Presentation Speech by Professor Ragnar Bentzel of the Royal Academy of Sciences
Translation from the Swedish text
Your Majesties, Your Royal Highnesses, Ladies and Gentlemen,
The basic economic problems are the same in all societies, regardless of whether these are characterized by capitalism, socialism or other types of political organization. As the supply of productive resources is limited, everywhere, all societies are confronted by a series of questions concerning the optimal use of available resources and the fair distribution of income among citizens. Such normative questions can be treated in a scientific manner that is independent of the political organization of the society under consideration, a fact which is nicely illustrated by the two prize winners of this year, professors Leonid Kantorovich and Tjalling Koopmans. Although one of them has been living and working in the Soviet Union and the other in the United States, these two scholars show a striking similarity in their choice of problems and methods. For both of them efficiency of production has been the central preoccupation of their analysis and independently of each other they have developed similar models of production.
At the end of the 1930’s Kantorovich was faced by a concrete planning problem – how to combine the available productive resources in factory in such a way that production was maximized. He solved this problem by inventing a new type of analysis, later called linear programming. This is a technique for finding the maximum value of a linear function under constraints consisting of linear inequalities. A characteristic feature of this technique is that the calculations give as by-products some expressions, called shadow prices, which possess certain qualities that make them useful as accounting prices.
During the following two decades Kantorovich developed his analysis further, and in a book published in 1959 he applied it also to macroeconomic problems. In addition he took a further and very important step by combining the theorems of linear programming with the theory of optimal planning in a socialistic economy. He came to the conclusion that rational planning should be based on results obtained from optimum calculations of the linear programming type and, further, that production decisions could be decentralized without loss of efficiency by getting lower level decision makers to use shadow prices as the basis of their profitability calculations.
By his research Kantorovich has strongly influenced the economic debate in the Soviet Union. He has emerged as the most prominent member of the “mathematical school” of Soviet economists and thus of the group of scholars who recommend a reform of the central planning technique. An important part of their argumentation is the thesis that the possibilities of a successful decentralization of production decisions in a centrally planned economy is depending upon the existence of a rationally constructed system of prices, including a unique rate of interest.
During the 1940’s linear programming was, independently of the Russian scholars, also developed by some American economists, among them Tjalling Koopmans. He was working as a statistician at the British Merchant Shipping Mission in wartime, Washington when he encountered a problem of optimal routing of empty ships. He formulated this problem in accordance with the linear programming model. In his treatment of this problem he stressed the importance of shadow prices and in addition he constructed a method of numerical solution of the model.
At an early stage Koopmans perceived that linear programming could be linked up with traditional macroeconomic theory. He saw that resource allocation in a competitive economy could be regarded as the solution of a vast linear programming problem and that the production model could serve as a basis for a stringent formulation of general equilibrium theory. In 1951 he expounded this view in a famous work in which he presented a theory called activity analysis. By showing, there, that technical efficiency was fundamentally related to the price system and to the allocation of resources in a competitive economy, he formed a bridge between the normative theory of resource allocation and the descriptive general equilibrium theory. Further, in conformity with Kantorovich he drew the conclusion that the use of shadow prices created possibilities of decentralization of production decisions.
In a series of papers published during the 1960’s Koopmans treated the problem of how to divide national income between consumption and investment in an optimal fashion. This question which is important to all long term economic planning, concerns a choice between present and future consumtion and involves consequently judgements of the welfare distribution between different generations. Koopmans stands out as the great pioneer in this field of research. He has taught us how to put the problems and he has formulated a number of important theorems concerning optimum conditions.
Drs Kantorovich and Koopmans,
On behalf of the Royal Academy of Sciences I ask you to receive your prizes from the hands of His Majesty the King.
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.