fifty major economists a reference guide phần 8 ppsx

The downward sloping IS curve shows that as interest rates fall, economic output must expand to keep the goods market in equilibrium.. LM stands for the fact that money demand L must equ

JOHN HICKS

reducing inequality He thus advocated higher

taxes on wealth, capital gains, and inheritances

Today, virtually every developed country

in the world has constructed a large

macroeconometric model of nearly 1,000

equations These models are used to study

economic activity and to predict the future

course of the economy They are also used

by governments and by central banks to help

formulate economic policies The existence

of these macroeconometric models is due to

the pioneering work of Tinbergen This work

makes Tinbergen one of the half dozen most

important economists of the twentieth

century

Works by Tinbergen

“Annual Survey of Significant Developments in

General Economic Theory,” Econometrica,

2, 1 (January 1934), pp 26–8

An Econometric Approach to Business Cycle

Problems, Paris, Hermann, 1937

Statistical Testing of Business Cycle Theories,

2 vols., Geneva, League of Nations, 1939

“On a Method of Statistical Business Cycle

Research: A Reply,” Economic Journal, 50

Centralization and Decentralization in

Economic Policy, Amsterdam,

Shaping the World Economy: Suggestions for

an International Economic Policy, New

York, Twentieth Century Fund, 1962

Lessons from the Past, Amsterdam,

North-Holland, 1963

Income Distribution: Analysis and Policies,

Amsterdam, North-Holland, 1975

Works about Tinbergen

Baum, Sandra R., “Jan Tinbergen 1969” in Nobel

Laureates in Economic Science, ed Bernard

S Katz, New York and London, GarlandPublishing, 1989, pp 304–17

Bos, Henk C., “Jan Tinbergen: A Profile,” Journal

of Policy Modeling, 6, 2 (1984), pp 151–8Hansen, Bent, “Jan Tinbergen: An Appraisal of

His Contributions to Economics,” Swedish

Journal of Economics, 71, 4 (1969), pp 25–36

Keynes, John Maynard, “Professor Tinbergen’s

Method,” Economic Journal, 39 (September 1939) Reprinted in The Collected Writings of

John Maynard Keynes, XIV, London,Macmillan, 1973, pp 306–20

Kol, J and Wolff, P de, “Tinbergen’s Work:

Change and Continuity,” De Economist, 141,

1 (1993), pp 1–28Van Der Linden, J.T.J.M “Economic Thought inthe Netherlands: The Contribution of Professor

Jan Tinbergen,” Review of Social Economy, 46,

3 (December 1988), pp 270–82

Other references

Piore, Michael and Doeringer, Peter Internal

Labor Markets and Manpower Analysis,

Lexington, Massachusetts, D.C.Heath, 1971

JOHN HICKS (1904–89)

John Hicks is best known for developingseveral pictorial diagrams used to demonstrateeconomic principles and techniques ofanalysis These now form the basis ofcontemporary economics, especially as it istaught to undergraduate students

Hicks was born in Warwick, England in

1904 into a middle-class family His father was

a journalist and an editor Hicks received a goodhigh school education at private Britishschools, and then earned a scholarship to

JOHN HICKSBalliol College, Oxford Hicks began studying

mathematics at Oxford, but soon changed fields

and concentrated on economics He received

his degree in philosophy, politics, and

economics in 1926

After graduating, Hicks taught at the London

School of Economics, at Cambridge University,

and briefly in South Africa He was not

enamored with Cambridge, disliking both the

physical climate and the intellectual climate (a

great tendency to quarrel), but he found the

London School a congenial place to work Hugh

Dalton of the London School got Hicks to read

Pareto’s Manual, an event of great importance

in his life When he got to the mathematical

appendices, Hicks realized Pareto did not finish

what he set out to do—make economic analysis

clearer and more precise by translating it into

mathematics At that moment Hicks decided to

devote his career to completing what Pareto

started (Klamer 1989, p 169)

