The problem of equilibrium is not only a theoretical problem. Violations of proportions between sectors and spheres of economic systems often occur due to miscalculations, erroneous conclusions of those who are responsible for making decisive decisions. Deep shaking of the economic organism in order to restore broken ties, for example, through the deliberate use of "shock therapy" methods, does not necessarily lead to the desired results.
Today, as, indeed, a hundred and two hundred years ago, the problem of matching between needs and resources, between supply and demand continues to occupy the minds of economists, politicians, and businessmen. Needs, as a rule, outstrip economic resources and opportunities. One has to either limit needs, or try to increase resources, or overcome deficits, or eliminate surpluses. But under what conditions, thanks to what mechanisms? Can the market provide equilibrium? How stable are the multidimensional parameters of the economy?
On the basis of what principles is the interaction of prices, costs, volumes of demand and supply in various markets established? Does this interaction take the form of equilibrium, or does the market mechanism work in the opposite direction?
Theorists and practitioners, scientists and politicians went step by step to the answers to the above and similar questions, sometimes moving in a “parallel course”, sometimes refuting or developing further, deepening the previously expressed ideas.
Many economists have been involved in the theory of market equilibrium. Let us recall H. Gossen, whose name is given to the law of saturation of needs and the law of utility equalization (see Chapter 10). Mention should be made of William Jevons (1835-1882). He owns the rationale for the "law of exchange", in which the exchange of two goods occurs in inverse proportion to the ratio of their marginal utilities.
Noteworthy is the contribution of the English mathematician Francis Edgeworth (1845-1926). He was one of those who introduced economic practice the concept of "indifference curves", which are a combination of two goods, expressing equal utility. Based on the provisions and conclusions of other theorists, A. Marshall analyzed the conditions for partial equilibrium and the formation of an equilibrium price.
The Swiss economist Leon Walras (1834-1910) is considered the founder of the theory of general economic equilibrium. Walras taught at the University of Lausanne, was engaged in theoretical research, played on the stock exchange, was the director of a bank. Walras was not limited to theoretical research, although he is called a "pure theorist." He sought to understand general principles on which the market economy operates.
To better understand the essence of the problem general equilibrium, let's try to imagine a "buffet" when for a certain amount the visitor should make the optimal set of dishes. Obviously, the choice of the appropriate menu - the number and size of the consumed dishes, their "price" and taste usefulness should maximally meet the preferences and appetite of the client.
Drawing some analogy, imagine a buffet on a scale national economy. For starters, let it be a consumer market with a multimillion-dollar nomenclature of various goods. Who sets prices, determines the size of output, correlates the quantities of interchangeable and complementary goods? To what extent do all these parameters correspond to consumer demand in terms of structure, requests, and budgetary possibilities of the population? How should factors of production be placed and combined, factor prices coordinated, to meet the wants and needs of consumers?
In other words, how are volumes and prices for goods and services formed? For each product market separately or in a certain sequence? Is the correspondence between prices and outputs isolated or interconnected?
And yet, how is interaction established in the markets for goods, services, factors, labor, money? Can an economic "buffet" finally take place, or does each market "table" emerge and balance separately?
“groping” for mutually acceptable prices
And now, starting from the "smorgasbord", let's put the same questions in a slightly different way, closer to the way Walras formulated them. He was interested: on the basis of what principles is the interaction of prices, costs, volumes of demand and supply in various markets established? Does this interaction take the form of "equilibrium" or does the market mechanism work in the opposite direction? Is equilibrium, if achievable, sustainable?
Walras proceeded from the fact that the solution of the problem can be achieved by using the mathematical apparatus.
Whole economic world He divided into two large groups - firms and households. Firms act in the factor market as buyers and in the market consumer goods- as sellers. Households - owners of factors of production - act as their sellers. At the same time, they are buyers of consumer goods.
Walras paints such a picture. Let's imagine that the whole society has gathered in a huge trading floor. The hall is filled with the noise of sellers and buyers, each shouting out his price. In the center of the hall - an entrepreneur, a farmer, a merchant. It performs two functions at once. First, it buys from owners and producers "productive services" (fertile lands, means of production, labor of workers, services of freelancers). Secondly, he sells industrial products, agricultural products produced at his enterprises and farms, and to the same persons who have just acted as sellers and have now become buyers. The participants of the gathering offer their prices, “groping” for acceptable ones, acting as either sellers or buyers.
The picture presented by Walras is a picture of economic equilibrium: consumers of products sell their services and buy goods from various firms; producers acquire the factors of production they need (machines, raw materials, labor, Natural resources) and produce goods that are then sold to the same consumers and other producers.
How compliance is established aggregate demand and the aggregate supply of goods and services? Through "groping" prices. Trade transactions are carried out by "shouting out prices" by buyers and sellers, as in a huge auction, so that, in the end, equilibrium will be reached in the markets for goods and services. These markets are, in essence, calculating machines that solve the equations of economic equilibrium.
Let us assume that when prices are set for the first time by buyers and sellers, demand exceeds supply. In this case, prices rise and goods are offered by more and more sellers, until, in the end, an equilibrium of supply and demand is established. The desired result is achieved through a system of free competition.
Everything depends on everything
"Fumbling", according to Walras, means moving towards the goal by trial and error. Intermediate, "incorrect" prices are eliminated, trade transactions are suspended until, finally, an equilibrium price is found.
The equilibrium price is established at the point of equilibrium between the utility of a good and its cost of production. Price acts as a regulator of the proportions of exchange. It provides a combination of the degree of usefulness of use value with the level of costs. For the buyer, the price acts as a criterion for the utility of this product in comparison with the utility of other goods. For the seller, the utility of the price is determined by the ratio of revenue and costs required for the production of goods.
Previously, it was believed that equilibrium prices are formed at different times and in isolation in each market. Prices for shoes and cigarettes, jeans and calculators are formed independently of each other. In fact, the prices are interconnected. Walras substantiates the principle of the interconnectedness of prices not only in the commodity market, but in fact in all markets.
The equilibrium price in the market of goods (computers or oranges) is the result of the interaction of prices for all goods in all markets. Prices for consumer goods are set in interconnection and interaction with prices for factors of production, prices for labor - taking into account and under the influence of prices for products. The process of interaction of various markets is a condition for moving towards equilibrium prices in society.
Model of General Economic Equilibrium
Recall the picture of the general auction described above. It illustrates the principle according to which Walras divides the entire market economy into two interrelated subsystems: consumers and producers. Some act as buyers, others as sellers. The roles of sellers and buyers are constantly changing.
