Production, capitalization and money
As early as the second edition, Walras deals with the exchange values of the factors of production (Part IV) after having dealt with that of commodities, and before the part (VI) on money.
With the introduction of the “equations of production”, the tatonnement is complicated by the fact that quantities of commodities are not given, but depend on production. So, if the set prices are not such that in each market demand equals supply, new prices are set, but it is also necessary to manufacture other amounts of products. Only with the fourth edition of Elements does Walras believe he has found a convincing solution: “In the theory of production, I no longer represented the preliminary taton- nements towards equilibrium as it takes place effectively, but I assumed, instead, that it was done by means of tickets [sur bons]” (OEC VIII: 5-7, original emphases). However, integrating production in general equilibrium remains problematic, especially in Part V, when Walras takes into account heterogeneous capital goods, as he had done for the other productive services, labour and land services. Already, when solving the production equations, the issue of the initial conditions matters and Walras, in the first edition of the Elements resorts to the expedient of a foreign market where entrepreneurs find services in indefinite quantities. In the theory of capitalization, to determine the quantities and prices of new capital goods, the available physical quantities of produced means of production are given data and hence include those of capital goods per se. However, “we cannot expect that configuration of capital stocks to be the most “appropriate” to the production of the outputs required by the preferences of the consumers” (Garegnani 1990: 16) and to obtain a uniform rate of net income (or profits) to obtain. With the fourth edition, Walras seems to realize the problem when he says that:It is not at all certain that the amount of savings...
will be adequate for the manufacture of new fixed capital goods proper in just such quantities as will satisfy the last l equations [which determine the quantities of new fixed capital goods proper to produce] of the above system. (OEC VIII: 431 [308])Thus, in the static context of general equilibrium, Walras admits that net income rates differ from one another, and that in a progressive society he could only postulate that they are uniform.
The construction of the general economic equilibrium is supplemented by taking money into account, in its payment function, because the unit of account function has already been introduced with the numeraire on the occasion of trading several commodities for each other. As noted earlier, monetary theory is the subject that underwent the most extensive changes throughout the four editions of the Elements.
In the first edition, the part on money concludes the first instalment, after studying the exchange of several commodities. Money is the necessary intermediary of exchange because “we cannot directly exchange commodities against commodities” (OEC VIII: 541). So, from the very beginning, Walras does not think in terms of a generalized barter system, but a Clower-like monetary economy and “there is a perfect analogy between the intervention of money and the intervention of numeraire” (OEC VIII: 228). Walras addresses the issue of determining the value of money from the fact that “the [total] value of the money that has bought the commodities is equal to the value of commodities that were sold against money” (OEC VIII: 468), which he formalizes in a “veritable exchange equation” that anticipates Fisher’s equation.
The publication of the second edition of the Elements “was delayed only by the studies that I had undertaken on the question of money” (OEC VIII: 4). His results, including those stated in Theorie de la monnaie (1886), lead Walras to change the order of chapters by shifting the part on money after that of capitalization and credit.
Thus, money is now considered as a circulating capital, in the dual form of circulating money and savings money (for the purchase of new capital), and the determination of its value is not only made in aggregate terms of the needs of the circulation, but in an individual perspective of desired cash balance to finance daily transactions. However, the most important change consists in the separation between pure and applied monetary theory that refers to a distinction between the steady-state equilibrium of pure economics and the dynamic, unbalancing aspects of applied economics. Following this logic, four lessons in the third edition (lessons 37-40) were removed and returned to the Etudes d’economie appliquee. The fourth edition continues along these lines, on the one hand, with the timeless general economic equilibrium, and, on the other hand, with the introduction of the demand for money in individual utility functions. Money is used to purchase capital and other commodities, thus it provides a service that Walras called d’approvisionnement (service of availability). So, he can finally put the equation of the equality of the supply and demand for money no longer “apart from the other equations and as empirically given... [but] deduced rationally” (OEC VIII: 9 [38]).Finally, four subjects, organized in two parts, conclude the Elements. In Part VII, outside his atemporal general equilibrium, Walras moves his thoughts on economic progress - including the theorem of marginal productivities - together with a critique of pure systems of political economy, that is, the Physiocrats and the English classical economists’. The last part deals with tariffs, monopolies and taxes.