In 1938 Hicks was appointed to the Stanley

Jevons Professorship at Manchester University

Eight years later he returned to Oxford, where

he taught until his retirement in 1965 Hicks

was knighted in 1964, thus becoming Sir John

Hicks In 1972 he shared the Nobel Prize in

Economics with Kenneth Arrow

Hicks has made important contributions to

both macroeconomics and microeconomics—

a rare feat in the twentieth century, when

macroeconomics and microeconomics have

remained separate and distinct fields and whenspecialization prevails in all academicdisciplines As a macroeconomist, Hicks is bestknown for formalizing the macroeconomictheories of Keynes In one of the most citedeconomic papers of all time, Hicks (1937)

condensed Keynes’ General Theory into a set

of two curves (see Figure 12)

Standard Keynesian theory never made therelationship between the goods market and themoney market clear In the goods market,businesses produce things and sell these things

to consumers, government, other businessesand other countries Equilibrium in the goodsmarkets requires that the supply of goodsbrought to market equals the demand for thesegoods In the money market, people andbusinesses demand a fixed stock of money that

is set by the nation’s central bank Equilibrium

in the money market requires that the demandfor money equals the supply of money.These two markets, however, areinterrelated rather than independent of eachother If the supply of money were increased,this would lower interest rates in the moneymarket But with lower interest rates,investment would rise and the total demand forgoods and services would increase in the goodsmarket Of course, with more goods andservices being produced, people would needmore money so that they can buy more things.But a greater demand for money would push

up interest rates, reduce investment and output,and thereby lower the demand for money.Interactions between the goods market andthe money market could conceivably go backand forth forever, yielding no final and stable

outcome The IS-LM model demonstrated that

the goods market and the money market wouldachieve equilibrium simultaneously Thisdiagram now serves as the basis for mostundergraduate education in macroeconomics,and has made IS-LM and Keynesianismsynonymous in the minds of most economicsstudents

The IS curve in Figure 12 representsequilibrium positions in the goods market ofthe economy IS stands for the fact that in the

Figure 12 IS-LM diagram

JOHN HICKS

goods market investment (I) equals savings (S)

The downward sloping IS curve shows that as

interest rates fall, economic output must

expand to keep the goods market in

equilibrium This is because lower interest rates

will increase business investment, but it will

also reduce savings To get savings up, and

ensure that savings and investment are equal,

the economy must produce more goods, more

jobs, and greater incomes

The LM curve shows possible

equilibrium positions in the money market

LM stands for the fact that money demand

(L) must equal money supply (M) in the

money market Figure 12 shows that as

interest rates rise it is necessary for the

economy to expand if the money market is

to remain in equilibrium This is because

higher interest rates reduce the demand for

money, since by holding money people lose

the interest they could be earning by holding

some interest-bearing asset However, if the

economy grows, people will want to hold

more money because they will be buying

more goods With more goods produced,

money demand will increase and will come

to equal the money supply

Simultaneous equilibrium is achieved at

the point of intersection between the IS and

LM curves Since the goods market moves

towards points on the IS curve and the money

market moves to points on the LM curve, the

whole economy must move towards the single

point at which the two curves meet

Hicks then went on to show how the

differences between Keynesian economists

and classical economists arose from

different assumptions about the two curves

If the LM curve was flat rather than steeply

sloped, fiscal policy (or a shift in the IS

curve) would be needed to expand

employment and we are in the world

described by Keynesian economists On the

other hand, if the IS curve were flat,

monetary policy (or a shift in the LM curve)

would be needed to expand output and

employment, and we are in the world

described by the classical economists

A second macroeconomic contribution due

to Hicks involves the term structure of interest

rates Economists frequently talk about “the

rate of interest” as if there were only one rate

of interest existing in the economy But aseveryone knows, there are many different rates

of interest at any given time Rates on creditcards are higher than rates for homemortgages, and rates are higher for fixed ratemortgages than for variable rate mortgages.Interest rate theory attempts to explain therelationship among all these different rates.Economists have devised two ways tomake sense of the vast array of interest rates.One focuses on the risk of lending money andthe other on the length of time for whichmoney is lent The greater the risk to thelender, the higher the rate of interest needs to

be More interest is required to compensate

the lender for the greater probability that theloan will not be repaid

The yield curve is a graphic device for looking

at the rate of interest on loans made for differentlengths of time These loans take the form ofpeople and businesses purchasing government (orcorporate) bonds A yield curve might show that

a three-month loan to the US government pays

Figure 13 The yield curve

JOHN HICKS4.4 percent, a two-year loan pays 5.5 percent, a

10-year loan pays 7 percent, and a 30-year loan

pays 8 percent (see Figure 13)