Today, the owners of the factors of production (land, labor, capital) sell them to entrepreneurs who act as buyers. The next day, entrepreneurs sell, and the owners of factors of production purchase consumer goods (Fig. 11.1). All expenses of producers of goods are converted into household income, and all household expenses - into income of producers (firms).
Walras emphasizes that the prices of consumer goods depend on the prices of factors of production (rent, interest, wages). In turn, the prices of factors of production depend on the prices of consumer goods (food, clothing, footwear, Vehicle). The principle of equivalence of transactions must be observed between participants in exchange transactions.
The prices of one subsystem depend on the prices of another subsystem. The amount of money paid for factors of production must match the amount of money paid for consumer goods. The equilibrium in the markets for factors of production is consistent with the equilibrium in the markets for consumer goods.
In the markets, one price is set for equivalent goods. This price equalizes the offered quantity with the demanded quantity; supply is consistent with real demand, demand is consistent with supply. The prices of goods correspond to costs, correspond to their marginal utility.
The prices of factors of production must correspond to the costs of firms; in turn, firms' incomes must be "matched" with household expenditures.
Equilibrium conditions
Having built a rather complex system of interrelated equations, Walras proves that the system of equilibrium can be achievable as a kind of "ideal" to which the competitive market strives. The position, called Walras's law, says: in a state of equilibrium, the market price is equal to marginal cost. The value of the social product is market value factors of production used to produce it. Aggregate demand equals aggregate supply. Price and output do not increase or decrease.
The Walrasian model is a static model of general economic equilibrium, a kind of snapshot of the national economy in its "pure" form.
The state of equilibrium implies the presence of three conditions:
1) the demand and supply of factors of production are equal: a constant and stable price is set for them;
2) demand and supply of goods (and services) are equal and are realized on the basis of constant, stable prices;
3) the prices of goods correspond to production costs.
The first two conditions presuppose the equality of exchange proportions. The third condition expresses the equilibrium in the sphere of production.
For the mathematical justification of the proposed system, Walras used the position according to which the ratio of the marginal utilities of goods to their prices should be taken the same for all goods. In other words, each participant in the exchange derives an equal benefit from it. This is the condition for equilibrium. Equilibrium prices contribute to the elimination of surpluses and shortages: the number of goods offered corresponds to the number of goods purchased, the total sum of goods prices is equal to total costs.
The system of interconnectedness and equivalence outlined by Walras is too strict and “beautiful” to correspond to the real picture. market relations. But the mathematical economist, with the help of a system of equations, proves that such a system can actually exist as an "ideal" to which it aspires.
If the number of equations and the number of unknowns are equal, a solution from a theoretical point of view can be found. True, it is practically impossible to solve a very complex system of equations for the entire huge mass of goods. Actually this is not necessary. For two goods, only six actions would be required, for three - twenty-four, for twenty-four - ten to the twenty-first power, for a million goods - ten to the six-millionth power.
The economic and mathematical model of Walras is aimed at substantiating the possibility of the existence of a system of equilibrium prices as a kind of centers of gravity, economic guidelines and regulators. A price system that satisfies both producers and consumers is an option that exists only in the form of a desired but never exactly achievable result. The real existence of the market - this or that degree of disequilibrium. The market strives to overcome this disequilibrium due to internal reasons, as already noted, it strives to get closer to the "ideal".
Equilibrium is stable if there are forces in the market that equalize deviations and restore “equilibrium”. Intermediate, "incorrect" prices are being phased out. This contributes to the development of competition.
The economic meaning of the theory of general equilibrium is that, according to neoclassicists, the market economy is, in principle, a stable, sustainable system that does not need outside help. Prices serve as a determining factor that stimulates the motives and decisions of people, the aspirations and actions of economic agents.
Conclusions from the Walras model
The main conclusion that follows from the model is to substantiate the interconnectedness and interdependence of all prices as a regulatory instrument, not only in the goods market, but in all markets.
Let us repeat once again: prices for consumer goods are set in relation and interaction with prices for factors of production, prices for labor - taking into account and under the influence of prices for products, etc. Equilibrium prices are established as a result of the interconnection of all markets (markets of goods, labor, money markets, securities markets).
The possibility of the existence of equilibrium prices simultaneously in all markets is proved mathematically. By virtue of its inherent mechanism, the market economy strives for this equilibrium.
From theoretically achievable economic "equality" follows the conclusion about the relative stability of the system of market relations. "Feeling" equilibrium prices occurs in all markets and, ultimately, leads to an equilibrium of supply and demand in these markets.
The Walrasian model is a simplified, conditional picture of the national economy. It does not consider how equilibrium is established in development, dynamics. It does not take into account many factors that operate in practice, such as psychological motives, expectations. The model considers established markets, well-established infrastructure that meets the needs of the market.
The theoretical model of Walras served as the basis for the further development of the most important sections of economic science, based on the justification of the social economic relations and relationships. The theory of Walras put on the agenda the study of the components of economic equilibrium, the proportions between the most important sectors and markets in statics and dynamics, the identification of prerequisites and methods for overcoming emerging violations.
The question arises, is it fair to say that the general economic equilibrium represents the optimal distribution of resources and products?
According to Walras, as a result of an equivalent exchange, each of its participants receives a maximum of utility. However, his opponents believe that such a conclusion needs to be proven. It is possible that, although the achievement of economic equilibrium leads to the maximization of the overall effect, the "gain" of each individual will be far from being equivalent. The question arises, how to evaluate the total utility, if its terms are very subjective, quantitatively incomparable?
Assume that the maximum overall effect is achieved. But the overall effect (growth in production, construction of new facilities) can give gain to some while losing to others. Achieving an effect on the scale of society does not mean that all its members will benefit from it. For example, the effect of increasing oil production will be felt primarily by workers in the oil fields, and the population of the oil-bearing region will lose as a result of the deterioration of the environmental situation. The construction of a new road will require additional costs, and even those people who will never use this road will feel the increase in the tax burden.
What is the criterion of social utility? What is the prerequisite for reaching the optimum?
The problem lies in the optimal distribution economic resources and produced goods in order to achieve the greatest efficiency. The decisive contribution to the solution of the problem was made by the Italian economist Vilfredo Pareto (1848-1923). He developed the initial provisions on which the theory of welfare is built.
Let us explain: the theory of welfare is the theory of economic optimum. Its task is the optimal distribution of economic resources and produced goods; it is engaged in the search for optimal solutions in the interests of ensuring the efficiency of economic activity.
