2.3.1. markets where products are only changed, but not produced <=> markete where products are produced

In contrast to Alfred Marshall who describes dynamic markets, see equilibrium in the long run and equilibrium in the short run, Léon Walras analysis markets where only a fixed amount of products are changed, but not produced. The difference is enormous. If we assume that the amount if fixed, the market equilibrium can obviously balanced by the price. If we assume that the amount is not fixed, the balance can be achieved by an adaptation of the price and the amount.

A market were product are only exchanged is the most extreme version of a short run analysis. The wider the period taken into account, the more the dynamic aspects comes into consideration.

Even if Léon Walras takes into account finally the productive resources, labour and capital, his analysis is based on monetary evaluated variables and monetary evaluated variables describes the effects of underlying causes but not the causes.

To put it simple: We can for instance say that the price for corn rises if the demand rises, because less fertible land has to be cultivated, but that doesn't explain why demand rises. This is a trivial example, but the fundamental problem we have in any kind of economic analysis.

But the analysis of Léon Walras is not only based on the assumption that the amount is fixed, but also that the market is cleared at the end of the period. This second assumption is only valid for the very special markets he uses to explain his theories, but not at all in general.

The assumption that products are only produced but not exchanged and that the market must be cleared, all the products must be sold, is true in special cases, for example in the case of perishable goods like fish. In this case the seller has a big interest in selling all products at the end of the day because the next day he not only cannot sell his products, but he has to pay for disposing them. In this case only the preferences of the buyers play a role. The seller would sell his products for just any price, even for free.

[By the way: In this extreme case, the logic we find in textbooks, the marshallian cross of the supply and demand curve is wrong is well. The marshallian suppy curve is actually a marginal cost curve and companies will offer their products, and produce them, until the marginal costs are lower or equals the market price. That means, to put in term of the commercial accountig system, until they get a contribution to margin. That means, that they are not offer until ALL costs are covered, the ones that doesn't depend on the decision to offer the product are not, but until the costs that depend on the decision to produce and sell the products are covered. If things go wrong, they don't make any profit that way, but at least the minimize the losses. If however the products are already produced, all the costs doesn't depend on the decision to produce the products and were therefore sold at just any price.]

In order to illustrate the problem with an another example. Alfred Marshall distinguishes clearly between a short run analysis and a long run analysis, see equilibrium in the short run and equilibrium in the long run and his theory about the producer surplus can only be understood in a context of short term analysis. In the long run differences in the production structure between one companie and another will disapper and therefore the producer surplus.

In the markets described by Léon Walras, Carl Menger or Vilfredo Pareto producer surplus are inexistent, because capital is allocated in a optimal way an all companies have the same production structure.

To illustrate that point with an example. The marktprice is 5 dollars per unit and at that price there is a demand for 6000 units. Company A can produce 4000 units at a cost of 4 dollars per unit, company B 1500 units at a cost of 4.50 dollars a unit and company C 500 units at a cost of 5 dollars. Therefore company A and B would get a producer rent, but company C not. In the long run however something would happen and the whole 6000 units would be produced at lower costs in a situation of competition prices would fall.

The general equilibrium of the Léon Walras or Vilfredo Pareto type however assumes that the capital invested in company C would immediately move to A and the knowledge needed would be transferred to A without delay. Implicetly Alfred Marshall accepts that the transfer of knowledge and the reallocation of resources takes time and that human decisions are needed. (What is obviously the right approach.) Léon Walras and Vilfredo Pareto assumes that adaptation of knowledge and resources happens automatically without any delay. (Obviously the wrong approach.)

However it is to assume that very few students who study the Alfred Marshall and the Léon Walras approach are aware of the fact that approach is completely different.

We don't say that in markets where products are only exchanged but not produced there will never happen a change in the amount. The fishermen, to continue with our example, who sell their fishes in a fish action and don't get the price they need to continue will abandon this business. But if we only focus on a certain day or a very short period, as it is done by Léon Walras, we have no change in the amount and only the price can balance supply and demand and that is what actually happens in the theory of Léon Walras. All the dynamic aspects, in other words the production side, doesn't play any role.

Those who believe that the walrasianian general equilibrium is the result of market process didn't understand the basic pillars of a market economy or the walrasianian theory or both.

All economic problems are actually excluded in the theory of Léon Walras. Léon Walras assumes that we can calculate the general equilibrium with some mathematical equations which are based on a market where all the problems of a market economy doesn't exist and which has nothing to do with the real world. If it were possible to reach the general equilibrium with some mathematical equations, it would be much more intelligent to reach it that way. If it were possible to plan the economy, it should better be planed instead of reaching it by try and error through a market process. That's what the socialist countries tried unsuccesfully.

The theoretical concept of marxism and Léon Walras may be different, but the error of thinking is the same.

The corporation of economists are not aware of that problem and even worse, the real world is more and more excluded from the analysis.

