Leon Walras
What is the role of money in Walras' general equilibrium and what determines the demand for it?Leon Walras is considered by many as the founder of the modern theory of general economic equilibrium. Money and its valuation is an important element in his Elements of Pure Economics of 1874. Money can be defined most basically as one type of circulating capital; the other is circulating physical capital. In this short essay, both the role of money in Walras' general equilibrium and how the demand for money is determined will be treated. Walras asserted that circulating physical capital yields utility according to its service of availability, that is, to the degree that it is readily available. Money likewise provides a service of availability as the commodity that physical capital is destined to purchase, and it yields the same amount of utility as physical capital. The service of availability that money provides and consequently its utility is, in my opinion, the essence of Walras' theory of money. Although he assigned other roles to the use of money as a medium of exchange and as an element of production for entrepreneurs, these roles are encompassed by service of availability. By yielding services of availab
It is not desired for itself, but is rather a facilitator of 'intertemporal' production and thus allocation. Although this essay dealt only briefly with the role of and demand for money and in a general equilibrium system, it has covered the basic ideas behind Walras's theory. The equilibrium prices of all commodities in terms of money are given by the role of money as numeraire and by the workings of the entire model that determine the ratio of exchange between each commodity and the numeraire. It is demanded insofar as it provides this service. Walras treated money as analogous to capital. Similarly, money is not desired for itself. Physical capital held by consumers and entrepreneurs is acquired with money. Walras defined the rate of interest as the price of the service of cash balances held for the acquisition of fixed capital, and the rate of discount as the price of the service of cash balances held for the acquisition of circulating physical capital (332). Capital, he recognized, is not a regular commodity. That is, income received between the present and the date of a future payment is for many firms and consumers insufficient to provide enough cash. He adjusted the utility functions for the service of money and observed that the rarete or value of the service of money changed in direct proportion. He adjusted the quantity of money and observed that the rarete or value of the service of money changed in inverse proportion, and that all prices changed in the same direction without any alterations in relative prices. Demand for MoneyTo analyze the demand for money it is necessary to understand the whole system. Thus, only insofar as it yields these "services" to consumers can we say that money yields utility. The rate of interest fluctuates according to the Walrasian pricing rule.
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