Lausanne school
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The Lausanne School refers to the Neoclassical school of thought surrounding the Frenchman Léon Walras and the Italian Vilfredo Pareto. The central feature of the Lausanne School was its development of general equilibrium theory, generalizing and extending the applicability of the Neoclassical approach to economics. The Lausanne School has also been alternatively referred to as the "Mathematical School" (due to its stress on mathematical exposition).
Overview
From the historical point of view, mathematical methods have always played a some part in economic consideration. A. A. Cournot, in 1838, used mathematical expressions of correlations between demand, supply, prices, costs, and incomes under different competitive conditions and degrees of monopolization. The last of the above-mentioned is considered to be among the first pioneers of the so-called formalistic revolution in economics, that is a precursor of the general application of mathematics to the analysis of economic phenomena.
Acknowledged as a great mathematician, Cournot in a way anticipated Léon Walras’ ideas. Embracing correlations, he claimed that in order to fully and rigorously solve the problems concerning respective parts of an economic system, it is necessary to take into consideration the entire system. However, Cournot did not continue to apply mathematical analysis to the whole system. The reason that he did not deal with complex correlations of the theory of overall equilibrium may have been the numerous assumptions that had to be made to analyze the problems. Thus, Cournot might have felt that mathematical analysis was not adequately developed at the time.
As a result, this first step was taken by Walras and the Lausanne School, who modeled a system of overall equilibrium through a clear and concise formal description with the use of mathematical notation.
Of the two leading members of this school, Walras was interested mainly with the overall equilibrium of goods on the market, with the assumption that an economy possessed self-driving mechanisms that could restore equilibrium when the system was upset by external stimuli (such as changes in technology or consumer tastes). Walras focused on the exchangeability of economic goods. He studied the relations between demand and supply given a price that ensured their equality and led to equilibrium. He believed that, since those relations concerned quantities, they were best be presented through mathematical equations. Thus, knowing parameters such as consumer tastes or production technology, it is possible to mathematically establish optimum quantitative proportions among respective elements of economy, and thus determine economic equilibrium. What takes place spontaneously through trial-and-error adjustment processes can be calculated with the use of algorithms provided that as many equations can be created as there are unknowns (Zalewska 2002).
Pareto’s contribution consisted mainly of extending the application of mathematical methods, developing the concept of overall equilibrium and in reformulating the idea of usefulness. He observed that usefulness is a relative value (which is more useful—one or two glasses of water?—the answer depends on such factors as whether we are thirsty or not and whether it is warm or cold). Thus, he parted with the theory of measurability of usefulnes (which underlined previous thinking in the Lausanne School) and based what became the so-called theory of choices on certain data observable in one’s management.
Pareto used the notion of indifference curves, formulated by Edgeworth, which visualized the scale of consumer preferences in relation to a given pair of goods. A consumer can acquire those goods in different quantitative combinations. As a result, when satisfying one’s tastes, one makes choices according to a preferences scale which, as Pareto initially believed, is statistically estimable. Indifference curves visualize the consumer preferences scale. Respective indifference curves bring together all the possible combinations representing the same level of needs satisfaction (Zalewska 2002) .
The Lausanne School was not very successful beyond the confines of the small group that surrounded Walras and Pareto. In England, it was professionally buried under the weight of the Marshallian orthodoxy, while in Continental Europe, the opposition of the German Historical School and its French equivalent prevented it from spreading very far. They also had little chance to break into America. The main obstacles were not only their theoretical stance or their focus on an elaborate, idealized economy, but also language. Their work was mostly written in French or Italian, left largely untranslated and published in relatively obscure locations (their most prominent organ was the Italian journal, Giornale degli economisti). Few economists came across their writings and, when they did, the generous coatings of mathematics ensured that most could not make little sense of them.
However, a few highly-talented individual economists with mathematical aptitude did pick up their ideas. Ladislaus von Bortkiewicz, Knut Wicksell, Henry Ludwell Moore, and Irving Fisher were greatly inspired by Walras's theoretical system. Albert Aupetit and Karl Schlesinger continued to work on Walras's theory of money while W. E. Johnson and Eugene Slutsky advanced the Paretian "tastes-and-obstacles" approach.
