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The Concept of Labor Market in Léon Walras’ Pure, Social, and Applied Economics

Le concept de marché du travail dans l’économie pure, sociale et appliquée de Léon Walras
Kayoko Misaki
p. 419-438

Résumés

Cet article vise à clarifier comment Léon Walras (1834-1910) aborde le problème du travail (ou « la question sociale ») en se concentrant sur sa conception du marché du travail dans son économie pure, appliquée et sociale. Selon certaines interprétations théoriques, Walras, qui a fondé la théorie de l'équilibre général, a jeté les bases de la théorie salariale néoclassique. En effet, Walras était opposé aux grèves ouvrières pour un salaire plus élevé et au système de salaire minimum. Cependant, cela ne signifie pas qu'il était optimiste quant à la situation des travailleurs à son époque ou croyait que seuls les mécanismes du marché pourraient les améliorer. En fait, il est resté très déterminé à résoudre la pauvreté des travailleurs à partir de son concept d'économie pure (théorie de l'équilibre général) tout au long de sa vie. Dans cet article, l'accent est mis sur sa conception de l'entrepreneur non seulement dans son économie pure, sociale et appliquée mais aussi dans ses autres écrits. Il offre une clé pour clarifier la compréhension spéciale de Walras de la relation capital-travail, qui est complètement différente de celle de Karl Marx. En conclusion, cet article évalue la validité du système économique que Walras a imaginé à partir de sa réflexion sur le marché du travail, où il pensait que l'équité et l'efficacité pouvaient coexister.

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  • 1 Concerning these two fields, he published Études d’économie sociale (first edition in 1896) and Étu (...)
  • 2 For example, see Schumpeter ([1954] 1994, 827-828).

1Léon Walras’ research encompasses three fields: pure, social and applied economics. Pure economics seeks truth in theory, while applied and social economics seeks utility and justice, respectively, in real life. While Walras succeeded in theorizing his concept of pure economics with a general equilibrium analysis in Éléments d’économie politique pure (the first edition was published in 1874-1877; hereafter referred to as Éléments), his work on social and applied economics has remained unfinished.1 In the 20th century, Éléments received great praise and developed into the theoretical foundation of neoclassical economics, whereas his work on applied and social economics, where he discussed economic policies and social reforms, was largely neglected.2

  • 3 In this paper, all quotations from Walras’ works (originally in French) are translated by the autho (...)

2Léon Walras once used the term ‘oak trees’ to explain that he hoped his efforts to develop a pure economic theory would be rewarded in the long run and would eventually bring lasting benefits. In 1903, he mentions in a letter to a friend:3

We have to know what we want to do. If we want to harvest in the short term, we need to plant carrots and salads; and if we have the ambition to plant oak trees, we must be wise enough to say: my grandnephews will owe me this shading. (Letter to Louise George Renard, dated 13 April 1903, letter 1543 in Jaffé, 1965, vol. 3, 224-226)

3In the same letter, Walras refers to a PhD candidate who visited him to suggest a solution to the unemployment problem, and deplores her ignorance of pure economics by emphasizing that applied and social economics cannot be implemented without pure economics. Thus, to Walras, the social issue—and more specifically the worker-entrepreneur relationship on the labor market—must be highlighted and discussed keeping in mind the inseparable contribution of those three fields of economics, a stance he would maintain until the end of his career.

4Although Walras’ pure economics exercises great influence on today’s economic theory, only a few studies have been conducted on his thinking about the labor problem. It is true that Walras, who demonstrated maximum satisfaction of all market participants in pure economics, refused any intervention to determine wages on the labor market. He opposed workers’ strikes and the minimum wage system in his applied economics. However, it is a mistake to think that Walras was optimistic about the working-class conditions in his day and that he just believed in the market mechanism to improve it.

5So far, few studies have dealt with the way Walras tackled the labor problem in terms of his labor market theory based on pure, applied and social economics. Boson (1951), Dockès (1996) and Potier (1998) partly dealt with this question when they examined the entire structure of Walras’ economic thinking. Potier (2011) deals exclusively with Walras’ idea of the labor market and his proposals for social legislation by focusing on the evolution of his thinking in relation to the historical background and the debate with his contemporaries. My own approach departs from these studies by focusing on the interconnectedness of pure, applied and social economics regarding labor market discussions. In this particular paper, I argue that Walras’ various arguments concerning the labor problem and the determination of wages indicate that the specific function of the entrepreneur is the key to clarify and underline Walras’ consistency in articulating his ideas in the pure, applied and social fields.

6In order to clarify how differently Walras tackled the labor problem compared to contemporary socialists and to evaluate the validity of his economic system, this paper focuses on Walras’ concept of the labor market in pure, applied and social economics, paying special attention to the way he sees entrepreneurs.

1. Walras’ Concept of the Labor Market in his Pre-Lausanne Days

  • 4 See, for example, Morishima (1994). Walras, in fact, believed himself to be a ‘scientific socialist (...)