One question that arises concerning the

yield curve is whether there is any linkage

among interest rates for assets with different

maturities—say 6-month and 1-year

government bonds Hicks (1939, Chs 11–13)

answered this question with a resounding

“yes,” and developed the expectations

hypothesis to explain the relationship among

assets with different maturity lengths

Hicks reasoned that if a 6-month bond

paid 5 percent now and a-year bond paid

5.5 percent now, then investors must expect

that six months from right now the rate on

a 6-month bond will be 6 percent Investors

earn 5.5 percent either way They can earn

5.5 percent over the whole year by

purchasing a 1-year bond now; alternatively,

they can earn 5 percent for the first six

months of the year, and 6 percent for the

second six months of the year This averages

out to the same 5.5 percent that could be

earned from a 1-year bond In general, the

expectations hypothesis holds that returns

on assets of longer maturities will equal the

average of the current return on shorter-term

assets and the expected return on

shorter-term assets in the future

Hicks then went on to explain why the

expectations hypothesis had to be true This

explanation essentially relies on the process

of arbitrage (see also COURNOT) If a

1-year bond paid 5.5 percent when a 6-month

bond paid 5 percent and was expected to

pay 5.5 percent at 6 months in the future,

no one would want to own 6-month bonds

and no one would buy them Over a 1-year

time period, two 6-month bonds are

expected to earn only 5.25 percent People

would prefer to have 1-year bonds paying

5.5 percent; so they will sell their 6-month

bonds and buy 1-year bonds This drives

down the price of the 6-month bond and

drives up the price of the 1-year bond Since

bond prices are inversely related to interest

rates, the interest rate on the 6-month bond

will rise and the interest rate on the 1-yearbond will fall This process will continueuntil the equilibrium condition identified bythe expectations hypothesis is finally

achieved—the rate on a 1-year bond will be

equal to the average of the rate on a 6-monthbond and the rate expected on a 6-monthbond a half year from now

While Hicks made many contributions as

a macroeconomist, it is as a microeconomistthat Hicks first achieved fame AlthoughEdgeworth drew the first indifference curvediagrams, it was Hicks (1934) whoincorporated indifference curve analysis intostandard microeconomic theory He showedhow indifference curves could be used toconstruct a downward sloping demand curvefor any good He then used indifference curves

to separate the income effect of a price change from the substitution effect of a price change.

The key to this analysis is the introduction

of a budget line This line represents howmuch of each good a consumer could purchasegiven their current income and the current

Figure 14 Indifference curve and budget constraint

JOHN HICKS

prices of goods For example, with $10 and

with pretzels and beer each costing $1, a

consumer can buy any combination of pretzels

and beer that adds up to 10 This is shown by

the negatively sloped line in Figure 14 At one

extreme, the consumer can buy 10 bags of

pretzels and no beer At the other extreme the

consumer can buy 10 beers and no pretzels

In between these extremes many

combinations are possible All of these

possibilities are show by the budget line

Hicks next added indifference curves (see

also EDGEWORTH) to this diagram in order

to explain consumer behavior Consumers

would choose the combination of pretzels and

beer that yielded the highest utility, or which

was the highest on the diagram (point A)

Hicks then looked at the effects of a change

in price Suppose that the price of a beer were

to increase to $2 With the price of beer

relatively higher, people will want to purchase

more pretzels and less beer This is the

substitution effect, whereby an increase in the

price of a good reduces demand for that good

and increases demand for most other goods (all

goods that are not complementary goods) Yet,

there is also an income effect When beer costs

more, consumer income can buy less ofeverything Spending on both beer and pretzelswill fall due to the income effect Together, thetwo effects together change spending from 5beers and 5 pretzels to 1.5 beers and 7 pretzels.These effects are shown by the rotation of thebudget line Due to this rotation, point C is nowwhere our consumer gets the greatest utility.Hicks then figured out an ingeneous way

to separate the income and substitution effects.The slope of the budget line represents therelative prices of the two goods If there were

a substitution effect, but no income effect, weshould be on our original indifference curve,but choosing different combinations of pretzelsand beer based on the new $2 price of beer orthe new budget line Hicks suggested that weshow the income effect by taking the old budgetline and moving it up the graph until it is justtanget to the original indifference curve This

is shown as the dashed line on Figure 15 Atpoint B the relative prices of beer and pretzelsare the same It thus shows the change inconsumer spending habits must therefore bedue to the income effect alone

