Home > New vs. Old Paradigm > “This real-world attribute straightforwardly invalidates Walras’s Law”

“This real-world attribute straightforwardly invalidates Walras’s Law”

. . . the totality of all goods cannot be traded by the totality of all agents at every single trading moment. Momentary analysis thus facilitates the recognition of an important real-world attribute: continual trade in different goods among different traders.

This real-world attribute straightforwardly invalidates Walras’s Law, understood as the necessary equality of the total value of goods brought to market and the total value of goods taken away from the market at its close. Walras’s Law does not describe an intrinsic quality of market exchange, but results from the stylisation of a single trading round per period during which a given set of agents seeks to trade a given and uniformly priced set of goods among each other. Hence when the identities of goods and traders are in continual flux, as they are in the real world, Walras’s Law fails (Tsiang, 1966). The scrapping of one arbitrarily chosen market facilitated by Walras’s Law has, unsurprisingly, no imaginable counterpart in economic reality. It is an absurdity. Yet it continues to be invoked (e.g. by Brunnermeier and Sannikov, 2011) while textbook LM theory also still employs it to rid itself of the bond market.

Piet-Hein van Eeghen
http://www.paecon.net/PAEReview/issue67/Eeghen67.pdf

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