Walras and the Lausanne School
The term “Lausanne School” was first used by the mathematician Hermann Laurent, in 1900, in a lecture at the Institut des actuaires franςais, and then in his Petit traite d’economie politique mathematique, redige conformement aux preceptes de I’Ecole de Lausanne (Laurent 1902).
The term refers to the economists who developed general equilibrium theory and who succeeded one another in the chair of political economy in the Faculty of Law of Lausanne University. This line of authors includes Walras, Pareto and Pasquale Boninsegni. While Walras is considered the founder of the school and Pareto a co-founder, the contribution of Boninsegni (1869-1939) was very limited and remained focused on the teaching of Pareto’s theories. After World War II, a “New Lausanne School” was formed around Firmin Oules (1904-1992), who succeeded Boninsegni at the chair, and Marcel Boson (1910-1988). This new school highlighted Walras’s contributions in applied and social economics to the point of considering him as the “founder of scientific economic policy”.[118]In fact, the concept of Lausanne School is very reductive, because it ignores the differences that existed from the beginning between Walras and Pareto about the conception of science in general and the methodology of economic science in particular:
The simplifying myth of a “Lausanne School” built by generations of economists and historians of economic thought hardly holds water. Even when one focuses exclusively on general equilibrium theory as a simple mathematical instrument for analysing the determination of a vector of equilibrium prices, the methodological differences between Walras and Pareto appear immediately.
(Bridel and Mornati 2009, 870)[119]
Fritz Wilfrid (Vilfredo) Pareto (1848-1923)[120] was born in Paris to a French mother and an Italian father exiled to France, a disciple of Giuseppe Mazzini.
After his family returned to Italy in 1854, he studied mathematics and physics at the University of Turin, then obtained an engineering degree in 1870. After working as an engineer and entrepreneur in industry in Tuscany, he turned to economics, taking advantage of his reading of Principii di economia pura by Maffeo Pantaleoni and then Elements d'economie politique pure by Walras. In 1893, he succeeded Walras in the chair at Lausanne University. In his obituary, “L’a'uvre scientifique de Leon Walras”, published in the Gazette de Lausanne, he noted:The main merit of this scientist, his very great merit, was to study, first, a general case of economic equilibrium. In this way, he has opened up a path to economic science that can only be compared to that which Lagrange has opened up to rational mechanics.
(1910, 1)
To help him in the preparation of his first lectures, Walras had provided Pareto with materials from his own course in pure economics, but Pareto would not use them (Bridel 1996, 730 ff). While they contributed to the diffusion of general equilibrium theory, Pareto’s lectures, which led to the publication in two volumes (1896-1897) of the Cours d'economiepolitique, diverged in form and content from the Walrasian perspective.[121] Based on his lectures, Pareto then published in French Les systemes socialistes (Pareto 1902-1903) and the Manuel d’economiepolitique (Pareto 1909), a revised and expanded edition of the Manuale di economiapolitica (1906). We will limit ourselves here to some information on the content of the Cours d’economiepolitique.
According to Pareto, political economy is a “natural science based exclusively on facts”, like psychology, physiology, physics or chemistry. It examines the phenomena resulting from the actions of men to procure things in order to satisfy their needs and “does not have to give precepts” to solve practical questions (1896-97, I, iii and 2). Thus, in pure economics, the theory of exchange “gives no precepts either for or against free competition” (1896-97, I, 28).
In contrast to Walras, Pareto asserted that: “pure economics is therefore an experimental science, because it draws its consequences exclusively from facts, and it is not based on any metaphysical principle” (1896-97, II, 40, note 1). According to Pareto, political economy must seek the regularities of phenomena, their laws, based initially on experience and observation. These laws are only hypotheses, abstractions derived from verifiable facts. Influenced by positivism, Pareto explained that:We have always asked statistics, observation, and history to demonstrate our proposals or to verify the inductions they have allowed us to make. In my opinion, there is only one criterion of truth: experience. Any theory which explains the known facts and allows new facts to be predicted may be admitted, at least temporarily; any theory that is contrary to facts must be ruthlessly rejected.
(Cours d’economiepolitique, I, iv-v)
Leon Walras did not share this perspective. In his “Notes d’humeur”, he reacted to Pareto’s approach as follows:
Certainly reasoning and science cannot stand in contradiction to experience and facts. But who knows the facts? Science tells truths that experience cannot confirm.... It is self-sufficient and can rectify the facts. (Newton’s system was at odds with the facts until Uranus’s disturbances were explained. Who completed the facts by finding the planet Neptune? Reasoning, not experience).
(2000, 567)
Although he was a better mathematician than Walras, Pareto did not give absolute priority to the mathematical method. Mathematics are necessary “to have an exact and truly complete conception of the relations that the economic equilibrium establishes between phenomena” (1896-97, II, 8), but they must be used with great caution, especially when the chain of deductions grows long. In the Cours d’economie politique, the mathematical apparatus is reduced to a minimum and is often placed in the footnotes, the author wishing the book to be read “by anyone with only a general culture” (1896-97, I, iii).
