Leon Walras

What is the role of money in Walras’ general equilibrium and what determines the demand for it?
Leon Walras is considered by many as the founder of the modern theory of general economic equilibrium. Money and its valuation is an important element in his Elements of Pure Economics of 1874. Money can be defined most basically as one type of circulating capital; the other is circulating physical capital. In this short essay, both the role of money in Walras’ general equilibrium and how the demand for money is determined will be treated.
Walras asserted that circulating physical capital yields utility according to its service of availability, that is, to the degree that it is readily available. Money likewise provides a service of availability as the commodity that physical capital is destined to purchase, and it yields the same amount of utility as physical capital. The service of availability that money provides and consequently its utility is, in my opinion, the essence of Walras’ theory of money. Although he assigned other roles to the use of money as a medium of exchange and as an element of production for entrepreneurs, these roles are encompassed by service of availability. By yielding services of availability, money does improve utility and therefore must be placed in the consumer’s utility function.
Walras treated money as analogous to capital. Capital, he recognized, is not a regular commodity. It is not desired for itself, but is rather a facilitator of ‘intertemporal’ production and thus allocation.It is demanded insofar as it provides this service.
[Capital goods] are demanded because of the land-services, labour and capital-services they render, or better, because of the rent, wages and interest which these services yield (267).
Similarly, money is not desired for itself. It rather provides a stream of services in the form of overcoming transaction costs or permitting the temporal break-up of purchases and sale…

Leave a Reply

Your email address will not be published. Required fields are marked *