Walras: Elements of Pure Economics

Walras, Léon. (1954). Elements of pure economics. London,: Published by Allen and Unwin.

Walras spends a bit of the first section of his book exploring a definition for political economy, as well as distinguishing between art, science and ethics. “There is a theory of wealth, that is, a theory of exchange and value in exchange, which is a science, and a theory of the production of wealth, that is, a theory of agriculture, industry and trade, which is an art…that political economy may be considered both as an explanation of what is and as a programme of what ought to be. Now, what ought to be, should be considered as such either from the point of view of expediency or material well-being, or from the point of view of equity or justice. What ought to be from the point of view of material well-being is the concern of applied science or art; while what ought to be from the point of view of justice is the concern of moral science or ethics.” (60).

Then goes on to explain what value in exchange is, distinguished between a person an a thing, adds that when a thing has value and is scarce, then it is exchangeable, explains that markets exist for the exchange of these things, that the price of the things being exchanged is similar to gravity in that it is a natural force, explains that, like gravity, we can affect it (decrease/increase supply/demand), then wonders why we would abstractly theorize about the interaction in the market when we can use mathematical language to more efficiently represent it.

“Only useful things limited in quantity can be produced by industry and all things that industry produces are scarce…In fact we may be certain that industry does nothing but produce scarce things and that it endeavors to produce them all” (73).

The book then goes on to methodically lay out the structure of economic interactions between purchasers and sellers. There are assumptions of rationality on the parts of the individuals, either utility or profit. Then, because these assumptions are reached, market clearing behavior takes over. Also, a socially optimum price is reached, a socially optimum level of production and utility are also reached.

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“Let…be the quantities of final products which consumers need to hold as reserves in kind; let…be the quantities of consumers’ goods and services they need to have on hand in the form of cash reserves; and let…be the quantity of new capital goods evaluated in numéraire which consumers require in the form of money savings. Altogether these quantities make up a fund of working or circulating capital for consumption” (377).

“Furthermore, let…be the quantities of newly produced final products, raw materials and new capital goods in stock and on display which producers need to have on reserve in kind’ and let…be the quantities of final products, raw materials, capital goods and productive services which these same producers require in the form of cash reserves. These quantities make up a fund of working or circulation capital for production” (377). “These two revolving funds added together…constitute the economy’s circulating capital…” (377).

“Finally, in order to come still more closely to reality, we must drop the hypothesis of an annual market period and adopt in its place the hypothesis of a continuous market. Thus, we pass from the static to the dynamic state. For this purpose, we shall now suppose that the annual production and consumption, which we had hitherto represented as a constant magnitude for every moment of the year under consideration, change from instant to instant along with the basic data of the problem” (380).

“Every hour, nay, every minute, portions of these different classes of circulating capital are disappearin and reappearing. Personal capital, capital goods proper and money also disappear and reappear, in a similar manner, but much more slowly. Only landed capital escapes this process of renewal. Such is the continuous market, which is perpetually tendin towards equilibrium without ever actually attaining it, because the market has no other way of approaching equilibrium except by groping, and, before the goal is reached, it has to renew its efforts and start over again, all the basic data of the problem, e.g. the initial quantities possessed, the utilities of goods and services, the technical coefficients, the excess of income over consumption, the workin capital requirements, etc., having changed in the meantime. Viewed in this way, the market is like a lake agitated by the wind, where the water is incessantly seeking its level without ever reaching it. But whereas there are days when the surface of a lake is almost smooth, there never is a day when the effective demand for products and services equals their effective supply and when the selling price of products equals the cost of the productive services used in making them” (380).