Translated by Robert Chapeskie and Kayoko Misaki

English Translation Series: Japanese Historians of Economic Thought 〈11〉

Eiichi Sugimoto, The Explicationof Modern Economics

Translated by Robert Chapeskie and Kayoko Misaki

Introduction by Kayoko Misaki

Eiichi Sugimoto’s The Explication of Modern Economics （Kindaikeizaigaku no Kaimei） was published in 1950 and is still widely read in Japan. It was written mainly for students to present the theoretical characteristics of the modern economics schools along with their historical viewpoints without us-ing mathematics. With this translated excerpt we aim to show how in this work Sugimoto explained the Lausanne School and general equilibrium theo-ry on the basis of their intellectual context.　　The Explication of Modern Economics is composed of two volumes.

Volume 1: The Genealogy and Current Evaluation ［of modern economics］Introduction: Attitudes towards the Study of EconomicsChapter 1. The Formation of Modern EconomicsChapter 2. The Genealogy of Modern EconomicsChapter 3. The Austrian School （Marginal Utility School）Chapter 4. The Lausanne School （General Equilibrium School）Chapter 5. The Cambridge School （Neoclassical School）

Volume 2: The Modern Mainstream and New Developments.Chapter 1. The Contemporary Legacy of Modern EconomicsChapter 2. The School of Keynes and its developmentChapter 3. The Fundamental Characteristics of Marxian EconomicsChapter 4. The Present State of Econometrics

The History of Economic Thought, Vol. 62, No. 2, 2021. Ⓒ The Japanese Society for the History of Economic Thought.

Chapeskie and Misaki: Eiichi Sugimoto, The Explication of . . . 27

　　Here we translate the first volume’s fourth chapter, “The Lausanne School,” as well as Section IV, “The Empirical Scientific Development of Marginal Utility Theory by Walras” of Chapter 3, “The Austrian School.”　　The author, Eiichi Sugimoto （1901-1952）, is known as a Marxian econ-omist, a critic of general equilibrium theory and a pioneer of econometrics in Japan. He studied economics at Tokyo University of Commerce （now Hito-tsubashi University） from 1919 to 1925, mainly under Tokuzo Fukuda （1874-1930）. Fukuda was the most eminent economist in Japan at that time

and played a primary role in the education of many pioneers of modern eco-nomics.　　Sugimoto read Marx’s Das Kapital in Fukuda’s seminar in 1922 and at first studied Marxian crisis theory. Fukuda rated Sugimoto’s work and person-ality highly, although he was anti-Marxist himself. In 1929, thanks to Fukuda’s efforts, Sugimoto become an associate professor of his alma mater and received a scholarship from the Ministry of Education to study overseas.　　From 1929 to 1932, Sugimoto had opportunities to study in Berlin, Kiel, Frankfurt and New York. At the University of Berlin, he studied business cy-cle theory under Ernst Wageman and materialism and Marxism under Karl Korsch. He also associated with Leontief there. Under the influence of these scholars, Sugimoto came to think highly of econometrics as a means of grasping empirical laws of the economy. In the political turmoil of the 1930s, he believed that econometrics could be a science free from ideology. He de-rived the demand curve of rice in 1935, which brought him fame as one of the pioneers of econometrics in Japan.　　Sugimoto asserted that general equilibrium theory could not analyze the contemporary real economy or the wartime economy and that consequently it had permitted rightist economics to gain power. After the Second World War, Sugimoto continued to criticize the Lausanne School and emphasized the validity of Marshall’s partial equilibrium theory. He also insisted on the possibility of a friendly rivalry between modern economics and Marxian economics, which was not accepted in Japan at that time.　　Here we must note the particularity of the definition of “modern eco-nomics （kindai keizaigaku）” in Japan in the latter half of the 20th century. The term ‘modern’ is not necessarily used in relation to periodization. It was generally used to indicate non-Marxian economics after the Marginal Revolu-tion. The emphasis is always put on the non-Marxian character of this thought. This definition of the term was established after the Second World War when Marxian economists were released from prison and returned to the academic world. In this work, Sugimoto gave his own definition of modern economics in contrast to its usual definition. Here it refers to all of the eco-

28 経済学史研究　62巻 2号（The History of Economic Thought, Vol. 62, No. 2）

nomics that were established after the 1860s, including Marxian economics. He insists that the exclusion of Marxian economics from modern economics has certain implications that are related not to science but to party spirit in the same way that Marxian adherents adopt an attitude of presuming all non-Marxian economics to be bourgeois economics.　　While contemporary modern economists believed that general equilibri-um theory could be free from ideology, Sugimoto points out its ideological implications. He tries to explain why many economists support general equilibrium theory although they know that it is irrelevant to the analysis of the real economy. He attributes one of the causes of the success of pure economics to the backwardness of Japan. We may say that his interpretation of Walras’ method of pure economics as empirical science is somewhat suspect. However, his approach to the Lausanne School and general equilibrium theory from the viewpoint of ideology is noteworthy even now.　　Unfortunately, Sugimoto died in 1952 before he had completed the third volume of this work where he planned to argue for a friendly rivalry between Marxian theory and the Lausanne and Keynesian Schools.

〈Explanatory Notes〉

All text in［　］parenthesis was inserted by the translators.

IV　 The Empirical Scientific Development of Marginal Utility Theory by Walras

By whom and through what kind of internal development were the prob-lems and theoretical failings of the founders of the Austrian School of the kind just described ［in the previous chapter of the original text］ later ad-dressed?

1.　 General Equilibrium Theory and Marginal Utility Theory in Walras

When it comes to how marginal utility theory was superseded, as it seems we can arrive at the core of this development most internally by discussing it in connection with how the economics of the Lausanne School developed, I would like to discuss the process by which this school came to abandon Walras’ marginal utility theory after starting out from the general equilibrium theory that had been built atop it. As the founder of the general equilibrium school, Walras was a proponent of the marginal utility school, and starting from the concept of marginal utility-which he called “scarcity”-went on to


establish the general equilibrium theory system. Even earlier than Walras, however, there was a scholar named Augustin Cournot （1801-77）.　　Cournot is often called the mathematical economist of the empirical school in contrast to Walras who is described as the mathematical economist of the psychological school. Cournot began with the empirical fact of indi-vidual commodities being exchanged with each other at a certain price and proceeded with a mathematical expression and analysis of them without attempting to explain what lies behind the empirical fact of these exchanges and what causes lead to these commodities being exchanged at a certain price. Cournot held that the “law of demand” is influenced by various psychological factors that can be neither enumerated nor measured, such as the type of utility of a commodity, the nature of the use and profit it can provide or the pleasure that can be obtained through it, the habits and customs of the citizenry, average wealth, and the distribution of wealth, and furthermore maintained that these factors themselves cannot be addressed by economics as an empirical science. All that he believed can be done within the scope of economics is to understand the amount exchanged as a result of these various factors and its relationship to price when these exchanges occur in the form of the law of demand, and by analyzing this law of demand create a theory of price. Walras, for his part, examined where the motivations and causes of exchanges were to be found, determined that it was in the psychological, subjective utility of individuals, and, starting from this subjective utility, discovered the theorem of maximum utility of commodities. This “theorem of maximum utility of commodities” is a law of general equilibrium for an individual economy in which the ratio of the intensities of the last want satis-fied among various wants for individual consumers who consume multiple commodities, that is, the ratio of scarcities, is equal to the ratio of the values in exchange or of the market prices. This is indeed nothing other than the so-called “law of equi-marginal utility” of the Austrian School discussed earlier. If the relationship between supply and demand is then extrapolated on the basis of this law of equi-marginal utility, and in addition we include the condition that income and expenditure of commodity owners are equal, or, at the level of society as a whole, that the total demand and supply for each commodity are equal, it is possible to stipulate a state of general equilibrium of the social economy arising naturally between the prices or quantities of supply and demand of each commodity. This is how the topic develops. I have already noted that the tablet commemorating Léon Walras at Lausanne University extols his achievements as “The first to establish the general conditions of economic equilibrium, thereby founding the Lausanne School.” The meaning of this inscription is that Walras founded general equilibrium


theory, but at the same time, when it came to where the cause of this equilibrium was to be found, he believed it was in utility.

2.　 How did Walras Differ from Menger, Jevons and Böhm-Bawerk?

Here we must point out how Walras’ marginal utility theory differed from that of Menger and Jevons. In the case of Menger and Jevons, it was assumed that it was possible to measure utility and that such measurement could be carried out empirically, but in order to perform this measurement a fixed unit is re-quired, just as a unit such as the meter is required in order to measure length. To say that a desk is two meters in length is to say we are able to measure the length of the desk within the following logical structure: assuming that the desk is something with a fixed length, in other words, something with a size that can be measured, and that the unit used in order to measure it, in this case the meter, has a size that can be determined, the length of the desk fits two meters within it. In the same way, when we undertake an empirical measurement of economic value with utility, we must first consider the unit this is measuring and then determine how many of these units fit within the utility of the commodity to be measured. Economists of the Austrian School make the further assumption that this process can be undertaken empirically.　　This was most lucidly stated by Eugen von Böhm-Bawerk, a great schol-ar of the Austrian School who has already been introduced ［in the original text］. Böhm-Bawerk puts it as follows. In order to engage in economic activi-ty rationally and deliberately, one must draw on a subjective determination of the magnitude-including both strength and duration-of pleasure and pain. In some cases it is presumably enough to be able to say whether two pleasures are equal, or whether the one is greater or lesser than the other. Böhm-Bawerk calls this the comparison of utility. In most cases, however, we are faced with the need to take it one step further and quantitatively determine how much bigger or smaller the utility of one is than the utility of the other, sum up multiple pleasures, and determine how many multiples of one corre-spond to another. Böhm-Bawerk calls this the measurement of utility. He says that if we are to engage in economic activity rationally and deliberately, it is not enough to simply be able to compare utility; to do so also requires the assumption that we are able to measure utility. Say there is a child who wants to exchange an apple for seven plums. The child presumably thinks that the sum of the utility of each of the plums that must be consumed one after another is equal to the utility of one apple, but in order to do so they must first determine the total utility of the seven plums. If we simply know that the utility of the second plum is less than the first, we are only able to compare these two utilities and cannot calculate their sum. In order to calculate the


