Lesson 0 General Introduction and Plan of the Course

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Lesson 0General Introduction and Plan of the
Course
Franco Donzelli Topics in the History of
Equilibrium Analysis
Ph.D. Program in Economics University of
York February-March 2008
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Equilibrium analysis a historical perspective 1

• History and theory a difficult relationship
• Most contemporary theoretical research in
  economics is historyless, i.e., it is wholly
  uninterested in the historical origin, filiation,
  and evolution of the ideas under discussion.
• Most contemporary research in the history of
  economics is theoryless, i.e., it is largely
  uninterested in (or unable to cope with) the
  strictly analytical aspects of the theories whose
  historical evolution is being reconstructed.
• Modern Equilibrium Analysis (MEA) and, more
  specifically, General Equilibrium Theory (GET)
  are a case in point.
• The origins of MEA and GET can be traced back to
  at least one hundred and forty years ago, i.e.,
  to the first significant theoretical
  contributions by Jevons (1866, 1871) and Walras
  (1874)
• But it might perhaps be reasonable to
  significantly back-date the starting point of the
  modern equilibrium approach in economics to much
  earlier contributions, such as Cournots
  Recherches (1838).

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Equilibrium analysis a historical perspective 2

• There are in principle many good reasons for
  expecting that MEA and GET may represent an area
  of useful cooperation between theorists and
  historians of thought.
• On the one hand, the historical evolution of MEA
  and GET have by now given rise to a very long,
  winding and complex time path, which would
  deserve to be carefully analyzed and
  reconstructed.
• On the other hand, the investigation of the
  theoretical foundations of the approach has
  always attracted the interest and the attention
  of its active practitioners.
• In view of this, one would expect a fruitful
  mixture of historical and theoretical research in
  this area. Yet, this is not so.

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General equilibrium theory a historical
perspective 3

• As a matter of fact,
• most theorists on the frontier of research are
  not even aware that a number of issues and
  questions they are currently engaged in analyzing
  have already been thoroughly discussed and
  occasionally solved by the founders and early
  developers of the approach (such as, e.g.,
  incomplete markets, expectations formation,
  temporary equilibrium, intertemporal relations,
  dynamic analysis, overlapping generations,
  strategic foundations of competitive price
  theory, bargaining theory, the theory of the
  core, coalitional game theory, etc.)
• most contemporary historians of economic thought
  are unaware of the relationships existing between
  the older debates and the modern developments, as
  well as of the many advances that have been made
  in recent times (the possible instances are the
  same as above).

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General equilibrium theory a historical
perspective 4

• In this course I shall try to fill the existing
  gaps in the literature and in the current
  theoretical debate, by showing
• on one hand, that reconstructing the origins and
  the process of filiation of economic ideas can
  and does shed much light on the issues now at the
  center of the theoretical stage
• on the other, that such a reconstruction cannot
  be properly attempted without exploiting the
  tools of contemporary analysis and, so to speak,
  the benefit of hindsight.
• The course will deal with the first 80 years of
  development of MEA and GET, that is with the main
  contributions put forward from about 1870 to
  about 1950, even if, for the reasons stated
  above, the analysis of the older controversies
  will always be conducted in the light of recent
  and contemporary developments, to which I will
  explicitly refer.

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General equilibrium theory a historical
perspective 5

• The 1870-1950 period can be subdivided into the
  following three phases
• I phase 1870-1890 foundations laying
• The foundations of MEA and GET are laid during
  this twenty-year period, thanks to the
  contributions of Jevons (1871, 1879), Walras
  (1874-77, 1889), Edgeworth (1881), and Marshall
  (1890).
• II phase 1891-1920 development and consolidation
• MEA and GET are further developed during this
  thirty-year period, thanks to the contributions
  of Pareto (1896-97, 1906, 1909), Fisher (1896,
  1907), J.B. Clark (1899, 1907), Wicksell (1898,
  1901, 1906), Walras (1900), Schumpeter (1911).
• III phase 1921-1950 tradition, crisis and
  renewal
• During this thirty-year period one witnesses the
  crisis of the stationary-equilibrium approach,
  the birth of the Neo-Walrasian research
  programme and the birth of modern game theory
• Hayek (1928, 1935, 1937, 1940, 1941, 1949),
  Lindahl (1929, 1930, 1939), Fisher (1930), Hicks
  (1933, 1934, 1939, 1946), Frisch (1935), Pigou
  (1935), von Neumann (1937), Schumpeter (1939),
  von Neumann and Morgenstern (1944).