What we find in lectures all over the world is something like that: General Equilibrium in a Pure Exchange Economy. This chap at least realised that he is talking about a market where products are only exchanged, but not produces. It is easy to find examples where the author is not even aware of that and still less about the consequences of this assumptions. Reading this kind of articles is really a vaste of time that can be used better to do something usefull.

The general equilibrium is presented in general as something very, very complicated. Actually it is quite simple and is perfectly described with the concept of Adam Smith of the natural price and the market price. We reached a general equilibrium if all the resources are allocated in an optimal way, in othere words, when reallocating them doesn't make any sense because the (monetary) marginal revenue will be less than in the present use.

To illustrate it with an example: If for instance someone works as a bricklayer, but would earn more as a hairdresser, he will qualify to work as a hairdresser and change his job. This would have two effects. The wage of the hairdresser will decrease, because the amount of hairdressers, the supply, will increase and the wage of the bricklayers will increase because the supply of bricklayers will decrease. Reallocation of resources will happen until the wages are equal in both sectors and it doesn't make sense any more to change the job. This is supersimple and everybody but economists understand that.

The problem with that general equilibrium is another one. Even if assume that there is no change in the underlying economic structure or that the resources adapt themselves immediately, in oher words even if we abstract completely from the real world, there is no guarantee that the total equilibrium is reached, because the interest rate is not determined by the supply and demand for money, but by the central banks. This point is a little bit complicated and we adress it in the chapter about the interest rate.

It is of crucial importance to get as quickly as possible to the crux of the problem. What can be said in five minute should be said in five minutes and without big abracadabra. The time saved should be invested in relevant issues, for instance in learning a foreign language, handling a relational database like msql or improve the programming skills in C++, Java, Perl, cooperate with other universities at a global level, get acquainted with commercial software packages etc. etc..

The basic problem with the analysis of equilibriums, almost all economic theory is about equilibriums, is that they describe equilibriums, but they don't describe how to get from one equilibrium to the next. We don't find this kind of thinking only in microeconmics, we find it in macroeconomics as well. The IS-LM modell is a typical example for this kind of thinking. In any textbook we find funny sentences like "if the amount of money is increased, the interest rates fall and the national income increases". If that doesn't happen, we are in a liquidity trap. This is kind of mechanical thinking that leads nowhere. Still more problematic are sentences like "if governmental spending inceases, the IS curve moves to the right and national income increases". If we don't distinguish between consumptive expenditures and investive expenditure the affirmation is useless. In term of variables measured with money that doesn't make any difference, but concerning the changes in the real productive structure, it makes a big difference. See the little book downloadable from the startsite of this website.

It is often said that the opposite of marxism is the neoclassical theory. That's not true at all. Both line of thinking ignore completely insecurity, the basic problem of the economy, and assume that the optimal allocation of resources happens without any delay and without any effort, no trial and error needed. The only opponent is keynesianisms, because keynesian theory puts insecurity in the focus.

It is therefore obvious that the analysis of a market where product are only exchanged but not produced is completely irrelevant when it comes to analysing market economies, because all the dynamic and complicated things are excluded in this model.

But the case of Léon Walras is even more extreme. For the kind of market he describes exists only one example: The stock market. The stock market doesn't work at all as a market of real goods. They won't be an increase of stocks if the price rises.

La valeur d'échange laissée à elle-même se produit naturellement sur le marché sous l'empire de la concurrence. Comme acheteurs, les échangeurs demandent à l'enchère, comme vendeurs, ils offrent au rabais, et leur concours amène ainsi une certaine valeur d'échange des marchandises tantôt ascendante, tantôt d'escendante et tantôt stationnaire. Selon que cette concurrence fonctionne plus ou moins bien, la valeur d'échange se produit d'une manière plus ou moins rigoureuse. Les marchés les mieux organisés sous le rapport de la concurrence sont ceux où les ventes et achats se font à la criée, par l'intermédiaire d'agents tels qu'agents de change, courtiers de commerce, crieurs, qui les centralisent , de telle sorte qu'aucun échange n'ait lieu sans que les conditions en soient annoncées et connues, et sans que les vendeurs puissent mettre au rabais et les acheteurs à l'enchère. Ainsi fonctionnent les Bourses de fonds publics , les Bourses de commerce, les marchés aux grains, au poisson, etc. A côté de ces marchés , il y en a d'autres où la concurrence, quoique moins bien réglée, fonctionne encore d'une manière assez convenable et satisfaisante : tels sont les marchés aux fruits et légumes, à la volaille. Les rues d'une ville où se trouvent des magasins et des boutiques de boulangers, de bouchers , d'épiciers, de tailleurs, de bottiers, sont des marchés d'une organisation un peu plus défectueuse sous le rapport de la concurrence. The exchange value is a natural result of the market. The buyers will offer higher prices in order to get more, the sellers will offer a discount and this way the competition will lead to a certain exchange value which sometimes falls and sometimes rise, sometimes remains the same and depending on the intensity of competition the exchange price is more or less correct. The best organised markets concerning competition are those where the sales and purchases are organised by an intermediary as the traders on the stock markets and similar agents who gather the offers for purchase and sell until the conditions are clear and it is no longer possible to give a discount or to outbid. That's the way the markets for governmental bonds works, the stock markets, the markets for corn, fish etc.. Beside these markets there are others where the intensity of competition is less intense, but who works however still good enough as the markets for fruit, vegetables and poultry. In the streets of the towns where we found the bakeries, the butchers, the grocery stores, the tailors, the shoemakers the intensity of competition is less intense and prices can therefore deviate from this ideal.

