Presentation Speech by Professor Assar Lindbeck of the Royal Academy of Sciences
Translation from the Swedish text
Your Majesty, Your Royal Highnesses, Ladies and Gentlemen,
One of the most characteristic features of an economic system is the mutual interrelations between the various parts of the system – what is usually called the interdependence within the economic system. Such an interdependence is characteristic also for the conditions in the production sector of an economy. For instance, in order to produce steel we need not only labor but also coal and thousands of other intermediary products, or “inputs”, in the production process. But to produce the necessary coal and other inputs we require, in turn, steel and other intermediary products in addition to labor.
This means that if we want to increase the production of steel we must at the same time increase production of coal, which in turn requires increased availability of steel, etc. in an infinite series – and similarly for the thousands of other products which are directly or indirectly involved in the production of steel and coal. This, in itself, rather trivial example illustrates the previously mentioned interdependence within the production system.
Let us now remember that a modern economy produces hundreds of thousands, or even millions, of different commodities and services, of which most of them are used, directly or indirectly, as inputs in the production of other commodities and services. Thus, it is easy to understand the difficulties in calculating how large a production of each commodity is required in order to produce not only what is necessary for final use as consumption, investment and export, but also what quantities are needed as inputs in the production of all other goods and services in the system.
It is precisely in order to analyze these complicated, mutual interdependences within the production system that Wassily Leontief has developed his so-called input-output method, which is a mathematically and statistically formulated model designed for the purpose of capturing in empirical analyses the complicated interdependence within the production process.
An obvious question now is, of course, what is all this good for. In a market system, such as Sweden’s, we know that we do not need any central decisions on how much to produce of each individual commodity. The composition of outputs in the economy is, as we are aware, mainly determined by a market process via the firms’ supply of commodities and services and the demand for these by households and other firms in various markets for commodities and services. As we shall see, however, the input-output method can be used as a complement to the market process – mainly for forecasting and economic planning. A few examples may illustrate the point.
In connection with the disarmament in the United States after the Second World War, and with the rearmament for the Korean War, the input-output method was used to calculate how the disarmament and rearmament, respectively, would influence the production volume and employment level in the various sectors of the American economy, taking into account also the various indirect effects on demand for inputs – not only in the defense industries but also in other enterprises which were, directly or indirectly, delivering commodities and services to the defense industry.
Another example is that the input-output method can be used to study how changes in production costs in one sector are spread to other sectors of the economy – again, in an infinite series of effects. In this way, it is for instance possible to study the effects on the economy as a whole of a change in wages in one sector or, to take a contemporary example, the direct and indirect effects on prices of various commodities and services of a change in oil prices. It has also been found out recently that the input-output method is quite useful for studying the various “residuals” from the production process that disturb the environment in our high-technology societies.
A centrally performed input-output analysis can in this way give information about the consequences for various production sectors of changes in other sectors – such as the consequences for production in various sectors of the economy of increased demand for consumption, investment or export. This is particularly valuable in the case of sudden changes in the economic system. Firms and public authorities will, through the centrally performed input-output studies, get a chance to anticipate future development without having to wait for the market signals which will appear due to changes in supply and demand in the various markets for commodities and services. This menas that the input-output method may occasionally be helpful not only for centrally carried out forecasting and economic planning but also for decision-making on the firm’s level.
I now turn to you, Professor Leontief. You have by your input-output model given economic science an important tool of analysis for studying the complicated interdependence within the production system in a modern economy. You have not only constructed the theoretical foundations of the input-output method; you have also by your painstaking work developed the empirical data that are necessary to utilize the method on important economic problems as well as to test empirically various economic theories.
It is a great honor to convey to you the congratulations of The Swedish Royal Academy of Sciences and to ask you to receive from the hand of His Majesty The King the 1973 Prize in Economic Science in Honor of Alfred Nobel.
Their work and discoveries range from the formation of black holes and genetic scissors to efforts to combat hunger and develop new auction formats.
See them all presented here.