V. Pareto turned out to be the economist who proved the illegitimacy of defining total utility as the sum of individual utilities. Utility can be measured, but not through quantitative measures, but by comparing the significance of consumer goods, by assessing their priority for the buyer. The recognition of an ordinalist rather than a cardinalist approach meant that use values (utilities) are lined up according to the criterion of preference, according to the degree of priority.
Usefulness for individual, the firm is not equivalent to utility from the point of view of the whole society. This seemingly simple, unobjectionable conclusion was not reached immediately. It was necessary to capture and distinguish between two parameters - microutility and macroutility.
Pareto, being a mathematician, came to the conclusion that millions of equations will not help to calculate the whole variety of economic relationships and relationships. Numerous variables are exceptionally mobile and changeable. As for the individual economic man”, then one should not think that his tastes and desires are constantly changing, they are relatively stable.
How is the consumer doing?
When choosing options, the consumer does not measure utility values, but compares them. Pareto used indifference curves as a tool to "measure" consumer preferences. The simplest version of the analysis is a comparison of a set of two goods, such as apples and bananas (Fig. 11.2).
The quantities of these two goods are plotted on the vertical and horizontal axes. The straight line connecting the extreme points (only apples - only bananas) is called the budget line, reflecting the ratio of two goods, expressed in prices.
The indifference curve reflects the options for combining two goods (apples and bananas), which are evaluated by the consumer as equivalent. He is satisfied with various combinations of sets (they lie on the curve). It practically does not matter to him which of these sets to prefer. Options that lie outside the curve, the consumer is not satisfied.
Which option will be chosen? Obviously one for the acquisition of which there is a sufficient amount of money. Direct, i.e. budget line, touches the indifference curve at the point M. With a given budget and the prevailing price level on the market, this option will be chosen as the most optimal.
Indifference curves can be used to forecast consumer demand.
Based on consumer preferences, results and costs are compared. Such comparisons are made on various levels. Achieving an effect on the scale of society, for example, increasing the result at the same cost, does not mean that all members of society will benefit from this.
For example, with an increase in production and a decrease in prices for personal computers part of the population - potential buyers of computers - will win. The "usefulness of the effect" from this event for the bulk of buyers will remain close to zero. The interests of the majority of the population will not be affected by the “negative effect”, for example, an increase in prices for polished diamonds. But the situation may be different: the effect of increasing oil production will be felt primarily by oilfield workers, and the population of the oil-bearing region will lose as a result of the deterioration of the environmental situation.
Criterion of public utility
The Pareto conclusion is as follows: the optimal case should be considered when, under given conditions (availability of resources, distribution system, consumer demands, prices), no one can improve his situation without worsening the situation of someone else. In other words, resources are more evenly distributed. If there is an opportunity to improve the position of one of the participants, then this means that the optimum has not been achieved.
What is the meaning of this formula? In the need to search for an option corresponding to the situation in which the maximum productivity of production factors and the most complete satisfaction of consumer needs are achieved.
The equilibrium state in which no one can increase the production of one good without decreasing the production of some other good is called Pareto optimum.
In reality, there is not one, but many options that meet the Pareto optimum criterion.
The practical significance of Pareto efficiency lies in the fact that he substantiates the criteria and limitations that contribute to the further development of the problem of efficiency, the theory of consumer choice and optimization at various levels. However, it should be recalled that indifference curves were first used by Edgeworth. The objective basis for assessing utility was proposed by Slutsky. Indifference curves were later developed in more detail by Hicks.
Since the priority given to certain industries, regions, social groups often limits the possibilities of others (the principle of residual budget financing is a typical example), it is important to find means of compensating for the limitations and losses of those who lose as a result of decisions made. In this regard, the need to follow the concept of "possible improvement in the sense of Pareto" reminds of itself.
So, let's summarize the conclusions that Pareto came to.
Ensuring economic balance is a necessary condition for achieving an optimum. Optimum means that a result is achieved, deviation from which increases the benefits for some and reduces them for others. The distribution of resources in society becomes optimal if any change in this option worsens the position of at least one participant in the economic system.
Let's illustrate what has been said. On fig. 11.3 the curve of consumer possibilities MN is represented. The curve shows the possible combinations of utility levels in the distribution of two goods between two participants.
Any point on the curve (for example, A or B) is Pareto efficient. Movement along the curve means an improvement in the position (resources, costs) of one while the position of the other worsens.
The points inside the OMN figure are below the MN curve. All points inside the curve, including points I and K, correspond to an inefficient allocation of resources. For example, moving from point I towards the curve (inside LPI) means a Pareto improvement.
If it is relatively easy to find the optimum at the firm level, based on minimizing costs and maximizing the result, then at the level National economy many factors, ambiguity and diversity of goals have to be taken into account.
The Pareto concept was developed in accordance with the approach according to which the core basis of all relations, the initial category is not "cost", but the principle of equilibrium - the nodal link of the marginal system of economic relations. As a result, efficiency is combined with balance; if equilibrium is reached, then it is both balanced and efficient.
The concept of the optimum is closely related to the theory of "elites" put forward by Pareto. According to this theory, the top rung in society is occupied by the "ruling elite". It is she who has the power and ensures the distribution of benefits in her own interests, while the overwhelming majority - the "non-governing elite" - remains on the lower steps of the social pyramid. Over time, the ruling elite becomes decrepit and is forced to give way to more mature and active individuals. As a result, a kind of “circulation of elites” takes place, which positively affects economic development.
The concept of the Pareto optimum and the theory of "elite circulation" leave aside the problem of social justice and the optimal allocation of resources. Distribution is based on action market mechanism; the state is called upon to fulfill a single task - to provide the most favorable conditions for free competition.
Describing the Pareto optimum, K. Arrow rightly noted: “Efficiency in the sense of Pareto in no way implies distributive justice. The allocation of resources can be Pareto efficient and at the same time generate unheard-of wealth for some and severe poverty for others.”
There is a tension between economic growth and resource allocation. Priorities given to some industries and regions limit the opportunities for others. Therefore, government programs are called upon to find means and methods of compensating those who are the losers from the decisions made.
The theory of value is the key category of the classical school. Its representatives sought to understand what underlies the price of goods, and hence the proportions of exchange. The basis of the price of the classics was seen in costs, labor costs and other factors. At the same time, it was important to determine not only the basis of value, but also its “derivative” - income, to understand what are the sources and forms of distribution of income. Income - the elements into which the price breaks down and which, obviously, one way or another participate in its formation.
Both positions are interrelated. The interpretation of the problem of income formation depends on how the problem of factors (sources) that form the price is solved. The solution to the problem of income generation should correspond to the interpretation of the original position - how the price is determined.
