Walras' Law of Markets

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.