2. Key Contribution to Economic Thought
• Leon Walras (1834-1910) transformed economics from a literary discipline into a
mathematical, deterministic science.
• For the first time, Walras expressed rigorously the view that all markets are
related, and that their relationships can be described and analyzed
mathematically.
• These interrelated markets tend toward a "general equilibrium" position,
undergoing a constant interactive adjustment process that Walras called a
"tatonnement".
• This conception of economics led to important new insights about the stability of
markets and about the capitalist economic system.
• A follower of Walras, Vilfredo Pareto (1848-1923), viewed economics as part of the
broader science of sociology, extending Walrasian analysis to say that society at
large is an equilibrium system.
• This view profoundly influenced the modern course of the "social sciences", in
which quantitative techniques have become standard analytical tools. Many later
scholars have been awarded the Nobel Prize for developing the Walrasian analysis
of capitalism.
3. Walrasian Approach
• Answering psychological arguments about the complexity of
human-directed economic activity, Walras held that there are
"uniformities of behavior" that can be expressed
mathematically.
• Mathematics can provide a more rigorous analysis than can
be obtained through ordinary language, he argued. Walras
was/is in the vanguard of a movement that views math and its
logic as creating a universal language free of value judgments
and cultural biases. His tiers of analysis proceed from this
notion.
4. • Walras divided economic analysis into three
parts:
– 1) Pure theory, or what is true.
– 2) Economic policy, or what is useful.
– 3) "Normative" economics, or what is just.
5. The General Equilibrium Theory
• Walras’s biggest contribution was in what is
now called general equilibrium theory. Before
Walras, economists had made little attempt to
show how a whole economy with many goods
fits together and reaches an equilibrium.
• Walras’s goal was to do this. He did not
succeed, but he took some major first steps.
6. • First, he built a system of simultaneous equations to
describe his hypothetical economy, a tremendous
task, and then showed that because the number of
equations equaled the number of unknowns, the
system could be solved to give the equilibrium prices
and quantities of commodities.
• The demonstration that price and quantity were
uniquely determined for each commodity is
considered one of Walras’s greatest contributions to
economic science.
7. • But Walras was aware that the mere fact that such a system of
equations could be solved mathematically for an equilibrium did
not mean that in the real world it would ever reach that
equilibrium.
• So Walras’s second major step was to simulate an artificial market
process that would get the system to equilibrium, a process he
called “tâtonnement” (French for “groping”).
– Tâtonnement was a trial-and-error process in which a price was called out and
people in the market said how much they were willing to demand or supply at
that price.
– If there was an excess of supply over demand, then the price would be
lowered so that less would be supplied and more would be demanded. Thus
would the prices “grope” toward equilibrium. To keep constant the
equilibrium toward which prices were groping, Walras assumed—highly
unrealistically—that no actual exchanges were made until equilibrium was
reached.
8. Criticisms and Approbation
Criticisms
• His theory of perfect competition
has lead to tunnel vision by
government regulators of today
who only see price competition.
• More generally, general-
equilibrium economics furthers
the phenomena of the
quantification of all things, which
leads to the social rape known as
international outsourcing, as well
as public idolatry of "science."
Approbation
• Joseph Schumpeter: “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.”