The solution of the "dual" theoretical problem includes a social aspect and has an important practical value. The problem of cost and price is a sphere of clash between supporters of one interpretation or another, one or another methodological principle, which guides the participants in the discussion.
In his search for a true measure of value, Smith sought to identify what should be considered as the cause of value and how, on its basis, the values of commodities are measured. The co-measurement is the labor expended on the production of goods; and in a more developed society (commodity-capitalist) value is derived not directly from labor costs, but from the proportions of exchange, which are made up of the incomes of participants in production.
It is generally accepted that Smith showed a "brilliant inconsistency" in admitting a number of important deviations from the principle of the labor theory of value. Smith's most important deviation was that, with the advent of capital and landed property, commodities were no longer exchanged in proportion to the outlay of labor.
According to the authors of the factor concept, the cost consists of income; incomes are the result of the productivity of factors or "victims" of the owners of labour, capital and land. But the development of the theory of value did not stop there. If Say and his supporters went from the factors (production), then Menger, when determining the cost, goes from the marginal utility of the product (consumer assessment). Marshall, who combined different approaches, believed that the determining role in the interaction of supply and demand (namely, they determine market prices) is played by demand, which is based on "consumption".
The income of the nation and "Smith's dogma"
Factor and "marginal utility" theories have been criticized for ignoring the role of labor costs. The authors of these concepts take into account income or demand, the impact of which depends on the size of income, and costs are left aside. And here it is appropriate to mention the theoretical "contradiction" that has received the name "Smith's dogma" in the literature. Its meaning is that if the price of an individual commodity is reduced to three components, three incomes, then, as Smith noted, “to the same three components the price ... of all commodities that make up the total annual product of labor of each country, taken total".
Thus, in defining the constituent elements of price, Smith ignored the fourth element, the cost of capital.
Smith suggested that, firstly, on the scale of society, the value of the annual product is reduced to one income and, therefore, secondly, it is legitimate to consider the value of individual goods for the purposes of analysis as a summand from income alone (since material costs can also eventually be fully decomposed into their component incomes).
Smith's proposition is, strictly speaking, inaccurate in practical terms, for by reducing the annual product of a nation to revenues and expenditures current year, ignores depreciation dimensions. But it is useful as a theoretical abstraction to get closer to practical analysis pricing patterns.
With the approval of marginal views, price theories come to the fore; in the studies of economists and in educational developments, the price, the laws of its formation occupy a priority position. Changes in methodology, in the very interpretation of the category of price are largely associated with changes in economic conditions, the system of economic relations.
Price Theory: Costs and Benefits
As arguments in favor of the "price approach", in substantiation of the two-factor theory of price, which was initiated by Marshall, the following points are put forward.
1. Industry-average costs cease to play a decisive role in shaping market prices. Labor costs are becoming less and less comparable, the determining role in the production of modern goods is played by skilled labor, which is difficult to reduce to simple labor. An increasing role in manufacturing process it is not physical efforts that play, but qualification, organization, professional training, the ability to quickly change the technological regime, and acquire new skills.
2. The idea of the total worker is changing. Today it includes participants (enterprises, information sources, suppliers, transport communications) that form a complex and multi-link chain based on a qualitatively new system of labor division.
3. The structure of demand is changing rapidly. If earlier new products appeared relatively rarely, now the share of new products is constantly increasing. For example, in the US, the share of new products in the consumer market is about 20%. In Japan, the electronics nomenclature is updated every three to four years. For the buyer, quality, novelty, fashion, and prestige are becoming more and more important. The use value of goods has an ever greater influence on the price, it is increasingly becoming of paramount importance among price-forming factors.
4. Not only tangible goods are produced in society, but everything in large sizes services. It is becoming more and more difficult to “separate” the production of goods and services. Workers in the production and non-production spheres participate in the creation of a social product, and the share and importance non-production sphere(medicine, education, communications, etc.) are getting bigger.
5. The price of a product and the price of a service are determined not so much by the time spent, but by the result achieved. The doctor's service is not evaluated by the amount of time spent on the diagnosis of the disease, but the service financial advisor- not by the number of pages in the analytical document prepared by him.
The two-factor theory of price and its corresponding approach to the pricing system can be called differently. AT study guide Paul Heine is an opportunity cost, a concept that links the law of demand and the principles that govern supply. In "Economics" by K. McConnell and S. Brew, the concept of a balancing price is used. The well-known economist V. Leontiev writes about the relationship between the "production function" and the "utility function". In the "Principles" of A. Marshall, the supply and demand curves are analyzed, the formation of an "equilibrium price" is considered.
In Russian literature, one of the first works justifying the need to abandon the "costly" concept and adopt the methodology of neoclassical analysis was the work of S. Braginsky and J. Pevzner. Popularly and intelligibly considered the theory of value, the successive stages of its formation S.I. Lushin. His brochure reveals the mechanism of value and price formation in modern conditions. Of interest is the monograph by B. Vorkuev, who put forward the idea of optimization to the center of the analysis of the theory of cost and price. There are other points of view.
It seems to us that the main difference in approaches is due to the desire to consider this problem in one case in theoretical terms, in the other - from the standpoint of the correspondence between the conclusions and provisions of real economic reality. The price plays exclusively important role in market economy. And the search for newer approaches that most fully combine the logical harmony of arguments and reasoning with the practical effectiveness of assessments and recommendations will continue.
Brief conclusions
The theory of general economic equilibrium was developed by prof. University of Lausanne L. Walras. He built a mathematical model covering the processes of exchange and production, the movement of goods and capital. According to his conclusion, the economic system constantly returns to a state of equilibrium in accordance with the action of internal laws. The Walrasian model, the provisions put forward by him were refined and improved by other economists.
Walras' colleague at the University of Lausanne, the Italian economist V. Pareto substantiated his approach to the conditions of economic equilibrium. He is the author of the postulate named after him, according to which the participants economic activity reach mutual balance and total satisfaction. Pareto used the indifference curves proposed by F. Edgeworth to compare utilities and put forward the principles (criteria) of welfare theory.
Economists of the Lausanne School contributed significant contribution in creating the foundations of neoclassical economic theory. The idea of the equilibrium of a competitive economy is one of the key provisions. Partial equilibrium analysis (proposed by A. Marshall) was developed in the theory of general equilibrium, in which all prices and outputs are interconnected and determined simultaneously.