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Plan of the course 1

• The course will chiefly focus on the first
  foundational phase, even if sometimes it will be
  necessary to follow the evolution of a certain
  line of thought during the second phase of
  development and consolidation of the approach.
• In particular, it will be necessary to jointly
  consider both the first and the second phase in
  contrasting the two alternative interpretations
  of the equilibrium concept, the instantaneous
  and the stationary one, that characterize the
  entire history of MEA and specifically of GET.
• As we shall see, in fact, both interpretations
  were introduced into the theoretical debate by
  the same author, Walras, during the first phase,
  but they ended up with acquiring an independent
  and parallel life only during the second phase.
• Apart from occasional references, the third phase
  will only be discussed at the end of the course,
  if there is some time left.

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Plan of the course 2

• 1. We shall start from a general discussion of
  the meaning of the equilibrium concept in MEA and
  GET.
• When so broadly conceived, the approach, as well
  as the equilibrium notion characterizing it, will
  be referred to as neoclassical.
• We shall show that, from the very beginning of
  the approach, there coexist two alternative
  interpretations of the neoclassical equilibrium
  notion as employed in MEA and GET an
  instantaneous interpretation and a stationary
  one.
• We shall show that both interpretations can be
  traced back to Walras, who employed them both in
  his writings, specifically in the Eléments, but
  eventually disavowed the stationary
  interpretation, saving only the instantaneous
  one.
• Then, we shall contrast the meaning of the
  equilibrium concept as employed by the Lausanne
  School, i.e., by Walras and Pareto, with the
  meaning of the equilibrium concept as employed by
  the so-called stationary equilibrium approach
  over the period 1870-1920.

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Plan of the course 3

• 2. After this general overview, we shall go back
  to Walras, where the story of GET actually
  begins.
• We shall reconstruct in detail the evolution of
  Walrass ideas over the four editions of his most
  important work, the Eléments déconomie politique
  pure (1874-77, 1889, 1896, 1900), with reference
  to his four equilibrium models (exchange,
  production, capital formation, credit and money).
• Walrass oscillations between a stationary and
  an instantaneous interpretation of the
  equilibrium concept will be explained. It will be
  shown that his ambiguous stance in the
  interpretation of the equilibrium concept depends
  on a more fundamental epistemological ambiguity,
  which has to do with the relation between
  equilibrium and disequilibrium and the nature of
  the tâtonnement construct in Walrass theory.

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Plan of the course 4

• 3. We shall then compare Walrass and Marshalls
  approaches to price theory.
• We shall oppose the received view, according to
  which the two approaches are fundamentally
  similar and Walrass general analysis can be seen
  as a natural extension of Marshalls partial
  analysis.
• On the contrary, we shall show that the two
  approaches widely differ in their
  presuppositions, including the fundamental
  conception of a competitive economy, their aims
  and results.
• Walrass and Marshall analyses of the
  disequilibrium process are basically different
  and consequently lead to basically different
  equilibrium concepts. The distinction between
  Marshalls partial analysis and Walrass general
  analysis is the necessary by-product of such
  epistemological differences and is there to stay.

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Plan of the course 5

• 4. After that, we shall contrast Walrass
  conception of competitive equilibrium and
  disequilibrium with Jevonss and Edgeworths
  views of the same concepts.
• In particular, we shall try to answer the
  following question
• Why Jevons, who is the first to fully formalize
  the competitive equilibrium conditions in a
  pure-exchange model, by writing down the
  so-called equations of exchange, never develops
  a true and proper theory of demand-and-supply,
  not even after receiving Jenkins and Walrass
  suggestions to this effect?
• (Jenkin is an engineer-economist contemporary to
  Jevons mand Walras)
• 5. Finally, if there is some time left, we shall
  address two questions concerning the history of
  GET that arise during the third phase of its
  development.

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Plan of the course 6

• a. First, we shall discuss the peculiar positions
  taken by Hicks and Hayek, the two economists who,
  having mostly contributed to the critique of the
  stationary equilibrium approach and the revival
  of the instantaneous version of GET in the
  inter-War period, apparently changed their minds
  in the late 1940s and early 1950s as to the
  significance and empirical content of the
  temporary and intertemporal versions of GET.
• b. We shall then devote some attention to the
  role played by GET in the famous inter-war
  controversy known as the Socialist Calculation
  Debate, where a group of economists favoring the
  free market economy clashed with another group of
  theorists advocating instead some sort of
  socialist interventionism and/or some form of
  economic planning.
• From a historical and theoretical point of view,
  one of the most intriguing aspects of this
  controversy is that, at a certain point, both
  groups of conflicting economists adopted GET as
  the theoretical foundation of their respective
  positions.
• This of course signals the existence of some
  unsolved problem at the basis of the approach,
  which we shall try to pinpoint.