The Economics of Impact Models

The fundamental mathematics and economic reasoning behind impact models are quite rigorous. The conceptual reasoning behind what is known as input-output models was developed by Wassily Leontief in the early part of the 20th century.106 Leontief's innovation, along with those of the pioneers of econometrics and the creators of the national income and products accounts, paved the way for economics to become an empirical science. For his contribution, Leointief was awarded the 1973 Nobel Prize in Economics.

Leontief could build on a few of the pioneers of economics, particularly Francois Quesnay whose Tableau Économique (1759) predated Adam Smith and became a founding document for the Physiocrats.107 Quesnay graphed the interactions among sectors in "zig zag" tables, showing how much of the product of one sector went to another.108

106 Wassily W.Leontief, The Structure of the American Economy 1919-1939, 2nd ed. (Fair Lawn, NJ: Oxford University Press, 1951). Earlier work by Leontief was published in 1936 and 1941. See "Wassily Leontief" in The NewPalgrave (New York: Stockton, 1991). See also Wassily Leontief, Input-Output Economics, 2nd ed. (New York: Oxford University Press, 1986).

107 An excellent summary is available from the History of Economic Thought Web site, sponsored by the New School University and found at:

http://cepa.newschool.edu/het/essays/youth/tableau.htm. Their presentation is based on Hans Brems, Pioneering Economic Theory, 1630-1980 (Baltimore, MD: Johns Hopkins University Press, 1986).

108 Quesnay is properly credited with the idea of calculating the flow of goods and services through the economy but not for getting that flow right.

The Physiocrats, while advanced for their day, suffered from some deficiencies in their analysis. In particular, they thought that land was a natural gift for which no return could be expected and that manufacturing simply consumed all of its inputs, leaving no net product to add to the country's wealth. This led them to purse a poorly defined "natural order" that balanced the production of the productive classes with the needs of all classes. See the History of Economic Thought Web site, cited above.

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