Questions for self-examination
1. What is the essence of the theory of general economic equilibrium, justified by L. Walras?
2. What conclusions can be drawn from the model of economic equilibrium proposed by L. Walras?
3. What conditions are necessary to achieve a state of equilibrium in a market economy?
4. Explain what is the practical significance of the Pareto optimum.
5. Expand the relationship between the state of economic equilibrium and the optimal allocation of resources.
6. How do economists of the neoclassical school interpret the main provisions of the theory of value (value)?
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Walras L. Elements of Pure Political Economy, or Theory of Public Wealth. M. : Economics, 2000.
History economic doctrines: Proc. allowance / Ed. V. Avtonomov, O. Ananyina, N. Makasheva. M. : INFRA-M, 2000. Ch. 13, 14.
Lushin S.I. Value. Price. Price. M. : Yurist, 2001.
Negishi T. History of economic theory. M. : Aspect Press, 1995. Ch. 7.
Pareto V. Textbook of political economy // World economic thought through the prism of centuries. T. II. Part 2. M. : Thought, 2005.
Seligman B. The main currents of modern economic thought. M. : Progress, 1968. Ch. IV.
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Stoleru L. Equilibrium and the economic growth. M. : Statistics, 1974.
Major contribution to economics contributed professor at the University of Lausanne in Switzerland Leon Walras (1834-1910) and succeeded him in the department Wilfredo Pareto (1848-1923).
Walras was the first who developed closed mathematical model of general economic equilibrium. It was based on the division of all those involved in production and exchange into two large groups: owners of productive services (land, capital, labor) and entrepreneurs, bringing potential factors of production into action. Owners of productive services offer them on the market to entrepreneurs who, in turn, act as sellers of manufactured consumer products. The markets for productive services and consumer goods are interconnected.
Equilibrium in the economy is ensured under three conditions: 1) the effective demand for productive services and the supply of these services are equal; 2) prices in the food market are stable; 3) the selling price of products is equal to the cost of their production, expressed in productive services. In the mathematical model, these equilibrium conditions are expressed through four interrelated systems of equations.
The first system characterizes the supply of productive services. The supply of each type of these services acts as a function of market prices for all types of services and for all finished products.
The second system of equations describes the demand for finished products. The demand for each kind of product is a function of the prices of all productive services and all products.
The third system reflects the consumption of productive services. The sum of the costs of each productive service for the production of all finished products should equal the total supply of this type of service.
Finally, the fourth system of equations demonstrates the relationship between the prices of productive services and finished products. The price of each finished product is equal to the sum of the prices of all productive services spent on its production.
The Walrasian model allows one to find a mathematical solution to the equilibrium problem, since the total number of unknowns in this model is equal to the number of equations. However, the author himself saw in it not a tool to ensure balance, which should be used by some almighty manager of economic life (for example, the state), but a proof of the possibility of a stable equilibrium in a free market and the aspirations of all subjects of the economy to maximizing utility.
According to Walras, the economic market equilibrium is socially beneficial to the population. True, this benefit itself is not interpreted very clearly. In some cases, Walras argues that in equilibrium, each subject has more utility than in the absence of such equilibrium. In other cases, he proclaims that at equilibrium, total utility is highest, although for individual actors it may be higher in a non-equilibrium state of the economy (but in the transition to equilibrium, their loss will be less than the gain of the rest).
Pareto, developing the mathematical concept of equilibrium, took a fresh approach to many ideas and categories underlying the theories of his predecessors, including Walras.
If Walras operated on the category of value, understanding it as utility, then Pareto proclaimed the liberation of economic science from the concept of value. Instead of quantifiable utility of goods (or "negative utility" of costs) Pareto introduces the concept of "preference", which has not a quantitative, but an ordinal meaning. The statement that these goods are more useful than others, in fact, according to Pareto, means that a person prefers these goods to others. At the same time, the preferences are not comparable for individual goods, but only for their sets (the same applies to the “negative preferences” of hardships).
To characterize preferences, Pareto used the proposed by the English economist Francis Edgeworth (1845-1926) the idea of "indifference curves". Edgeworth defined an indifference curve as a plane mapping of combinations of two goods such that they provide equal utility. Pareto, unlike Edgeworth, does not operate on a curve on a plane, but on a surface in three-dimensional space. Mutual intersection of surfaces of indifference gives paths of optimal ascent from one level of preferences to another.
Based on the Walrasian equilibrium model, Pareto argues that five conditions are necessary and sufficient for equilibrium in the economy:
1. Price-weighted preferences are equal for all goods.
2. For any subject of economic relations, the amounts of income and expenses are equal.
3. The transition from a non-equilibrium state to an equilibrium one does not require either an increase or decrease in the amount of goods.
4. The prices of finished products are equal to the costs of their production.
5. Productive goods are fully utilized in the production process.
Pareto approaches the social assessment of equilibrium in a new way. He makes such an assessment an indicator, a criterion of sustainable economic equilibrium. This estimate is called the Pareto optimum. The social optimum, according to Pareto, is the position, in which it is impossible to increase the well-being of at least one subject through the production and exchange of goods and services without harming the well-being of any other subject. If this requirement is met, the economy is in equilibrium.
Pareto emphasizes that in reality there can be many variants of an equilibrium economy, depending on how the ownership of productive resources is distributed. Therefore, many "Pareto optimums" are also possible. How can we compare the social effect of these different equilibrium options? According to Pareto, of the two compared options, the one in which the position of at least one subject is better, and the rest - according to at least, not worse. Subsequently, the concept of the Pareto optimum was enriched and partially rethought by a number of economists. At the end of the 30s. English economists Nicholas Kaldor and John Hicks proposed two close versions of the compensatory criterion: with changes in the economy, the “Pareto optimum” is observed not directly, but as a result of the fact that the winners from the change give part of their gain to compensate the losers, so that in the end the position of the latter does not worsen. Thus, "Pareto optimum" is achieved with the help of introduction of a certain economic policy income redistribution(through taxes and subsidies). Another way to improve the Pareto criterion was proposed in the late 30s - in the 40s. American economists Abram Bergson (b.1914) and Paul Samuelson (b. 1915). They included ethical standards in the analysis, formulating a “social welfare function in the sense of Pareto”: if at least one subject gives an unconditional preference to a certain economic outcome, while other subjects do not show an unconditional preference for other outcomes, then this preferred outcome has a higher social welfare index. .
V. Pareto also entered the history of economic science as the author of the so-called "Pareto law", expressing the relationship between the amount of income and the number of persons receiving it. This law, bred Pareto based on statistics, says that the distribution of near- and above-average incomes is highly stable, for it reflects the distribution of the capacities of the population. However, if the total amount of income grows faster than the population, the income gap between different strata can narrow.
