Leontief's Scarce Factor Paradox

PROFESSOR LEONTIEF has recently applied his input-output analysis to American foreign trade and has discovered that, contrary to common belief, America's exports are as a whole labor-intensive and its imports from abroad capital-intensive.2 Leontief advances as a theoretical explanation of his result the argument that American labor, because of education, health, and "know-how," is superior to foreign labor in comparable combinations with other factors. America is thus in effect amply supplied with labor and relatively capital-poor and therefore engages in trade as a means of exporting its "surplus" labor in return for scarce capital. Unexpected empirical findings usually lead to a re-examination of received theory. This particular finding seems to upset so completely the economic background of American commercial, employment, and foreign investment policy that it invites a long, hard critical look. I shall try to show the following: (a) Input-output models (except for rare luck) are logically incompatible with international trade. Therefore, Leontief's way of getting his estimates is likely to be invalid (Secs. III and IV). (b) A country does not have to ex-