Walras' Law of Markets
Categories: Financial Theory, Econ
Familiar with the “invisible hand” theory from Adam Smith? It says that the invisible hand of the market works to keep the supply and demand of goods always headed towards equilibrium. Which means that the supply created is all bought: there’s no excess supply from producers, and no excess demand from consumers.
Walras’ law is a theory that says if there’s excess supply somewhere, there’s a matched excess demand somewhere else, in another market. Basically, if you take a look at the entire market, all of the excess supply and excess demand should cancel out, giving a net balance of equilibrium.
If you know a little bit about statistics, and you believe in the invisible hand theory, this would seem to be a plausible theory. Yet, some say observations have found this to be untrue. But...maybe those observations were incomplete. For instance, what about the black market? Just because really bad pirated DVDs and fake-label handbags aren’t legal doesn’t mean they’re immune to the market effects of the invisible hand...but it does mean they’re hard to track.
In general, you could say that it’s not very Keynesian of you to be on the Walras train. Keynesian economics says one market could be imbalanced without necessarily having a matching imbalance in another market. Maybe in the future, it’ll be easier to conclude if Walras’ Law has merit or not.
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Finance: What is Laissez Faire?9 Views
Finance a la shmoop what is laissez faire? alright well you know the
Renaissance Fair you know about playing fair and what about with laissez faire?
French term for more or less a Beatles [Beatles band singing]
song yeah let it be well as it applies to economics let it be means that the
economy is smarter than we are or at least a better arbiter of what works
what doesn't and what is fair ish so the ideology of laissez faire argues that
economic forces should be allowed to work themselves with maximum freedom and
minimal government interference part of the logic is purely economic government [Stash of cash appears]
involvement is friction bureaucrats who insert their noses only serve to hit the [Car driving uphill and approaches woman with stop sign]
brakes on the economy and make transactions more expensive by applying
taxes, ever been to the DMV and you know gotten the angry stare from the woman
whose Facebook page updating you just interrupted while hoping to get your [Dog on a leash appears]
license renewed yeah that's big government at work friction tax dollars
being spent to employ that woman instead of just figuring out a website that'll
let you go do it all on your own for about one millionth of the cost but part
of the argument of laissez faire is ethical, laissez faire advocates argue that
government interference distorts the natural and equitable forces of economic
development like think global warming for economics courtesy of our carbon [Earth heating up]
pollution otherwise known as regulatory friction slowing down the natural forces
of the commercial markets well in the heyday of laissez faire economics in
the last decades of the 19th century you really could buy happiness money was
pretty much everything government could be bought and it was kind of not a real
force without money behind it right kill someone well, you pay a fine of 199.95
kind of the way you know mexico works today
so what's fair about laissez faire? is it fair to have no minimum wage well laissez faire [Scribbles appear on graph of federal minimum wage]
would say yes but john steinbeck you know The Grapes of Wrath guy yeah he
would say no no and a half the logic is that human being
needing to eat will do pretty much anything to feed their kids right and [Man using shovel]
can't blame them will they work for just five bucks an hour to pay for that last
meal and probably a dollar an hour if it'll feed their last kid yeah you bet
fair well maybe among cave people but not today [Cave people by a fire]
but then there are other perspectives to consider like is it fair to have child
labor laws? if kids want to earn money cobbling shoes or making straw hats or
working 16-hour days in a stock brokerage or at shmoop...
shouldn't they be allowed to do so what do you think fair
not fair laissez faire yeah we don't know for sure what do you think? [People in shmoop boardroom]