History of Equilibrium Analysis: A Historical Perspective

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

2. 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 Cournot’s Recherches (1838). Lesson 0 - Introduction and Plan

3. 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. Lesson 0 - Introduction and Plan

4. 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). Lesson 0 - Introduction and Plan

5. 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. Lesson 0 - Introduction and Plan

6. 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). Lesson 0 - Introduction and Plan

7. 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. Lesson 0 - Introduction and Plan

8. 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. Lesson 0 - Introduction and Plan

9. 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 Walras’s ideas over the four editions of his most important work, the Eléments d’économie politique pure (1874-77, 1889, 1896, 1900), with reference to his four equilibrium models (exchange, production, capital formation, credit and money). Walras’s 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 Walras’s theory. Lesson 0 - Introduction and Plan

10. Plan of the course 4 3. We shall then compare Walras’s and Marshall’s approaches to price theory. We shall oppose the received view, according to which the two approaches are fundamentally similar and Walras’s general analysis can be seen as a natural extension of Marshall’s 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. Walras’s and Marshall analyses of the disequilibrium process are basically different and consequently lead to basically different equilibrium concepts. The distinction between Marshall’s partial analysis and Walras’s general analysis is the necessary by-product of such epistemological differences and is there to stay. Lesson 0 - Introduction and Plan

11. Plan of the course 5 4. After that, we shall contrast Walras’s conception of competitive equilibrium and disequilibrium with Jevons’s and Edgeworth’s 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 Jenkin’s and Walras’s 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. Lesson 0 - Introduction and Plan

12. 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. Lesson 0 - Introduction and Plan