Course Video 6: Léon Walras and General Equilibrium

Lynne Kiesling

Léon Walras and General Equilibrium Theory from Lynne Kiesling on Vimeo.

I knew from the first economics course I took that I loved economics — the systematic analytical framework for understanding humans and our decisions, and the implications of those decisions for individuals and in aggregate, captivated me. I loved (and still do to this day) the fact that economics incorporates written/verbal analysis, mathematical modeling, history, philosophy, statistics, all of which are ideas or ways of thinking that I find meaningful.

Learning general equilibrium theory for the first time was exhilarating. Suppose you have two individuals, each of whom has a set of preferences over the two goods in the economy, and an initial endowment of those two goods. How much exchange between them is mutually beneficial? When do they stop trading? What will the prices end up being at that point when they stop trading? How much new surplus/gains from trade is generated as a result? Now, generalize that from 2 people/2 goods to n people and m goods, and what happens?

Léon Walras was the economist who, more than anyone, established that framework for modeling general equilibrium. He was motivated to understand interconnectedness, and although his general equilibrium model requires some pretty unrealistic assumptions about individual knowledge, frictions in the economy, and the stability of preferences, it’s still an elegant framework that led to profound depths of understanding.