Because the income effect and thesubstitution effect each reduce the consumption

of beer, it follows that when the price of beerrises, people buy less beer The demand curvefor beer must therefore slope downward—asthe price of beer rises, the quantity consumedfalls and conversely as the price of beer falls,the quantity consumed will increase

Finally, Hicks (1932) is responsible for

introducing the notion of the elasticity of substitution, a natural extension of Marshall’s

notion of elasticity Marshall applied the notion

of elasticity to consumer demand and producersupply, and studied how much more consumerswould buy and how much more producerswould sell given some change in price Hickstook this elasticity notion and applied it to thedecisions businesses had to make aboutproduction

From a firm’s point of view, goods can beproduced in several different ways, each usingdifferent combinations of labor and capital Amore labor-intensive production process would

Figure 15 Income and substitution effects

OSKAR LANGEemploy less capital and more labor, and a more

capital-intensive production process would use

less labor and more capital In general, firms

face a trade-off in production—each additional

worker employed requires less machinery, and

each additional machine used in production

requires fewer workers The elasticity of

substitution measures how much machinery

could be dispensed with if one more worker

were used in producing goods, or alternatively

how many workers could be dispensed with

by purchasing and using one more machine

Hicks pointed out that workers should not

necessarily oppose labor-saving technical

change since it could lead to higher wages This

would arise if the elasticity of substitution

between labor and capital is large, and it is easy

to substitute capital for labor With more

capital, workers will be more productive and

thus will be paid more

Hicks has justly been called (Hamouda

1993) “the economist’s economist.” Writing

exclusively for his professional colleagues, he

developed numerous tools and diagrams that

have enabled economists to depict the

principles of economic analysis more clearly

and concisely Hicks showed how to combine

an analysis of the money market with an

analysis of the goods market, how to

understand the relationships between interest

rates of different maturities, and how to

combine utility theory and the theory of

demand For his many advances and for the

many areas in which he made important

contributions, Hicks must be regarded as one

of the half dozen most important

twentieth-century economists

Works by Hicks

The Theory of Wages, London, Macmillan, 1932

“A Reconsideration of the Theory of Value,”

Economica, 1 (February and May 1934), pp

52–76, 196–219, with R.D.G.Allen

“A Suggestion for Simplifying the Theory of

Money,” Economica, 2 (February 1935), pp.

1–19 Reprinted in Hicks (1967)

“Mr Keynes and the ‘Classics’: A Suggested

Interpretation,” Econometrica, 5 (April 1937),

pp 147–59 Reprinted in Hicks (1967)

Value and Capital: An Inquiry into Some Fundamental Principles of Economic Theory,

Oxford, Clarendon Press, 1939

Capital and Growth, Oxford, Clarendon Press,1965

Critical Essays in Monetary Theory, Oxford,Oxford University Press, 1967

Collected Essays on Economic Theory, 3 vols.,Oxford, Basil Blackwell, 1981–3

Works about Hicks

Baumol, William, “John R.Hicks’ Contribution

to Economics,” Swedish Journal of

Economics, 74 (1972), pp 503–72

Hagemann, Harold and Hamouda, Omar F., The

Legacy of Hicks: His Contributions to Economic Analysis, London and New York,Routledge, 1994

Hamouda, Omar F., John R.Hicks: The

Economist’s Economist, Oxford, Blackwell,1993

Klamer, Arjo, “An Accountant AmongEconomists: Conversations with Sir John

R.Hicks,” Journal of Economic Perspectives,

3, 4 (Fall 1989), pp 167–80Morgan, Brian, “Sir John Hick Contribution toEconomic Theory,” in J.R.Shackleton and G

Locksley (eds.) Twelve Contemporary

Economists, London, Macmillan, 1981, pp

OSKAR LANGE (1904–65)

Oskar Lange (pronounced LANG-ga) is bestknown for his work on economic planning andthe economics of socialism This workexplained how socialist economies couldallocate resources efficiently despite the factthat prices were set by bureaucrats rather than

by the market It also explained how lessdeveloped countries could use the tools of

