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The Validity of Walras’ Law in a Monetary Exchange Economy: Money, Prices and the Integration of Monetary and Value Theory

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  • Narciso Túñez Area

Abstract

Walras’ Law is one of the most important tenets of Neo-liberal economics. It is supposed to be a Tautological Identity according to which disequilibrium in market economies has a compensatory nature. Hence, disequilibrium in any market would imply an opposite imbalance somewhere else in the system. However, in monetary systems commodities do not buy commodities, i.e. they are not substitutes of money. When budget constraints take into account the realization problem associated with the violation of the Classical Gross Substitution Axiom, disequilibrium turns out to be non-compensatory. This paper shows that Walras’ Law does not always hold.

Suggested Citation

  • Narciso Túñez Area, 2015. "The Validity of Walras’ Law in a Monetary Exchange Economy: Money, Prices and the Integration of Monetary and Value Theory," Iberian Journal of the History of Economic Thought, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Dpto. Historia e Instituciones Económicas I., vol. 2(2), pages 101-114, December.
    • Handle: RePEc:ucm:ijohet:v:2:y:2015:i:2:p:101-114
    DOI: 10.5209/rev_IJHE.2015.v2.n2.52053
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    Keywords

    Walras’ Law; Gross Substitution Axiom; Budget constraints; Realization problem; Compensatory disequilibrium.;
    All these keywords.

    JEL classification:

    • B12 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Classical (includes Adam Smith)
    • B13 - Schools of Economic Thought and Methodology - - History of Economic Thought through 1925 - - - Neoclassical through 1925 (Austrian, Marshallian, Walrasian, Wicksellian)
    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General

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