7I begin with Walras’ ideas on the labor market in the 1860s before he started his academic career and set out to develop his pure economics theory in mathematical form in Lausanne in 1870. During this period, Walras was involved in discussions and activities with contemporary socialists in France. Some scholars have put forward that there is a discontinuity between Walras’ ideas during this period and the success in pure economics he achieved in Lausanne.4 However, the consistency of Walras’ viewpoint will be clarified if we focus on his thinking about the labor market.

1.1 L’économie politique et la justice (1860): Belief in the Equal Exchange of Labor and Wage Between Worker and Entrepreneur

8In 1860, Walras published his first work on economics, entitled L’économie politique et la justice. This book was intended to refute the ideas of Proudhon and other socialists by giving Walras’ own vision of scientific socialism. In this book, Walras did not manage to propose his full conception of socialism but showed strong determination to improve conditions for workers, an ideal he would maintain throughout his career:

The idea of social order is that the worker, engaged in the work for which he is suited, succeeds in earning a living, meeting the present requirements, and preparing resources for the future by working eight or ten hours a day; and that he then has the leisure to cultivate his mind, to fulfil his heart’s desire, by setting aside his specialty or attempting to widen it. We hear complaints, which come from all walks of society, about mind-destroying and enslaving work, that is to say, excessive and poorly paid work. (Walras, [1860] 2001, 166)

9This quotation implicitly criticizes Proudhon for attributing the cause of poverty to the division of labor. According to Walras, working class poverty is mainly due to insufficient wages, constantly cut by taxes so that the problem cannot be overcome by more labor (Walras, [1860] 2001, 166). He continued to assert until the end of his career that taxing wages was the main cause of poverty and should be abolished, this being mainly advocated in his social economics (see section 4 of this paper).

10Walras also criticized Proudhon’s idea of ‘reciprocity’, which emphasized the division of producers between workers and masters and insisted on obtaining equality between product and wage (Walras, [1860] 2001, 185). According to Walras, ‘masters’ ceased to exist after the French Revolution. Society is now left with ‘entrepreneurs’ and ‘workers’ only, and entrepreneurs are not masters. Between entrepreneurs and workers, there is an exchange of wage for labor. The equivalence of labor and wage is achieved by the law of equality of the values exchanged. Here, Walras continues to explain how they exchange wage for labor of equal value on the market:

Yet the value of labor, as well as the value of wages, is established by the demand to supply ratio on the market. The worker who gives his time and effort for a certain price does so only if he cannot get a higher price. The entrepreneur, who gives a wage in return, agrees to give it only if he cannot give a lower wage. It is free competition that creates the market conjecture, determines all values and allows exchange to occur between equal values. ‘It’s free competition that sets a fair price for goods’, says Montesquieu. (Walras [1860] 2001, 185)

11From this quotation, it is clear that Walras believed in (1) equality between entrepreneurs and workers on the labor market and (2) fair wage determination by free competition. To the end, Walras never abandoned these two beliefs. If we merely consider these two ideas, Walras seems to be an optimistic liberalist advocating laissez-faire principles on the labor market. However, nothing could be farther from the truth. In order to understand Walras’ real intention, we must note that he mentions ‘entrepreneurs’ rather than ‘capitalists’ as counterparts to ‘workers’ on the labor market. The distinction between entrepreneur and capitalist is a key point in order to clarify both his wage determination theory in pure economics and his plan to encourage workers to become capitalists in the cooperative union in which he was engaged in the late 1860s.

1.2 Walras’ Goal in the Cooperative Movement: Assimilating Workers to Capitalists

12In January 1865, Walras joined the foundation and administration of the Cooperative Credit Union (La Caisse d’escompte des Associations populaires de crédit, de production et de consommation) whose founder and president was Léon Say (1826–1896), the future French Minister of Finance. Some of Walras’ lectures for workers of the Union were published as Recherche de l’Idéal Social in 1868, later reproduced in his Etudes d’économie sociale in 1896.

  • 5 This idea of assimilating workers with capitalists can be found not only in Walras’ writings during (...)

13In these lectures, Walras insisted that his first goal was to encourage workers to accumulate capital through saving (Walras, [1865] 1990, 22), and that one of the most important solutions to pauperism was to help these workers become capitalists. The Union workers were forced to save more money, which was deducted regularly from their wages. This was made possible, allegedly, thanks to the decrease in purchase prices by buying on a large scale, which allowed Union workers to buy everyday commodities at lower cost and therefore save more money. At the same time, higher labor productivity would allow Union workers to be paid higher wages and save more. The capital would go to loans for industrial endeavors managed by the Union workers individually. The interest paid by debtors was supposed to be divided among Union workers according to their holdings. On the credit market, the rate of interest might increase too much to be paid from wages. In that case, the Union could become their collective guarantor. Therefore, Walras attempted to lower the price of products, raise wages and lower the rates of interest to encourage each worker to be a capitalist.5

14Despite Walras’ zeal, the Cooperative Credit Union went bankrupt in 1868. In his autobiography, he explains that the Union stubbornly pursued a policy of higher wages and low prices for everyday commodities but never worried about capital (Walras, [1893-1909] 2001, 15). Instead, Walras insisted that they should accept the wage determined by free competition on the market, which caused serious disagreement with his colleagues in the Union (Walras, [1893-1909] 2001, 14). However, if wage determination was left to free competition, wages might decrease indefinitely because, on the real market, workers are powerless. Walras had already acknowledged these serious issues when he published L’économie politique et la justice (1860) (Walras [1859] 2001, 120 and Walras [1860] 2001, 280). Later, in his work on pure economics, he would seek to develop the market model that achieves ‘the law of equality of the values exchanged’ without arbitrary power in his theory of pure economics.

