Abstract
This article shows that “Walras' Law,” which is one of the crucial foundations of modern economic theory as formulated by Lange, and modified by the modern authors, differs essentially from Walras's own original laws. These two versions of “Walras Law” are disconnected from real economics; nevertheless, unfortunately, they replaced Walras's original laws which are compatible with a hypothetical regime of perfectly free competition.
Highlights
“Walras’ Law” has played a significant role in modern mathematical economics
The demand functions of services do not exist and their demand are determined by the demand for all commodities, for which these services are employed. Taking into account these facts, Walras generalized the law of the equilibrium establishment for the production economy (Walras 1954: 253–254): Given several services by means of which various products can be manufactured and assuming that these services are exchanged for their products through the medium of a numéraire, for the market to be in equilibrium, for the prices of all services and all products in terms of the numéraire to be stationary, it is necessary and sufficient (1) that the effective demand for each service and each product be equal to its effective supply at these prices; and (2) that the selling prices of the products be equal to the cost of the services employed in making them
The law of equilibrium establishment here has two additional parts: (1) the equilibrium magnitude of the rate of income is determined by the relationship between the effective demand for the new capital goods and the total saving; and (2) the equilibrium quantities of the new capital goods are determined by the relationship between their selling prices and costs of production (Walras 1954: 294–295): Let there be given several services, from the prices of which it is possible to deduct an excess of income over consumption to be transformed into new capital goods proper, and which can be exchanged against various consumer’s goods and various new capital goods through the medium of a numéraire
Summary
“Walras’ Law” has played a significant role in modern mathematical economics It is one of the crucial components used when proving the existence of equilibrium, which is one of the main achievements of the modern General Equilibrium Theory (GET) (Arrow 1989; Ingrao and Israel 1990; Weintraub 1985). This law is more and more frequently used in macroeconomic theory (Patinkin 1989; Barro 1997; Mas-Colell et al 1995). The way modern authors interpret “Walras’ Law” is considered in the sixth section.
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