Members
Léon Walras
Léon Walras'(1834-1910) suffered many disappointments in his career. He failed to satisfy the admissions board of the Ecole Polytechnique of his competence in mathematics, and spent more than a decade as a journalist, aspiring novelist, railway clerk, and bank employee. Meanwhile, in his leisure time he studied economics. Lacking the proper credentials, though, he was unable to break into the French academic establishment.
Fortunately, in 1870 he was appointed to the newly created chair in economics in the Faculty of Law at the University of Lausanne, Switzerland. There, Walras transformed economics from a literary discipline into a mathematical, deterministic science. For the first time, Walras expressed rigorously the view that all markets are related, and that their relationships can be described and analyzed mathematically. These interrelated markets tend toward a "general equilibrium" position, undergoing a constant interactive adjustment process that Walras called a "tatonnement" (Walras 1874). This conception of economics led to important new insights about the stability of markets and about the capitalist economic system.
Walras' main objective was to produce an exhaustive account of the implications of a regime of perfect competition (Barber 1977). Part of the value of this exercise, as he saw it, lay in the fact that many economists had been too readily persuaded of the merits of laissez-faire:
How could these economists prove that the results of free competition were beneficial and advantageous if they did not know just what these results were? ... And how could they know these results when they had neither framed definitions nor formulated relevant laws to prove their point? ... The fact that economists have often extended the principle of free competition beyond the limits of its true applicability is proof positive that the principle has not been demonstrated (Walras 1954).
[Walras]’s neoclassical theory is often taken to represent some sort of idealized capitalism (Mirowski 1987: 92 ). It may be argued that Walras was not aiming at ‘capitalism.’ He was aiming at ‘scientific socialism.’ His involvement with the cooperative movement is well-known as is his scheme for land nationalization. In his Etudes d'economie appliqué ( in:Walras 1834-1910), Walras even toys with possibilities which look for all the world like market socialism. Speaking of the different possible combinations of private and public enterprise, Walras held that it would not be possible to leave all production to the private sector.
In short, Walras’s terminology is sometimes profoundly confusing: “…, neoclassical theory is often taken to represent, in one way or another, a market process ……but we have also seen that science describes, not a process, but the ideal ends of action….” ( Koppl 1995 )
However,one of the most powerful reasons why the Walrasian system has survived for so long,
even in the present era of the fragmentation of the mainstream and the rise of heterodox
alternatives, is the comprehensiveness of the categories it has. The categories outlive many of
the details of the mathematics. Positive, normative, and applied; static and dynamic (the latter
added later); supply and demand; exchange and production; one-period or intertemporal;
micro (without money) and macro (with money); perfect and imperfect competition – all exist
in some form in the Elements ( Walras 1874 ), and all exist in some form in heterodox attacks on it. But the categories are already there, they can be arranged in an orderly fashion, and they transcend the mathematics and the ideology.
Vilfredo Pareto
Vilfredo Pareto (1848-1923), a follower of Walras, viewed economics as part of the broader science of sociology, extending Walrasian analysis to say that society at large is an equilibrium system. This view profoundly influenced the modern course of the "social sciences', in which quantitative techniques have become standard analytical tools.
In 1905, Pareto ( 1896, 1906 ) constructed a consumer theory which does not require the notion of utility at all. His point of departure is that an individual confronted with two baskets of commodities will always either prefer one basket or be indifferent as to which one he gets. Given this faculty of binary choice, Pareto reasoned that, by asking the individual to choose between M and every other possible basket, we can determine an indifference curve, i.e., a curve that represents the loci of all baskets “indifferent” in relation to M. The procedure does not refer in any way to utility. And once the indifference curves are determined, they help determine the optimal distribution of any budget in exactly the same manner as the utility isolines.
Today the notion of an ordinal utility dominates consumer theory, the central problem of which is how to derive an ophelimity, the ordinal-value preference based function, from directly observable budget data.