sum of two quantities of utility, we must measure the magnitude of each quantity with the same unit quantity adopted as a common scale. The child must determine that the first plum has, for example, the utility of seven times and the second plum the utility of six times this unit quantity, and then by summing the two arrive at a total utility of thirteen. The child measures the utility of plums three, four, five, and so on, determines that they have utility of five, four, three, two and one, and then by summing up these utilities comes to know that seven plums have a total utility of twenty-eight. They then determine that the utility of one apple is also equal to twenty-eight. As can be understood from this example, in order to be able to say that the utility of seven plums is equal to that of one apple, one must be able not only to compare the magnitude of the utility possessed by a unit of each of the goods, but also to measure this utility and sum up the utility that has been measured. We can therefore say that Böhm-Bawerk’s marginal utility theory was established on the premise of the empirical possibility of this kind of measurement of utility.　　As mentioned earlier, one characteristic of the theory of marginal utility is that it absolutizes the opposition between the person who evaluates and the object being evaluated. The good that is the target of evaluation is viewed as a simple given provided from outside the economy, and the act of economic evaluation is reduced to a simple subjective operation that does not possess a concrete physical body. I have already talked about this being both the dis-tinctly modern characteristic of the marginal utility school and its historical limitation, but here the problem becomes whether this kind of purely subjec-tive utility can be measured. This is just like the subjective determination of something like warmth; while we can say that quilted clothing is warmer than linen clothing, it isn’t possible to say something like, “If the warmth of linen clothing is one, the warmth of quilted clothing is ten.” This kind of subjective sensation of temperature cannot be quantitatively measured. In the same way, when it comes to utility in economics, too, while it may be possible to com-pare its magnitude, we cannot directly empirically measure it. If economics is supposed to be a modern empirical science, and we take the perspective of a conscientious modern empirical scientist, it is obviously incorrect to accept essentially unmeasurable individual subjective utility as a premise as though it were something that could be directly empirically measured. Since the sub-jective utility a certain amount of a commodity holds for a particular consumer is a quantity that only has meaning as a whole, it cannot be broken down into units of equal quantity. In other words, utility cannot be directly measured in the proper sense of the term.　　It was indeed none other than Walras who attempted to make progress


on this problem while remaining in accordance with modern scientific empir-icism. While he drew inspiration from 19th century classical physics in the creation of his economics, in contrast to that of Böhm-Bawerk, Walras’ ap-proach was strikingly empiricist. He believed that as an empirical scientist one should not, like Böhm-Bawerk, take an approach that assumes utility can be directly empirically measured. This is where we find the distinctive char-acter of Walras’ marginal utility theory that sets it apart from other theories of utility.

3.　 To What Extent did Walras Provide a Modern Empirical Scientific Demonstration of the Validity of Marginal Utility Theory?

Why then did Walras, while saying that utility cannot be directly empirically measured, nevertheless take utility as his starting point when constructing his theoretical system of economics? He did so because he took a typically con-scientious stance regarding this issue. Even if utility could not be measured in reality, Walras posited it could be measured hypothetically-he hypothesized that the intensity of want, that is, intensive utility, could be measured, and therefore a common scale of measurement existed not only for all units of the same kind of wealth but for all units of all kinds of wealth, and on this basis he attempted to demonstrate indirectly the measurability of utility. Unlike that of Böhm-Bawerk, however, Walras’ measurability of utility was nothing more than a hypothesis. On the basis of this hypothesis Walras derived the law of diminishing utility, then went on to determine marginal utility （scarcity） from its relationship to the quantity possessed and to precisely explain the effect of this on price mathematically. As a result of this he established the relationship between price and the quantity of demand or supply. By doing so, while relying on the measurability of utility that had at first been nothing more than a hypothetical premise, he proceeded to demon-strate the validity of the economic theory thereby deduced in respect to price relationships as an empirical fact. In other words, Walras believed that the possibility of measuring utility could be proven indirectly.　　As for the concrete way in which he constructed his economic theory, using the approach just described Walras first posited the possibility of meas-uring utility. He then created a utility function that expressed a relationship in which as the quantity of a commodity increases the utility derived from each additional unit of that commodity gradually decreases. When this utility func-tion and the existing amount are given, the general principle of individual action which holds that each person seeks maximum satisfaction leads to the law of maximum utility of commodities, that is, the law of equi-marginal


utility. As a result of the law of maximum utility of commodities, the consumption of a commodity by a consumer in relation to a certain income and a certain price is determined. Next, when a price that had been assumed to be given is thought of as something that changes, the circumstances of maximum satisfaction shift accordingly, and the quantity of demand also alters. Since the relationship of an quantity of demand changing in accordance with price variations is determined in this way, a demand curve is derived from the interrelationship of this price and demand, and we can furthermore derive a supply curve based on the demand curve. If the condition that there can only be one price that generally leads to equality between supply and demand is added, the equilibrium price is mathematically determined from both the supply and demand functions already derived. This is what he calls the “theo-retical solution.” Walras maintained, however, that this “theoretical solution” did not stop at a simply theoretical and abstract solution, but was in fact naturally implemented through the price fluctuations that actually occur in real markets. As he puts it, “What must therefore be proved to establish that the theoretical solution and the one in the market are identical?” If we follow his way of thinking, the measurability of utility, at the start of the argument, is nothing more than a hypothesis. Deduction on the basis of this hypothesis, however, leads to the demand function, supply function, and eventually the equilibrium price. As this equilibrium price is also the price relationship in an equilibrium state when it is actually established in the market, Walras therefore asserts it is demonstrated to be valid in reality. As a result, the measurability of utility, even though it was initially nothing more than a hypothesis, is indi-rectly verified as being valid in reality through this kind of demonstration. Walras is thus saying that marginal utility is indirectly verified as the cause of price, and in the sense that this is valid in reality, is found to be an underlying cause of actual exchange phenomena as a matter of empirical science.　　The feeling of temperature, of it being warm or cool, is not something that can be empirically measured, but assuming hypothetically that this feel-ing of temperature can be measured, we try deriving the relationship in which receiving a breeze from a fan gradually lowers the perceived temperature. Then we happen upon the idea of employing mercury, a substance capable of objectively measuring temperature, and after constructing a thermometer with this substance hit this measuring device with cool wind from a fan. When we do this the mercury in the thermometer gradually goes down. Obviously, it is possible to objectively measure this drop in the mercury in a manner accepted as empirical science. When the fact of cool air being applied is present, the perceived temperature will decline, and moreover the volume of the mercury, which can be empirically measured in reality, will shrink in accordance with


this reduction in perceived temperature. Assume these two facts run in parallel. If so, it can then be concluded that the theory that had assumed the feeling of temperature could be measured, even though at first this was noth-ing more than a hypothesis, has ultimately been indirectly proven through the fact of measurement by the volume of mercury. Walras attempted to prove the measurability of utility using exactly the same kind of approach. In natural science or dynamics, efforts are made to take this approach and express various things such as the subjective feeling of temperature or subjective feeling of weight using various objectively measurable magnitudes, and to conversely organize human experience on the basis of these objective data. The result of this organization can indeed be thought of as regulating the facts of the human world. This is how Walras sees things. The argument he makes is not only extraordinarily ingenious but also circumspect. Regarding the actual validity of the theory of marginal utility, it can surely be described as standing at the pinnacle of all arguments that had been put forward up to that point.

V　The Overcoming of Marginal Utility Theory by Pareto

Does assuming a hypothesis as in Walras not already require fundamental criticism from the perspective of modern 19th century science?

1.　 The Thoroughness of Modern Empiricism: Correspondence with Machism

As has just been presented in detail, Walras’ approach has the following theo-retical structure: utility cannot be directly empirically measured, but if, having hypothesized that utility can be empirically measured, the abstract law de-rived on the basis of this hypothesis accords with the price relationship that emerges in actual markets （something that can be empirically measured）, then conversely the measurability of utility that had initially been nothing more than a hypothesis has been indirectly empirically proven. I have already asserted that trying to indirectly prove the measurability of utility on the basis of this kind of structure reveals the scientific conscientiousness of Walras as a modern empirical scientist. On this point we can presumably say that Walras’ approach was far more in keeping with modern empirical science than that of Böhm-Bawerk, which begins with the non-empirically scientific proposition of the direct measurability of utility.　　Here, however, our consideration must go one step further. This is to ask whether hypothesizing the indirect possibility of the measurement of subjec-


tive utility is necessary in order to reach Walras’ conclusion. A shortcut to answering this question can be found by reflecting on the trend in natural science from which Walras drew the greatest inspiration. It is a well-known fact that in natural science subjective judgements are in general replaced with objective relationships as much as possible, and efforts have been made to restrict the role of natural science to determining objective relationships. If we look at the development of natural science in the 18th and 19th centuries, we see this field being established through phenomena that are mostly subjective, such as the perception of color or temperature, being reframed as completely objective relationships such as wavelengths of light or changes in the height of mercury in a thermometer, and through this process a trend toward such subjective phenomena being excluded from what is considered the proper object of natural science. This is in fact where the defining characteristic of the process by which classical physics established this objectivity was to be found. This way of thinking was most consistently expressed in the interpre-tation of dynamics-referred to as “empirio-criticism”-presented by Ernst Mach （1838-1916） at the end of the 19th century. Mach asserted that, in order to explain the relationship between the change in one quantity and the change in another quantity, the dynamics of his era considered the workings of a cause called “force” and addressed physical phenomena in terms of the theory of cause and effect. He criticized this as being a metaphysical stance, and argued that since the concept of force transcended experience this meta-physical concept should be discarded by dynamics as an empirical science.　　Take, for example, a physics-based explanation of the phenomenon of a billiards player hitting a white ball so that it hits a red ball and causes it to move. In existing dynamics this had been thought of as force being applied to the white ball causing it to move, and this force then being transferred to the red ball on contact causing it to move in turn, but Mach said this explanation was metaphysical and not in keeping with empirical science. A physicist can-not apprehend the thing called “force” directly; all they can observe is the fact that the white ball moved a certain distance at a certain speed, the fact that the red ball moved a certain distance at a certain speed, and the relation-ship between these two facts. They can express the relationship between these two phenomena as a function such as y＝ f （x）, but this is all any physicist can do on the basis of empirical science-physicists should not consider mystical concepts such as “force,” and there is indeed no need for them to do so. As a result, according to Mach, the role of physics is only to express the functional relationship between one physical change and another, and no consideration should be given to something like force existing as the cause of such changes. In other words, the defining characteristic of Machian natural


science lies in expunging whatever does not involve, in every sense, an objective and empirical quantitative relationship from physics. This became the mainstream interpretation of classical dynamics at the end of the 19th century, and precisely the same method was taken up by Pareto.

