Applied and social economics

In his writings, Walras often recalls that, theoretically, the solution of the “social question” involves two problems to be solved. On the one hand, the production of social wealth must be “as abundant as possible”, and on the other hand, the distribution of this social wealth must be “as equitable as possible”.

Applied economics and the State

In the article “Une branche nouvelle de la mathematique”, published for the first time in Italian (1876), Walras distinguished between the fact, the idea and the prin­ciple of competition, which correspond to three stages of the scientific process.

(1) The “fact” refers to competition as it exists “under more or less imperfect conditions”. The author recalls here that in concrete reality, production and exchange operate under three factors (1876, 298): partly “under the influence of competition” (historically growing);^[116] partly “under the influence of legal restrictions” (historically declining), such as industry regulations, commercial tariffs, and fiscal or protective taxes; and partly under the influence of custom, which “always has considerable influence”.

(2) The “idea” refers to the regime of “absolutely free competition” theorised in pure economics.

(3) The “principle” refers to free competition as it should exist, with the crite­rion of social interest. The “principle of free competition” should normally govern the production of most “services and products of private interest “, the State being here in charge of a complex task of legislation and regula­tion.

Laissez faire should not mean do nothing, but let free competition work. Hence, where free competition cannot work, there is reason for the State to intervene to take its place. Where free competition is feasible there is reason for the State to intervene to organize it and to assure the conditions and cir­cumstances for its working.

(1880, 388; 2005, 339)

What are the other areas of State intervention? The State must first provide pub­lic services free of charge, as these activities correspond to “moral monopolies”. Why? Firstly, public services are used for the satisfaction of collective needs that are identical and equal for all individuals. Secondly, the utility of public services cannot be properly perceived “in its entirety” by individuals. Finally, there are also goods and services whose social utility exceeds the utility felt by individuals. Among public services, Walras considers the following activities: administration, justice, police, national defence, infrastructure (roads, etc.), education (including higher education) and progress of the arts (museums, etc.).

In the name of social interest, the State must also take charge of certain “services and products ofprivate interest” which have the character of “economic monopolies”. Walras refers to quarries, mines, including gold and silver mines, natural springs, gas, etc. He also refers to the post office. These activities, called “natural and neces­sary monopolies”, are characterised by very high fixed costs, constituting a barrier to entry into the industry.

Finally, the State must intervene in activities that fall into the categories of “moral monopolies” (public services) and “economic monopolies” (“natural and necessary monopolies”): this involves means of communication, canals and rail­ways.^[117] Walras discusses the question in an article written in 1875, ”L’Etat et les chemins de fer”, but only published in 1897 with a supplementary “Note”. For him, the railroads and the trains that use them, like other means of communica­tion, escape from competition “by nature”. Railways provide a “service of public interest”, playing an indispensable role not only in matters of national defence and justice (transport of troops and police), but also in providing transportation for participants in scientific conferences and exhibitions; they also serve as a means to distribute newspapers throughout the country. Railways also provide a “service of private interest” (regular passenger and freight transport).

According to Walras, the State can choose several forms of organisation for each of these monopolies: (i) the private company may have responsibility for the monopoly with the authorisation of or under the supervision of the State; (ii) it may hold a State concession, granted after an invitation to tender, competing by offer­ing either the lowest tariffs charged to customers or the highest rent [fermage] paid to the State (1897a, 213; 2005, 185) - in this case, the company that was granted the concession must comply with very precise State specifications indicating, for example, the maximum tariffs to be applied; (iii) the private company or compa­nies may be “nationalized” and the monopoly is then ensured either directly by the State (through a regie), or through a public company.

Walras did not seem to be in favour of the first solution, as State surveillance may be ineffective. The second solution seemed to him particularly appropriate for natural monopolies and railways. The third solution was, in his view, a possible option (1897a, 213-4; 2005, 185-6). However, later in the years 1896-1898 he considered this last solution in a more favourable light, thus proposing the repur­chase of the six French railway companies and their management by the State itself (“Note”, 1897a, 216, 2005, 187). In all cases, the State must ensure as far as pos­sible that the general rule of equality between the selling price and the cost price of productive services is respected in these companies: neither profit nor loss.

In the years 1895-1900, Walras also discussed the theme of “collectivism of production”, based on the debates on Marx’s work that were taking place in France at the time. In “L’economique appliquee et la defense des salaires”, he asserted:

All enterprises could possibly be supposed collective, but they cannot all be supposed private. Collective production is materially possible and would not, in itself, be contradictory to liberty, equality, order or justice. It is just a simple matter of social utility.