2The Labor Market in Walras’ Pure Economics: The Distinction Between the Role of Capitalists and the Role of Entrepreneurs

15In 1870, Walras secured a teaching position in economics at the Lausanne Academy (now the University of Lausanne) and became professor in 1871. He started to develop his theory of pure economics in mathematical form and proposed a general equilibrium analysis. This new theory is part of his main work, Éléments d’économie politique pure, which was first published in 1874-1877. In this section, I examine how Walras explains the labor market and wage determination in this work, paying special attention to the clear distinction made between entrepreneurs and capitalists.

2.1. The Definition of Classes

16In the preface to Éléments, Walras defines pure economics as “the theory of the determination of prices under a hypothetical system of absolute free competition [libre concurrence absolue]” (Walras, [1874-1877-1900] 1988, 11). For Walras here, prices including wages, meant the price of all material or immaterial things which are scarce (both useful and limited in quantity) and hence part of the ‘social wealth’, as objects of pure economics as he saw it. I begin by looking carefully at Walras’ classification of social wealth according to the theory of production in Éléments, as this helps understand the specific nature of his analysis of the labor market.

  • 6 Therefore, in his pure economics, Walras used the French word ‘profit’ to refer to capital services (...)

17Walras divided social wealth into two categories: ‘capital’ and ‘income’. Capital is defined as all durable goods belonging to three categories: land, personal faculties and capital proper. Income is defined as all non-durable goods and services. Services fall into two groups: consumer services and productive services, the latter being transformed by agriculture, industry and commerce into products. Capital gives rise to services. Land yields land services (‘rente’ in French), personal faculties yield services provided by individuals, which he calls labor (‘travail’ in French), and capital proper yields capital services (‘profit6 in French). Holders of land, personal faculties and capital proper are called landowners, workers and capitalists, respectively. The prices of services derived from three types of capital—land, personal faculties and capital proper—are respectively called rents (‘fermages’ in French), wages (‘salaires’ in French) and interest (‘intérêts’ in French).

18Walras considers a wage as a price for a productive service, and its determination is explained in the same way as for all other productive services in Éléments. Here, contrary to common custom at the time, Walras uses the term ‘capital’ to refer not only to capital goods proper but also to land and personal faculties. Landowners, workers and capitalists are also classified as ‘capitalists’ in a broad sense because they are holders of capital according to Walras’ definition. With the definition latter, he intended to challenge the common classification of production factors, namely land, labor and capital, and show the homogeneity or equality of the owners of these factors, that is, landowners, workers and capitalists, on the market. Furthermore, he laid the ground for thinking about the price determination of these services along a single line of argument.

19The "entrepreneur", the fourth person who appears in the theory of production, is given a totally different role from that of the three classes above.

2.2. The Entrepreneur

20According to Walras’ definition of the theory of production, the role of the entrepreneur is to lease land from the landowner, hire personal faculties from the worker and borrow capital from the capitalist in order to combine these three productive services in agriculture, industry or commerce. On the service market, landowners, workers and capitalists are seen as sellers, and entrepreneurs are seen as buyers of various productive services. On the product market, entrepreneurs are seen as sellers whereas landowners, workers and capitalists are seen as buyers.

  • 7 Walras’ particular distinction between the French words ‘profit’ and ‘bénéfice’ gave rise to misund (...)

21Here, the action of landowners, workers and capitalists to offer productive services and products on demand are based on the desire to obtain maximum satisfaction. In the state of equilibrium, their satisfaction should be maximized. On the other hand, an entrepreneur is mainly driven by the desire to avoid losses and make profit (‘bénéfices’ in French)7.

  • 8 In the 20th century, a number of scholars have misinterpreted Walras’ distinction between the entre (...)

22Under free competition, as long as the decisions of an entrepreneur result in profits, he will enter this branch of production or expand his output in order to increase the quantity of product, thus reducing its price and the difference between price and cost (and reciprocally in case of losses). When production is at equilibrium, the selling price and the unit cost will be equal, which means that the entrepreneur’s profit will be equal to zero. The assumption of the zero-profit entrepreneur has caused much controversy because if the entrepreneur earns nothing, he is unable to make a living. Walras explained that in reality, capitalists, workers and landowners are supposed to play the role of entrepreneurs (Walras, [1874-77-1900] 1988, 284). For Walras, the essential point in pure economics is that the role and income of the entrepreneur are clearly distinct from those of the capitalist and the worker.8

23Interestingly enough, Walras points out that both profits and entrepreneurs themselves could disappear.

