Note 1129 — Chapter I · : THE HEDONISTS

A full exposition of Walras’s system involves the supposition not only of two but of three markets interwoven together. On the actual market where goods are exchanged the quantity of these commodities depends upon the quantity of productive services, land, capital, and labour, and the quantity of these productive services, at least the quantity of capital, depends to a certain extent upon the creation of new capital, which in turn depends upon the amount of saving. The third market, then, is that of capitalisation. Since the new capital can only be paid for out of savings, i.e. out of that part of the revenue which has been employed in other ways than in buying consumable commodities, the price of capital must be such as to equal the quantity saved and the quantity of new capital demanded. If saving exceeds the demand the price will fall, etc.

To say that the price of capital has gone up is to say that the rate of interest or the reward of saving has fallen. But a fall in the rate of interest will check saving. The result will be a change of equilibrium, the price of new capital will fall, the rate of interest will go up, etc.

Briefly, then, the total maximum utilities on the one hand and the price on the other, these are the two conditions determining equilibrium in the economic world, no matter whether it be products or services or capital. “The same thing is true of gravity in the physical world, which varies directly with the mass and inversely with the square of the distance. Such is the twofold condition which determines the movement of the celestial bodies.… In both cases the whole science may be represented by a formula consisting of only two lines. Such a formula will include a great number of facts.” (Walras, Économie politique pure, p. 306.)