Léon Walras
Marie-Esprit-Léon Walras was a French mathematical economist and Georgist. He formulated the marginal theory of value and pioneered the development of general equilibrium theory.
Biography
Walras was the son of a French school administrator Auguste Walras. His father was not a professional economist, yet his economic thinking had a profound effect on his son. He found the value of goods by setting their scarcity relative to human wants.Walras enrolled in the École des Mines de Paris, but grew tired of engineering. He worked as a bank manager, journalist, romantic novelist and railway clerk before turning to economics. Walras received an appointment as the professor of political economy at the University of Lausanne.
Walras also inherited his father's interest in social reform. Much like the Fabians, Walras called for the nationalization of land, believing that land's productivity would always increase and that rents from that land would be sufficient to support the nation without taxes. He also asserts that all other taxes eventually realize effects exactly identical to a consumption tax, so they can hurt the economy.
Another of Walras's influences was Augustin Cournot, a former schoolmate of his father. Through Cournot, Walras came under the influence of French rationalism and was introduced to the use of mathematics in economics.
As Professor of Political Economy at the University of Lausanne, Walras is credited with founding the Lausanne school of economics, along with his successor Vilfredo Pareto.
Because most of Walras's publications were only available in French, many economists were unfamiliar with his work. This changed in 1954 with the publication of William Jaffé's English translation of Walras's Éléments d'économie politique pure. Walras's work was also too mathematically complex for many contemporary readers of his time. On the other hand, it has a great insight into the market process under idealized conditions so it has been far more read in the modern era.
Although Walras came to be regarded as one of the three leaders of the marginalist revolution,
he was not familiar with the two other leading figures of marginalism, William Stanley Jevons and Carl Menger, and developed his theories independently. Elements has Walras disagreeing with Jevons on the applicability, while the findings adopted by Carl Menger, he says, are completely in alignment with the ideas present in the book.
Life and career
General equilibrium theory
In 1874 and 1877 Walras published Éléments d'économie politique pure, in English, Elements of Pure Economics, trans. William Jaffé.That work that led him to be considered the father of the general equilibrium theory. The problem that Walras set out to solve was one presented by A. A. Cournot, that even though it could be demonstrated that prices would equate supply and demand to clear individual markets, it was unclear that an equilibrium existed for all markets simultaneously. Walras's law implies that the sum of the values of excess demands across all markets must equal zero, whether or not the economy is in a general equilibrium. This implies that if positive excess demand exists in one market, negative excess demand must exist in some other market. Thus, if all markets but one are in equilibrium, then that last market must also be in equilibrium.
While teaching at the Lausanne Academy, Walras began constructing a mathematical model that assumes a “regime of perfectly free competition”, in which productive factors, products, and prices automatically adjust in equilibrium. Walras began with the theory of exchange in 1873 and then he proceeded to map out his theories of production, capitalization and money in his first edition. His theory of exchange began with an expansion of Cournot’s demand curve to include more than two commodities, also realizing the value of the quantity sold must equal the quantity purchased thus the ratio of prices must be equal to the inverse ratio of quantities. Walras then drew a supply curve from the demand curve and set equilibrium prices at the intersection. His model could now determine prices of commodities but only the relative price. In order to deduce the absolute price, Walras could choose one price to serve as a unit of account, coined by Walras as the numeraire and state all other prices in units of this commodity. The term numeraire, meaning unit of account, has become part of the international vocabulary of economics and for many economists, the only French word they know. Using this numeraire he determined that marginal utility, or rarete, divided by the price must be equal for all commodities. Walras felt that because the value of what an individual consumer consumes is equal to the value of that individual’s stock of goods, that the aggregate, the value of total sales must equal the value of total purchase, must hold true. This became known as Walras’ Law which held that equilibrium equations can be derived from the others until only m-1 equations in the m-1 relative prices remain. Walras then expanded the theory to include production with the assumption of an existence of fixed coefficients in said production making possible a generalization that the marginal productivity of the factors of production varied with the amount of input, making factor substitution possible.
Walras constructed his basic theory of general equilibrium by beginning with simple equations and then increasing the complexity in the next equations. He began with a two-person bartering system, then moved on to the derivation of downward-sloping consumer demands. Next he moved on to exchanges involving multiple parties, and finally ended with credit and money.
Walras wrote down four sets of equations—one representing the quantity of goods demanded, one relating the prices of goods to their costs of production, one for the quantities of inputs supplied, and one showing the quantities of inputs demanded. There are four sets of variables to solve for, namely, the price of each good, the quantity of each good sold, the price of each factor of production, and the quantity of each of those factor bought by businesses. To simplify matters, Walras added one further equation to his model, requiring that all the money received must be spent, one way or the other. But there are now more equations than unknowns. From the theory of equations, one learns that a necessary but insufficient condition for the existence of a unique solution to a system of equations is that the number of equations must equal the number of variables. Walras tackled this problem by selecting an arbitrary good, G1, whose price is designated as the standard against which the prices of the other goods shall be compared. The system of equations can now be solved for the prices of all goods in terms of G1, though not for the absolute price levels.