In fact, this problem is relatively old. It was first formulated ( 1886 ) in a neglected memoir of an Italian engineer, Giovanni B. Antonelli, 1858-1944, another member of the Lausanne School. And, as happens quite often, the glory went to the more famous rediscoverer of the idea, in this case to Pareto.
In 1906, Pareto created a mathematical formula to describe the unequal distribution of wealth in his country, observing that twenty percent of the people owned eighty percent of the wealth ( Wicksteed 1906 ). In the late 1940s, Dr. Joseph M. Juran inaccurately attributed the 80/20 Rule to Pareto, calling it “Pareto's Principle.” While it may be misnamed, Pareto's Principle or Pareto's Law as it is sometimes called, can be a very effective tool to help you manage effectively. It, generally means that in anything a few (20 percent) are vital and many (80 percent) are trivial.
Today, the 80-20 principle affects our lives in a number of ways:
- Work: 80% of revenue comes from 20% of the products; 80% of people in an organisation are influenced by the other 20%; 80% of perceived customer value comes from 20% of the things you offer;80% of profit comes from 20% of sales.
- Society : 80% of famine, disease and poverty can be found in 20% of countries; 80% of accidents are caused by 20% of drivers; 80% of the value of crime is committed by 20% of criminals: 80% of traffic jams occur on 20% of our roads.
- Life: 80% of happiness comes from 20% of your life! 80% of your time you wear 20% of your clothes; 80% of the time you listen to 20% of your CDs; 80% of our speech contains 20% of the words available to us.
Pasquale Boninsegni
Pasquale Boninsegni (1869–1939), was one of Pareto’s pupils and his successor at the University of Lausanne. He was born in Rimini ( Italy ) and studied mathematics at the Turin University. A member of the Italian socialist party, he was editor of an anticlerical revue L’Asino.
Indicted for a defamation, having concurrently some political problems with Italian authorities, he moved to Lausanne and joined Pareto as his assistant. Later, in 1907, after Pareto was retired, he became a full professor at the faculty of political economics of Lausanne University. From 1928 to 1938 he served as president of the school of political and social sciences at the Lausanne University.
His works concerned political economy ( Boninsegni 1930 ) as well as continuing with Pareto’s theories. In fact, while Pareto was too big a name to attack directly, many, who disagreed with Pareto’s work criticized Enrico Barone, Luigi Amoroso and Pasquale Boninsegni for following Pareto much too closely.
Enrico Barone
Italian economist and dedicated follower of Walras and Pareto, Enrico Barone ( 1859-1924 ) was instrumental in convincing Walras to incorporate variable production techniques - and, by extension, marginal productivity theory - into the Walrasian system. Barone's most famous contribution, however, was in getting the "Socialist Calculation" debate started with his famous 1908 article. His position, later taken up by Taylor and Lange, was that it was indeed possible in a collectivist state for a planning agency to calculate prices in order to achieve maximum efficiency. But he did not think it could do "better" than a capitalist economy.
Barone was also a capable public finance economist. His 1912 article ( Barone 1912 ) was the first to apply indifference curve analysis to compare the relative burdens of income taxes and excise taxes. He was also an articulate opponent of "progressive" taxation schemes as they rested on what he considered highly dubious utilitarian calculations.
Henry Ludwell Moore
Henry Ludwell Moore (1869-1958) was a student of Carl Menger's in Vienna and an early disciple of Léon Walras, Henry L. Moore can be rightly considered the only American (and perhaps the only English-speaking) member of the original Lausanne School.
Moore's life-long work was one of the first serious empirical examinations of Marginalist Revolution in general, and Walras's system in particular. He dedicated himself to the statistical derivation of demand curves (a task carried on by his student, Henry Schultz), and the statistical test of J.B. Clark's marginal productivity theory (a task continued by his other student, P.H. Douglas).
He also delved deeply into discovering the connection between commodity business cycles and equilibrium theory - thereby performing one of the earliest empirical examinations of the business cycle in a general equilibrium theory context. His major, and even in the first decade of 21st century virtually unknown, contribution to the business statistics is, however, his “percentage changes ( growth rates )” transformation used instead of absolute values in multiple correlations models (Moore 1917, 1967).