(1897b, 250-1; 2005, 221)

The prices of products and of productive services would be determined on the market through the overbidding and underbidding mechanism [enchere/rabais], and the State, now “single entrepreneur” [entrepreneur unique], would reduce the production in case of loss and increase it in case of profit. Although Walras does not advocate this solution in applied economics (see below), he examines with great attention this case of “collectivism” which cannot be equated with “communism” (Dockes 1996, 206-21; Potier 2019, 462-7). Thus he is led to assert that the “free competition” of firms is not, in theory, the “only way to bring the selling price down to the cost price”.

Socialjustice and “liberal” or “scientific” socialism

In addition to the scientific approach itself, used in pure economics, which consists of starting from “real types” in order to identify “ideal types”, which will lead to the deduction of theorems, Walras used a “conciliation or synthesis method” in the field of social economics.

Walras wished to reconcile socialism with liberalism: on the scientific level, socialism was right against liberalism in asserting the importance of the social question and trying to find solutions, but it was wrong with regard to the authoritar­ian political solutions proposed; on the political level, liberalism was right against socialism in defending freedom against authoritarian solutions, but it was wrong on the scientific level in underestimating the importance of the social question.

Walras also wished to reconcile communism and individualism. In a note added in 1896 to the article “Methode de conciliation ou de synthese” written in 1868 (1896a, 151, note 1; 2010, 115), he revealed that he owed much of the idea of reconciliation to the “old Saint-Simonians” whom he had frequented in his youth. His theory of justice was based on a “general formula for the constitution of social science” that could be expressed thus: “Equality of conditions, inequality of posi­tions”. The “personal positions” support the argument for individualism, while the “social conditions” support the argument for communism. The inequality of posi­tions for individuals refers to distributive justice. In this field, every man must possess what nature has given to him in his own right or what he has given himself through the development of his faculties. Equality of conditions refers to commuta­tive justice.

To respect the inequality of positions, personal faculties, labour service and wages belong to the individual by natural law. To respect the equality of condi­tions, land, land services and ground rent belong to humanity, that is, to all human generations, by natural law. All individuals must benefit equally from the resources provided by nature, for the achievement of their objectives, in the exercise of their activities. The system of private ownership of land constitutes a perpetual violation of natural law. According to Walras:

The land does not belong to all the people of one generation; it belongs to humanity, that is to say, to all human generations. If society were a conven­tional, free association, the parties contracting to establish it could decide to share the land in equal parts among themselves; however, if society is a natu­ral and necessary fact, any alienation of land is against natural law, because it wrongs future generations. In legal terms, humanity is the owner and the present generation is the usufructuary of the land.

(1896b, 189; 2010, 145)

The legitimate representative of humanity can only be the State. In our time, char­acterised by the privatisation of agricultural land, natural resources and public ser­vices on a world scale, the Walrasian project has gained new significance in the context of reflections about the “commons”.

If property rights to personal faculties and lands are attributed according to natural law, what about capital proper, profit and interest? For Walras, there is no theory of natural law for the wealth produced. Products belong to those who made or bought them. But capital proper is a product. Created by the State’s savings, it is the subject of collective ownership; created by saving from wages (or transmitted by donation and inheritance), it is the subject of individual ownership.

In Walras’s view, an important connection between social economics and pure economics can be found in the 36th lesson of the Elements d’economiepolitique pure. In this lesson, the author shows that in a “progressive society” (in which capital and population increase), the (present and future) ground rent [fermage] increases, the “rate of net income” (or the ratio of net interest to the capital price) “decreases markedly”, while on the other hand, “the price of land increases both in proportion to the decrease of the rate of net income and in proportion to the increase of rent” (1877, 36th lesson, 597; 2014, 328).

From a critical examination of Hermann-Heinrich Gossen’s theory devel­oped in Entwickelung der Gesetze des menschlichen Verkehrs (1854), Walras built a “Mathematical theory of the price of land and its repurchase by the State” (1881). According to Walras, the State should gradually repurchase all land at market price so as not to harm the interests of the landowners, who would be compensated in bonds issued at current interest rate. Most of the land should be rented out on long leases to entrepreneurs in agriculture, but also in industry and commerce. The highest rents for the State would be obtained through an auction system. To Walras, the farm-lease system seemed to be the most efficient, as in the case of English agriculture. In the industrial and com­mercial stage, extensive cultivation would be replaced by intensive cultivation in large farms, whence the convergence of the principles of justice and eco­nomic efficiency.