Léon Walras, Elements d' economie politique pure ou theorie de la richesse, Section II, 9° Leçon

The sellers offers discount, in other words they adapt the price and not the amount. Producers would adapt both, the price and the amount. If a producers realises that even at higher costs he can sell his products because he can increase the price as well, he would produce more.

His description of the stock markets doesn't really word the way he describes it. Actually the purchasers anounce the amount they would by and the price they would pay for it and the broker will chose the price where the turn over is maximised, see equilibrium in the short run and equilibrium in the long run.

The role of the jobber in the walrasian logic is not very clear. One can imagine something like this. The jobber announces a price. At this price a certain amount will be bought and a certain amount sold. If the offer exceeds the demand, he will then lower the price and if the demand exceeds the offer he rise the price and at the end we will get to a price where the market is cleaned. Everytime he announces a new price, the buyers and sellers can make new orders.

(If we suppose that all the sellers have to sell their product until the end of the day, something that is obviously not true for stock markets, because sellers have no need to sell their stocks, they can just keep them, the market will be cleared this way at the end of the day.)

The model of Léon Walras assumes that nobody sells and nobody buys until the price that clears the markets is found.

The author would say that a market like the one Léon Walras assumes doesn't exist and if it exists, it is not typical. It is possible that "... La valeur d'échange laissée à elle-même se produit naturellement sur le marché sous l'empire de la concurrence...", but it doesn't happen like that. In the real world some sellers will try to put a higher price than their competitors, but in ideal constellation, the purchasers will realise that the competitors sell the product at a lower price and therefore they will be obliged to lower their prices as well. If the price is too low, there is an exceed of demand and the sellers will increase the offer or rise the price.

Why Léon Walras based his analysis on an actually inexistent market is unclear. For a market economy it is enough that there is a tendency to get the market cleared, but it is not necessary that there is only one price that clears the market perfectly. This is only necessary if want to model a market economy mathematically or graphically and want to maintain the fiction that the market result can be precisely prognosticked.

In modern textbook about microeconomics this is done by assuming absolut homogeneous goods, no temporal / personal / regional etc. preferences, perfect information, no delay in the adaption to any kind of changes. In this case we actually have only one price. Nobody pays more for an identical product if he knows that he can get it cheaper somewhere else.

Léon Walras has a different approach. In order to use his mathematical abracadabra he assumes a market that actually exists nowhere.

He sees very clearly that his market is not typical at all "...Les rues d'une ville où se trouvent des magasins et des boutiques de boulangers, de bouchers , d'épiciers, de tailleurs, de bottiers, sont des marchés d'une organi- sation un peu plus défectueuse sous le rapport de la concurrence...", but he has obviously some problems accepting this fact.

The title of his book is "Elements d' économie politique pure". It could have as well the title Elements pures, because his elements are indeed very pure, free from anything related to reality. We can see a lot of purity but nothing of economy and still less of politics, because both are about human decisions, but in his "economy" the resources moves alone to the most efficient use driven by forces which are as stable and universal as the laws that let the earth turn around the sun.

He proves with an endless number of equations in an endless amount of different scenarios trivial relationships which are completely irrelevant because the basic assumptions of his model are already wrong.

It is cristal clear that if there are two persons, A with 500 apples and the other with 1000 banana the exchange rate is 1 to 2. (If they change all what they have.) If A has 1000 apples, the exchange rate is 1 to 1.

Deux marchandises étant données, pour qu'il y ait équilibre du marché à leur égard, ou prix stationnaire de l'une en l'autre , il faut et il suffit que la demande effective de chacune de ces deux mar- chandises soit égale à son offre effective. Lorsque cette égalité n'existe pas il faut, pour arriver au prix d'équilibre, une hausse du prix de la marchandise dont la demande effective est supérieure à l'offre effective, et une baisse du prix de celle dont l'offre effective est supérieure à la demande effective. If we have two goods it is necessary and enough to reach an equilibrium at respective price givent that the effective demand for each of these goods equals the effective offer. If this is not the case it is necessary in order to reach the equilibrium that the price of the good with excessive demand increases and the price of the good where the offer exceeds demand decreases.

Léon Walras, Elements d' economie politique pure ou theorie de la richesse, 12° LEÇON, Courbes d'offre effective.

Sin seems obvious at first glance, however it is wrong. If the amount is fixed and both trade partners would to exchange all they have it is true, but in reality the amount is not fixed and the question is not wheter the trading partners want to exchange all they have, because they will produce only what they want to exchange.