OSKAR LANGE

economic planning to grow more quickly and

efficiently Less well-known is the work that

Lange did on capitalist economies This work

explained why market economies went through

regular business cycles, and why the standard

policies to deal with high unemployment were

inadequate

Lange was born in the town of Tomaszów

Mazowiecki, in western Poland, in 1904 His

father was a German textile manufacturer who

produced goods for sale in eastern Europe

Proceeds from the business allowed the Langes

to live a middle-class lifestyle until shortly

before World War I; at that time the business

went bankrupt and the family economic

circumstances became difficult

Lange developed interests in biology,

mathematics and the social sciences while he

was growing up When the time came to choose

a path of study, he had difficulty deciding

between the biological sciences and the social

sciences After much anguish Lange opted for

the latter, and enrolled at the University of

Krakow to study mathematics, statistics, law,

and economics He received his doctorate in

1928 for a study of business cycles in Poland,

and then obtained a position as lecturer in

statistics at the University

During the 1930s and early 1940s Lange

visited England and then the US as a

Rockefeller Foundation Fellow During this

time he studied with Joseph Schumpeter at

Harvard; then he held teaching positions at the

University of Michigan, Stanford University,

and the University of Chicago In the later war

years Lange worked to set up a new Polish

government After World War II he served the

Polish government as ambassador to the United

States, Polish delegate to the UN Security

Council, member of Parliament, and member

of the Central Committee of the Polish

Worker’s Party In 1948 Lange returned to

academic life, teaching at the Central School

of Planning and Statistics in Warsaw and then

at the University of Warsaw

The economic work of Lange was

concerned primarily with the theoretical and

practical problems of a planned or socialist

economy He studied questions such as whethercentrally planned economies could be run asefficiently as market economies, how toprovide adequate incentives to managers undersocialism, and how to find the proper balancebetween centralization and decentralization Inall his work, Lange tried to bring mathematicsand statistical analysis to bear on the planningproblem

One of the major problems facing anysocialist economy is how to allocate resourcesefficiently In a capitalist economy this functiongets performed by markets Those goods ingreater demand by consumers fetch higherprices, thus signaling to producers of thesegoods that they need to expand production Incontrast, goods that consumers do not want pile

up on store shelves and in warehouses.Businesses stop producing these items andinstead make those goods in greater demand.Lange was instrumental in showing that justbecause there was no market it did not meanthat socialism led to an inefficient allocation

of goods—producing too many thingsconsumers did not want and not enough of whatconsumers greatly desired

In 1908 the Italian economist Enrico Baroneattempted to show that markets were notnecessary for economic efficiency (translated

as Barone 1935) He started with a set ofmathematical equations, each representing thesupply or the demand for some particular good.Barone used this set of equations to show thatsocialist economies could set prices correctlyand efficiently allocate goods All economicplanners had to do was solve these equationsand find the market clearing price for eachgood, or the price where supply and demandwould exactly equal each other By setting theprice of each good equal to its market clearingprice, planners would make sure that theeconomy produced the goods consumerswanted

In the 1930s, Friedrich Hayek and LionelRobbins, two economists teaching at theLondon School of Economics, raised a ratherobvious objection against this scheme Theyargued that the procedure envisioned by Barone

OSKAR LANGEwas possible in theory, but impossible in

practice; before making any decision, a

socialist government or ministry of economic

planning would have to gather an immense

amount of information, and derive hundreds

of thousands (Hayek 1935), or maybe even

millions (Robbins 1934) of equations They

would then have to solve all these equations in

order to find the set of market clearing prices

Moreover, as Robbins (1934, p 151) pointed

out, by the time this set of equations was solved

mathematically the economy would have

changed, and the information upon which the

solution was based would be obsolete Planners

would thus have to re-estimate all the equations

and solve this new set of equations Of course,

by the time this was done, the economy would

have changed again, and the prices set by an

economic planning board would again be out

of date

In 1938 Lange (1964) responded to these

objections and demonstrated that an efficient

socialism was possible He showed that it was

not necessary for economic planners to know

thousands upon thousands of mathematical

equations; nor was it necessary for them to

solve all these equations in order to get prices

right All that was needed, Lange contended,

was for planners to follow a simple trial and

error method Whenever shortages existed in

an economy, economic planners should raise

prices; and when surpluses existed, planners

should lower prices By imposing these rules,

socialist planners would function just like the

market in a capitalist economy, and the socialist

economy would be able to efficiently allocate

resources Making their job even easier,

planners would not have to start their

trial-and-error process from scratch Rather, they would

begin with the set of efficient prices determined

by the market

Lange (1964) also argued that this

procedure would result in an economic system

far superior to capitalism The economy would

reach equilibrium prices more quickly, since

economic planning boards would have greater

knowledge of the whole economy than any

individual entrepreneur under a capitalist

system Many years later Lange realized thatwith the aid of a computer it would be possible