2.　 The Expunging of the Idea of the Measurability of Utility by Pareto

Based on the assertion that it was impossible to directly empirically measure individual subjective utility, Pareto sought to expunge any notion of the idea of the measurability of utility from the field of economics, and proceeded in his inquiry by asking whether it was possible to construct what Walras had presented as a conclusion of general equilibrium theory. Here he created the so-called “theory of choice” （théorie des choix）. This theory of choice became a fundamental principle of the way of thinking of the Lausanne School. Let me therefore give a brief explanation of Pareto’s theory of choice before moving on. Pareto begins with the case of someone consuming two commod-ities, for example, a kilogram of bread and a kilogram of wine. Let us assume this consumer obtains a certain amount of satisfaction by consuming this combination of commodities. The combination of bread and wine that will give this consumer this particular amount of satisfaction, however, is not limited to one kilogram of bread and one kilogram of wine. Pareto thought it was clear from our everyday experience that there are in fact countless other combinations of bread and wine that could secure the same amount of satisfaction for this consumer as that obtained by one kilogram of each. In other words, imagine we tried saying to this consumer, “Please give me ten grams of bread from your one kilogram of bread and one kilogram of wine. As compensation, let me give you as much wine as you need to be as satisfied as you were before.” If we did so, in light of their everyday experience, they would presumably be able to immediately tell us the amount of additional wine required. They would be able to answer, for example, “Twenty grams,” meaning a new combination of nine hundred and ninety grams of bread and one thousand and twenty grams of wine would bring them as much satisfac-tion as the old combination of one kilogram of each commodity. In this case, we can say that for this consumer these two combinations are indifferent when it comes to choosing between them. And there are presumably many more such indifferent combinations. Innumerable examples of this kind of combination might include nine hundred and eighty grams of bread and one thousand thirty-eight grams of wine, for instance, or nine hundred and seventy grams of bread and one thousand fifty-three grams of wine. As far as choos-ing between them is concerned, these countless combinations are indifferent


to the consumer. Pareto called this group of combinations an “indifference curve.”　　Here I have started with the combination of one kilogram of bread and one kilogram of wine and discussed countless other combinations that are in-different in terms of choice, but this also applies to other combinations that confer greater satisfaction; for example, starting from two kilograms of bread and two kilograms of wine, we could find various other combinations that resulted in the same satisfaction, that is, a series of combinations that are indifferent when it comes to choice, and thereby create a new indifference curve. In the same way, we could presumably empirically construct a curve of combinations indifferent regarding choice to the combination of three kilograms of bread and three kilograms of wine, another curve of combinations indiscriminate to the combination of four kilograms of bread and four kilograms of wine, and so on for an unlimited number of such groups. This is what is meant by an “indifference curve.” This “indifference curve” is thus nothing other than an objective expression of the state of the consumer’s desires, a purely objective and empirical quantitative relationship that includes no subjective elements whatsoever. Starting only from these indifference curves that can be empirically and objectively confirmed, the system of market prices as quantitative relationships that can similarly be empirically and objectively established, and the likewise empirically and objectively confirmable initial quantity of commodities, Pareto reached Walras’ “theorem of the maximum utility of commodities” or a formal expression of the law of equi-marginal utility, that is, an equilibrium relationship where the ratio of the degree of marginal utility is equivalent to the ratio of price. Following Walras from this point, Pareto then succeeded in deducing the main content of the theory of general equilibrium of exchange. This is the main content of Pareto’s theory of choice, and in this case, he proceeded in a manner perfectly in line with empirical science, expunging the subjective judgement of utility that cannot be empirically confirmed from economics. In doing so, he adopted precisely the same method Mach had used in expunging the non-empirical idea of force from physics.

3.　 The Discarding of the Theory of Maximum Satisfaction as a Logical Consequence of Pareto’s Theory of Choice

In what I have just discussed, Pareto has merely gone around the problem of the measurement of utility, and vestiges of Walras’ theory of maximum satis-faction remain. While the hypothesis of measurability of utility discards this, when it comes to constructing indifference curves, Pareto compares different quantities of utility with each other and describes them with terms such as


“equal satisfaction,” “greater satisfaction” or “less satisfaction.” From the perspective of the original purpose for which Pareto’s theory of choice was created, however, all that was needed was a certain rational relationship arising between objective economic quantitative relationships, that is, a form of equilibrium, and this rationality did not necessarily have to be narrowly interpreted as the rationality found in the subjective judgement of utility of an individual acting in pursuit of maximum satisfaction. Individuals could just as well be thought of as acting out of altruism as out of selfishness. In short, we should proceed only from the quantitative relationships treatable by empirical science that arise between economic quantities as a result of an individual’s various economic, political, moral, or other motivations. Needless to say, Pareto also engaged in sociological research separate from his study of economics, and according to the results of his investigations, the determining factors in human activity were not rational as the utilitarians believed; the roots of human behavior instead lay submerged in “instinctive, non-logical, permanent psychological states.” On the basis of this kind of sociological consideration, Pareto then completely banished all vestiges of the idea of maximum satisfaction from his economics. In other words, in his final years, Pareto not only went around the theory of marginal utility but completely renounced it. This was a logical consequence of his theory of choice.　　Here let me give another summary. In Pareto’s economics at this final stage, all that is given is the relationships of change of various objective economic quantities that have been confirmed in an entirely empirical manner. Among these economic quantities, there are some that can be measured in material units, such as amounts of demand, supply, production and consump-tion, and also some that can be measured in terms of economic value, such as price and income. Every one of these quantities, however, can be measured empirically and objectively. Some are obtained from production and consumption statistics, the others from price statistics. Moreover, these empirically established objective economic quantities are constantly moving, and the shifting relationships between them can also be empirically confirmed. Interdependent relationships, such as the relationship in which a change in price leads to a change in demand, that is, when price increases demand decreases and vice versa, can be empirically and objectively confirmed. The defining characteristic of Pareto’s theory of choice lies in its seeking to arrive at the main content of general equilibrium theory starting from only these sorts of relationships.　　A detailed discussion of Pareto’s theory will be taken up in the following chapter on the Lausanne School. Here I hope readers will have acquired a basic understanding of the process of development of the economics of the


Lausanne School in which, going from Walras to Pareto, the assumption of the measurability of utility was completely discarded, and the conclusions of general equilibrium theory were arrived at starting only from quantities that could be objectively and empirically confirmed. In other words, in line with the development of science in the latter half of the 19th century, the more thoroughly empirical this discourse became, the more it was forced to aban-don the assumption of the measurability of utility.

Chapter 4　The Lausanne School （General Equilibrium School）

I　The Theoretical Structure of the Lausanne School

Thanks to the explanation in the previous chapter, I already have a fairly good understanding of the formation of the Lausanne School in relation to the Austrian School, but please describe for me again the basic theoretical structure of this School.

1.　Pareto’s General Equilibrium Theory

As discussed in detail above, in Pareto’s general equilibrium theory, the ulti-mate motivation behind human economic actions is not addressed. It may be a determination of utility, or in some cases religious piety. Or it may be something like service to one’s country. The motivations behind human actions are diverse and wide-ranging. Pareto therefore believed that talking about the motivations behind our economic actions as though they were in some sense rational was very likely to lead to misunderstandings. He claimed that while utilitarians say that the determinative motivation behind the eco-nomic actions of human beings is the pursuit of maximum utility, the root of human action is neither so rational nor so constant; the ultimate cause that determines human actions varies widely from person to person, and consti-tutes a kind of non-logical, instinctive “psychological state” that can change drastically from moment to moment. As a result, including the study of this kind of non-logical, instinctive, and subjective motivation behind human actions as one of the duties of economics would prevent this field of study from ever becoming independent as an empirical science. What was important to Pareto’s economics was not this kind of theory of motivations. Various economic quantities change as a result of behavior whatever its motivation may be, and since all of these quantities, whether they be the quantity of demand, the quantity of supply, or price, can be apprehended objectively and empirically, Pareto believed that economics should only address such


objectively and empirically graspable quantitative relationships. This is the fundamental character of both Pareto’s theory of choice and the general equilibrium theory of the later Lausanne School that carried on his work.　　Pareto thought that such interdependent relationships of change of economic quantities were constantly shifting as a result of changes in the motivations underlying them and offered no handhold for those trying to understand them. As a result, in order for economics to address them, a kind of theoretical manipulation had to be implemented. This theoretical manipulation was the hypothesis of a static general equilibrium, but let us save a detailed explanation of the theoretical assumptions under which this hypothesis was envisioned and what it ultimately signified in reality for later. In any case, Pareto imagined a state of static equilibrium, that is, an ultimate state in which the interdependent changes among economic quantities finally come to a halt and no inclination toward further change is displayed. Moreover, this state of general equilibrium was a uniform fact that could be recognized in economic life. Pareto thought of economics as the study of this uniformity in economic life. He saw this as precisely equivalent to science that studies the uniformity of nature. He viewed conceiving of these kinds of general equilibrium relationships and expressing them as mathematical functions as the main content of theoretical economics as a general equilibrium theory.