The assumption of Léon Walras are based on a market were products are only exchanged, but not produced or in a very short run analysis and beside that he makes another unrealistic assumption: The markets must be cleared.

But this is not even the main problem. The main problem is, that he is not even aware of the limitations of his model. It is very typical for mathematical or graphical models that the narrow the perspective. A normal person would have realised immediately that the equilibrium can be reached by a change of the price and the amount.

If we abandon the assumption of the fix amount the situation is more complex. A women in Bolivia who sells organges in the street, which she can get for free because she has her own orange trees, that's something we assume for the sake of simplicity, will decrease the price until the turn over is maximised. From the moment on that the price effect exceeds the effect of the amount, she will stop lowering the price.

Let's say that the initial situation is this.

Initial situation: 50 organges * 2 bolivianos = 100 bolivianos

The effect of the price is stronger than the effect of quantity: 30 oranges* 4 bolivianos = 120 bolivianos
The effect of the quantity is stronger than the effect of the price: 65 oranges * 2 bolivianos = 130 bolivianos
The effect of the price is less strong than the effect of the quantity: 20 oranges * 4 bolivianos = 80 bolivianos

In this scenario he departs from a situation where one product is exchanged by another. Maybe this scenario had a certain relevance 10000 years ago and with a lot of mathematical abracadabra it looks somehow scientific but actually it is trivial. If two persons change potatoes for carrots and and at the end there some carrots left the exchange rate was not correct if they desired to change the whole amount of carrots, but this logic is wrong. The one who has the carrots will try to get the potatoes giving away as little of his carrots as possible and if the one who has the potatoes is in urgent needs of carrots, the owner of the carrots can keep some carrots. His equation system is based on completly wrong assumptions.

By the way: It is often said that Léon Walras sticked to th theory of the decreasing marginal utility, but under his assumptions utility plays no role. If the amount is fixed and the market must be clear, the price is a logical consequence of the amount and utility doesn't play any role.

It is much easier to imagine what is going to happen in the real world that we know than to figure ou what wil happen in parallel worlds.

He continues as strange as he started and tells us really suprising things: "La solution pratique est d'une rapidité et d'une sûreté qui ne laissent rien à désirer." He assumes that equilibrium prices will be reached quickly. The truth is that there is only a tendency to equilibrium prices and these prices are the result of a longlife learning process. People know more or less which amount of money they spend for food, rent, transportation, insurance, rent and so on and inside this general partition of their money they have a vague idea how they spend their money. If fundamental data would change from one day to another, if for instance a change in world wide clima would reduce the heating expenses to cero and would make it possible to construct houses at lower prices it would take some time until a new equilibrium is found.

The problem is not that Léon Walras has strange ideas about economics. There are a lot of fouls on earth, that's nothing surprising. But the fact that millions of people copy that is really stunning.

On voit clairement à présent ce qu'est le mécanisme de la concurrence sur le marché : c'est la solution pratique , et par hausse et baisse des prix, du problème de l'échange dont nous avons fourni la solution théorique et mathématique. On doit comprendre d'ailleurs que notre intention n'est aucunement de substituer une solution à l'autre. La solution pratique est d'une rapidité et d'une sûreté qui ne laissent rien à désirer. On peut voir, sur de grands marchés fonctionnant même sans courtiers ni crieurs, le prix courant d'équilibre se déterminer en quelques minutes, et des quantités considérables de marchandise s'échanger à ce prix en deux ou trois quarts d'heure. Au contraire, la solution théorique serait, dans presque tous les cas, absolument impraticable. Aussi serait-ce nous faire une objection bien singulière que de nous parler de la difficulté d'établir les courbes d'échange ou leurs équations. L'avantage qu'il pourrait y avoir, dans certains cas, à dresser, en totalité ou en partie , la courbe de demande ou d'offre d'une marchandise déterminée, et la possibilité ou l'impossibilité de le faire, est une question que nous réservons tout entière. Pour le moment, nous étudions le problème de l'échange en général , et la conception pure et simple des courbes d'échange nous est à la fois suffisante et indispensable. We see know the effect of competition on the market. It is the practical solution of the exchange problem trough an increase and decrease of prices and we have given the mathematical solution for that problem. One has to understand however that our intention was not to substitute one solution by another one. The practical solution is so fast and sure that it is completely satisfying. We see that the big markets work and even without jobbers and traders the equilibrium price is found in a few minutes and considerable amount of goods were exchanged at this price in two or three quarters of an hour. The theoretical solution would be practible. It would be a strange kind of objection if one tells us that the exchange curves or the equations are hard to define. The possibility to determine totally or in part the demande or the supply curve of certain good is a question that we put aside for the moment. Right now we study the problem of exchange in general and the pure and simple existence of an exchange curve is sufficient and indispensable for us.

Léon Walras, Elements d' economie politique pure ou theorie de la richesse, 12° LEÇON, Courbes d'offre effective.

Léon Walras is mad. He affirms that he saw "le prix courant d'équilibre se déterminer en quelques minutes", that in a few minutes the market found the equilibribum price. That's something he had never seen in reality, he had not even seen a tendency to a market price, however that actually exists. People know already BEFORE they go shopping more or less the market price, because the market price is something that had been established over years.