In this situation, we can even disregard the intervention of entrepreneurs and can not only consider productive services as being exchanged for products and products for productive services, but also even consider productive services as being exchanged directly for one another, all things considered. (Walras, [1874-1877-1900] 1988, 284)

  • 9 On this point, see also Misaki (2012).

24We may conclude that, in Walras’ pure economics system, the entrepreneur is not a real person but a function. The entrepreneur and the three classes identified by Walras are always in a symmetrical position when determining the price of products and productive services. Thanks to the entrepreneur, all three classes can be regarded as equal on the market. This makes it possible to explain how the price of all services—rent, wage and interest—is determined based on the same principle. The entrepreneur’s raison d’être is to ensure the connection or mediation between the product and the service markets. This leads Walras to show that the price of services is determined in the same way as for products.9

  • 10 This is from the public lecture, entitled ’Système des phénomènes économiques’, given in Geneva in (...)

25It may be useful to point out that Walras also used this representation of the entrepreneur to criticize the wage fund theory of the English Classical School. Before the publication of Éléments, he emphasized that:10

The English school has not understood the role of the entrepreneur. He is an intermediate that can be disregarded. Landowners, workers and capitalists, are sellers of land services, labor and capital services as well as buyers of land services, labor and capital services. Thus, the value of land services, labor and capital services is determined on the market. Always the theory of capital and income.
It is therefore incorrect to say that:
the wage rate is determined by the population to capital ratio. (emphasized in the original publication) (Walras, [1872] 1993, 473)

2.3 The Homogeneity of Land, Personal Faculties and Capital Proper: Did Walras Approve of Slavery?

26As we have seen, Walras assumed that the three types of capital—land, personal faculty and capital proper—were equal when determining the price of the services provided. Rent, wage and interest are determined in the productive service market on the same principle. This assumption of homogeneity of the three kinds of capital leads to an important question: did Walras consider that the determination of the price of personal faculties on the market was the same as for the price of land and capital proper? This issue is closely related to whether he approved or disapproved of slavery.

27Indeed, in the theory of production in pure economics, Walras referred to this question:

When saying that persons are a natural capital and that they replenish after a generation which has reproduced itself, we must take into account the principle of social morality, which is more and more generally accepted, that persons should neither be bought nor sold like things and that they cannot be bred in farms like cattle or horses. For this reason, one could think it is useless to include this in the price determination theory. However, first of all, even if personal capital is not exchanged, personal service—in other words, labor—is offered and demanded on the market every day and the personal capital itself can and should be at least evaluated. Moreover, let us not forget that pure economics is primarily founded in order to disregard the point of view of justice and interest, and to consider personal capital, like land and capital proper, exclusively from the point of view of their exchange value. We will therefore continue to speak of the price of labor and even the price of persons without prejudging anything, either for or against slavery. (Walras, [1874-1877-1900] 1988, 270-271)

  • 11 For example, Auguste Ott (1814-1903) criticized Walras’ idea of homogeneity by making reference to (...)

28Indeed, in the theory of capital formation, which follows the theory of production in Elements, Walras discussed the determination of the price of newly produced capital goods and the rate of net income. As a result, theoretically, the price of persons or personal faculties can also be determined according to the same principle in his general equilibrium theory. Walras did not deny this and avoided the argument for or against slavery in his pure economics. This caused much controversy among his contemporaries and he was harshly criticized11.

  • 12 On this point, see also Dockès (1996, 57).

29However, Walras’ reference to slavery in pure economics never meant that he approved of it in reality. In his lecture notes on social economics, he clearly states that slavery goes against both justice and utility (Walras, 1996, 200). As Walras explains in the quotations above, we must note that the homogeneity of the three kinds of capital was established with the specific methodological assumption of pure economics, which is free of any values, including justice. Walras did not necessarily believe in the actual homogeneity of the three classes12. Therefore, we should seek the answer to how Walras tried to construct the real labor market in his applied and social economics rather than in his pure economics.

3. Labor Market Policy in Applied Economics: The Necessity for State Intervention and the Objection against Strikes

30Walras’ general equilibrium analysis shows that in a competitive environment, the price of services and products at equilibrium are interdependent. This implies that all agents—landowners, workers and capitalists—generically classified as capitalists, are also equal in the sense that they are all price-takers. Under free competition, nobody can exercise arbitrary power to determine prices. It seems that this pure economics conclusion is rooted in Walras’ earlier belief that fair wage determination results from free competition. It also reinforces his objection against strikes for higher pay by labor unions, which he expressed in his writings on applied economics.

  • 13 It was published in Revue d’économie politique, December 1897.

31In Etudes d’économie politique appliquée (1898), the chapter in which Walras revealed his opinion about labor market policy is entitled “The applied economics of defending wages” (“L’économique appliquée de la défense des salaires”), which was first published in 1897.13 In this chapter, Walras criticizes laissez-faire doctrines and explains why state intervention is necessary in order to organize the labor market, while insisting on the wage determination by free competition and never permitting workers to strike for higher pay (Walras, [1898] 1992, 256).

