Leon Walras Biography (1834-1910) — General Equilibrium Model

Competitive General Equilibrium Economic Theory and Analysis

Marie Esprit Leon Walras wrote Elements of Pure Economics in 1874 and was most noted for his extensive work with general economic equilibrium. Walras's general economic equilibrium theory examined the relationships among different markets with the realization that the forces of supply and demand in any one particular market depended in varying degrees on the prices prevailing in innumerable other markets. Recognizing the problem of circularity and interdependence of prices of one market on another market, Walras attempted to formulate a general theoretical framework showing how all prices could be determined simultaneously through interactions of all markets.

General economic equilibrium explained how all prices and quantities would exchange within an entire economy for a given period. In contrast, partial equilibrium theory took, as given, all prices and quantities exchanged except for one or two and attempted to explain those one or two markets within the context of the other given prices and quantities.

To develop his general economic equilibrium theory, Walras first had to describe some of the features of the social and economic setting of the market situation that was to be used in explaining the prices and quantities exchanged. Basically, the setting was comprised of competitive capitalism with landowners, workers, and capitalists. Institutional factors included acceptance of existing property laws as morally right, that perfect competition prevailed (ignored monopolies), and that people were assumed to have measurable marginal utility schedules that remained fixed or constant for each period of analysis.

From his analysis, Walras came up with a law that proved that if all markets but one are in equilibrium, then the last market must also be in equilibrium. This meant that with any given set of prices, the total demand for all things exchanged must equal the total supply of all things exchanged. Therefore, supply was a consequence of demand. This implied that there would always be a demand for all newly produced commodities. If there was disequilibrium or excess supply somewhere, then there must also be an equal disequilibrium or excess demand somewhere else since total excess supply equaled total excess demand.

Walras's law purportedly held even if every single individual market was out of equilibrium. The central issue, then, became whether market forces would automatically correct disequilibrium through forces of supply and demand. Walras assumed that it was indeed so and that there would be immediate reaction or fast adjustment from disequilibrium to equilibrium.

Some of the problems with Walras general economic equilibrium theory included the fact that the perfect competition assumption was, of course, invalid. Also, how would new prices get established in the first place? Walras assumed that an auctioneer or "crier" would announce prices. The problem with this was that if a wrong price was established, it would throw off all of the other prices to states of disequilibrium. After all other prices were thrown off, mistake after mistake would be compounded and move everything farther from equilibrium. Walras recognized this problem and escaped this it by asserting that a given price change would have a primary effect only in the market of the affected commodity. Effects in other markets would be secondary.

Walras's analysis was especially valuable in the sense that it demonstrated how complex market interrelationships made it very difficult for a state of full employment type general equilibrium to be achieved. It also inferred, by using the same reasoning, that once a crisis started it, would spread.