Only in auctions the price is found within minutes but this is something completely different. In auctions we have ONE buyer who is willing to pay more than the others and ONE seller. An auction is not really a market if we understand by market the anonymous encounter of an indefinite amount of sellers and an indefinite amount of buyers. In a market the buyers are not obliged to pay what they would have to pay if they were obliged to reveal their preferences, they just pay the market prices, and the sellers are not obliged to reveal the price they would sell if they were obliged to that, they get the market price. That's why they get a producer and a consumper surplus, see cardinal measurement of utility. In case of an auction there is no consumer surplus. The buyer has to reveal his real preferences. Auctions actually exists for corn, fruit, flowers, fish, petrol, electricity for wholesalers, but are not at all typical.

The next question is this: If he assumes that markets work without jobbers and traders, why he introduces them? If the market his theory is based on would be typical, there would be no need to base his theory on somehow strange and inexistent markets.

Ather that he explains us that his method, determinating the prices by some mathematical equations, is impracticable. That means that he introduces a market that actually doesn't exist in order to analyse it with some mathematical equations and tells us afterwards this solution, determinating the price with some mathematical equations is impractical. It would have been easier to depart from really existing markets and describe a tendency.

Léon Walras is a nice example for something that economists to very often. The don't resolve with a lot of mathematical abracadabra and a lot of effort inexistent problems.

The question he considers irrelevant is however very relevant: "..L'avantage qu'il pourrait y avoir, dans certains cas, à dresser, en totalité ou en partie , la courbe de demande ou d'offre d'une marchandise déterminée, et la possibilité ou l'impossibilité de le faire, est une question que nous réservons tout entière..". Any entrepreneur would be very interested in knowing the demand curve, partial or complete. That would allow him to set the optimal price, in other words the price he gets the maximal profit. Although the price is normally fixed by the price of the competing companies, if a new company enters a market they benchmark on the prices of competitors, there is in general a range. However the only way to find out the optimal price is trying. If Léon Walras assumes that equilibrium price is found easily, he had never sold something.

In favour of the methodological approach of Léon Walras, we have that everywhere in economics is argued in generally that reality is so awfully complex, that it is necessary to simplify a bit. The problem is, that if the simplification leads to completly useless results and if beside that, as Léon Walras admits himself, the problem is already resolved in reality, the advantages of this methodological approach are hard to see. What we get at the end is the insight that we reach a general equilibrium if the (monetary) marginal revenue of the resources if the same in all uses. That we can learn already from the concept of Adam Smith, see natural price / market price.

The concept that the (monetary) marginal revenue and the marginal utility of the different resources must be the same in any use is indeed a central pillar of a market economy, but this is not the point. The crucial question is whether this optimal allocation can be reached by central planning or by individual decisions of thousand of millions of people. In other words, the central problem, how this general equilibrium is reached, is not even addressed by Léon Walras. At most with all his mathematical abracadabra he proves that something like a general equilibrium exists, something we already know, but not which economic order leads to that general equilibrium and that is the crucial question. In socialist economies the central planning commission will allocate the resources, with much more equations than Léon Walras but with very little success and in market economies individual decisions of hundred of millions of people will lead to the general equilibrium, at least there will be a tendency toward the general equilibrium.

Léon Walras is considered as belonging to the neoclassical theory and the neoclassical theory is considered the opponent of marxism. This is not true at all. Léon Walras is a fervent socialist. Socialists would never deny that the resources should be allocated in an optimal way. That's not the point. The point is, that socialists believe that a central planning commission can allocate the resources in an optimal way.

Besides the problems already mentioned there is another one. The equilibrium price of Alfred Marshall is stable. Products can be produced at this price. The idea is that the supply will increase as long as the product can be sold with contribution margin, in other words as long as it contributes something to cover the fix costs. Therefore this equilibrium price is stable. The products can be produced, sold, produced and sold again.

If we consider a market where products only are exchanged the situation is completely different and especially under the assumptions of Léon Walras. If a certain amount of fishes has to be sold completely until the end of the day, the price can fall below what is needed to produce the same amount the next day and in this case the amount will increase and the equilibrium price of today will not be valid tomorrow.

Not be able to resolve a real problem is something that happens unfortunately very often. To resolve an inexistent problem is a nice hobby, although not very usefull. However not resolving an inexistent problem is really stupid and that's it what Léon Walras is doing.

After having explained his theory with two products he need 40 (!!) pages to explain that all the "economics laws" he discovered with his two products models are valid as well with an infinite number of products. In order to get to an equilibrium it is needed that the price of the products where the offer exceeds the demand decrease and the price of the products where the demand exceeds the offer increase.

The logic is the same as before. If A) has apples, bananas and strawberries and B) potatoes, carrots and tomatos and if the market is not cleared because A) wants two much tomatoes for his apples, than the apple / tomato relationship must change, less tomatos for apples, what means a decrease of the price for apples. (Always under the strange assumption that the markt must be cleared at the end of the day.)