This transformation: (1) exposes the “nonsense correlation” between any two monotonically increasing time series, (2) changes the resulting regression coefficients into much more useful elasticity coefficients, (3) gives the analyst a chance to upgrade the incomplete series by using “instrumental” variables as (4) the “percentage differences” data-base is virtually dimensionless ( Karasek 1987: 33-43 ).
Conclusion
Walras’ and Pareto’s social and economic ideas greatly influenced the shape of other economists’ viewpoint. Amartya Sen (1987) argued that economics sprang from two different origins, both related to politics, but in different ways.
- The first origin, which Sen calls the ethical approach, goes back at least to Aristotle. It relates economics to human ends and social achievement.
- The second, which he calls the engineering approach, is concerned primarily with logistical issues. It derives in part from technique-oriented analyses of statecraft, and in part from analyses of technical problems connected with the functioning of markets. Sen claims that Adam Smith was a major protagonist of the first approach, and Leon Walras was a major protagonist of the second ( Sen 1987).
For Walras, the equations of his general equilibrium theory do not represent any market process. This system represents: ‘free competition.’ Free competition is an ideal end state, not a process. Moreover, in spite of his name for it, ‘free competition’ does not necessarily describe a situation in which individuals are free to buy and sell as they please. The free competition Walras envisioned was consistent with almost any degree of government regulation and control ( Koppl 1995 ).
The most distinctive aspect of the Paretian system was the "New Welfare Economics" of the late 1930s, which sought to connect criteria for "efficiency" to competitive equilibria. The first step towards this was the famous "marginal cost pricing" principle introduced by Abba Lerner (1934) and Harold Hotelling (1932, 1938), and taken up with fervor by the French engineer-economists.
The greatest result of this research avenue were the two Fundamental Welfare Theorems, originally suggested by Pareto and Barone: namely, that every competitive equilibrium is Pareto-optimal (First Welfare Theorem) and that any Pareto-optimal allocation can be obtained as a competitive equilibrium given an appropriate transfer of initial endowments (Second Welfare Theorem). The Fundamental Welfare Theorems were demonstrated graphically by Abba Lerner (1934) and then proved mathematically by Oskar Lange (1942) and Maurice Allais (1943). Abba Lerner (1936) and Oskar Lange (1938) went on to use the results on Paretian efficiency to pursue the case for economic planning and market socialism in the Socialist Calculation debate with the Austrian School.
The problem in these debates was two-fold: (1) the “mathematicians” considered only static equilibrium ( without changes in productivity and the new products that consumers should like better, among other improvement and upgrades ) and thus also omitted all feed-backs as to how the consumers priorities change at any moment, that producers were getting and hence were changing quality and quantity of production and its prices accordingly; (2) The model of “perfect competition” that is the core of neoclassical welfare economics was also seen by the Austrians as a misleading description of what actually occurs in a market economy. "...The concept of equilibrium,..." argued Hayek, “...presupposes that the facts have already all been discovered and competition therefore has ceased....." (Hayek, 1978: 259)
On top of that, two points must be kept in mind:
- In the first place, a purely mechanical process model that has no room for choice, the subjectivism of expectations, and the interpretation of information, would be no improvement at all on general equilibrium.
- Secondly, different markets evolve different institutions which influence the sequence of events on them. There are even some real auction markets in the world today (wool). Hence the market process assumes different forms in different markets. We must study them with some care ( Lachmann 1979: 6).
And finally, general demand and supply equilibrium cannot serve as a "center of gravity" ( a Walras-Pareto term ), a source of permanent forces of constant strength as, under the impact of innovation, technical progress and simple changes of taste, relative demand and supply of various commodities are continuously changing. A planet whose composition and mass are undergoing continuous transformation could not exert a gravitational force of constant strength. If so, how can it be asserted that economic equilibrium forces, necessarily of varying strength over time, will always overwhelm and outlast all other forces ( Lachmann 1979: 7).
ReferencesISBN links support NWE through referral fees
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