The Elements d’economie politique pure
With four editions during his lifetime (1874-77, 1889, 1896, 1900) and a posthumous fifth (1926), the Elements d’economie politique pure are probably the most accomplished and important part of Walras’s work.
In it Walras provides a formulation of the general economic equilibrium with which he wishes to analyse the interdependencies of markets. He assumes as given (1) initial resources, (2) production technology, (3) economic agents’ preferences and (4) their initial endowments. He then shows that, on the assumption of absolutely free competition, it is possible to determine the quantity and price of any traded commodity and any input in production in such a way that the maximum utility position reached by each economic agent is compatible with those of all other agents. This state of general economic equilibrium is the maximum production of social wealth.The first part of Elements d’economie politique pure is dedicated to the definition of the subject, and to the divisions of its political and social economy arising from Walras’s research programme directed towards the scientific resolution of the social question.
The object of study is social wealth, which Walras defines as “all things, material or immaterial... that are scarce, that is to say, on the one hand useful to us, and on the other hand, only available to us in limited quantity” (OEC VIII: 45 [65], original emphases). From this definition, Walras draws a triple consequence: (1) useful things limited in quantity are appropriable, (2) they are valuable and exchangeable, and (3) they are industrially producible or reproducible (OEC VIII: 49 [66]). This triple consequence of scarcity defines three distinct groups of facts, therefore three sciences: (1) social economics (or the theory of the distribution of social wealth), (2) pure economics (or the theory of the value of social wealth) and (3) applied economics (or the theory of the production of social wealth) - each with a specific validation criterion.
The general economic equilibrium deals with value in exchange: “pure economics is, in essence, the theory of the determination of prices under a hypothetical regime of [absolutely] free competition” (OEC VIII: 11 [40], original emphasis). This is a hypothetical scheme, in that Walras supposes “that the market is perfectly competitive, just as in pure mechanics we suppose, to start with, that machines are perfectly frictionless” (OEC VIII: 71 [84]).
Absolute free competition is said to prevail when economic agents cannot influence prices by their own personal supplies or demands. Thus, since the value of social wealth “does not result either from the will of the buyer or from the will of the seller or from any agreement between the two” (OEC VIII: 50 [69]), its determination under an absolutely free competition regime is a natural fact; therefore, the science that deals with it meets the criterion of truth. Then, since producing social wealth results from exercising man’s will over things, applied economics meets the criterion of usefulness. Finally, social economy “is guided by considerations of justice” (OEC VIII: 61 [75]), because the distribution of social wealth consist of a “relationship between persons and persons designed for the mutual co-ordination of the destinies of the persons concerned” (OEC VIII: 42 [63]).
After this introductory and methodological part, Walras presents the core of the general equilibrium approach, moving from simple to more complex phenomena.
[I]t becomes possible to arrive successively at: (1) a determination of the prices of consumer’s goods and services by means of the theory of exchange; (2) a determination of the prices of raw materials and productive services by means of the theory of production; (3) a determination of the prices of fixed capital goods by means of the theory of capitalization; and (4) a determination of the prices of circulating capital goods by means of the theory of circulation. (OEC VIII: 12 [40], original emphases)
In the Walrasian terminology, economic agents are distinguished depending on the nature of the factors of production they possess, that is, what Walras calls (fixed) capitals.
These can be natural, such as land; personal, such as the ability to work; or capitals proper, such as plant and equipment; they are distinguished from incomes (or circulating capitals) because they are not exhausted after having been used once. Thus, landowners own the land, workers own personal capacities and capitalists own plant and equipment.There are also the entrepreneurs who, through access to credit, have the opportunity to acquire inputs and assemble them, so as to minimize production costs of commodities, with given technology as known to them. These commodities are sold as consumer, intermediate or capital goods, in such quantities that maximize entrepreneurs’ profits. However, in a state of equilibrium, neither excess-profits (benefices) nor losses (pertes) can exist since the absolutely free competition mechanism is such that one “bought his services and sold his products by auction, and... decreased his output in case of loss and always increased it in case of a profit” (OEC VIII: 284 [225]). The mechanism of absolutely free competition implies that buyers at the auction bid higher and sellers offer tenders at a discount; this is assumed to cause the price of a commodity to fall when supply exceeds demand, and rise when demand exceeds supply.