Plusieurs marchandises étant données , pour qu'il y ait équilibre du marché à leur égard , ou prix stationnaire de chacune d'elles en toutes les autres, il faut et il suffit qu'à ces prix, supposés d'équilibre général, la demande effective de chaque marchandise soit égale à son offre effective. Lorsque cette égalité n'existe pas, il faut, pour arriver aux prix d'équilibre, une hausse proportionnelle des prix des marchandises dont la demande effective est supérieure à l'offre effective, et une baisse proportionnelle des prix de celles dont l'offre effective est supérieure à la demande effective. If we have several merchandises it is necessary and enough for a market equilibrium respecting these merchandises or for a stability of the prices of these products in order to have a general equilibrium that the demand corresponds to the offer. If this balance is not given it is necessary in order to get to the equilibrium price an increase of the price of those merchandises is needed where the demand is higher than the offer and a proportional decrease of the prices is needed for the merchandises, where the offer exceeds the demand.

Léon Walras, Elements d' economie politique pure ou theorie de la richesse, 22° LEÇON, Loi d'établissment des prix d'équilibre

Keynes sometimes makes strange remarks, things that cannot really be proved, but the author would say that this one is very true.

The study of economics does not seem to require any specialised gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy and pure science? Yet good, or even competent, economists are the rarest of birds. An easy subject, at which very few excel ! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must reach a high standard in several different directions and must combine talents not often found together. He must be mathematician, historian, statesman, philosopher-in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general, and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man's nature or his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near the earth as a politician. Much, but not all, of this ideal many-sidedness Marshall possessed. But chiefly his mixed training and divided nature furnished him with the most essential and fundamental of the economist's necessary gifts-he was conspicuously historian and mathematician, a dealer in the particular and the general, the temporal and the eternal, at the same time.

John Maynard Keynes, The economic journal, September 1924, Alfred Marshall, 1842 - 1924

It is indeed obvious that a science that more than any other science has to take into account almost everything, the political system, technological advances, difusion of knowledge and the educational system, changes in the demography, the legal system, changes in the preferences and social attitudes etc. must be able to analyse problems in detail without losing sight of the global perspective. Economics is a transveral science. An approach that takes into account only variables and parameters that can be evaluated with money, as it the case with all kind of mathematical modeling in economics, are therefor misleading. The effects measured in money are only the effects of something, but not the causes.

Any problem, subsidising or not the operas and theaters, how many languages should be learned at school, how to organise the pension system and public health, have economic aspects, but some equations will contribute nothing to public debate.

After another 100 (!!) pages with a lot of mathematical equations he reaches the famous walrasian general equilibrium. In this model the labour market is NOT a separated market as we find it in any textbook about microeconomics, but just a merchandise as any other.

But although we have learned already a lot of things from Léon Walras, he is always able to surprise us. Suddenly there is an adaptation as well through prices, although in a stunning way. (Numeraire is any means of payment.)

The paragraph is a little bit weird, but what he want to say is simple. After a lot of pages he became aware that there is a little problem with his ideas that it is enough that the market is cleared, because that can happen as well at a price that doesn't cover the costs of production. In other words, even if the market is cleared, some companies will go bankrupt and that will change the equilibrium price because the offer will decrease. A price that doesn't cover the costs is therefore not a equilibrium price.

That's why he introduces no a second condition. The price must cover the production costs. (If we want to be precise, the price has to cover the marginal costs, what is the same that saying that there must be at least a marginal cover of zero.) If the costs of production exceed the price, a reduction of the AMOUNT (!!) of the product is needed and if the cost of production are lower than the price, the AMOUNT must be increased.

We get therefore to a very strange situation. In the first case the adaption is realised through an adaption of the PRICES, but in the second case the adaption is realised through an adamption of the AMOUNT.

Plusieurs services producteurs étant donnés, avec lesquels on peut fabriquer divers produits , et dont l'échange se fait contre ces produits avec intervention de numéraire , pour qu'il y ait équilibre du marché, ou prix stationnaire de tous ces services producteurs et de tous ces produits en numéraire, il faut et il suffit : 1° qu'à ces prix la demande effective de chaque service producteur et de chaque produit soit égale à son offre effective , et 2° que le prix de vente des produits soit égal à leur prix de revient en services producteurs. Lorsque cette double égalité n'existe pas , il faut , pour arriver à la première , une hausse du prix des services producteurs ou des produits dont la demande effective est supérieure à l'offre effective , et une baisse du prix de ceux dont l'offre effective est supérieure à la demande effective; et, pour arriver à la seconde , une augmentation dans la quantité des produits dont le prix de vente est supérieur au prix de revient, et une diminution dans la quantité de ceux dont le prix de revient est supérieur au prix de vente.

