Theory of Capital and Cambridge Controversies

Abstract

In our analysis of the structure of the neoclassical theory, we stated that the theory is, usually, advanced in three stages: In the first stage, the discussion is limited to pure exchange, where the individuals (or households) are endowed with various commodities and their differences in preferences induce them to exchange these goods in their effort to maximise their utility. Walras’s contribution was that he managed better than any of his contemporaries to incorporate the (new) utility theory into an explicit model of a pure exchange economy. In such a model, given the preferences of individuals and the initial endowment of goods, we form the demand of each and every individual and then, by aggregating the demand curves of all individuals, we get the total social demand. The model of pure exchange economy is used only for instructive purposes and is restricted to showing the attainment of general equilibrium; a more realistic analysis, besides exchange, should include production.