He argues that "Walras's Law
cuts to the heart of the matter.
What economists three generations later were to call Walras's Law
is the principle that any market in which people are planning to buy more than is for sale must be counterbalanced by a market or markets in which people are planning to buy less.
Note that Walras's Law
requires that the profits of the firms go to the individual.
, n) are single-valued continuous functions in P; the excess demand functions are positive homogenous of degree 0; or [E.sub.i] ([lambda]p) = [E.sub.i](p) for [lambda] [greater than] 0, p [epsilon] P(i = 1,2, ...,n); Walras's law
holds, that is, (p,E(p)) = 0 identically in P; weak gross substitutability prevails, that is, [E.sub.i]([p.sup.*]) for [p.sup.*] [greater than or equal to] [E.sub.i](p) for [p.sup.*] [greater than or equal to]p, [[p.sup.*].sub.i] = [p.sub.i] everywhere in P(i = 1,2,...,n); and we are concerned with the possibility of a competitive equilibrium.
In point of fact, Mundell (1991) had identified "...exactly sixteen ways of looking at the balance of trade...(e)ight of...(which)...can be deduced from the application of Walras's law
in the national and international economy..." (p.202).
Dornbusch and Fischer |1990, 125~ are assuming that: "When the money market is in equilibrium..., the bond market, too, is in equilibrium...." Their analysis winds up with monetary expansion producing an excess demand for goods unmatched by an excess supply of anything else, thus violating Walras's Law.(13)
Through the use of Walras's Law, the IS-LM framework can correctly focus on just the two markets.
However, there is no clear presumption that this line slopes either upward or downward, although by Walras's Law it slopes less steeply upward than the LM curve or less steeply downward than the IS curve.
It is well-known that the equation called Walras's Law
operates in a mature Walrasian system and specifies that the sum in numeraire of the excess demands for all final commodities, including numeraire A itself, vanishes identically [Morrison, 1996, pp.
The reason for this is that fixprice theory virtually jettisons Walras's law. It is demonstrated that Walras's law makes the general equilibrium analysis of monopoly very tractable, although it was long thought that monopoly and general equilibrium were incompatible.
With fixprice theory, expressed demands and Walras's law part company.
To digress, arguably the best way to describe Walras's law is that it is whatever one gets when the budget constraints for all individuals are aggregated.