The crucial step in the argument was Walras's law which states that any particular market must be in equilibrium, if all other markets in an economy are also in equilibrium. Walras's law hinges on the mathematical notion that excess market demands must sum to zero. This means that, in an economy with n markets, it is sufficient to solve n-1 simultaneous equations for market clearing. Taking one good as the numéraire in terms of which prices are specified, the economy has n-1 prices that can be determined by the equation, so an equilibrium should exist. Although Walras set out the framework for thinking about the existence of equilibrium clearly and precisely his attempt to demonstrate existence by counting the number of equations and variables was severely flawed: it is easy to see that not all pairs of equations in two variables have solutions. A more rigorous version of the argument was developed independently by Lionel McKenzie and the pair Kenneth Arrow and Gérard Debreu in the 1950s.
A significant part of the general equilibrium theory as introduced by Walras has become known as the Walrasian auction which is a type of simultaneous auction where each agent calculates its demand for the good at every possible price and submits this to an auctioneer. The price is then set so that the total demand across all agents equals the total amount of the good. Thus, a Walrasian auction perfectly matches the supply and the demand. Walras suggests that equilibrium will be achieved through a process of tâtonnement, a form of incremental hill climbing.
Economic value definition of utility
Léon Walras provides a definition of economic utility based on economic value as opposed to an ethical theory of value:I state that things are useful as soon as they may serve whatever usage, as soon as they match whatever need and allow its fulfillment. Thus, there is here no point to deal with 'nuances' by way of which one classes, in the language of everyday conversation, utility beside what is pleasant and between the necessary and the superfluous. Necessary, useful, pleasant and superfluous, all of this is, for us, more or less useful. There is here as well no need to take into account the morality or immorality of the need that the useful things matches and permits to fulfill. Whether a substance is searched for by a doctor to heal an ill person, or by a assassin to poison his family, this is an important question from other points of view, albeit totally indifferent from ours. The substance is useful, for us, in both cases, and may well be more useful in the second case than in the first one.
In economic theories of value, the term "value" is unrelated to any notions of value used in ethics, they are homonyms.
Legacy
In 1941 George Stigler wrote about Walras: What caused the re-appraisal of Walras's consideration in the US, was the influx of German-speaking scientists – the German version of the Éléments was published in 1881.According to Schumpeter:
Major works
Éléments d'Économie Politique Pure
The Éléments of 1874/1877 are the work by which Walras is best known. The full title is- Éléments d'Économie Politique Pure, ou Théorie de la richesse sociale.
Plan of work
The work was issued in two instalments in separate years. It was intended as the first of three parts of a systematic treatise as follows:- 1^{re} partie:– Éléments d'Économie Politique Pure, ou Théorie de la richesse sociale.
- * Section I. Objet et divisions de l’économie politique et sociale.
- * Section II. Théorie mathématique de l’échange.
- * Section III. Du numéraire et de la monnaie.
- * Section IV. Théorie naturelle de la production et de la conommation de la richesse.
- * Section V. Conditions et conséquences du progrès économique.
- * Section VI. Effets naturels et nécessaires des divers modes d’organisation économique de la société.
- 2^{e} partie:– Éléments d’Économie Politique Appliquée, ou Théorie de la production agricole, industrielle et commerciale de la richesse.
- 3^{e} partie:– Éléments d’Économie Sociale, ou Théorie de la répartition de la richesse par la propriété et l’impôt.
Editions
- First. Most readily available. Described by Walker and van Daal as a ‘brilliant expression of pure originality, containing many theoretical innovations’ which ‘needed alteration and development in a variety of important respects’.
- Second. Revised, corrected and enlarged.
- Third. A minor revision with new appendices. This is considered the best edition by Walker and van Daal.
- Fourth. Revised and extended. According to Walker and van Daal, ‘these changes resulted in an incomplete, internally contradictory, and occasionally incoherent text’.
- Fifth. Posthumous; published by his daughter Aline. Follows the fourth.
Derived work
Translations
- William Jaffé of the fifth edition as Elements of Pure Economics.
- Donald A. Walker and Jan van Daal of the third edition as Elements of Theoretical Economics.
Online and facsimile editions
- Online:
- Facsimile: cheap photographic reprints are produced by facsimilepublisher.com.
Other works
- Francis Saveur, 1858.
- "De la propriété intellectuelle", 1859, Journal des économistes.
- "Paradoxes économiques I", 1860, Journal des économistes.
- "Théorie critique de l'impôt", 1861.
- De l'impôt dans le Canton de Vaud, 1861.
- "La bourse et le crédit", 1867, Paris Guide.
- "Correspondance entre M. Jevons, professeur a Manchester, et M. Walras, professeur a Lausanne", 1874, Journal des économistes.
- "Un nuovo ramo della matematica. Dell' applicazione delle matematiche all' economia politica", 1876, Giornale degli economisti.
- Théorie mathématique de la richesse sociale, 1883.
- "Notice autobiographique de Léon Walras", 1893.
- Études d'économie sociale; Théorie de la répartition de la richesse sociale, 1896.
- Études d'économie politique appliquée; Théorie de la production de la richesse sociale, 1898.
- "Théorie du crédit", 1898, Revue d'économie politique.
- "Sur les équations de la circulation", 1899, Giornale degli economisti
- "Cournot et l'Économique Mathématique", 1905, Gazette de Lausanne.
- "La Paix par la Justice Sociale et le Libre Échange", 1907, Questions Pratiques de Legislation Ouvrière.
- L'état et le chemin de fer.
- "Leone Walras, Autobiografia", 1908, Giornale degli Economisti.
- "Un initiateur en économie politique, A.A. Walras", 1908, La Revue du Mois.
- "Économique et méchanique", 1909, Bulletin de la Societe Vaudoise de Sciences Naturelles
- Correspondence of Léon Walras and related papers, 1965.
Note