Economic Equilibria and the Balancing Act between Total and Partial Analysis

Abstract

Equilibria have long been central to economic thought and theory. Extensive areas of theoretical economics culminate in the idea of equilibrium and in the question of what quantities determine equilibrium. Even in the analysis of disequilibria the idea of equilibria often serves as a standard of comparison. Walras, the Nestor of economic equilibrium analysis, and regarded as the founder of total analysis, tried to present a simultaneous equilibrium on different markets. However, with reference to Walras’ “mechanistic” point of view, equilibria are often interpreted as a quasi-natural state, but this ignores Walras’ understanding of equilibrium as an ideal state, which for example helps to explain the adjustment process within disequilibria. While partial analysis only investigates the principle reason, in his concept of general equilibrium Walras emphasized the separability of influences and their intercorrelation, the concept of total analysis was recognized as an appropriate method of representation. But even the use of total analysis, especially when expressed in mathematical terms, imposes limits. Assuming non-linear functions (e.g., utility functions) the economist has the problem of empirical foundation. Using linear functions, which is exactly what Walras did in most cases, actually implies the “whole as the sum of all single causes.” We are convinced thatWalras intended to explain dependencies of economic quantities on the basis of a non-linear context. But verbal explanation and its transformation into mathematics are two different things. Nevertheless, even nowadays we use linear models because the mathematical representation of interaction fails for lack of more detailed knowledge of the quantitative context (making simplicity a matter of principle in case of doubt). It is Walras’ ideas on representation of complex structures and not the attempt to transform them into mathematical terms which will be emphasized as his outstanding achievement - his ideas were of a more far-reaching content than his mathematics. It will also be argued that Walras’ ideas can be taken as an excellent introduction into a well-founded structuring of microeconomic problems, they also allow us to gain an insight into fundamental economic ideas such as utility, exchange and equilibrium, and they enlighten on the general discussion of mutual dependency of economic quantities. A deep knowledge of the interaction of economic variables is an indispensable tool for reconciling scarce means and ends or, more generally speaking, for rational behaviour itself. We are trying to give Walras economic profundity and breadth in an area where it is “normally” denied him by critics of equilibrium theory. Equilibria, linearities and non-linearities, total vs. partial analysis are the keywords of our paper.