Introduction

During one of our very last discussions Wassily Leontief asked me: “What are you doing these days?” I replied that I reconcile input-output analysis and neoclassical economics. He leant back, thought, looked me straight in the eyes, and said: “Should be easy.”

Yet input-output analysis and neoclassical economics seem hard to mix. The resentment between the two schools of economics is a two-way affair. Neoclassical economists consider input-output analysis a futile exercise in central planning. The relationship between the delivery of a bill of final goods and its requirements in terms of gross output and factor inputs is considered mechanical, with little or no attention paid to the role of the price mechanism in the choice of techniques (Leontief, 1941). True, input-output analysis is used to relate prices to factor costs, but here too the analysis is considered mechanical as input-output coefficients are presumed to be fixed. To make things worse, the quantity and value analyses are perceived to be disjunct, with no interaction between supply and demand.

Conversely, input-output economists consider neoclassical economics a futile exercise in marginal analysis that fails to grasp the underlying structure of the economy. Firms supply up to the point that marginal revenue equals marginal cost and set the price accordingly. But does not marginal cost depend on all prices in the system, including the one of the product under consideration? And if the answer is yes, should not we take into account the interindustry relations, i.e. apply input-output analysis?