Walras’s law is an economic principle that suggests that the existence of excess supply in one market for a certain good must be balanced by an excess demand for a different good in another market in order for the two forces to balance out. In that regard, an examined market must be characterized by equilibrium, provided that other markets are balanced. It was developed by Leon Walras, a French economist who lived between 1834 and 1910. A balance between supply and demand is important for the achievement of a state of market equilibrium. The law is founded on equilibrium theory that suggests that a state of equilibrium is achieved if excess supply and demand forces are evened out. The principle of the invisible hand offers an explanation for the application of the law. In instances of excess demand, the invisible hand raises prices and decreases prices during times of excess supply in order to create equilibrium. He argued that producers are rational in their responses to fluctuations in interest rates. High rates lead to reductions in production and lower rates lead to increased investments in manufacturing. These dynamics are based on the assumptions that organizations’ main goal is profit maximization while consumers are concerned with the fulfillment of their self-interests. Walras’s law has been widely criticized because of the difficulties experienced by economists in their efforts to formulate it into a mathematical equation.
Say’s law is a classical economics principle which states that the production of a good creates its own demand among consumers. Moreover, it elicits demand due to the value that it creates, creating an opportunity to exchange it with another good. In that regard, demand originates from the production of goods. The law suggests that the main method of enhancing economic growth is by increasing production and not demand. Economists like James Mill and David Ricardo have made key contributions that have expanded the law. The production of goods generates wages for workers and earnings for investors. As such, the process has increased wealth that increases the people’s ability to buy other goods in the market. This law is different from Walras’s law in different ways. First, while Walras’s law focuses on the importance of equilibrium between supply and demand, Say’s law states that the two forces can be either equal or unequal. A general equilibrium must be maintained in order for the macroeconomic to function optimally. It is impossible for a market to be out of equilibrium while all the other markets are in equilibrium. Second, Walras’s law can be expressed mathematically, while Say’s law cannot. The latter is an economic theory that can only be argued verbally without the use of a formula. Third, Say’s law focuses on the relationship between production and demand while Walras’s law focuses on market equilibrium that is created by demand and supply forces.
References
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