For a number of years, the rent paid would not be sufficient to pay the interest on the bonds given to the former owners, and the State’s debt would grow. How­ever, as the rent increased, amortisation of the debt would become effective. At its completion, the rent alone would allow the State to finance all public expenses and it would be possible to eliminate all taxes on income and capital. Thus, the main social question would be solved at the practical level, thanks to collective initiative.

Here we should recall that for Walras, all systems of taxation are unjust, because individuals do not benefit from public spending in direct or increasing proportion to their income or capital. As members of society, everyone benefits equally from public spending. The worker, living exclusively from his labour, is taxed on wages and is prevented from saving, from becoming partially capitalist; he is reduced to the status of proletarian. Walras therefore rejects the principle of proportional or progressive taxation of income. However, until implementation of the repurchase of land, or during the transitional period, he suggested in 1896 a solution to avoid State intrusion into the sphere of private interests: “[a]n indirect tax on rent [loyer] or, rather, a direct tax income evaluated according to rent received, this would be the only tax that could pass as approximately proportional or progressive without enormous material and moral disadvantages” (1896c, 410; 2010, 336). As a tran­sitional measure, Walras always accepted the principle of a tax on ground rent [fermage], as it could be interpreted as de facto State co-ownership of the land.

Leon Walras’s plan was criticised by several economists, especially Paul Leroy- Beaulieu, Charles Gide and Vilfredo Pareto.

Paul Leroy-Beaulieu denounced the Walrasian reconciliations between social­ism and liberalism and between individualism and communism. In Le Collecti- visme, he exclaimed:

Who will deliver us from the conciliators, those floating and empty spirits who believe that twilight reconciles night and day? This mania for wanting to unite and dissolve opposites is the most characteristic sign of intellectual debility.

(Leroy-Beaulieu 1884, VII)

Gide and Pareto criticised the programme of repurchase of land by the State. In 1883, Gide recommended that this experiment should not be carried out in France, with its “army of agricultural landowners”, suggesting that it might rather be attempted in England, in “new countries” (USA, Canada, Australia, South America, etc.) and colonies (Algeria) with grants of new land (Gide 1883, 95-7). And in a review of Etudes d’economie sociale, he deplored the prospect of the abolition of taxes. Firstly, on a moral level, because it is detrimental to social solidarity, since tax is for many people the “only act of altruism” they perform during their lives. Secondly, because in all countries, public expenditure is much higher than the income that the State could obtain from rent “even if the expropriation is carried out without compensation, all the more so if it is done by paying the full price” (Gide 1897, 306). In Les systemes socialistes, Pareto argued that there is no way to be certain that the price of land will rise for a long time. And in the event that the State succeeds in becoming a landowner, it will need to withstand collective pressure from all the tenants: “One cannot imagine how a government existing on the basis of universal suffrage could resist a vote by all of the farmers and tenants asking for a general reduction of rent” (Pareto 1903, II, 311). Abolition of taxes is a utopian project, as the needs of the State are “infinite, the more they are satisfied, the more there are to be satisfied” (1903, II, 311-2).

In the second half of the 1890s, Walras spoke about the rational society in the future as he imagined it:

in such a society, we should imagine the mass of capital that does not belong to the State as being, in the hands of workers, in small fractions, in the form of shares and bonds of various firms, of bonds of cooperative enterprises, which adds to present well-being, assuring security for tomorrow, preparing for future retirement; all this thanks to private initiative, as it should be, with­out any interference from the State except, if need be, to give disinterested and benevolent support.

(1896b, 205; 2010, 157)

Thus, he describes market production carried out by small or medium-sized firms of various legal forms. In this “rational society”, “wealth would be both the conse­quence and the reward for labour and savings, poverty would be the consequence and the punishment for laziness and dissipation” (1896c, 404; 2010, 331). The inequality of individuals’ positions would be reduced to a minimum (no large for­tunes), the class struggle would disappear and the State as landowner would achieve the equality of conditions and take charge of moral and natural monopolies.

Walras asserted that, at a push, he “would not at all dislike declaring [himself] a collectivist, both in matters of the production and in matters of the distribution of wealth”. However, since the term “collectivism” had Marxist connotations, he pre­ferred his formula of “synthetic socialism or synthetism” (1896b, 206; 2010, 158), or that of “liberal socialism”. From the years 1863 to 1867, he claimed to adhere to “scientific and liberal socialism” (1866-67, 22; 1867-68, 147 and 172; 2010, 14, 110, 130). On the day of his jubilee at the Lausanne University, he declared that he had finally succeeded in building a “scientific, liberal and humanitarian socialism” (1909b, 511).

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