Walras contribution to Marginalism
Leon Walras( 1834-1910) was a contemporary of Jevons and Menger in analyzing marginal principle. Walras like other marginalist promoted the use of mathematics, algebra in the field of economic analysis. He also used the marginal principle in his analysis of general equilibrium.
Walras developed the process of general equilibrium more systematically than his predecessors. Walras makes a distinction between the product market and the factor market. He mathematically proved that the general equilibrium in a market of perfect competition should be equal to the marginal utility(demand) and cost of production(supply) in the long run. The buyer and the seller continue their transactions till the equilibrium price is achieved and it is likely to be determined at the point where demand is equal to the supply.
In the Walrasian system, if there are m products, n factors m product prices and n factor prices and mn technical coefficient, the total numbers of unknowns adds up to 2m+2n+mn. This was reduced by Walras by 1. Therefore, the total number of unknowns become 2m+2n+mn-1. He reduced the number by 1 because of one of the products services as numeraire (the measure of value) in which all other prices are expressed and which itself has a price of 1.
In his system, the number of unknowns is matched by m-1 demand equations for products, m cost equations, n quantity equations for factors of production, n price of productive services, mn technological co-efficient equations, i.e., 2m+2n+mn-1 equations.
Thus, the number of unknowns exactly matches the number of equations and general equilibrium is established. Thus, Walras law means that under certain conditions equilibrium in m-1 markets implies equilibrium in the remaining markets. In other words, of m-1 market is an equilibrium then mth market would also be in equilibrium. Thus, Walras with the help of his mathematical technique demonstrated that a perfectly competitive economy will be in equilibrium in which a number of the economic variables are studied to see the interactions and the interdependence among the variables for the proper understanding of the economy a whole.
The criticism against Marginalism:
· The ideas of mercantilism regarding wealth was wrong. They thought the wealth was something like money and bullion.
· They wrongly considered that foreign trade is the most important activity. But the critics pointed out that not only foreign trade by all activities are important for a country.
· Mercantilism was based on the policy of exploitation.
· The mercantilist wanted a favourable balance of trade at the cost of other countries. So, their policy was self-centred.
· The mercantilist were not in favour of the working class.
· The mercantilist were narrow-minded. They advocated certain narrow policies for their temporary gain. In the light of the above criticisms, mercantilist couldn’t be contained for a long time. It faced in downfall due to their narrow and partial way of analyzing economic problems.
Factors responsible for the decline of Mercantilism:
· The development of banking reduced the importance of gold and silver.
· The expansion of the market economy showed that real estates factors and machinery were more important itself of wealth than those gold and silver.
· The economic growth that took place during the Industrial Revolution made it possible for the society to depend competitive and Laissez Faire rather than promoting regulating monopoly.
· The great progress in science and technology though in a country could become riches not only by impoverishing its neighbours but also by mastering the forces of nature in a more efficient way.
· During the period of mercantilism economic life was highly regulated. There were many regulations protecting the quality of good. But this regulation which was once necessary ultimately become a barrier to progress. So, the regulation was widowed.
Because of these factors mentioned above the mercantilism decline in England & other Europe countries in the last part of the 18th century. But it is to be mentioned here that in spite of the decline of the mercantilism, there are some ideas and direction that are present today resemble with the ideas of the mercantilism.
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