2.　The Hypothesis of a Static Equilibrium State

As I have already noted, the concept of equilibrium （équilibre, Gleich-gewicht） runs through the core of Pareto’s theory, but this is a feature not only of Pareto’s economics but of the Lausanne School as a whole. Indeed, it had already been clearly articulated by Walras, and in this regard, Pareto can be described as simply having carried on the Walras’ approach. This fact is indicated by the words on the Walras memorial tablet at Lausanne University mentioned above: Léon Walras-The first to establish the general conditions of economic equilibrium, thereby founding the Lausanne School. In this sense, not only Pareto but all of the scholars of the Lausanne School took up Walras’ approach and emphasized the theory of general equilibrium. This was also the reason it came to be called the “General Equilibrium School.” Here I would like to give a slightly more involved explanation of this concept of equilibrium.　　This is how the Lausanne School of economics thought about things. While human social life is extremely diverse and complicated, its economic aspects can be singled out, and these singled-out aspects can then be consid-ered as a self-contained system. As for the method by which this is carried out, if we single out this economic life from social life in general, we see that


economic competition is occurring. Each person acts according to what he or she sees as the best approach, and as a result, brings out various changes in demand, supply, and price. Among these relationships of change, there are relationships of close and complex interdependence, and through the workings of competition, these relationships eventually arrive at a static state. Walras takes this idea and expresses it in the form of the claim that a state of static equilibrium will ultimately arise in a society of “absolute free competition,” but this state of static equilibrium is just like the flat surface of a still body of water. If you throw a stone into a pond, ripples will presumably appear on the surface of the water. This occurs because the molecules of water hit by the rock are pushed down, neighboring molecules are thereby pushed up, and this action spreads to other molecules one after another. But since all of them are constantly being pulled on by the Earth’s gravity, ultimately these individ-ual molecules give rise to a state that maintains an equilibrium. This is the phenomenon of the flat surface of still water.　　Now let us say that the same is true of economic society, and that a change has occurred as a result of some sort of external circumstance. For example, say that the demand for a specific commodity has exceeded supply. Competition between demanders of the commodity will presumably tempo-rarily increase its price. This higher price will then make some demanders less inclined to purchase the commodity and cause them to decrease their demand or disappear from the market entirely. As a result, demand in society as a whole will decrease. As for suppliers, on the other hand, the increase in price will presumably lead them to increase supply. A higher price may also lead new suppliers to enter the market. As a result, supply in society as a whole will increase. Since demand decreases and supply increases, the price will inevitably fall. This phenomenon of the two conflicting operations of decreasing demand and increasing supply working together to lower the price will continue until a perfect agreement of supply and demand is reached, at which point the movement of the price will stop. Competition between demanders ultimately brings about this kind of equilibrium of demand, supply, and price. Here we have considered the case in which demand increases because of an external circumstance and exceeds supply, but the same can be said if we look at the converse case in which supply exceeds demand. In this case the price temporarily declines, but then begins to climb because of the increase in demand and decrease in supply. This movement of demand, supply, and price continues until an alignment of supply and demand, and stops when accord between supply and demand, in other words, a state of equilibrium, is reached.　　This functioning of competition, or inevitable emergence of a static equi-


librium as a result of competition, is not simply observed regarding price along with supply and demand of a single commodity. There are competitive relationships between commodities, such as the relationship between rice and wheat or coal and electricity. There are also mutually reinforcing relation-ships, that is, complementary relationships, such as the relationship between staple foods and side dishes or coal and steam engines. There are also joint product relationships, that is, relationships in which production of one com-modity leads technologically to the natural production of another commodity, such as the relationship between wheat and straw or beef and leather, and commodities that stand in relation to each other as product and method of production, such as in the case in which cotton plants and spinning machines are used to produce cotton thread. Since all commodities possess these sorts of relationships of close interdependence, if the demand, supply or price of one commodity changes, this will presumably affect the demand, supply and price of all other commodities and cause a general disturbance in the eco-nomic world. These fluctuations, however, will also ultimately offset each other and come to a halt through the mechanism described in the case of a single commodity. In other words, a state of static general equilibrium will arise. According to Walras, the emergence of this state is only inevitable given the assumption of absolute free competition, but in this kind of static general equilibrium state, a definitive relationship forms between each economic quantity. In other words, for each and every commodity, demand is equal to supply, the price of a product is equal to its production cost, and so on. He believed that the main task of economics was to describe these equilibri-um relationships between economic quantities as mathematical functions. Pareto and other members of the Lausanne School would later find the approach of “absolute free competition” to be too narrow and expand the theory to cases, for example, of monopolies and oligopolies, but basing their approach on the hypothesis of a state of static equilibrium in the manner just described is a common characteristic shared by all scholars of the Lausanne School.

3.　Given Conditions and Economic Statics

In the preceding section, I have explained how the hypothesis of a state of static equilibrium is a fundamental assumption of the Lausanne School of economics. This was simply a theoretical hypothesis, however, and even the members of this school did not think such states of perfect static equilibrium existed in reality. This was their understanding, just as it is understood that in reality there are no perfectly still or flat surfaces on bodies of water. No mat-ter how light there is always at least a little wind, so there are always some small ripples on the surface of a pond. Some water will presumably trickle


out from the roots of the trees growing around it, and in some cases there may be a spring adding fresh water to the pond. As a result, the pond’s water is constantly being disturbed, and its surface is never completely still. In pre-cisely the same way, systems of economic quantities are constantly being subjected to various external forces that inevitably disturb them. Looking, for example, at the total population that comprises an economic society, even putting aside events that lead to a sudden drop such as wars and epidemics, this number is constantly shifting up and down through factors such as births, deaths, and migration. That this will have an effect on total demand is obvi-ous. Nor is the amount or type of commodities consumed per capita in this population by any means constant. New desires will replace old ones, as we are constantly experiencing in our daily lives. What I have just discussed concerns change factors on the demand side, but change is also constantly occurring on the supply side. Production technology is always advancing and being improved, causing changes in the amount and type of commodities pro-duced. This is also something our experience of daily life tells us. Because these factors that influence the demand side and factors that influence the supply side are constantly changing, a state of completely static equilibrium of the sort required by general equilibrium theory will never exist in reality. This is something of which even the proponents of this theory are well aware.　　The reason that the economists of the Lausanne School nevertheless hy-pothesize a state of static equilibrium lies in the fact that they see the various change factors listed above, which they organize into the categories of total population and its composition, psychological states that become the motivation behind the actions of individuals, quantities of initially existing commodities, and production technology and economic systems, as nothing more than con-ditions given to an economy from the outside and not as essential factors of the economy itself. They call these conditions given from outside an economy “data,” and assert that these data are non-essential, incidental factors that operate on an economy from the outside and alter the framework that governs it. According to them, the role of economics is not to examine these changes in external conditions, but instead to clarify the essential character of an economy’s passive adaptation that emerges in economic systems as a result of these changing data. As a natural conclusion of this approach, general equi-librium theorists assert that assuming what they consider to be non-essential data in regard to the economy itself are unchanging-which they call “given conditions”-and constructing their theory on this basis is a theoretical abstraction that should be permitted in economics as a science. They maintain that this is just like the approach taken to the investigation of gravity in physics, in which to begin with a perfect vacuum is assumed and how objects fall in it is


then examined. Indeed, since if economic competition is fully implemented on the basis of this theoretical abstraction of the fixing of data, a state show-ing no tendency towards further change, that is, a state of static equilibrium, emerges, general equilibrium theorists assert that the main work of theoretical economics must inevitably be to describe what sort of interdependent rela-tionships exist between economic quantities in this kind of hypothetical state of static equilibrium. In this sense, therefore, the economics of the Lausanne School must essentially be the study of statics. This fact not being properly grasped has often led to mistaken views of the theoretical structure of the economics of the Lausanne School arising and has been a cause of internal differences between the theoretical structure of this school and other schools being overlooked. Putting aside the differences between it and other modern schools of economics to be discussed in detail later, for now let us dig a bit deeper into the significance of the Lausanne School of economics being a static equilibrium theory.

4.　The Theoretical Essence of Economic Statics

The first meaning of the Lausanne School of economics being a static equilibrium theory is that in a strict sense it is a theory of simultaneous equi-librium. As I have already noted, in a state of static equilibrium, there is an equality between the supplied quantity and demanded quantity for all goods, and here the supplied and demanded quantities considered to be equal, pre-cisely speaking, are meant to be supplied and demanded quantities arising simultaneously. For example, when the equilibrium supply of rice in a given year is nine billion kilograms, the assertions of the Lausanne School do not imply that the equilibrium demand for rice in the next year will also be nine billion kilograms. It may be nine and a half billion, it may be eight and a half billion. The Lausanne School does not assert that the demand that must be in equilibrium with this supply must be the demand in the following year. It says that the demand for this year is nine billion kilograms, and this is in equilibrium with this year’s supply. Not an intertemporal equilibrium, but a simultaneous equilibrium. Schumpeter compares a static state to a snapshot, and this is because, as noted earlier, a static state is a state of simultaneous equilibrium. On top of this, a static state is also said to be a state established in the long run, and this is because when conditions are given and economic competition is allowed to fully play itself out the state established in the long run is nothing but a state of simultaneous equilibrium.　　The second meaning of the Lausanne School of economics being a static equilibrium theory is that the goal of this theory, precisely speaking, is a theory of states of equilibrium and not a theory of the establishment of


equilibrium. Static equilibrium theory was not, originally, an explanation of how a state of equilibrium can be reached from a state of disequilibrium. Something like the following explanation is often found in textbooks written from the perspective of static equilibrium theory. When demand and supply are not equal at a certain price, for example, when the former exceeds the latter, competition among demanders will naturally tend to drive the price upward. This in turn inevitably leads to a decrease in demand and an increase in supply. These two effects will continue as long as the quantity of demand continues to exceed the quantity of supply, stopping only when the two quantities are equal. This is the standard genetic explanation. This kind of explanation, however, is nothing more than an introductory account as a first step in presenting general equilibrium theory. The main body of this theory is a description of states of static equilibrium in the strictest sense, and strictly speaking this kind of genetic explanation cannot be attempted by economic statics. It is for the reasons outlined above that Schumpeter, who understood static theory most strictly, wrote as follows.

If it is to be shown how all the elements of the economic system are determined in equilibrium by one another, this equilibrium system is considered as not yet existing and is built up before our eyes ab ovo. This does not mean that its coming into being is genetically explained thereby. Only its existence and functioning are made logically clear by mental dissection.1

In a given time and place, for each commodity the price at which it is sold and the price at which it is bought are the same. Sellers cannot sell more than buyers will buy, and buyers cannot buy more than sellers will sell. This is the case regardless of whether the price that emerges is an equilibrium price or disequilibrium price, and it applies to all conceivable prices. Another condi-tion is thus required in order to determine which among these innumerable possible prices is the equilibrium price. This condition is that a state in which no further changes occur in the relationship between various economic quan-tities, in other words, a static equilibrium, has already been established. Under such a condition, quantities such as how much of each commodity is bought and sold and at what price and how much of each commodity is produced and at what cost are all simultaneously determined in relation to each other. The essential task of economic statics is thus to describe these relationships

1 Joseph Schumpeter, The Theory of Economic Development, translated by Redvers Opie, Harvard University Press, 1949, p. 83. Emphasis on “genetically” and “logically” added.