to solve thousands of equations and findmarket-clearing prices for all goods in just afew seconds (Feiwel 1972, p 614)—much lesstime than the market itself would need Bymoving to equilibrium prices more quickly,business cycles would be shorter and milder;therefore socialist economies would experienceless unemployment than capitalist economies.According to Lange, a socialist economyhad other advantages It was superior to acapitalist economy because it had a more equaldistribution of income In addition, socialisteconomies were plagued less by the problems

of monopoly power Under socialism firmscould not make excessive profits by restrictingoutput, and thus they could not wield greatpolitical power

Although Lange devoted much effort toshowing how socialism could be as efficient

as capitalism, socialism was not a utopian endstate for Lange He (1964, p 109) saw that “the

real danger of socialism is that of a bureaucratization of economic life.” And heworried that economic planners might act intheir own interests rather than in the interests

of the nation But Lange also noted that thesame problems existed under monopolycapitalism—corporate managers becamebureaucrats and did not respond to the needs

of consumers Lange thought that decentralizeddecision-making and better-educated plannerswould help to mitigate these problems.Lange’s analyses of the economic problemsthat exist under capitalism constitute his secondcontribution to economics According toLange, in capitalist economies the market didnot play the role that economic theory gave itbecause monopolies had destroyed the marketand free competition These monopolies wereable to control prices, keep out competitors,and influence both consumers and politicians.Lange thus saw socialism as a way to restorethe efficiency of market pricing andcompetition, as well as a means to makeeconomic decision-making more democratic.Economic management would be undertaken

OSKAR LANGE

by public functionaries, who were subject to

democratic control, rather than by the heads

of large and powerful enterprises that were

subject to no controls at all

A second problem with capitalism

according to Lange (1944a) is that capitalist

economics tend to remain stuck at high levels

of unemployment This work parallels that of

John Maynard Keynes Lange noted that two

outcomes were possible during a recession,

only one which would lead to a growth in

employment First, the recession could cause

prices to drop but have little effect on the

amount of money in circulation With lower

prices, the existing money supply would allow

consumers to buy more goods and services and

businesses to purchase more plants and

equipment Flexible prices would thus help the

economy move to full employment This is the

traditional analysis of how economies

responded in times of high unemployment

But Lange argued it was also possible for

the money supply to fall by more than the

decline in prices To understand why this might

occur requires knowing that in mature

economies money gets created when banks

make loans In a recession, banks will fear that

they may not get repaid when they lend out

money If they call in loans and refuse to lend,

this will reduce the money supply and push up

interest rates In this case we get even less

investment and greater unemployment

Either of these two scenarios is possible in

practice A monetary economy thus possesses

no automatic mechanisms, like flexible prices,

to guarantee that it will head towards full

employment equilibrium Moreover, Lange

argued that rising monopolistic elements under

capitalism make flexible prices less likely and

the second scenario more likely

Going even further, Lange doubted that

macroeconomic policies of the sort advocated

by Keynes could solve the unemployment

problem Here too monopolies got in the way

Monopolies were more likely to respond to

greater demand by raising prices than by

expanding output and hiring more workers

This, obviously, limits the ability of greater

demand for goods to create more jobs The onlysolution to unemployment becomes curbing thepower of monopolies by having the state takethem over In the interests of economicperformance, the state must assert democraticcontrol over the economy Monopolycapitalism thus becomes a roadway todemocratic socialism for Lange

