Who Was Wassily Leontief and What Was His Paradox?

Who Was Wassily Leontief?

Wassily Leontief was a Nobel Prize-winning Russian-American economist and professor who contributed several insightful theories to economics. Leontief’s Nobel Prize research focused on input-output analysis, which breaks down the sectors of the economy and discusses how changes in one sector can affect other sectors. 

Understanding Wassily Leontief

Wassily Leontief was born in Germany in 1906 and died in New York City in 1999 at the age of 93. As an economist, he made several contributions to the science of economics. Leontief’s research into sectors led to his development of input-output analysis, which won him the Nobel Memorial Prize in Economics in 1973. Leontief is also credited with his discovery of the Leontief Paradox and the Composite Commodity Theorem.

Throughout his professional life, Leontief promoted the use of quantitative data in economics. Leontief campaigned for broader and deeper developments in the area of quantitative data analysis throughout his career. He was also one of the first economists to use a computer for quantitative research.

Leontief taught at Harvard University for 44 years and subsequently at New York University. He served as president of the American Economic Association in 1970. Four of Leontief’s doctoral students were also awarded the Nobel Prize, including Paul Samuelson (1970), Robert Solow (1987), Vernon L. Smith (2002), and Thomas Schelling (2005).

Leontiff's Research

Input-Output Analysis

One area in which Leontief pursued his goal of making economic analysis more quantitative was in developing an empirical implementation of general equilibrium theory. To do this, Leontief broke down the U.S. economy into 50 sectors, establishing one of the first economic sector classification systems. He developed input-output tables for sector analysis that estimated the impact a change in production of a good has on other industries and their inputs—establishing the interdependent relationships of economic sectors.

Analysts can use input-output analysis to estimate the impacts of positive and negative economic shocks by showing the changing demand for inputs when the production of outputs changes. This helps to analyze ripple effects throughout an economy as changes in demand for final goods work their way up the supply chain. Input-output tables can produce very rough estimates for small or moderate changes in outputs, but because they assume fixed production technology they cannot accurately account for the dynamics of a real economy. Leontief’s input-output analysis has been used by the World Bank, the United Nations, and the U.S. Department of Commerce.

The Leontief Paradox

Leontief also studied trade flows in the 1950s. Based on input-output analysis of international trade he discovered that the U.S., a country with a great deal of capital, was importing capital-intensive commodities and exporting labor-intensive commodities. This is in contrast to prior theories of international trade, which predict that countries will specialize in and export goods that they have a comparative advantage in producing. This means that a capital rich country, such as the U.S., would be expected to export capital-intensive goods and import labor-intensive goods from countries where labor is comparatively cheaper.  

The Leontief Paradox, as it came to be known, led many economists to question the Heckscher-Ohlin Theorem, which states that countries produce and export what they can create most efficiently, depending on their factors of production. Moreover, they import goods that they cannot produce as efficiently. Several later economists proposed solutions to this apparent paradox, including the Linder Hypothesis and the Home Market Effect.

Notably, Leontief's Paradox does not account for human capital and the resulting difference between skilled and unskilled labor. Later researchers showed that U.S. exports were skilled-labor-intensive—or, in other words, human capital intensive relative to imports—resolving the Leontief Paradox in favor of the comparative advantage view.

Composite Commodity Theorem

The Composite Commodity Theorem was a third major development credited to Leontief, who fathered the concept with John Hicks. This states that if the relative prices of a basket of goods are assumed to be fixed, then they can be treated as a single composite good for the purpose of mathematical modeling. This simplified the equations needed to model price theory.