that are simultaneously determined in relation to one another. It is a well-known fact that Walras and Pareto created a system of simultaneous equations in order to express these relationships mathematically, established that the number of these equations was equal to the number of unknowns, asserted it was possible to arrive at an definitive solution of this system of simultaneous equations, and believed this definitive solution was nothing other than a description of the content of a static equilibrium.　　This way of thinking, however, has been criticized as being too abstract to allow for an adequate understanding of reality, and recently self-critique along these lines has been conducted within the Lausanne School itself. One development that has emerged was put forward by Hicks. This is his theory of static stability conditions. This is a theory created by Hicks by further de-veloping Pareto’s theory of choice and work done by the Russian scholar E. Slutsky, and through this effort Hicks took a step beyond the simple static equilibrium theory of the Walras/Pareto approach and purported to be able to clarify the laws of motion of price systems regarding multiple markets. Here let us briefly examine this theory of static stability conditions at which Hicks arrived.　　Say a state of equilibrium has been established, and one element that composes it changes only very slightly. If so, the state of equilibrium will change slightly, and an overall adaptation will occur. In this case, the econo-my may tend to return to its original equilibrium （this is called a “stable equilibrium”） or once it moves away from its equilibrium, it may have a structure that makes its disequilibrium greater and greater, and never return to its original equilibrium （this is called an “unstable equilibrium.”） Hick’s theo-ry of static stability conditions clarifies under what sorts of conditions these two types of equilibrium arise. As a result, this theory is clearly not a simple theory of equilibrium. Here there is the first hint of the theory being made dynamic. Recently this budding dynamism has been greatly developed by Samuelson and reached the point of the formation of a theory of dynamic stability conditions, but this was only made possible by taking the perspective of the macroscopic theory of dynamics of the Cambridge School. I shall discuss this in more detail later. At least in Hick’s theory of static stability conditions itself, however, there is nothing more than the first hints in the direction of dynamism, and Hick’s creation itself is in no way a dynamic the-ory. It is an approach that wholly adopts the perspective of a theory of static equilibrium. Some scholars have misunderstood it as being in an essential sense a theory of the formation of states of equilibrium, but it is unable to explain the actual dynamic process of this formation or how economic systems operate throughout the process of disequilibrium. In Hick’s theory, to


begin with a static equilibrium is posited, and its structure is assumed to be something that does not undergo substantial change. After having made these hypotheses, how a slight change in one element that composes this equilibri-um system affects other elements is then examined without regard for the time it takes for this change to spread throughout the system. This is not an attempt to theoretically come to grips with actual transactions that are intimately con-nected to time, but merely an attempt to theoretically organize a series of imaginary transactions from which time has been abstracted. This is not a dynamic theory that clarifies the actual dynamic processes by which a state of equilibrium is established, but a type of static theory that explains the structure of a static equilibrium by addressing a series of imaginary transactions.　　In this section, I have discussed the essentially static nature of the eco-nomics of the Lausanne School. In the end, this is a theory of simultaneous equilibrium, a theory of the state of static equilibrium, and a theory of the structure of static equilibrium. In this sense, the economics of the Lausanne School is said to be an economics without time. This means that the econom-ics of the Lausanne School do not include temporal elements on the basis of the essential character of this school’s theoretical approach. Based only on what I have discussed so far, however, the deeper significance of this state-ment remains difficult to fully comprehend. This is the case because it is not as though even the Lausanne School does not often try to address some sort of element of time. I will provide a more detailed account of this in the fol-lowing section.

II　General Equilibrium Theory and Temporal Elements

According to what you have said so far, in a strict sense general equilibri-um theory does not include temporal elements, but how did such a theory correspond to reality as it actually develops?

1.　Business Cycles and Temporal Elements

As the preceding explanation makes clear, while general equilibrium theory does not originally include temporal elements, since concrete, actual econom-ic life develops over time, it is obvious that even the Lausanne School of economics had no choice but to incorporate temporal elements in some sense within its theoretical system. It is perhaps no exaggeration to say that it is in the effort to do so that the historical development of this school’s theory is to be found. Ironically, it was regarding this point that the historical limitations of this school were revealed. I will therefore add a postscript to the develop-


ment of theory in this regard and use it as a starting point for the clarification of the historical limitations of this school of economics.　　As was made clear in the previous section, economic statics held that, assuming economic data are constant, if perfect competition is allowed to be carried out within these limitations eventually a state in which there is no trend toward any further change, that is, a state of static equilibrium, will be established. The quantity of each commodity that will be produced, bought and sold and the rate of exchange at which transactions will occur in this hy-pothetical state will be definitely determined, and the fundamental task of economic statics is to describe the functional relationships between the eco-nomic quantities that are determined in this way. One thinker who tried to shrink the gap between theory and reality as much as possible while strictly preserving this theoretical essence of economic statics was Schumpeter.　　In his effort to gradually shift the scope of application of this theory from the hypothetical static world toward the real world without destroying the theoretical essence of economic statics, Schumpeter began by assimilating business cycles within the domain of economic statics.　　Here what Schumpeter refers to as the “business cycle （Kreislauf der Wirtschaft）” is a process in which all commodities that are produced are con-stantly exchanged, distributed and consumed by the same method and in the same amount, and each commodity that is consumed is constantly reproduced in the same type and amount. As a result, each commodity is constantly moving. This movement occurs over the period of time in which the cycle of production - exchange -distribution - consumption is carried out. This is not a perfectly static state, but a kind of state of motion. It also includes a kind of temporal element: the period of the cycle. Schumpeter furthermore asserted that this kind of business cycle could be completely understood through eco-nomic statics.　　Why is this the case? Because the component processes of production, exchange and consumption Schumpeter has in mind when it comes to the business cycle belong strictly to the same cycle period, and are theoretically unrelated to other processes of production, exchange and consumption that belong to other cycle periods. Economic quantities belonging to a single cy-cle period compose a complete, self-sufficient static state that is theoretically unrelated to economic quantities in other cycle periods. To illustrate this with the same example of rice used in the previous section, the quantities of sup-ply and demand for rice were in equilibrium in 1949, and this has nothing to do with quantities of supply and demand in other years. This is to all extents a simultaneous equilibrium. So while the “time” of the cycle period does in-deed exist, since all changes occur completely and self-sufficiently within the


same cycle period, theoretically speaking we can say they occur at the same point in time. Here the instant of a point in time has been stretched to the du-ration of the cycle period. Even if it takes one year for a commodity to be consumed after being produced, the time being considered here is in fact nothing more than the time it takes for the change in the physical good （pro-duction - consumption） to occur in its natural form. In terms of economics, for all intents and purposes changes can be seen as occurring instantaneously. This is in line with what was already stated in the previous section. On this point, Schumpeter’s “cycle” has a completely different theoretical character from that of Marx’s process of simple reproduction. Marx’s process of simple reproduction is an intertemporal equilibrium rather than a simultaneous equi-librium. This year’s supply is in equilibrium with next year’s demand. As a result, its essential theoretical character is that of dynamics rather than statics. I will explain this in greater detail in a later chapter when I critique an essay by Lange that attempts to bring together the theory of the Lausanne School and that of Marx, but Lange makes a grave error when he views Schumpeter’s cycle and Marx’s process of simple reproduction as being the same. Leaving the examination of this point for later, however, in any case the essential the-oretical character of Schumpeter’s cycle was that of simultaneous equilibrium theory. This is why Schumpeter’s cyclical approach was at the same time a snapshot approach. From this perspective, it is natural to conclude that this kind of cyclical process is best understood through an economic statics that makes given conditions its fundamental assumption.

2.　Economic Growth and Temporal Elements

The “temporal” phenomenon Schumpeter addressed after the cycle was what he called the phenomenon of growth （Wachstum）. According to Schumpeter, growth is the process of the gradual quantitative expansion of the economy based on changes in its data. This is a phenomenon that temporarily disturbs the state of static equilibrium, but this disturbance only occurs very gradually, and along with the magnitude of the changes being minute, at each stage the equilibrium is restored through adaptation. It is a process in which the state of equilibrium gradually shifts without any fundamental changes in the track of the economy. In this case, since there are changes in data from the start, in this sense it is not as though this approach does not include time. The chang-es in the data, however, are extremely small, and can be thought of as hardly changing the content of the state of equilibrium at all. As a result, with only slight modifications statics as a theory of equilibrium states can be employed even in the case of growth.　　Schumpeter formed this modified static theory, which he called the “var-


iational method （Variationsmethode）,” in line with the work of E. Barone. Its content was as follows. Posit a state of equilibrium as something already established. Now say that one of its constituent elements changes, but only once and only to such a small extent that it does not substantially alter the structure of the equilibrium system, and following this change, there is an internal adaptation. If so, the economy will presumably shift from the old state of equilibrium to a new, slightly different state of equilibrium. The vari-ational method is a method of comparing the content of these two states of equilibrium that differ only slightly. In the variational method, temporal changes are therefore seen as substantially non-existent, and as a result this is essentially a static method.　　The variational method is a theory that traces changes in an equilibrium that happen only once and are moreover very small, but this method can presumably also be applied to the process of growth if it is broken up into extremely small periods of time and the countless states of equilibrium corresponding to each period are considered as being extremely close and in parallel. It was in this sense that Schumpeter applied the variational method to the phenomenon of growth.

3.　Economic Development and Temporal Elements

In the preceding section I have traced the results of Schumpeter’s efforts to close the distance to the state of reality that is in motion while strictly main-taining the theoretical essence of economic statics, and clarified the grounds on which he took the application of economic statics as far as phenomena such as cycles and growth. These phenomena are one facet of the moving reality of an economy, but Schumpeter unrelentingly understood them as tied to states of equilibrium and by doing so attempted to ensure the validity of economic statics. The effectiveness of this sort of approach, however, has its limitations. These are related first to there being problems with this way of understanding reality itself and second to the fact that the phenomenon of growth is essentially not a single event but an ongoing, cumulative operation, but since this kind of criticism is transcendental rather than inherent in regard to Schumpeter and I will have a chance to touch on this point when I discuss the late-stage Cambridge School and Marxist School, for now I will take what Schumpeter says at face value and move on to the third temporal phe-nomenon he addressed, the phenomenon of development （Entwicklung）.　　The phenomenon Schumpeter called “development” is the process of the qualitative expansion of an economy. He believed that in this case, unlike that of growth, fundamental changes occur in the track of the economy.　　Schumpeter divided economic agents into two types. One is a “simple


