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Marie-Esprit-Léon Walras (French: [valʁas];[2] 16 December 1834 – 5 January 1910) was a French mathematical economist and Georgist.[3] He formulated the marginal theory of value (independently of William Stanley Jevons and Carl Menger) and pioneered the development of general equilibrium theory.[4] Walras is best known for his book Éléments d'économie politique pure, a work that has contributed greatly to the mathematization of economics through the concept of general equilibrium.[5] The definition of the role of the entrepreneur found in it was also taken up and amplified by Joseph Schumpeter.
Léon Walras
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Walras in 1862 (age 27)
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| Born | (1834-12-16)16 December 1834
Évreux, Upper Normandy, France
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| Died | 5 January 1910(1910-01-05) (aged 75)
Clarens, now part of Montreux, Switzerland
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| Academic career | |
| Field | Economics Microeconomics |
| School or tradition | Lausanne School Marginalism |
| Alma mater | École des Mines de Paris |
| Influences |
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| Contributions | Marginal utility General equilibrium Walras's law Walrasian auction |
For Walras, exchanges only take place after a Walrasian tâtonnement (French for "trial and error"), guided by the auctioneer, has made it possible to reach market equilibrium. It was the general equilibrium obtained from a single hypothesis, rarity, that led Joseph Schumpeter to consider him "the greatest of all economists". The notion of general equilibrium was very quickly adopted by major economists such as Vilfredo Pareto, Knut Wicksell and Gustav Cassel. John Hicks and Paul Samuelson used the Walrasian contribution in the elaboration of the neoclassical synthesis. For their part, Kenneth Arrow and Gérard Debreu, from the perspective of a logician and a mathematician, determined the conditions necessary for equilibrium.
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.[6] 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 (i.e. on goods, labor, capital) eventually realize effects exactly identical to a consumption tax,[7] so they can hurt the economy (unlike a land tax).
Another of Walras's influences was Augustin Cournot, a former schoolmate of his father. Through Cournot, Walras came under the influence of 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.[8]
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.[9] 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,[10] 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 (even though expressed non-mathematically).[11]
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.
In 1874 and 1877 Walras published the work that led him to be considered the father of the general equilibrium theory, Éléments d'économie politique pure [see next section for bibliographical details].
His main goal was to solve a problem presented by A. A. Cournot: Does a general equilibrium exist? Though it had been demonstrated that prices would equate supply and demandtoclear individual markets ("partial equilibrium"), it was unclear that an equilibrium existed for all markets simultaneously ("general 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 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 the numeraire, such that all other prices are measured in units of this commodity. Using the numeraire, he determined that marginal utility [rareté] divided by the price must be equal for all commodities.
Then he argued that, because each individual consumer consumes as much value as the value of that individual's stock of goods, the value of total sales equals the value of total purchase. That is, Walras's law holds.
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:
There are four sets of variables to solve for:
To simplify matters, Walras added one further equation (the Walras's law equation), requiring that all the money received must be spent, one way or the other.
By Walras's law, any particular market must be in equilibrium if all other markets in an economy are also in equilibrium, because the excess market demands sum to zero. Thus, 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 unknown prices that can be determined by the n-1 simultaneous equations, he thus concluded that the general equilibrium exists.[12]
Though this argument works when all equations are linear, it does not hold when the equations are nonlinear. It is easy to construct a pairs of equations in two variables with no 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.
The Walrasian auction 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 (French for "trial and error"), a form of incremental hill climbing.
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 an 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.[a]
In economic theories of value, the term "value" is unrelated to any notions of value used in ethics, they are homonyms.
In 1941 George Stigler[13] wrote about Walras:
There is no general history of economic thought in English which devotes more than passing reference to his work. ... This sort of empty fame in English-speaking countries is of course attributable in large part to Walras's use of his mother tongue, French, and his depressing array of mathematical formulas.
What caused the re-appraisal of Walras's consideration in the US, was the influx of German-speaking scientists – the German version of his Théorie Mathématique de la Richesse Sociale was published in 1881.[14] According to Schumpeter:[15]
Walras is ... greatest of all economists. His system of economic equilibrium, uniting, as it does, the quality of 'revolutionary' creativeness with the quality of classic synthesis, is the only work by an economist that will stand comparison with the achievements of theoretical physics.
The Éléments of 1874/1877 are the work by which Léon Walras is best known. The full title is
The half title page uses only the title ('Éléments d'Économie Politique Pure') whereas inside the body (e.g. p. 1 and the contents page) the subtitle ('Théorie de la richesse sociale') is used as if it were the title.
The work was issued in two instalments (fascicules) in separate years. It was intended as the first of three parts of a systematic treatise as follows:
Works with titles echoing those proposed for Parts II and III were published in 1898 and 1896. They are included in the list of other works below.
The 'Théorie Mathématique de la Richesse Sociale' included in the list of other works (below) is described by the National Library of Australia as 'a series of lectures and articles that together summarize the mathematical elements of the author's Élements '.[19]
Walker and van Daal describe Jaffé's translation of the word crieur as 'a momentous error that has misled generations of readers'.
Both of these are made from the first edition and are defective in respect of illustrations. The original figures were included as folding plates (presumably at the end of each fascicule). The online edition contains only Figs. 3, 4, 10, and 12 whereas the facsimile contains only Figs. 5 and 6.
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