues: in the 1920s, the Greeks were barred from international capital markets after years of wars and financial mismanagement. A mission was sent to Greece by the League to evaluate the reforms needed before backing the emission of a loan, with several French emissaries among the envoys. The French government subsequently tried to take advantage of the ratification process of the loan, by threatening to block its emission if the Greeks did not repay their war debts. The debt-diplomacy of the French government is an example of a two-level game: pushed to the brink on the domestic side by their own financial troubles and resentment over the German reparations, France sought to obtain an international victory through the process of European reconstruction. On the international scene, they were stymied by the extension of Anglo-American financial interests. The political process of the League shows how much economic problems were subordinate to political considerations, and how domestic and international levels were entangled in the financial diplomacy of the postwar reconstruction.
Understanding the bitterness of Wassily Leontief: Intention and reception of input-output techniques, 1940s-1950s
Abstract
Although Leontief was and still is one of the most recognized names in economics, inextricably linked to the development of input-output techniques, he remained fiercely critical of other economists’ works and of the state of economic science during his whole life. To understand his bitterness, we go back to the root of the split between Leontief and the rest of the economics profession, through an examination of the debates that took place in the late 1940s. From his input-output model, conceived as an operational theory of economic interdependencies, Leontief drew a specific approach to economic policy and planning which had a lot of success with government agencies, explaining how he could durably sustain his split from the profession.