agent” who always wants to go on behaving as has been their custom. For ex-ample, a farmer has cultivated his fields and grown daikon every year in the past, so he wants to grow daikon this year as well, and because he has sold the daikon he grows to a certain wholesaler every year so far, this year too he will sell to the same buyer. He acts only in accordance with empirical data he has received in the past and in a method he has acquired through experience. These data may change, but as soon as he recognizes such a change he im-mediately adapts. Even in this case, however, he does not engage in a new kind of activity, adhering as much as possible to what he has been doing thus far. So while changes in the form of the economy are certain to occur, its state in each moment is very close to what it had been in the preceding mo-ment. As a result, even if at a certain moment there is state of disequilibrium, as time passes it will naturally approach a state of static equilibrium. Where only this normal type of economic agent exists, only the business cycle and perhaps growth will occur, and there will be no changes in the track of the economy.　　The second type of economic agent is what Schumpeter called an “entre-preneur.” Unlike the first type of economic agent, entrepreneurs are constantly seeking new things and can change the economy’s track. They pioneer new markets, create new types of products, and introduce new methods of production to the production process. Schumpeter calls these innovations “new combinations,” and it is only through the creative activities of entrepre-neurs who introduce such new combinations into the economy that economic development occurs. The phenomenon of development is completely different from the phenomena of the business cycle and growth, occurring in a discon-tinuous or leaping manner and having the effect of constantly destroying the existing equilibrium. Time in its proper sense first emerges in development. It therefore cannot be addressed in an “economic statics” based on equilibrium, stationariness, and continuity. Here a limitation that economic statics cannot transcend arises, and Schumpeter, seeing the necessity of establishing an economic dynamics （Dynamik）, wrote his second book, The Theory of Economic Development. The subtitle An Inquiry Into Profits, Capital, Credit, Interest, and the Business Cycle was added to its second edition, and since all of these phenomena are fundamentally bound up with temporal elements, they belong to a domain that cannot be addressed using general equilibrium theory. It was in this sense that Schumpeter said, “Development, in its deepest character, constitutes a disturbance of the existing static equilibrium and shows no tendency at all to strive for that or any other state of equilibrium. . . . Development has a tendency to move out of equilibrium. . . . Thus, develop-ment and equilibrium in the sense that we have given these terms are


therefore opposites, one excludes the other,” and “My presentation is based on the fundamental differentiation between ‘statics’ and ‘dynamics’ of the econo-my, a point that cannot be stressed enough. The methods of pure economics today are just good enough for the former and the most important results apply to them. ‘Dynamics’ is totally different from ‘statics,’ in their methods and in content.” In other words, without destroying the logical essence of economic statics, Schumpeter gradually expanded the range of its application, came up against the phenomenon of development at the outer limit of this expansion, became aware of the limitations of economic statics, and ultimately arrived at an economic dynamics which had nothing in common with statics either in terms of its essential character or in terms of its content. At this point, Schumpeter’s economic theory split into the two completely unrelated theoretical fields of economic statics and economic dynamics, and he could not help but lose sight of a single, unified approach.

III　General Equilibrium Theory and the Theory of Value

The economics of the Lausanne School is often described as an economics without a theory of value, but how was this school able to do away with this kind of theory? And by doing so, was it indeed able to undertake an understanding of economic society as a whole?

1.　The Expunging of the Theory of Value

As I discussed in the previous chapter and the first section of this chapter, in Pareto’s theory of choice, there is no trace of the idea of maximum satisfac-tion that was the starting point of Walras’ general equilibrium theory. The theory of marginal utility was completely abandoned, and we can say that his positivism was more thoroughgoing than that of Walras. To Pareto, the idea that utility is the essence of the economy or the root cause of exchange was metaphysical, and in this sense the theory of marginal utility had to be reject-ed as non-empirical. This was a complete rejection of the theory of marginal utility. The transmission of the theory of value, however, was not exclusively through the theory of marginal utility; there was also the labor theory of val-ue. Pareto also rejected this theory. He saw the labor theory of value, like the theory of marginal utility, as metaphysical rather than a matter of empirical science. He thought that labor was considered essential or the cause of exchange in the labor theory of value. Whether seeing the essential perspective of the labor theory of value as simply identical to that of the theory of marginal utility in this way is correct or not is a question to be addressed, but I will


have an opportunity to discuss this issue later. In any case, after describing the essence of the labor theory of value in this way, Pareto’s assertion that this theory’s approach was metaphysical and that such metaphysical ways of thinking had to be expunged was no different from his stance regarding mar-ginal utility theory. As a result, according to the general equilibrium approach of Pareto and likeminded economists, theories of value were to be done away with in every possible sense. On this point, the economics of the Lausanne School had a fundamentally different character from the economics of the Austrian, Cambridge, or Marxian Schools. For economists of the Lausanne School, all that is needed is the relationship of prices; they assert that the task of economics is to construct a theory of general equilibrium from this price relationship that could be empirically grasped, and argue that such an undertaking forms the main content of economic theory. Next I will clarify the defining characteristics of the economics of the Lausanne School from the perspective of the expunging of the theory of value.

2.　Phenomena and Essence

Before examining this point in detail, we must first clean up the misconception that the theory of value requires some sort of transempirical, metaphysical “essence” divorced from experience. As for the origins of this misconception, it comes from the idea that essence and phenomena must be clearly distin-guished from each other, with essence being something transempirical that underlies phenomena while being completely unrelated to them. If this is the case, then obviously a theory of this substance that is unrelated to phenomena is not required in order to understand phenomena themselves. In other words, in order to understand relationships of value as phenomena, there is no need for a metaphysical theory of value as a theory of essence completely uncon-nected or unrelated to phenomena.　　Phenomena and essence, however, are not such clearly distinguishable, contrasting entities. Phenomena, unlike mere appearance, are manifestations of an essence, and essence is not unrelated to phenomena but rather a principle that prevents phenomena from emerging merely as a collection of individual facts. Phenomena and essence can only be grasped in dialectic unity with one another. This is something that mechanical empiricists like Pareto forget; this misconception is not limited to Pareto but common to mechanical empiricism in general. When attempting to understand a given phenomenon theoretically, positivists often say that we should view the simple relationships between what is given to us as phenomena just as they are. Let us now examine whether this is indeed the case.　　Consider, for example, the case of attempting to clarify the law of de-


mand for rice. Phenomenally speaking, the quantity of demand for rice can be obtained from production, current stock, and import-export statistics for this commodity. This is calculated by adding up the existing stock of rice at the start of the year （surplus carried over from the previous year）, the amount of rice harvested the previous year, and the amount of rice imported during the year, and subtracting from this the total sum of the amount of rice exported during the year （although this has not been a factor in the post-war period） and the amount of stock at the end of the year （the surplus that will be car-ried over to the next year）. As for the price of rice, this can be obtained from commodity price statistics. Laypeople therefore tend to think that the law of demand for rice should simply connect the data of price and the quantity of demand obtained from the various statistics listed above. This is a matter of econometrics, and in fact it is not so simple. First, regarding the quantity of demand, there is the question of whether this should be just the total demand in society as a whole or demand per capita. Under a market economy, rice cannot be obtained without paying its price in money, so income presumably has an effect on demand. When it comes to the price of rice, there is also the question of whether the number produced by rice price statistics should be taken as it is or fluctuations in the price of rice in relation to the prices of other commodities should be considered （for example, in agriculture and for-estry statistics the rice price index divided by the commodity price index is called the “rice price ratio”）. And whether we are considering the price of rice or the rice price ratio, in either case there is the influence of changes in currency and other changes in the economic situation and other factors char-acterized by effects such as seasonal fluctuations, and it cannot be said that changes are caused simply by changes in the demand for rice. Because of this, even if we say that we ought to establish the relationship between the data for demand and price, there is still the question of which quantities of demand and which prices are to be related. Other questions then arise, such as whether the relationship between these factors is linear or curvilinear. What’s more, all of these data contain errors. In order to exclude these errors and calculate the purely theoretical relationship between demand and price, we must perform certain statistical operations, but in fact these operations themselves cannot be performed unless we anticipate a theoretical, essential relationship. This is the case because “errors” are by nature discrepancies from relationships as they theoretically ought to be. A fundamental theoretical analysis is absolutely necessary for a stochastic analysis to be possible. Be-fore performing statistical operations, econometricians such as ［H. L.］ Moore, as I will discuss later, had to begin with a theoretical analysis concerning the so-called “price elasticity of demand” that economic theory teaches deter-


mines the relationship between price and demand.　　Here I have simply explained the conclusions reached by econometrics to enable positive research on the relationship between the supply and de-mand of rice as an example, but these sorts of circumstances apply to all em-pirical research. In economics, theory does not emerge using a straightforward approach that says when we attempt to theoretically address a phenomenon we should consider only the relationships between statistical materials given as phenomena just as they are. This does not allow us to do anything more than simply present each fact on its own. When we attempt to address a situ-ation in which there is some form of definite relationship between individual phenomena that emerges beyond this kind of simple approach, we must al-ready have a theory that essentially connects these phenomena. Among the scholars belonging to the Lausanne School, there are those who take the interpretation that equilibrium is an essence （such scholars are particularly numerous in Japan）, but if we interpret this approach as having arisen because the fact that a kind of essentialist viewpoint is required first in order to directly grasp phenomena has been tacitly acknowledged by these scholars themselves, putting aside for now whether it is right or wrong, their stance is understandable. When it comes to the original reasoning of the Lausanne School, as I have already noted, the character of this school was at its root thoroughly mechanical empiricist; things like essentialism had to be driven out of our minds, and Pareto’s goal of expunging the theory of value should be also attributed to this way of thinking. The belief that equilibrium is an essence should therefore not be a way of thinking found among scholars of this school, so how is it that many scholars of the Lausanne School have in fact taken this approach? Even though the position of the Lausanne School is that we have no choice but to adopt mechanical empiricism, as long as noth-ing beyond mechanical empiricism is entertained, theory cannot arise, and as a result these scholars have sought to introduce the new metaphysics of the idea that equilibrium is essential.