If we have several productive factors with which we can produce several products and which can be exchanged by the use of a means of payment in order to get a market equilibrium at a stable price for all the productive services it is necessary and sufficient: 1) that given these prices the demande of each production service and of each product is equal to the offer and 2) that the selling prices of the products is equal to the productive services. If these two conditions are not given it is necessary, in order to satisfy the first condition, an increase of the prices of the productive services or of the products where the demande exceeds the offer and a decrease of the price of those where the offer exceeds the demande. In order to satisfy the second condition an increase of the amount of the quantity of these products where the selling price is higher that the price for the production services and a decreas of the amount of those products where price for the production services is higher than the selling price.

Léon Walras, Elements d' economie politique pure ou theorie de la richesse, 43° LEÇON, Résolution des équations de la production. Marché des services producteurs

Léon Walras realises after several hundred pages that the "services producteurs" are costs that must be covered. "Service producteurs" is labour, who gets a salary, and the capital needed to buy raw materials, to machinery, buildings etc. which gets a profit. This productive facteurs has to be paid with some means of payment, normally money.

In order to get a general equilibrium two conditions have to be met.

1) The offer of the production factors and the products which are produced with them has to correspond to the demand.
2) The selling price of the products has to cover the costs of production.

If the condition 1) or 2) is not met, processes of adaptation will happen until both conditions are met. What is strange in this logic is his assumption that in the 1) case, the adaptation will happen through prices and in the second case the adaptation will happen through the amount.

This logic denies completely one of the most fundamental rules of the neoclassical theory, the only rule that, taken as a tendency and not a law, is actually true and a pillar of market economies. What would really happen in the long run, if the supply for labour exceeds the demand for labour or if the demand for labour exceeds the supply for labour?

The supply for labor, we take labor as an example for just any productive factor, is to high, it the wages are too high and therefore the price of the corresponding product is too high for a given demand. The offer will therefore shrink, less labour will be used for the production of this product and at a lower price. We will therefore have an adaptation of the amont AND of the price in the amount of products offered as well as in the labour needed to produce these products.

If the demand exceeds the supply the product can be offered as a higher price as well. That means, that higher pages can be paid. That means, that more labour will be used to produce this product and less in producing other products. In this case as well we will have an adaptation of the amount AND the prices.

In other words: There is only one condition. The price has to cover all the costs. The condition 1) is nonsense. If the supply exceeds the demand, in other words if nobody buys the excess, the costs are not covered and the prices, and therefore the wage, will decrease until this excess of production is eliminated. If the demand exceeds the supply, in other words that some people are willing to pay more, the prices of this product will rise and higher wages can be paid. There will be as well an adaptation of the prices and of the amount.

Léon Walras assumes that the prices of the productive factors are fixed. In this case obvioulsy we can only reach an equilibrium through an adaptation of the amount. Only the people willing to pay more, in case of an excess of supply, buy the product and therefore only fewer people can get employed at the necessary higher wages. That contradicts completely one of the most fundamental concepts of the neoclassical theory or in other words, the causal relationship is reversed.

The general statement of neoclassical theory is that the wage corresponds to the (montetary) marginal revenue. This is normally understood this way: Wages decreases until we reach full employement. Léon Walras puts it the other way round. The wage is fixed and the amount of products adapt itself to the wages. That can actually happen, but this way we don't reach full employement.

[We don't say that we believe in the neoclassical theory, the equilibrium is actually fixed on the market for goods and not in the labour market, see Keynes. But the Léon Walras version of the labour market is still more absurd. Nobody can change the demand, in his theory, and the wages adapt themselves to a given demand. For a market economy it is crucial that labour can be reallocated and that wages, a market prices, is an incentive to reallocate it, see allocation of productive resources. Assume fix prices for labour doesn't make any sense.]

Summary: Léon Walras wanted to describe us a general equilibrium. That was not necessary because it was already explained by Adam Smith in a clear and straightforward way, see natural price / market price.

However he is a nice illustration for a phenomenon that happens very often. His modell is from the very beginning based on false assumptions and narrowed his perspective. The result is something that is not even true in his parallel world.

Léon Walras is a nice example for something that happens very often in economics. People are so concerned in constructing mathematical modells that at the end they get completely confused.

And the paragraph below he asks himself if it was necessary to present such a simple theory with a mathematical model. The answer is clear. It was not. Not only because his theory can be summarised in a few sentences, but also because his presentation of the general equilibrium is in part wrong.

