Alfred Marshall (1842-1924) and Leon Walras (1834-1910) are two of the most renowned neo-classical economic theorists, who contributed a great deal to the contemporary economic analysis. Leon Walras was born in Normandy, France, and was later accredited as the originator of general-equilibrium analysis. He, along with Jevons and Menger, are classified as the originators of the Marginal Utility principle; which boosted his reputation. Alfred Marshall, on the other hand, was not the son of an economist, rather his dad was a bank cashier. He was born in Clapham, England in 1842. Their individual works; Walras’s Elements of Pure Economics (1874), and Marshall’s Principles of Economics (1890), were very dissimilar. Yet they did share some similarities. For instance, both of them incorporated stability into their analysis, and were greatly influenced by Cournot’s use of differential calculus in economics.
The essential difference between the two lies in their utilization of different conventions when dealing with markets. Marshall utilized the partial-equilibrium analysis, in which markets are said to be in quasi isolation. Walras, on the other hand, developed and used general-equilibrium analysis. Both Marshall and Walras agreed upon the determination of equilibrium price and quantity by means of the demand and supply function intersection. They did have some conflicting views in regards to the determinants of the supply and demand function, and the technicalities of market equilibrium.
Considering the orange juice example in the textbook (A History of Economic Thought and Method, chapter 15,page 383), Marshall placed a great deal of emphasis on the ceteris paribus assumptions. He assumed the demand for orange juice was determined not only by the price of orange juice, but also by the prices of its substitutes and complements, and the tastes and income of the consumers. All the other factors are assumed constant as per ceteris paribus. He did this so to isolate the market for closer assessment.
In contrast, Walras was interested in the interdependencies between markets, and did not disregard the vaguely related determinants of the price and quantity of any particular good, like orange juice in our case. He considered the ceteris paribus assumptions used by Marshall as improper, and asserted that other factors could not be considered constant. Walras and Marshall seemed to differ in their analysis partly also because they focused their books onto different audiences. Marshall’s audience was comprised of the typical clever business person, and so in his book Principles he outlined the tools and uses of economic analysis. Walras, in contrast, aimed his book Elements onto his professional colleagues.
When markets are in disequilibria, Marshall and Walras used two different independent variables to work as market adjustment mechanisms. Marshall used ‘quantity’ to do the adjustment, whereas Walras thought price was a more appropriate adjusting tool. Since stability comes into light when talking about excess demand, it’s worthwhile to point out another obvious difference between Marshall and Walras. According to Marshall the suppliers and demanders are offered a list of alternative quantities so they can set the maximum demand prices and minimum supply prices, whereas as mentioned above Walras would present them with prices. This is because he believes price is the independent variable bringing about a change in the dependent (quantity) variable. Although they contradicted each other in this aspect, both of them used a negatively sloped excess-demand function when analyzing stability issues.
Since most of the comparison between Marshall and Walras has been about their differences, I will now outline some of their similarities, as emphasized by Hicks (Classics in Economic Thought). Cournot has been a major influence on both Marshall and Walras. Both of them read his work, and were introduced to the use of differential calculus in economics by none other than Cournot himself. When observing their individual works, some major fundamentals of Cournot’s mathematical economics are present in there. They also share the notion of a well-defined equilibrium, and defined markets to be either in or out of equilibrium. Both of them define competitive equilibrium in the same manner, such that price and price vectors are both defined by the market structure.
When determining exchange equilibrium, Walras used two equations. His whole general equilibrium analysis rests on one of these two, which links the equality of demand and supply in certain markets. It is from here that Walras and Marshall seem to go in two different directions. Walras’s picture of equilibrium assumes that equilibrium would be attained if at the proposed set of prices demands and supplies were equal.
As mentioned earlier, Walras used ‘price’ as an adjusting mechanism, and so if in the case at hand, demands and supplies do not equal, then according to him price will change continuously until it brings about supply and demand harmony. Marshall’s approach to this equilibrating problem was different. There different approaches were not solely based on the fact that Marshall thought quantity brought about the adjustment, rather then price. Marshall thought this problem could be eliminated if the marginal utility of one of the commodities being exchanged could be held constant.
Marshall’s use of time is very unique to him. Time in his analysis; like short run and long run; is well defined in terms of the calendar time. Firstly, in the short run period where time is so short that supply is fixed, value of a good is determined by its demand. Secondly, in the short-run period, firms can change their production but cannot vary their plant or capital size, which allows supply as well as demand to have an effect on value. In the long-run periods where plant size can be altered, the large effects of the supply side on value depends on whether the industry of a particular good has constant, increasing or decreasing costs to scale.
One of the main differences between Walras and Marshall is in their concept of demand, where Walras stresses the presence of many independent variables when considering demand functions. He accused Marshall of illicitly explaining demand curves in terms of marginal utility curves. In terms of stability, when the excess- demand function is positively sloped, there is instability in Walras’s system, and stability in Marshall’s system. When demand and supply curves are positively sloped there’s regularity in both systems’ stability. It is only when the demand and supply curves are negatively sloped that stability becomes irregular between the two.
Another one of the essential differences between the two is in regards to their attitude towards each other’s work. Walras has always been ruthlessly critical of Marshall’s work. Marshall never criticized Walras’s work out in open. Walras’s major criticism was directed towards Marshall’s display of demand curves devoid of the interdependencies of utilities and demands for all goods. Although these two are different in many ways, as Hick says in the reader “their ultimate differences are due more to divergence of interest than of technique”. Looking at their individual works, one difference clearly stands out. Marshall’s focal efforts have been on creating a mechanism that will allow for an easier application to the problems of history or experience. In contrast to Marshall, was interested in inventing principles, which trigger the operation of an exchange economy.
Therefore the contribution of William Stanley Jevons, Karl Menger, and Leon Walras was not the mere substitution of a utility for a cost theory of exchange value. Meanwhile, Alfred Marshall amalgamated the best of classical analysis with the new tools of the marginalists in order to explain value in terms of supply and demand. He recognized that the study of any economic concept, like value, is hindered by the interrelativeness of the economy and varying time effects. As a result, Marshall who differed from Walras’ general scheme, instead used a partial equilibrium framework, in which most variables are kept constant, in order to develop his analysis on the theory of value. For Marshall a correct understanding of the influence of time and interdependence of economic variables would resolve the controversy over whether it was the cost of production or utility which determines value.