Regarding wages and working conditions, the real solution is the suppression of strikes by means of rational State intervention to be exercised here in order to improve the functioning of the product and service markets. We must boldly react against an old political economy that gives laissez faire the scanty meaning of doing nothing with the pompous name of freedom of work. (Walras, [1898] 1992, 254; emphasized in the original work)

32Walras explains conflicts between entrepreneurs and workers by comparing the labor market to the stock market. No strikes occur between entrepreneurs and capitalists on the stock market because it is comparatively well-organized. Consequently, conflicts between entrepreneurs and workers arise from insufficient organization of the labor market. Strikes can be avoided if the State intervenes to organize free competition. Therefore, in his applied economics system, Walras never sees the conflict between capitalists and workers because he sees the entrepreneur as an intermediate.

  • 14 See Potier (1998) for details.

33Walras insists that his notion of organized free competition is totally different from that of ‘laissez-faire’.14 His applied economics can be read as an inquiry into the possibility of organizing free competition in the real economy, having established the efficiency of absolute free competition in pure economics.

34The question that arises is how Walras identified the methods for organizing free competition on the labor market. Unfortunately, there are only fragments of discussion on this matter in Walras’ writings. In “L’économique appliquée de la défense des salaires”, Walras suggests methods of State intervention.

35Referring to the labor supply function in pure economics, Walras draws attention to the fact that it is different from reality. Since working hours tend to be endlessly extended in the laissez-faire system (Walras, [1898] 1992, 253) he insists that the State should intervene to curtail them.

36Walras also suggests that the State should encourage the mobility of workers.

In order to achieve or maintain the production equilibrium with respect to wages, in the final analysis, we must turn the labor away from companies where wages tend to decrease toward companies where wages tend to increase.

This is the general formula to solve the problem of wage determination in free competition. (Walras, [1898] 1992, 255; emphasized in the original text)

37Therefore, Walras encouraged free competition to be organized on the labor market but never accepted that an agent might exercise arbitrary power to influence price determination on the service market. For the same reason, he was opposed to idea of minimum wage (Walras, [1898] 1992, 261). He insisted heavily on the fairness and economic advantage of wage determination by free competition.

  • 15 See the 28th lesson: “On Coalitions and Strikes” (“Des coalitions et des grèves”) and the 29th less (...)

38We can find the same idea in Walras’ lecture notes on applied economics at the University of Lausanne.15 He rejects workers uniting against entrepreneurs to demand higher pay, by showing that entrepreneurs and workers are equal in the free competition mechanism. He also emphasizes that it cannot satisfy the interest of workers and recommends that workers should use individual methods to keep their income or cut expenses (Walras, 1996, 585-586). The first method is to avoid increasing the labor quantity by careless increase of the population. Walras warns workers not to marry or start a family until they have enough to live on, which is reminiscent of the Malthusian idea. Walras adds that freedom of work does not exclude the right of the State to establish laws and regulations on the work of women and children in factories in order to protect their dignity. The second method is to increase labor productivity by developing general and special education so that workers might easily overcome the inconvenience of using machines and take full advantage of that. The State can also intervene by giving free public lectures. The final method is to look for all the resources available in the cooperative union.

39Therefore, Walras never abandoned the idea that workers should accept the wage determined on the service market. At the same time, he insisted on the right of workers to receive their full wage. In the same lecture notes, he states that:

As a worker, the worker only has the right to have his wage debated freely under the same terms as those of entrepreneurs on the market of productive services. But we believe, for example, that he has the right to receive his full wage. (Walras, 1996, 585)

4. Walras’ Criticism of Marx in his Social Economics: Do Profits and Interest Result from Exploitation?

40Walras dealt with the abolition of taxes on wages mainly in his social economics system.

41In his “Recherche de l’idéal social” (“Search for the Social Ideal”), reproduced in his Études d’économie sociale, we find his ideas on the matter unchanged since the 1860s.

I call proletarian the man who lives exclusively from his labor and for whom taxes remove the only portion of the wage he could save to become an owner or a capitalist as well as a worker. I have already shown that wage is actually the only kind of social wealth on which the right of individual property is rigorously established; I will show later that wage is, among all types of social wealth, the one which bears the main tax burden. Whatever it is, is this deduction fair? (Walras, [1896] 1990, 126)

  • 16 On the methodological significance of Walras’ idea of distribution between the State and individual (...)

42It is well-known that Walras advocated the nationalization of land in his social economics. He assumed that the abolition of all taxes would be made possible with this plan, because the State could pay all public expenses with the revenues obtained as landowner. He also believed that in a progressive society where rents were higher due to the increasing scarcity of land services, the State would be able to cover the rise in expenditure associated with population growth.16

43In Walras’ social economics, another point that deserves attention is Walras’ critique of Marx, which shows how Walras defended his own plan of scientific socialism, including wage determination under free competition, against contemporary socialists after the publication of Éléments.

4.1. Walras Regarded Marx’s Capitalist as the Capitalist-Entrepreneur

  • 17 Walras read the first volume of the Capital, but probably not the second or third volume, for which (...)