Reasoning by analogy may be useful to clarify the meaning of a theoretical proposition, but not in demonstrating that proposition. This is the case with analogies between the equilibrium of an economic system and the equilibrium of a mechanical system (1896-97, II, 11-12). But for the study of the evolution of societies, of social organisms, biological analogies are more useful (1896-97, II, 27).Having to take into consideration a large number of phenomena, the human mind must proceed from the simple to the complex. Here, Pareto used the theory of “successive approximations”, borrowed from the physical and natural sciences. The first approximation gives us the general form of a phenomenon; so, for example, the earth is first considered as a sphere by astronomy. By detailing the globe’s surface, geography allows us to establish a second approximation. Topology will then provide a third more accurate approximation (1896-97, I, 16). In the case of “economic phenomena”, the first approximation is provided by pure economics and the theory of general equilibrium in absolutely free competition. Here we consider the most fundamental general facts, the “manifestations of ophelimity”[122] in their abstract form (tastes and the obstacles encountered in obtaining the goods that will satisfy these tastes). Pure economics is the domain of the ideal man, the “homo reconomicus”, who has only one goal: to obtain the “maximum of ophelimity”. The analysis of agents’ rational behaviour is the starting point to study the structure of markets: an approach contrary to that of Walras.
In the Cours d’economie politique, the part devoted to the principles of pure economics is relatively short (74 pages). It summarises the theories of exchange, production and capitalisation, in a static perspective. But extensions were made in the book, such as the introduction of monopoly into the general equilibrium (vol. I), or a consideration of the variability of coefficients of production and the establishment of the conditions of welfare (vol.
II). According to the author, the general equilibrium is never achieved, because as we get closer to it, “it changes continuously, because the technical and economic conditions of production change. The real state is therefore that of continual oscillations around a central equilibrium point, which itself moves” (1896-97, I, 47). Pareto did not attach much importance to tatonnement (marchandage in his own terminology), which he saw as an irreversible process over time. In his view, the stability of the general equilibrium is a purely theoretical problem, unrelated to any mechanism that could actually occur in the markets. Referring to the debate between Walras and Francis Ysidro Edgeworth,[123] he noted:Mr Walras pointed out that the marchandage established with free competition is the way to solve the equations of the exchange by trial and error. Mr Edgeworth objected that it was only one means. He is right; but the means indicated by Mr Walras is indeed the one that represents the main part of the economic phenomenon.
(1896-97, I, 24-5)
In Pareto’s view, theoretically, the stability of the general equilibrium would require the implementation of a system of dynamic equations. However, he did not wish to engage on this path, and he observed:
It should be demonstrated that these various adjustments bring us ever closer to the equilibrium We will not develop this demonstration, which would
be useless to people who do not know mathematics, and which will be found easily by people who know the general theory of equations.
(1896-97, I, 61, note 2)
In fact, Pareto considered that, unlike physicists with d’Alembert’s principle, economists could still do no more than glimpse the dynamic state of a system. He recognised that “we are obliged to substitute the consideration of dynamic equilibrium with the consideration of a series of static equilibria”, and then presented the following metaphor:
suppose a man on a sledge slides down a slope.
Another man walks down the same slope, stopping every step. The two men start at the same time from the top, constantly travelling in company, and arrive at the same time at the bottom of the slope.... But the movement of the man on the sledge is a continuous movement, its study constitutes a problem of dynamics. The movement of the man descending by foot represents a succession of equilibrium positions.... It is precisely a similar sequence of equilibrium positions that we can study in political economy.(1896-97, II, 10)
In fact, Pareto did not return to this issue in his Manuel d’economiepolitique.
The second approximation is provided by applied economics, which allows us to get closer to the complexity of reality; this field does not correspond to the one envisaged by Walras. Here we study beings closer to the “real man” (1896-97, I, § 592, 12, note 1). Historical facts and available statistical data are mobilised, and political economy can enrich itself with the contribution of other social sciences (history, anthropology, psychology, etc.). Within this field, Pareto presented his famous “curve of wealth distribution”. In the Cours, applied economics takes up 346 pages in the first volume and the main part of the second, in which we find developments that are already part of general sociology.
Leon Walras was very critical of Pareto’s approach in terms of successive approximations. In his “Notes d’humeur”, he asserted:
M. P[areto] believes that the goal of science is to get closer and closer to reality by successive approximations. And I believe that the ultimate goal of science is to bring reality closer to a certain ideal; that is why I express this ideal.
(2000, 567)
Pareto, as we have seen, believed that science does not have to provide “precepts” for the resolution of practical questions, that the search for utility and justice has nothing to do with science. His liberalism in economics is the antithesis of Walras’s “liberal socialism”. Pareto criticised Walras for contaminating his pure economics with social philosophy. In the article “L’muvre scientifique de Leon Walras”, he noted:
Leon Walras wished to apply his theories to practical problems. This generous impatience is easily explained; but, frankly, these applications were premature; and it will require a lot of time, many studies, many works, before we can think about putting the results of theory into practice He tried to
accomplish a similar work for social economics as he had done for political economy; but his efforts were not successful. This does not detract from his merits; just as the great Newton’s merit is not diminished by the fact that he did not obtain, through his theory of light emission, the same success that so brilliantly crowned his theory of universal attraction.
(1910, 1)
In his eyes, Walras’s field of “social economics” did not belong to science, but to metaphysics. In 1896, he expressed his criticism to Walras after reading his study “Methode de conciliation ou de synthese”, submitted to the Revue social- iste (Steiner 1994). According to Pareto, any consideration of “social justice” is a matter of faith, of metaphysics, because it cannot be demonstrated by experience and logic. Pareto even stated: “My ideal ‘ofjustice’ is certainly not yours; who will decide between us?” (Pareto 1975, XXIX-1, 288).