Quelques personnes se demanderont peut-être s'il était bien nécessaire, si même il n'était pas plus nuisible qu'utile, de pré- senter sous la forme mathématique une doctrine qui peut sembler par elle-même assez simple et assez claire. Ma réponse à cette question sera la suivante. Affirmer une théorie est une chose ; la démontrer en est une autre. Je sais qu'en économie politique on donne et reçoit tous les jours de prétendues démonstrations qui ne sont rien autre chose que des affirmations gratuites. Mais, précisément, je pense que l'économie politique ne sera une science que le jour où elle s'astreindra à démontrer ce qu'elle s'est à peu près bornée jus- qu'ici à affirmer gratuitement. Or, pour démontrer que des prix de marchandises , qui sont des quantités , à savoir les quantités de numéraire susceptibles de s'échanger contre ces marchandises, résultent effectivement de telles ou telles données ou conditions, il est absolument indispensable à mon sens de formuler d'abord, d'après ces données ou conditions, un système d'équations, en nombre rigoureusement égal à celui des inconnues, dont les quantités en question soient les racines, et d'établir ensuite que l'enchaînement des phénomènes de la réalité constitue bien la résolution empirique de ce système d'équations. C'est ce que j'ai fait en ce qui concernait successivement l'échange, la production et la capitalisation. Et non-seulement l'emploi du langage et de la méthode mathématiques m'a permis de démontrer ainsi les lois d'établissement des prix courants d'équilibre, mais elle m' a permis de démontrer, en outre, les lois de variation de ces prix, d'analyser le fait et, par cela même, d'asseoir le principe de la libre concurrence. Some may ask themselves if it was necessary or even harmful to present a theory that seems so easy and clear in a mathematical form. My answer to this question is the following. To affirm a theory is one thing, to prove it something different. I know that in economics every day are given and received statements which are nothing else than useless affirmations. But I think that economics only becomes a science if it make an effort to demonstrate what until know has only be affirmed. To prove that the price of the merchandises, expressed in quantities of other products, in other words by the quantities of a means of payment necessary to obtain them, is the result of certain facts or condition it is needed in my opinion to formulate first, once these facts and conditions have been presented, a system of equations with as much equations as unknown variables where the quantities are the basis and to prove that the phenomenon of reality can be explained by the empirical resolution of this equation system. That's what I did beginning with the exchange, the production and the capitalisation. The mathematical language had not only allowed me to demonstrate this way how the prices were determined in a state of equilibrium, but allowed me as well to explain how the prices vary, to analyse the principle of free competition.

Léon Walras, Elements d' economie politique pure ou theorie de la richesse, 58° LEÇON, exposition et réfutation de la théorie anglaise de l'intérêt

We would say that he proved that the result of a mathematical model can be complete nonsense. Beside that an equation system proves by itself absolutely nothing. It is not even necessary that there is any relationship to reality in order to resolve it. Only in the case that the assumption made in the equation system are based on empirical data the equation system can deduce from known variables the unknown variable. (A least if we have as much equations as unknown variables.) In order to see if the assumption made are correct, we have to test is against reality, something that Léon Walras never did. His equations are not only not necessary, they are indeed harmful. Reading his book is a waste of time.

The problem of Léon Walras is that he assumes that a certain methodological approach, in this case mathematical modeling, is a guarantor for correct results. However he gives no reason why this should be the case. But the problem is obviously not Léon Walras, he is only a represenative for a certain kind of economist. Mathematical modeling has been used with a lot of success in physics, because in physics we have actually stable relationships that can be modelled with mathematical equations, that means that unknown variables can be deduced from known variables, if the theory behind the mathematical model is correct.

The success of mathematical modeling in physics is one reason why it is used as well in economics, although it doesn't make a lot of sense there, because the causal chaines in economics are very instable. Mathematical modeling makes economics look as scientific as physics, what is of big help in ideological confrontations. The problem is, both sides, socialist and free market economies understood that and therefore both could prove in a "objective and scientific" way that the other side is wrong.

Léon Walras published a novel in 1858, Francis Sauveur, without any success. There is no need to have read this novel in order to know that it was nonsens, because he himself stated that he has problems withe the "method littéraire".

Tels sont les dangers de la méthode littéraire substituée à la méthode scientifique. This are the dangers of the literarily method if it is used instead of the scientific method.

Léon Walras, Elements d' economie politique pure ou theorie de la richesse, 44° LEÇON, Du principe de la libre concurrence

The problem is, that his mathematical method let him to the assumption that there is an daption of the price in the case that supply exceeds demand or the other way round and that there is an adaption of the amount, in the case that the market price doesn't cover the cost of production.

This is wrong. In both cases we have an adaption of prices and amount. With the "méthode littéraire" he would have understood that what is true for a market where products are only exchanged but not produced is not true for a market where products are produced as well. With his méthode scientifique he got to mad results.

The term scientific is used in an inflationary way, almost everything can be "scientific", starting form molecular biology, something actually really scientific, to the interpretation of a historical situation, something not scientific at all. Scientific or not has nothing to do with the methodological approach, but with the possibility to test the theory against reality and its relevance. A theory that is true in any case, like the law of the decreasing marginal utility is true, but useless, because it doesn't explain a relevant fact. A thesis that describes the impact of estrogen on heart attacks can be tested against reality and is very useful, because it allows to find drugs that protects against heart attacks.

"Nuisible", harmful, is not the correct word to describe the theory of Léon Walras. Idiot would be the right expression.

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Léon Walras and the analysis of irrelevant markets

Léon Walras analysis only, as Vilfredo Pareto, markets where products are exchanged, but not produced what explains his misleading ideas about the general equilibrium.

The analysis of markets where products are only exchanged and not produced abstracts completely from the production side, in other words from the dynamic side of market economies.


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