3.　Commodity Price Theory and the Monetary Theory of Value

If we then examine the question of what defect emerges when the theory of value is expunged from the content of economics, we find that, when we take the approach that the theory of value can be done away with and price theory alone is sufficient for economics, price theory itself can no longer be erected. Price theory addresses the question of why a particular good costs a hundred yen, but in order to clarify how price is determined, we must first clarify how the value of money is determined, and in order to determine the value of money, we must have a theory of value. When we say that the price of a


commodity is a hundred yen, if we are asked what this hundred-yen price is, the answer is of course that it is one hundred times the value of one yen. In this case, how the value of one yen is determined is already assumed. Here we see the element an economics of price without a theory of value must explain that is ultimately left unaddressed is always this assumption of price theory itself, namely, the assumption of how the value of money is deter-mined.　　In this case, it does not solve the problem to say that the value of money is determined in a different place than the world of price and based on a dif-ferent principle. In the field of monetary theory, there is something called the “quantity theory of money.” This theory holds that the value of money is cal-culated by dividing the total value of the commodities to be exchanged for money by the total quantity of money. Based on this theory, the scholar Irving Fisher （1867-1947）, for example, believed that, if there is no change in this sum total of transactions, increasing the quantity of money will lead to a rise in prices while decreasing it will cause prices to fall. Price level is the average of the prices of individual goods, and since this is thought to be the reciprocal of monetary value, in the end, this theory concludes that, if the transaction total does not change, movement in the quantity of money leads to the value of money moving in the opposite direction. However, it is clearly a mistake to think that the quantity of money changes with no connection to the transaction total, and that therefore the value of money changes too. If the quantity of money changes, then the quantity of investment also changes; if the quantity of production changes, so too does price, and indeed income. As a result, the transaction total must inevitably change as well. We must say it is an error to believe that changes in the quantity of money or changes in the price of money are determined without relation to the price of goods and the quantity of transactions involving goods.　　This kind of error is not limited to Fisher. Hilferding, who belonged to the Marxian School, and, as I have already mentioned, made a great contribu-tion to the analysis of financial capitalism, also fell into the same error in his theory of money by adopting an approach based on the socially necessary circulation value. Walras too, through an approach called “encaisse désirée ［desired cash balance］,” arrived at a kind of quantity theory of money. It dif-

fered from the straightforward Fisherian quantity theory and was close to the Cambridge School’s cash balance theory I will discuss later, but it was indeed a kind of quantity theory. In all of these sorts of approaches, the theory of commodity prices and the monetary theory of value are constructed as com-pletely distinct principles, and they inevitably fail to create economics as a unified, synthetic theory. As I will discuss later, Keynes’ desire to oppose this


traditional approach to economics and attempt to form a “General Theory” as a synthesis of price theory and monetary theory was rooted in an effort to avoid, through an analysis of the process of the increase of products-that is, through a dynamic theory-the errors of static equilibrium theory and the quantity theory of money, and therefore as far as this is concerned Keynes did indeed get to the core of the problem. His starting point was a critique of the assertion that the value of money was to be determined in a different place and by different principles than the world of commodity prices. This is-sue turns on whether the “transaction value” is determined without relation to the quantity of money or the value of money. The transaction value is the to-tal of the quantity of transactions of each commodity multiplied by its price, so it already assumes price as a premise. And, since this price is measured with the value of money as its unit, it assumes the value of money. The price and quantity of each commodity must therefore be determined in order to determine the value of money and the quantity of money, and in order to determine the price of each commodity the value and quantity of money must be ascertained. This is clearly a circular argument. In order to escape this circular reasoning, we must say that the value of money, the quantity of money, the price of commodities, and the quantity of transactions are all determined correlationally. This is the starting point of Keynes’ critique of the quantity theory of money.　　In the case of static equilibrium theory, while under the assumption of a fixed quantity of money, it is possible to simultaneously and correlationally determine the rate of exchange of money and commodities, that is, relative price and quantity of transactions of each commodity, and thus to determine the total value of transactions for each commodity, the relationship between the price of money and the quantity of money that must be assumed, has to be left up to another theory, namely, the quantity theory of money. In other words, the quantity of money must be given to the world of commodities from outside of this world, with commodity prices, the quantity of transac-tions, and the price of money only then being determined as a result of its introduction.　　The quantity of money being given, however, means nothing other than a fixed amount of money with a fixed price of money being given. Moreover, this quantity of money and the value of money are simultaneously and corre-lationally determined. If so, it is clearly irrational to say that the quantity of money is determined through some kind of technical relationship outside of the world of commodity prices, and commodity prices, the quantity of trans-actions, and the value of money are only determined after it is given. The value of money must therefore be said to be determined outside the theory of


commodity prices. The price of a commodity is the value of the commodity measured in terms of the value of money. The value of the commodity is expressed in terms of a special commodity in a general equivalent form, that is, money, and received in the form of price. A commodity price, therefore, is in fact something that arises within relationships of exchange of money and commodities, and commodities and money are exchanged because they have an equivalent value. And what determines this value, of course, is nothing other than a theory of value. The theory of price and the theory of value are not essentially unrelated, separate theories. The Lausanne School’s anti-value theory that hastily deems value to be something transempirical and independent of price is nothing more than a misunderstanding of the fundamental meaning of value. Seeing value as essence and price as phenomenon as completely unrelated is a natural error into which mechanical empiricism inevitably falls. We must view commodities and money unifiedly and understand commodity price theory and the money theory of value synthetically. It must therefore be said that the Lausanne School has failed in its overall understanding of economic society, which fundamentally has to be grasped in a unified and synthetic manner.

4.　The Lausanne School’s Theory of Value Judgement

In the preceding section, I have briefly explained how mechanical empiricism of the kind practiced by the Lausanne School is unable to determine the value of money, and cannot even explain the phenomenon of price given in actual experience. Next let us turn to the relationship between the Lausanne School and value judgement theory as a topic belonging to a different dimen-sion, albeit closely related to the preceding discussion. Related to this issue, within the approach of attempting to expunge value judgements from economics, we find the Wertfreiheit ［value freedom］ theory of Max Weber （1864-1920）. It was not as though every member of the Lausanne School

had a conscious, direct relationship to this theory, but one specific scholar who held there was a connection and tried to create an economics that avoids value judgements was the London School economist ［Lionel］ Robbins. Since Robbins’ approach strongly displayed the characteristics of that taken by the Lausanne School, let us touch on his perspective before moving on.　　Robbins believed that value judgements had to be excluded from economic theory in every sense, citing Cambridge School economist Pigou as an example of someone who made the error of bringing value judgements into economic theory and criticizing his welfare economics. In his critique, Robbins argues that the introduction of a concept that requires practical value judgements such as welfare means that economics can never be objectively


scientific, and as a result, this kind of utility judgement must be placed outside of economics. In this case, he adopts Max Weber’s “Wertfreiheit theory” as a scientific methodology. He thought that it was the responsibility of economics to “understand” Max Weber’s “meaning thought of subjectively,” and that, while economics was a value-related field of study, it was not a science that made practical value judgements; through relationships between objective, em-pirical quantities, it could produce something similar to value judgements as the motivations of human actions insofar as they give rise to these sorts of changes, but this was the ultimate limit of what economics ought to do. If theoretical economics goes beyond this limit and brings practical value judgements inside its theories, it must inevitably abandon being a system of objective truth. This is an excellent example of the way of thinking of the Lausanne School being bound up with Max Weber’s theory of value judgement.　　Here let me briefly explain Robbins’ critique of welfare economics. This is related to Pigou’s welfare economics having used a marginal utility theory approach, as was previously discussed. I will introduce Pigou’s welfare eco-nomics in detail later when I discuss the economics of the Cambridge School, but for now I will note that he addressed economic welfare from the perspec-tive of the production, distribution and stability of the national income and established the “three propositions” of welfare economics. Robbins takes issue with the second of these propositions in particular. Pigou says that, all else being equal, the greater the share ［of total income］ belonging to the compar-atively poorer classes, the greater the economic welfare. What Pigou means by the “poorer classes” is the working masses. In other words, therefore, Pigou’s second proposition states that, ceteris paribus, if the portion of the national income comprising the income of labor increases in relation to the portion comprising the income of capital, economic welfare will increase. In order to prove this proposition, Pigou employs a marginal utility theoretical format.　　Pigou attempts this proof as follows. Since the marginal utility of money decreases as the amount of money possessed increases, and since those be-longing to the poorer classes have only a small amount of monetary income, this money has large marginal utility, and conversely since the rich have a large amount of monetary income the marginal utility of that income is rela-tively small. As a result, if the government adopts a policy that gives money taken from the rich through taxation to the poor-for example, if it adopts a policy in which an unemployment insurance system is maintained with premiums paid by the rich from which funds are dispensed to unemployed laborers-then since the marginal money of the capitalist class which has comparatively little marginal utility will be transferred to the working class


and this same quantity of money will become marginal money of the working class, a greater amount of marginal utility will be obtained than before; the total satisfaction of the capitalist class and the working class ensured by the same size of national income should thus be greater after the redistribution than before. In other words, the second proposition of welfare economics, that is, that the greater the portion of the national income that belongs to the in-come of labor, the greater the economic welfare, has been prove-this was Pigou’s approach that was the target of Robbins’ criticism.　　Robbins says that, when it comes to value judgements, both their charac-ter and direction differ depending on the person; what one individual judges to be valuable another may judge to be valueless, and what one individual judges to be of great value another may judge to be of little value. As a result, it is impossible to compare the utilities of different individuals, add them together, or subtract one from the other, but Pigou’s second proposition is posited as though the utility judgements of different individuals could be compared on a common objective scale; this is an enormous error, and as long as it is based on this kind of approach, empirical scientific objectivity will inevitably be lost. This is how Robbins criticizes Pigou. In other words, Robbins criticizes Pigou on the basis of Max Weber’s theory of value judge-ment.　　Robbins also classifies existing economics into two types, one defined as the science that studies wealth and welfare on the basis of economics, the other as the science that studies equilibrium relationships between various ends and various means, and asserts that, with the first type being nothing more than metaphysics, only the second type can assert a system of objective truth as an empirical science. Robbins says that his own perspective belongs to the second type; he says that economics is not an undertaking attached to some kind of economic requirement, but rather a science that elucidates an economic order expressed in relationships between economic quantities. In this sense, Robbins can indeed be said to have adopted the stance of Pare-toian choice theory; Robbins’ critique of Pigou in this case corresponds to the Paretoian critique of marginal utility theory, which asserts that subjective util-ity cannot be empirically measured, and economics as an empirical science must take as its starting point only the interdependent relationships between economic quantities that can be objectively measured. In a different aspect, Robbins’ critique of Pigou, as already noted, was also connected to Max Weber’s approach in which value judgements must not be carried out within the scope of empirical science. This critique involved asserting that to take up topics that involve value judgements such as economic welfare within economics is to go beyond the limits of this field as an empirical science.


