Between Walras and Marshall: Menger's Third Way

Abstract

Neoclassical economics is bifurcated between Marshall’s partial-equilibrium and Walras’s general-equilibrium. Neoclassical theory having failed to explain the Great Depression, Keynes proposed a theory of involuntary unemployment, later subsumed under the neoclassical synthesis of Keynesian and Walrasian theories. Lacking suitable microfoundations, that synthesis collapsed. But Walrasian theory provides no account of how equilibrium is achieved. Marshallian PE analysis offered a more plausible account of how equilibrium is reached. But presuming that all markets, but the one being analyzed, are already in equilibrium, Marshallian PE, like Walrasian GE, begs the question of how equilibrium is attained. A Mengerian approach to circumvent this conceptual impasse, relying in part on Fisher's analysis of the stability of GE, is proposed.

Keywords: Menger, Walras, Marshall, general equilibrium, partial equilibrium, intertemporal equilibrium, macroeconomics, tatonnement, rational expectations, Lucas, Milgrom, Stokey, no-trade theorem, Keynes, neoclassical synthesis, Hayek

JEL Classification: B13, B22, B41, B53, E12, E13, E14, E32