Walras In Retrospect

Walras in Retrospect

Walras's high place in the history of economic theory rests partly on his independent discovery of marginal utility theory, but more on his conceptuali­zation of the interdependence of the sectors of a market economy. Although others before him had perceived the interrelatedness of households, firms, prices of final goods, prices of factors of production, and quantities supplied and quantities demanded of all final and intermediate goods, no one had been able to express this perception as precisely as Walras did by stating it as a system of simultaneous equations. Now it was possible to see that equilibrium for the household and equilibrium in the markets for final goods were consistent with equilibrium for the firm and equilibrium in factor markets. The attempts by Jevons and Menger to find a simple causal relationship between marginal utility, the prices of final goods, and the prices of factors of production seem unsophisticated compared with Walras's general equilibrium model. Walras clearly demonstrated the power of mathematics as a tool of economic analy­sis, although full acceptance of his message did not come until well into the twentieth century. The appropriate use of mathematics is still being debated by some today.

Walras's marginal analysis was more sophisticated than either Jevons's or Menger's. He did not see a simple direction of causation from subjective utility to value; instead, he saw a complexly interrelated system. Because Walras was focusing on the interdependence of sectors, and in a sense only working backward to demand, he did not fall into some of the traps that Jevons and Menger did. Whereas Jevons and Menger were content to search for a one-way,

cause-and-effect relationship among utility, prices of final goods, and prices of factors of production, Walras's general equilibrium model showed that they were all interconnected. In the Walrasian system, all prices are mutually deter­mined, and it is not possible to assign value causation in either direction. The prices of final goods influence and are influenced by the prices of factors of production. In a general equilibrium model, everything depends upon everything else. It is not at all clear that this sophisticated exposition was the result of understanding, and not a byproduct of Walras's focus on general equilibrium rather than on utility. For Walras, utility was merely something he needed to assume in order to get to the demand curves he wanted. Thus, rather than providing a full utility underpinning for demand analysis, Walras only hinted at the underpinning.