Lange saw socialism not as the negation ofcapitalism but as its extension He believed thatthe growth of monopolies and oligopolies hadalready destroyed the market and freecompetition Market socialism was a way torestore competition and maintain democracy.Lange was critical not only of capitalism;

he was also highly critical of the Sovieteconomy Refusing to describe it as a socialisteconomy, Lange (1944b) thought the SovietUnion was “an authoritarian economy guided

by political objectives.” Its political objectives

were to be one of the world’s leadingindustrial countries and to provide adequatelyfor the national defense The Soviet Uniontherefore did not develop a democratic marketsocialism Rather the government divertedresources to defense spending and investment

in large-scale manufacturing It did this byreducing the quantity of goods available toother sectors Consumers were starved forgoods and had to spend hours waiting in line

to buy them Agriculture was hindered in order

to develop a manufacturing sector Andmaterials were always in short supply.Likewise, the emphasis on quantity (ratherthan market-clearing prices) by Sovieteconomic planners hurt quality In order tomeet the quantity goals imposed by planners,firms would make the cheapest goodspossible Because goods were always in shortsupply, no matter how shoddy the goods were,they would be bought by someone

The work of Lange should be viewed as anattempt to combine the best aspects ofsocialism (democracy in economic decision-making) with the best aspects of capitalism(efficiency) He advocated governmentownership of large, monopolistic firms and alsoadvocated using the price mechanism to insure

WASSILY LEONTIEFthat the economic system produce goods that

satisfy consumer needs He sought to combine

central planning with decentralized

management, and he sought to make planners

more efficient through better education and by

providing them with the modern tools of

analysis and forecasting If the countries of

Central and Eastern Europe begin to look for

some middle ground between

survival-of-the-fittest capitalism and total government control

over all economic activity, it is certain that the

economic thought of Lange will take on

increasing importance

Works by Lange

“Say’s Law: A Restatement and Criticism,” in

Studies in Mathematical Economics and

Econometrics-in Memory of Henry Schultz,

Chicago, University of Chicago Press, 1942,

pp 49–68

“The Theory of the Multiplier,” Econometrica, 11

(July-October 1943), pp 227–45

Price Flexibility and Employment, Bloomington,

Indiana, Principia Press, 1944a

Working Principles of the Soviet Economy, New

York, Research Bureau for Postwar

Economics, 1944b

“Economic Controls After the War,” Political

Science Quarterly, 60 (1945), pp 1–13

Some Problems Relating to the Polish Road to

Socialism, Warsaw, Polonia Publishing House,

1957

Economic Development, Planning and

International Cooperation, New York,

Monthly Review Press, 1963

On The Economic Theory of Socialism, New York,

McGraw Hill, 1964, with Fred M.Taylor

Economic Theory and Market Socialism: Selected

Essays of Oskar Lange, ed Tadeusz Kowalik,

Hants, Edward Elgar, 1994

Works about Lange

Feiwel, George R., “On the Economic Theory of

Socialism: Some Reflection on Lange’s

Contributions,” Kyklos 25, 3 (1972), pp 601–

18Fisher, Walter D., “Oskar Ryszard Lange, 1904–

1965,” Econometrica 34, 4 (October 1966),

pp 733–8Rider, Christine, “Oskar Lange’s Dissent fromMarket Capitalism and State Socialism,” in

Economics and its Discontents, ed RichardP.F Holt and Steven Pressman, Cheltenham,

UK & Northampton, Massachusetts, EdwardElgar, 1998, pp 165–82

Kowalik, Tadeusz, “Oskar Lange’s Market

Socialism,” Dissent, 38, 1 (Winter 1991), pp.

86–95

Other references

Barone, Enrico, “The Ministry of Production in

the Collectivist State,” in Collectivist

Economic Planning, ed F.A.Hayek, London:Routledge, 1935, pp 245–90

Robbins, Lionel, The Great Depression, London:

Macmillan, 1934Hayek, Friedrich A., “The Nature and History of

the Problem,” in Collectivist Economic

Planning, ed F.A.Hayek, London, Routledge,

1935, pp

WASSILY LEONTIEF (1906–99)

Wassily Leontief (pronounced

LAY-yon-TEE-F) is best known for developing input-output analysis. This technique, which describes theinterrelationships among the different sectors

or industries of an economy, has a number ofimportant applications and provides broadinsights into how economies work Input-output analysis has been used to understandhow production bottlenecks might arise wheneconomies expand, and how the inflationaryprocess gets distributed and diffusedthroughout the economy (Leontief 1946) Thetechnique was also used by socialist economiesand by developing economies after World War