Leon Walras (1834 - 1910) - Swiss economist, founder of the Lausanne School, which is a branch of the mathematical school.
I became interested in economic theory thanks to the works of O. Kruno. From 1870 he worked at the Department of Political Economy at the University of Lausanne.
His main work is called The Elements of Pure Political Economy (1874).
L. Walras - the creator of the general statistical economics mathematical model economy of a country known as the system of general economic equilibrium.
The model of general economic equilibrium developed by L. Walras testifies to the existence of a unique equilibrium of many markets ( finished products and factors of production) under the conditions of the market mechanism and perfect competition.
Equilibrium in a certain part of the markets does not guarantee the general equilibrium of the economy with a given number of markets.
In the 1950s and 1960s, the Walrasian model was transformed by means of linear programming.
The market model reflects the following:
The main conditions for matching the demand and supply of goods are determined;
The relationship between the main indicators of production and exchange is represented by a system of equations;
All transactions in the market are made simultaneously;
The model is static (assumes the same supply and variety of products);
Perfect awareness of the subjects of production;
The solution of the problem for the entire national economy to an extremum.
The purpose of the model is to derive the general laws of the operation of the price system in the presence of many markets.
The state, according to L. Walras, should perform the following functions:
Control the stability of money;
Ensure the safety of citizens;
Restrain speculative processes;
Support the general education of citizens;
Guarantee social protection workers;
To promote the functioning of effective competition;
Encourage the production and consumption of useful things.
The state must operate the principle of equality of opportunity in the inequality of the actual situation.
Vilfredo Pareto (1848 - 1923) - Italian economist, professor of political economy at the University of Lausanne, follower of L.
V. Pareto sought to theoretically substantiate the concept of the interdependence of all economic factors, including the price, and improve the theory of general economic equilibrium of L. Walras. Unlike the latter, he considered a number of equilibrium states in time, and also allowed the coefficients of the production function to vary depending on the size of output.
Analysis of "indifference curves". When using "indifference curves", V. Pareto predicts the behavior of buyers in the market, and using a graph reflects the relationship between goods and their utilities. The analysis of "indifference curves" shows how much of one good a household is able to give up in order to purchase an additional amount of another good.
Optimum V. Pareto. The optimum is a state of the system in which no redistribution of products or resources can improve the position of one participant. economic process without worsening the situation of the other.
The law of distribution of income ("Pareto law"). The essence of the law is that inequality in the distribution of income can be reduced if income and production grow faster than the population.
V. Pareto widely used to solve economic tasks mathematical methods.
The methodology of marginalism gave birth to another school of political economy - mathematical, which arose in late XIX in. at the University of Lausanne (Switzerland). Lausanne School of Political Economy- a school, a feature of which, in comparison with other neoclassical schools, is the reliance on the mathematical method of studying economic processes and phenomena, both at the micro and macro levels.
Mathematical concepts in political economy originate in the works mentioned in the first question of this topic by D. Cournot, I. Thünen, G. Gossen and some others. But in a mature form, the mathematical theory of economic equilibrium was presented in the works of the founder of the Lausanne school Leon Walras (I834-I910), whose main work is called "Elements of Pure Political Economy".
Leon Walras was the first to develop mathematical model of general economic equilibrium. He based it on the division of all agents of production into two large groups - owners of productive services - land, labor and capital; and entrepreneurs bringing potential factors of production into play. Owners of productive services offer them on factor markets to entrepreneurs who, in turn, act as sellers of consumer goods produced. The markets for productive services and consumer goods are interconnected.
Three conditions ensure general economic equilibrium:
1) the demand for productive services is equal to their supply;
2) commodity market prices are stable;
3) the selling price of products is equal to the cost of their production, expressed in productive services.
In the mathematical model, these equilibrium conditions are expressed through four interrelated systems of equations:
The first characterizes the supply of productive services: the supply of each type of productive service acts as a function of market prices for all types of services and for all finished products;
The second describes the demand for finished products: the demand for each type of product is a function of market prices for productive services and for all products;
The third reflects the consumption of finished products: the sum of the costs of each of them for the production of all finished products should be equal to the total supply of this type of service;
The fourth shows the ratio of prices of productive services and finished products. The price of each product is equal to the sum of the prices of all productive services spent on its production.
The L. Walras model allows finding a mathematical solution to the equilibrium problem, since the total number of unknowns in this model is equal to the number of equations. L. Walras saw in this model a proof of the possibility of a stable equilibrium and the best distribution of economic resources in a free market and the desire of all economic entities to maximizing utility.
The development of the general theory of economic equilibrium was continued by a student of L. Walras and his successor at the department at the University of Lausanne V. Pareto . He formulated the concept of economic equilibrium - Pareto optimality- as a state that does not allow any exchange participant to improve its utility function without simultaneously worsening the utility functions of other exchange participants.
In his works “Lectures on Political Economy” (1896) and “Guide to Political Economy” (1906), V. Pareto set the task of developing the “pure political economy” of L. Walras to such a construction that would make the psychological model of the hedonist-optimizer and the concept itself superfluous utility”, which V. Pareto proposed to replace ... with the Greek equivalent (“ofelimite” - with a semantic connotation “desirability”).
The idea put forward by F. Edgeworth indifference curves V. Pareto used to build a psychologically neutral model of the market mechanism. Since human tendencies are so varied, different combinations are possible to achieve the greatest possible satisfaction. Different combinations that give equal satisfaction can be represented as indifference curves. These curves give an idea that the satisfaction of an individual is a function of the amount of not only one good, but also functions of the amount of other goods.
Even in the case of two goods, economic agents may consider different combinations of the acquisition of goods as equivalent. You can designate the quantities of both goods on the axes of the coordinate system and connect the curve all the points that give equal degree satisfaction. Then another line can be drawn connecting the points of those combinations that give equal satisfaction but are more difficult or weaker than the first.
Noting that the curves plotted in this way resemble the cartographic curves of height, V. Pareto showed a man climbing the “hill of desires” more or less high along paths strewn with obstacles. These obstacles are the rarity of the goods that a person desires to have, and the sacrifices that must be made in order to receive them.
A balance is established between inclinations and obstacles, in the sense that no man will ever sacrifice a combination from which he hopes to derive a certain pleasure, unless he counts on some other that gives at least equal pleasure.