44We can find Walras’ definitive comments on Marx in chapter 5 of his Études d’économie sociale, entitled “The Theory of Property”. Walras became interested in Marx in the 1880s and wrote his theory of property shortly thereafter though it was first published in 1896 in Revue Socialiste.17

45In “The Theory of Property”, based on the classification from the theory of production in Éléments, Walras defines Marx’s ‘capitalist’ as a ‘capitalist-entrepreneur’. Walras explains that Marx assumes the State takes over the entrepreneurs of all sectors in order to prevent exploitation by private capitalist-entrepreneurs.

46Walras aims to point out several defects in the Marxist system from a practical perspective. One of them is the impossibility of measuring the scarcity of land services.

47Because Marx’s theory of value assigns no value to land services, it cannot make supply equal to demand in the case of products with a high utility, based on a high quality of land services.

48Walras gave as an example the production of Chateau-Laffite wine (Walras, [1896] 1990, 199). If the average cost of Chateau-Laffite is only based on the labor required for its production, demand for the wine will exceed its supply. Consequently, the distribution of the wine will be impossible and production will cease. He concludes that in a Marxist system, entrepreneurs must abandon production of all products for which land services are needed and which do not exist in such large quantities that their distribution is possible at the average cost of labor (Walras, [1896] 1990, 200). Walras points out that it would bring about a considerable loss of utility, in an amount equal to the decrease in the sum of satisfaction of demand on the part of people able to consume superior products (e.g., wine), if they were available, but who must instead consume inferior products (e.g., cider or beer).

  • 18 On this point, see also Dockès (1996, 183).
  • 19 Some scholars acknowledged their similarities. For example, see Blaug (1996, 258).

49Here we can see that Walras regarded Marx’ labor theory of value merely as the theory of production cost measured by labor.18 As we have seen, in Walras’ pure economics, there is a distinction among personal faculty, labor as a productive service and wage as its price. In this framework, Walras did not explain accurately Marx’s distinction between labor and labor-power and his exploitation theory based on the theory of surplus value. As a result, he failed to show the critical difference between these concepts on the labor market. As we know, for Marx, it is not labor but labor-power that is sold and bought on the labor market. For Walras, it is generally labor that is offered and demanded on the labor market. As we have seen in section 2.3 of this paper, Walras theoretically assumed the presence of a market for personal faculty only in pure economics, but we cannot regard Walras’ personal faculty to be the same as Marx’ labor-power.19 We will see in section 4.2 how Walras’ explanation of exploitation is very different from that of Marx.

50Walras points out that another defect of the Marxist system is the inability of the State entrepreneur to know beforehand which products to produce and which to eliminate. He explains that such knowledge would in turn require advanced knowledge about consumer demand.

In the Marxist system, how will the state-entrepreneur know in advance which products can appear on its list and which ones need to be eliminated? To settle this point, it would not only need the elements concerning supply, which it may be able to calculate, but would also need those concerning demand, i.e. the needs of consumers, which they cannot predict because they can change from one moment to another. (Walras, [1896] 1990, 200)

51Walras insisted that this problem does not exist in the market system of price determination because price variations equilibrate supply and demand. In contrast, in the Marxist system, where prices are invariable, if demand is less than supply, the excess must be discarded. He explained that Marx’ system therefore sacrifices economic advantage in order to prioritize justice—in other words, to prevent the exploitation of workers by capitalist-entrepreneurs.

4.2. The True Causes of Injustice: Private Landownership and Monopoly

52I now wish to examine how Walras answered the question of exploitation or income inequality resulting from the determination of market prices for productive services or for rents, wages and interest in his criticism of Marx.

53Walras admits that, in a market system, rents for land in Médoc and wages for author Alexandre Dumas may be high. With regard to the latter, Walras insists that it is a fair distribution because Dumas owns his personal faculties and therefore the high wages paid for his services are adequate. In contrast, he is strongly opposed to private landownership and insists that the land in Médoc has been given to all of us and that the high rents for its service should therefore belong to the state. He explains that, thanks to these rents, free public services will be provided and in a progressive society, rent will rise proportionally to the scarcity of land services.

54Now, let us focus on how Walras considers the inequality that could result from ownership of capital proper and capital services. Unlike other contemporary socialists, Walras supports the private ownership of capital and the market determination of the price of capital service or of interest. However, he makes exceptions. Walras insists that capital services should be owned by individuals only when they are created by wages and that they should be owned collectively when they are created by means of State rent. Therefore, Walras insists that the true cause of injustice is the rent earned by private landowners, which, in a progressive society, increases in proportion to land service scarcity rather than the interest of capital, which is in general derived from the savings of workers.

55In addition to the private ownership of land, Walras points to monopolies as the cause of injustice because they allow entrepreneurs to fix the quantities to be produced at a price above average cost. He adds that the source of American multimillionaire fortunes at that time was speculation on the increase of land value and the operation of businesses without competition (Walras, [1896] 1990, 205).

56Walras concluded his critique of Marx by referring to a rational society without landownership and monopolies.