The idea of V. Pareto about the rejection of the concept of “utility” did not receive support, but under the influence of his work in economic theory, ordinalist understanding of utility. The first marginalists, especially O. Behm-Bawerk and F. Edgeworth, insisted on the possibility of quantitative commensurability of different degrees of utility (exactly how much pleasure from consumption nth unit of this good exceeds the pleasure of consuming the n + 1st unit). This approach has been called cardinal (lat. cardinalis). V. Pareto considered the choice of economic goods as order (lat. ordinal) preferences without quantification, paving the way for the ordinalist concept of consumer choice, which analyzes market phenomena based on the fact that one set of goods is preferred over another without proof that the consumer desires one set of goods 3% or 10% more than the other.
The theoretical models of the Lausanne School proceeded from the relationship of economic equilibrium as the optimal satisfaction of needs and distribution of resources with the relations of free competition - the lack of price control, freedom of entry and exit to the industry, accessibility for each of the economic entities, important for extracting maximum income information.
The neoclassical direction proclaimed the principle of free competition, arguing with the German historical school and various socialist teachings. It contributed to the renewal of the ideological arsenal of bourgeois liberalism. In the twentieth century this direction took the place of the main channel (mainstream) world economic thought. The "marginalist revolution" laid the foundations for the "new orthodoxy" of economic science - "neoclassical theory". Its main premises were:
1) the laws of "pure economy" as an economy of free competition are universal;
2) the individual acts as homo economicus- a hedonist-optimizer, based on a rationally calculated desire for his own interest;
3) value is determined by marginal utility, and the price in the market depends on the intensity of the last need that must be satisfied;
4) the value of productive goods is due to the value of commodities, and incomes are subordinated to common law prices, representing the prices of factors of production;
5) the origin of the automatic equalization of supply and demand, the price of the product with the factors of its production, and the achievement of the optimal distribution of economic resources.
The first two and the last of the listed points are common with classical political economy in the form in which it was presented in the works of A. Smith, D. Ricardo, J.-B. Say and St. Mill; the other two are the novelty of marginalist theorists who have entrenched themselves on the “university heights” of economic science.
Claiming to describe the mechanisms operating in all economic systems(methodological universalism), focusing on individualistic behavior in the market of individual consumers and firms (methodological individualism), neoclassical theory began to develop as microeconomics- a science that studies the forms of human behavior in terms of the relationship between the goals of private benefit and limited, but allowing for various uses, resources.
general characteristics
Of all the strands of marginalism, the Lausanne school played the greatest role in the formation of the neoclassical school. In fact, the neoclassical trend can be interpreted to a large extent as a combination of the teachings of the Lausanne school with the findings of D. B. Clark and A. Marshall.
It was the representatives of the Lausanne school, along with the English marginalists W. S. Jevons and F. I. Edgeworth, who were the initiators of the introduction of mathematical methods into economics, especially the methods of differential calculus.
Another important characteristic of the Lausannes' approach to the analysis of the economy was its likening to mechanical systems. In this they sharply differed from the Austrians and were close to the classical economists; moreover, it can be said that, in terms of the mechanistic nature of their analysis, they went much further than the latter. For the classics, as already mentioned, the assimilation of the economy to mechanical objects was significant in terms of putting forward the idea that universal and objective laws are inherent in it. As for the representatives of the Lausanne school, for them such assimilation was important because it allowed them to represent the economy as an equilibrium system.
This is another, perhaps the most significant, characteristic of the Lausanne approach. They were the first to carry out an analysis of the economy from the point of view of general equilibrium; subsequently, modeling based on the idea of general equilibrium became one of the characteristic features mainstream of modern economic theory. It is no coincidence that the main work of the founder of the Lausanne school and one of the creators of the Marginalist Revolution, L. Walras, was called by J. Schumpeter "The Magna Carta of exact economic science", and T. Negisi "the bible of modern neoclassical economic theory."
Methodology of economic analysis L. Walras
According to L. Walras, economic theory consists of three parts: pure, applied and social theory. The basis of this division is his definition of social wealth. Public wealth is a set of tangible and intangible goods that are rare, i.e., on the one hand, they represent a certain utility for us, and on the other hand, the number of them at our disposal is limited. Three consequences follow from the limited number of these goods: these goods are the object of appropriation; they are an object of exchange; they are the subject of industrial production.
From this, there are three main economic phenomena, or the three main aspects of social wealth: exchange (exchange value), production (industry) and distribution (property). Accordingly, three points of view on social wealth are possible: pure, applied and social theories, each of which studies its own field of economics. In modern terminology, a pure theory is positive theory functioning of the market mechanism, applied theory - normative theory optimal allocation of resources, and social theory - the normative theory of the optimal distribution of income. At the same time, L. Walras carried out a systematic development of only pure theory.
The concept of the circulation of L. Walras
L. Walras begins his analysis with the classification of goods. Among the goods that make up public wealth, one can single out capital and fleeting goods. The former are used more than once, while the latter are used only once. Capital goods consist of land, personal ability, and capital proper. Transient goods are divided into commodities and raw materials. Commodities have direct utility, while capital goods and raw materials have indirect utility. Every good renders a service to man: consumer goods - consumer services, capital and raw materials - productive services.
There are four classes in society: landowners, workers, capitalists and entrepreneurs. The first three classes own capital goods. The function of entrepreneurs is to combine various capital goods in various combinations in order to create new goods with the help of their productive services. agriculture, industry and trade.
Thus, we can distinguish two different markets: the market for services (resources, capital goods) and the market for products (final goods). In the first, landowners, workers, and capitalists sell their productive services to entrepreneurs. In the second, entrepreneurs sell final goods to landowners, workers, and capitalists.
Model of general economic equilibrium by L. Walras
General equilibrium involves the establishment of equilibrium in exchange and production. Equilibrium in exchange means that the effective (actual) demand for productive services (products) is equal to the effective supply of productive services (products). Equilibrium in production means that the price of each product is equal to the cost of its production, including the normal profit as a reward for capital.
Such a state of equilibrium in production and exchange is an ideal case, not a real one. It never happens that the selling price of a product exactly equals the cost of producing this good, just as there is no exact correspondence between effective demand and efficient supply. But such a state can be called normal in the sense that an economy operating in conditions of absolutely free competition strives for it. In such a situation, if the price of the product exceeds the cost of its production, entrepreneurs receive excess profits and begin to expand production. If the price of the product is lower than the cost of its production, entrepreneurs incur losses and begin to reduce output. As a result, the prices of final goods change and a general equilibrium is established.
How is the general economic equilibrium established? Consider, for the sake of simplicity, a model of a barter economy in which there is no production. In this economy, there are n goods, with the nth good acting as the unit of account, or money. The price of each good is expressed in this unit of account. Let Pi/Pn be the price of the i-th good divided by the price of the n-th good (relative price). Suppose that Pn =1, then the price of the i-th good will be equal to Pi. At the beginning of the exchange, each business entity has a certain stock (allotment) of various goods, including money. The total utility of this stock depends on the marginal utility of each good at the disposal of the individual. The individual's goal is to maximize his utility. He can achieve this by exchanging goods belonging to him with less marginal utility for goods belonging to other individuals and representing greater utility for him. Naturally, in this case, the marginal utility of each good is weighted taking into account its relative price (Gossen's second law), as well as the relative prices of other goods. Therefore, the demand for i-th benefit just like the supply of this good, there are functions of the relative prices of all goods:
Di = Di(P1,..., Pn-1); (one)
Si = Si(P1,..., Pn-1). (2)
General economic equilibrium means that supply and demand in each market are equal, that is, the amount of a good offered for sale is equal to the amount of a good that buyers are willing to purchase. The equality of these quantities is ensured by the relative price of the good. The equilibrium price is established in the Walrasian model during the so-called "groping" process. There is a special person in the market - the auctioneer - who observes the course of affairs in the economy and shouts out the relative prices of goods. Then the participants in the exchange tell the auctioneer how much of this or that good they would like to sell or buy at given prices. If at the same time demand is not equal to supply (there is an excess of demand (Di > Si) or an excess of supply (Di< Si), аукционщик назначает новые цены. Причем здесь действует следующее правило: если был избыток спроса, - цена повышается, если избыток предложения, - цена понижается. Обмен состоится только тогда, когда набор относительных цен, объявленный аукционщиком, окажется равновесным. Математически, чтобы найти этот набор, состоящий из n-1 цены, необходимо решить n-1 уравнение (цена n-го блага - денег - задана):
Di(P1,..., Pn-1) = Si(P1,..., Pn-1); i = 1,.. n-1. (3)
The number of equations here is equal to the number of unknowns, and therefore this system will have a unique solution, i.e., an equilibrium set of relative prices exists and it is unique. From this we can deduce the so-called Walrasian law:
SPiDi º SPiSi, (4)
which states that the value of aggregate demand is equal to the value of aggregate supply. In other words, the sum of excess supply and demand in all markets must always be zero. Therefore, if n-1 is in equilibrium (i.e., there is neither excess demand nor excess supply on any of them), then nth market should also be in balance. Thus, Walras's law by no means assumes that the economy is always in equilibrium, that is, there is no excess supply or demand in all markets. It's just that at the level of the entire national economy, all these surpluses, in terms of value, "mutually cancel each other out."
As can be seen from the general equilibrium model, money plays a passive role in it as a unit of account (measure of value), in which the value of other goods is expressed. Here it is necessary to distinguish between relative and absolute prices. Relative price is the price of one good relative to the price of another good. The absolute price is the price of money (Pn), or general level prices. Business entities are only interested in relative prices. So, if I am a cloth seller, then the fall in the relative price of the good I sell in relation to, say, bread (regardless of what caused it: whether the price of bread rose or the price of cloth fell) means that, having sold the same amount of cloth, I can only buy a smaller quantity of bread. The absolute price depends on the amount of money in circulation. The change money supply leads to a proportional change in the absolute price level. Thus, if the quantity of money triples, then the absolute prices must also triple: the price of each good triples, and the relative prices remain unchanged. As a consequence, a change in the money supply does not entail a change in real values (asked and offered quantities of goods).
Thus, the approach of L. Walras to the pricing process was based largely on the ideas of O. A. Cournot (see Section 2.1) and differed from the approach of H. G. Gossen - W. S. Jevons - F. I. Edgeworth, that sellers in the market are faced with an already “ready” price. If F. I. Edgeworth relied on the concept of renegotiating contracts in describing the market mechanism, then L. Walras - on the concept of fumbling. However, like the idea of "reconclusion", the concept of "groping" is unrealistic, because in a market economy real world there is no auctioneer, and transactions are often carried out at non-equilibrium prices.
In addition, due to the actions of the auctioneer, in the Walrasian model of general equilibrium, buying and selling turn out to be absolutely synchronized in time. Therefore, economic entities do not have incentives to use money as a medium of exchange and a store of value. Thus, using the model of L. Walras, it is impossible to explain the existence of money in a market economy.
The development of the teachings of the Lausanne school of V. Pareto
The merit of the further development of the teachings of the Lausanne school belongs to V. Pareto, rightly regarded as one of the direct creators of the neoclassical paradigm economic analysis.
First of all, V. Pareto tried to rid economic science of excessive subjectivity and psychologism, and in particular, of the idea of value based on the quantitative measurement of utility. He proposed to replace the term "utility" with the concept of "preference" or "benefit". Profitability is a relative concept: it can be used when comparing two or more goods, or rather, their sets, noting that one set of goods is more profitable or preferable than another. Direct measurement or comparison of utility is not required.
For a formalized analysis of the profitability of sets of goods, V. Pareto used the tools of indifference curves, first proposed by F. I. Edgeworth. But if the latter used it to determine the equilibrium price in the course of the functioning of a market economy, then V. Pareto used this tool to analyze the study of determining the optimum consumption. Another difference in the use of this toolkit between F. I. Edgeworth and V. Pareto was that the latter operated not with curves on a plane, but with a surface in three-dimensional space. Within the framework of his approach, the mutual intersection of the surfaces of indifference provided "paths" of optimal ascent from one level of preferences to another with minimal burden.
Naturally, V. Pareto was also developing the general equilibrium model of his senior colleague from the Lausanne school. In particular, he singled out five necessary and sufficient conditions for achieving general equilibrium in a market economy.
1) Price-weighted preferences are equal for all goods.
2) Income and expenses of each of the economic entities are equal.
3) The transition from a non-equilibrium state to an equilibrium state does not require changes in the supply of goods.
4) The prices of finished products are equal to the costs of their production.
5) Productive goods are fully utilized in the production process.
Finally, V. Pareto made a huge contribution to the normative theory of the optimal allocation of resources (ie, in the terminology of L. Walras, to applied theory). He formulated the famous criterion for the optimal allocation of resources, known as the "Pareto optimum" or "Pareto optimum". According to this criterion, the allocation of resources is optimal from a social point of view if, through the production and exchange of goods and services, it is impossible to increase the welfare of at least one economic entity without reducing the welfare of any other entity. If this requirement is not met, the possibilities of optimal allocation of resources have not yet been fully used, and it is possible to increase the well-being of at least one subject without causing damage to all the others.