In a rational society, without land ownership and monopolies, the capital of individuals generally results from individual savings only, that is to say, from an excess of wages relative to consumption; it does not result from exploitation by entrepreneurs of product buyers or owners of productive services, since the likelihood of profits and the risk of loss for these entrepreneurs are correlative, and, apart from inventions and improvements, are balanced in the end. (Walras, [1896] 1990, 205)

57Therefore, Walras explains that the profit (bénéfice) earned by the entrepreneur cannot be the result of exploitation because it is reciprocal with loss. One can say that this is what he meant by the zero-profit entrepreneur in his theory of pure economics.

58He goes on to say:

Therefore, in a rational society, we should imagine the mass of capital that does not belong to the State as being in the hands of the workers, in small fractions, in the form of shares, bonds of various companies, and especially cooperative enterprise bonds, adding to the well-being of the present, ensuring future security, preparing the remaining future. (Walras, [1896] 1990, 205)

59In his Notes d’humeur, Walras summarizes his stance with respect to the Marxist view:

Not to abolish capital and capitalism. But to make everyone a capitalist. (Walras, 2000, 575

4.3. Walras’ Own Collectivism Versus Communism

60As we have seen in Section 3, Walras rejects strikes for higher pay in “L’économique appliquée de la défense des salaires”. Here we must note that, in this chapter, Walras advocates the possibility of his own form of collectivism based on the state-entrepreneur.

All enterprises could be supposed to be collective, while all enterprises cannot be assumed to be individual. Collectivism in production is practically possible and would not constitute in itself anything contrary to freedom, equality, order or justice. There is only a simple question of social utility. However, it is certain that even under collectivism where the State was the sole entrepreneur, the price of labor of personal faculties, of land services and of capital services should a fortiori be determined on the market for services, by bidding up in case of excess of demand over supply, and bidding down in case of excess of supply over demand, as one would do for the price of products. In our ideal conditions of distribution and production, wage-earning, selling labor for services at a contracted price on the service market, remains and, in this respect, our form of collectivism would not be communism. (Walras, [1898] 1992, 251; emphasized in the original text)

61Walras’ idea of the state-entrepreneur is intended to prevent a private entrepreneur from earning extra profits by arbitrary output control in the case of a monopoly. Walras believes that this plan, combined with the nationalization of land, could eliminate injustice. At the same time, he insists that the prices of productive services (rents, wages, interest) and of products should be determined on markets in order to provide economic advantage.

  • 20 Referring to Stalinism, Boson (1963) points out that Walras encouraged an economic policy that was (...)
  • 21 However, Walras did mention that, if there was a contradiction between justice and economic advanta (...)

62Therefore, Walras defends the mechanism of wage determination by the market and emphasizes that the existence of the labor market is the crucial point that differentiates his system from communism.20 Concluding that Marx’ system sacrifices economic advantage in order to prioritize justice, Walras presents his own version of collectivism, in which justice and economic advantage coexist.21 

5. Concluding Remarks

63As we have seen by examining the role of the entrepreneur in Walras’s concept of the labor market in his pure, social and applied economics, we can clarify the special nature of his understanding of the capital-labor relationship. Walras supposed neither an opposition between capitalists and workers nor the exploitation of the latter by the former. Walras encouraged the assimilation of workers to capitalists with the aim of improving their conditions. He explained that the real injustice was not caused by capital ownership itself but by private landownership and monopoly.

64The significance of Walras’ criticism of Marx cannot be fully understood by the theoretical opposition of the neoclassical and Marxist approaches. In pure economics, Walras clearly made abstraction of the particularity of the labor market by emphasizing the homogeneity of land, personal faculty and capital proper on the market, and by using the special role of the entrepreneur as an intermediate. However, this homogeneity of the three classes and that of all markets never meant that Walras saw a real economy as harmonious without conflicts between workers and the other classes, and that he advocated the laissez-faire principle on the labor market.

65The aim of this paper was to clarify the real implication of Walras’ definition of the capitalist and the worker by examining the role of the entrepreneur in a real society, or his own version of collectivism achieved by the state-entrepreneur.

66However, in this paper, there are still questions that remained to be tackled regarding Walras’ special understanding of the capital-labor relationship. First, we pointed out the steadiness of the concept of labor market throughout his work, but we did not discuss the origin of Walras’ thinking, in other words, the influence of his father, Auguste Walras, and other French economists on his conception of the entrepreneur, the capitalist and the worker. Secondly, I did not enter into a detailed discussion of Walras’ interpretation of Marx’ exploitation theory. It is debatable to what extent Walras actually understood its meaning in the development of his pure, social and applied economics. Thirdly, in this paper, I have referred to the theoretical opposition of neoclassical and Marxist approaches, but I have not mentioned the difference between Walras’ wage determination theory and the theories of the other marginalists (Jevons and Menger). The argumentation in this paper constitutes an important step towards a fuller study of this issue.

67Finally, even if I have succeeded in explaining how Walras sought fairness and efficiency in his social and applied economics, the question of how the State in Walras’ collectivism can have so many roles based on different values and incentives remains to be debated. As we have already seen, even if we limit the improvement of conditions for workers, Walras’ State is given such roles as those of organizer of free competition in the labor market, legislator of labor laws, supplier of national education, as well as the roles of entrepreneur and landowner. In other words, the State is both organizer and regulator of the market, and at the same time, one of the participants in the market. As such, when evaluating the relevance of Walras’ thinking on collectivism to modern labor problems, the issue of the State as a ‘black box’ should certainly not be avoided.

The first version of this paper was read at the Wage Workshop ‘Theoretical, Empirical and Historical Perspectives on Wage, Subsistence and Basic Income’ held at the University of Lausanne, 29-30 September 2016. I am grateful to the participants for their inspiring comments. I also would like to thank the journal’s two anonymous reviewers for their insightful and helpful comments. This study was supported by the Japan Society for the Promotion of Science (JSPS) KAKENHI Grant Numbers JP26380257, JP17K03642.

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Notes

1 Concerning these two fields, he published Études d’économie sociale (first edition in 1896) and Études d’économie politique appliquée (first edition in 1898). These are collections of papers he wrote on the subject from he began research.

2 For example, see Schumpeter ([1954] 1994, 827-828).

3 In this paper, all quotations from Walras’ works (originally in French) are translated by the author.

4 See, for example, Morishima (1994). Walras, in fact, believed himself to be a ‘scientific socialist’, seeing pure economics as its foundation. This is one of the main purposes of the lecture “Ruchonnet et socialisme scientifique” that he delivered at his Jubilee in 1909 to reassert his ideas (Walras [1909]1987, 504-514).

5 This idea of assimilating workers with capitalists can be found not only in Walras’ writings during this period, but also in his lectures on applied economics at the University of Lausanne. See Walras ([1866] 1990, 172) and Walras (1996, 704) for further details.

6 Therefore, in his pure economics, Walras used the French word ‘profit’ to refer to capital services (Walras, [1874-77-1900] 1988, 264-265). In this paper, the word ‘profit’ corresponds to Walras’ bénéfice’ in the original French edition, as well as in Jaffé’s translation (1954, 212).

7 Walras’ particular distinction between the French words ‘profit’ and ‘bénéfice’ gave rise to misunderstandings. Charles Gide, in his Principes d’économie politique (6th edition, 1898) referred to Walras’ ‘bénéfice as ‘profit in French (Gide, 1898, 537-538), when he explained Walras’ concept of the entrepreneur. In Notes d’humeur, Walras pointed out that Gide’s ‘profit corresponds to Walras’ ‘bénéfice’. He judged inaccurate Gide’s assertion that entrepreneurs could make profit solely from monopolies and that profit should therefore be abolished (Walras, 2000, 539).

8 In the 20th century, a number of scholars have misinterpreted Walras’ distinction between the entrepreneur and the three market classes he identified (landowners, workers and capitalists). For example, see Misaki (2004) for a criticism of Morishima’s definitions of the entrepreneur and the capitalist in Morishima (1977).

9 On this point, see also Misaki (2012).

10 This is from the public lecture, entitled ’Système des phénomènes économiques’, given in Geneva in 1872.

11 For example, Auguste Ott (1814-1903) criticized Walras’ idea of homogeneity by making reference to slavery in his book review of the second version of Elements in 1890. For a broader account, see Bridel (1996, 335)

12 On this point, see also Dockès (1996, 57).

13 It was published in Revue d’économie politique, December 1897.

14 See Potier (1998) for details.

15 See the 28th lesson: “On Coalitions and Strikes” (“Des coalitions et des grèves”) and the 29th lesson: “On the Labor-Capitalist Relationship” (“Des rapports du travail et du capitaliste”) in Cours d’économie politique appliquées (Walras, 1996, 579-587).

16 On the methodological significance of Walras’ idea of distribution between the State and individuals through the nationalization of land and the abolition of taxes, see Lallement (2014).

17 Walras read the first volume of the Capital, but probably not the second or third volume, for which there was no French translation at the time (Walras, L., 1990, 448). The editor of Revue Socialiste was one of Walras’ best friends, George Renard (1848-1930).

18 On this point, see also Dockès (1996, 183).

19 Some scholars acknowledged their similarities. For example, see Blaug (1996, 258).

20 Referring to Stalinism, Boson (1963) points out that Walras encouraged an economic policy that was less totalitarian than Marxian collectivism by respecting individual initiative (Boson, 1963, 96).

21 However, Walras did mention that, if there was a contradiction between justice and economic advantage, he, like Marx, would prioritize justice (Walras, [1896] 1990).

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Kayoko Misaki, « The Concept of Labor Market in Léon Walras’ Pure, Social, and Applied Economics », Œconomia, 8-4 | 2018, 419-438.

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Kayoko Misaki, « The Concept of Labor Market in Léon Walras’ Pure, Social, and Applied Economics », Œconomia [En ligne], 8-4 | 2018, mis en ligne le 01 décembre 2018, consulté le 14 octobre 2019. URL : http://journals.openedition.org/oeconomia/3116 ; DOI : 10.4000/oeconomia.3116

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Auteur

Kayoko Misaki

Faculty of Economics, Shiga University, kayoko@biwako.shiga-u.ac.jp

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