Robbins’ economics criticized Pigou’s welfare economics in terms of both of these aspects, and the achievements of the younger generation of the London School economists such as Kaldor, Hicks, and Lerner in relation to the “fundamental premises of welfare economics” lay in stripping value theory elements from the old Pigovian welfare economics and reconstructing this approach using the theory of choice in the spirit of Robbins’ critique of Pigou. In this sense, the economics of the London School was dubbed “new welfare economics,” while the welfare economics of Pigou came to be referred to as “old welfare economics.” But, since this new welfare economics of the London School expunged the “idea of welfare,” so to speak, from economic theory, it would presumably eliminate confusion to say that it is not welfare economics at all in the original sense of the term.　　A second criticism later emerged, however, regarding the new welfare economics mentioned above. This was the approach of economists such as A. Bergson and Samuelson that can be described as the “new new welfare economics.” While in general they accepted the criticism of old welfare economics by new welfare economics and the placing of individual utility judgements outside the bounds of economics, Bergson and Samuelson argued that, to the extent that new welfare economics endorsed the current state of the distribution of the means of production, it had not gotten away from a kind of value judgement, and indeed economics should not avoid value judgements. Unlike old welfare economics, they sought the basis of value judgements not in individual utility judgements but in social value judgements. Samuelson, for example, expressed this kind of value judgement criterion mathematically, creating the concept of a social welfare function on the basis of which he went on to develop his theory.　　The question that arises here is whether this new new welfare economics of Bergson and Samuelson is a correct economics that leaves no room for criticism, but there will be several opportunities to address this point later. For now, because at the same time it can also be a critique of the Lausanne School’s value judgement expunging theory, we must take up as our own the main thrust of new new welfare economics’ critique of new welfare econom-ics, that is, the criticism that while it called itself “new welfare economics” it was surreptitiously engaging in value judgement.　　As I have just stated, the critique leveled against the new welfare eco-nomics by proponents of the new new welfare economics such as Bergson and Samuelson points out that, insofar as it assumes the current state of the distribution of the means of production and holds that it can only be changed by individual judgements, the new welfare economics is indeed underpinned by a kind of value judgement-a conservative, individualistic value judge-


ment. But value judgements that can be adopted by theorists are not limited to this kind of conservative, individualistic value judgement. We have the same right; we can instead assume a value judgement that does not endorse the current state of distribution of the means of production, and moreover seeks to change this from the perspective of society as a whole. The approach of the new new welfare economics can be characterized as advocating that we start from a more comprehensive perspective that includes both this kind of progressive, social value judgement and the conservative, individualistic value judgement described above and posit a “social welfare function” as the basis for critiquing both of these value judgements. If we believe that, when the individualistic, status quo-maintaining value judgement and the social, status quo-destroying value judgement are laid out beside each other mechan-ically, no reason to adopt one and discard the other can be found within the scope of theory, then a Lausanne School-type pure economics will presuma-bly arise, but in this case, as a characteristic of mechanical empiricism, differing value judgements are seen as data given through experience, and theory is constructed with these data as something that is simply mechanically given. As a characteristically Anglo-American school, however, new new welfare economics adopts a perspective of practical empiricism. This approach does not view experience as something mechanically given, but rather grasps it through a process in which it is practically objectivized. Without mechani-cally separating and abstracting value judgements and empirical objects, it views them in terms of a process of objectivizing the actions of subjects who carry out value judgements and addresses the issue of value judgements theo-retically in line with this process of practical objectivization. We can think of it as an approach that tries to recognize the true meaning of historical social experience. In this sense, the new new welfare economics’ critique of the new welfare economics should in fact be seen as an incisive attack on the failure of the mechanical empiricism of the Lausanne School to understand econom-ic society as a whole.

IV　A Modern Evaluation of the Lausanne School

In the end, if we evaluate the Lausanne School as a whole from a modern perspective, should we think of it as an approach that has several limita-tions from a historical or theoretical perspective?


1.　 The Limitations of the Lausanne School from a Historical Perspective

I think the preceding explanations have made clear the inadequacy of the practical validity of general equilibrium theory. At very least I think it is im-possible to maintain, as some people do, that precisely because it is unrelated to historical development general equilibrium theory is applicable to all eras and all societies. For my part, even when it comes to the economics of the Lausanne School, I believe all we can do is consider whether it may indeed have had validity in a particular historical period. That is, as a first approxi-mation, I think it is not impossible to think of a particular era in which it had a certain amount of validity. This is the era of liberal economy. In the era of liberal economy, the economy had a so called “self-regulating function;” even if a disturbance in economic society destroyed the equilibrium of supply and demand, this disequilibrium would naturally dissolve thanks to the self-regu-lating function of the economy itself-this kind of structure existed. In such a society, general equilibrium theory can be said to have a certain degree of validity as a first approximation. It is indeed the case that since actual economic activities, even in the era of liberal economy, are constantly moving away from an equilibrium, if we try to positively explain the process of dis-equilibrium or to study the intermediary processes between disequilibrium and equilibrium, we must naturally leave the static equilibrium theory of the Lausanne School and head toward a dynamic theory. Even so, however, since an era of liberal economy has a special structure in which these intermediary disequilibria dissolve as temporary phenomena and bring about a state of equilibrium, looking at such liberal economic societies, it can be said that general equilibrium theory as a theory of static equilibrium may be valid as a first approximation.　　Historically speaking, however, classical liberal economic society only secured this self-regulating function on the basis of the British global hegem-ony of the 19th century. Consequently, as this exclusive global domination of British capital gradually declined under competition from developing nations such as Germany, America, and Italy in the late 19th century and was deci-sively upended following the First World War, this self-regulating function too was damaged, and a state of affairs arose in which disequilibria between supply and demand could not necessarily be resolved automatically within the framework of capitalist systems. Looking at this kind of crisis period for capitalism, general equilibrium theory, to the extent that it is viewed in its entirety as a theoretical system, cannot be considered valid in the light of empirical reality.


　　The fact that, in spite of this, even today there are many supporters of this approach is something we must consider in depth. One reason for this is belief in its effectiveness as a method of economic analysis. As I will discuss later, this can only be overcome by properly evaluating the theoretical results these people have produced. I think the second reason there are so many sup-porters of this approach even today is based on the fact that, in connection with their underlying view of society, these people hold a view of the econo-my in which actual economic activities ultimately, even in the present era, bring about equilibria. We cannot help but conclude that this view is connect-ed to their belief that capitalism is an eternal system. In other words, I think the historical limitation of this approach is to be found here in the fact that even today, as long as we only attempt to view economic activity from the perspective of capitalist civil society, we cannot help considering it in terms of some manner of equilibrium and harmony.

2.　Validity as a Method of Economic Analysis

The assessment given above is based on considering the Lausanne School as a single overall system, but if we look at the individual theories of the Lausanne School as techniques of economic analysis, we cannot say that among these individual techniques there are none that should be put to empirical use.　　Taking the price system as a premise and looking at the results of the activities of individual entrepreneurs, for example, or studying the results of the distribution of the income of individual consumers-since regarding these sorts of unit economic phenomena, the subject in question, whether an entrepreneur or the head of a household, has complete jurisdiction and is con-sciously in control, unit economic equilibria will ultimately arise, and as a result the individual technical methods produced by the economics of the Lausanne School should be used in such cases. There is no doubt that such individual economic analysis arising as a result of the Paretoian and later Hicksian theory of choice can be employed almost unaltered as long as we are dealing with individual economies. And the various tools of analysis that make up the content of this kind of theory of individual economic equi-librium, for example, the analytic expression of concepts like the individual economic demand function, the individual economic supply function, and the production function, can be well employed as discrete techniques.　　But while these approaches can be described in this way as usable indi-vidual techniques, when combined as a method of understanding economic society as a whole, they cannot of course be used just as they are in this synthesized form. For example, we cannot adopt without modification an


approach in which, as is often found in the work of scholars such as Walras and Pareto, an equilibrium state of economic society as a whole is posited and a system of simultaneous equations is used to express it.　　Even when it comes to these individual techniques, as they are used within the scope of the theory of the Lausanne School, there are cases in which they cannot be made to perform adequately. One example of this is the Hicksian theory of static stability conditions I have already described. The static stability conditions theory is a theory that clarifies under what condi-tions a static equilibrium is stable or unstable, but this theory cannot address what happens when these conditions do not arise, and even when they ulti-mately do arise, it cannot address what sort of path is followed leading up to this point. In other words, in such cases the scope of the use of stability conditions theory is limited. If we attempt to expand it to cases in which equilibrium is not reached, or to study the intermediary processes even in cases in which equilibrium is ultimately reached, we must inevitably go beyond the scope of the static equilibrium theory of the Lausanne School to the dynamic stability conditions theory of the Samuelsonian approach. I will discuss Samuelson’s dynamic stability conditions theory in more detail later, but it was a theory more in line with the Anglo-American School than the Lausanne school, and while it had a Cambridge School-like, macroscopic dynamic structure, in this case when stability ultimately arises what sort of path was taken by the intermediary processes by which it emerged can be explained, and explanations of cases in which stability does not arise can also be undertaken.

3.　 The Worldview of Contemporary General Equilibrium Theory Economists

As we saw in the previous section, members of the Lausanne School today acknowledge the means nature of equilibrium theory and understand their own theory as a technique of economic analysis. As a result of thinking of it completely as a technique in this way, the following can presumably be said without further examination. Because this is its original nature, the criticism that this theory is not useful as a comprehensive understanding of capitalist society is off the mark from the start, and I think it can moreover be said that it is by no means a contradiction for the theorists of this school to reject the-ories of value. In other words, general equilibrium theorists do not think of economics as a means of comprehensive understanding, but rather as a partial technique; it seems to me we can say that the rejection of something like a theory of value that is supposed to be a means of comprehensive understand-ing does not necessarily contradict the Lausanne School’s view of economics


as a means. When you put it like this, it seems quite straightforward, but in general if you express it in these terms, there are many cases in which econo-mists of the Lausanne School cry out in opposition. This is because, while openly asserting the means nature of their own theory, they tacitly believe that in most cases economic society has the kind of structure posited by the Lausanne School, and that the kind of society they envision is the most nor-mal society. To put it another way, I think it is because they tacitly maintain a kind of metaphysical view of economic society in which the many contra-dictions in capitalism, while they do indeed exist, are ultimately to be re-solved within the framework of capitalism itself.　　Having arrived at this way of looking at things, is it not indeed possible to think that the Lausanne School, which is supposed to have expunged theo-ries of value, also includes value judgements in a hidden sense?-I think this is indeed the case. Just as there were value judgements hidden behind Max Weber’s Wertfreiheit ［value freedom］ theory, I think it can also be said that the economics of the Lausanne School, while ostensibly banishing theories of value, are in fact tacitly underpinned by hidden value judgements. I think it is necessary for us to thoroughly pursue and consider these value judgements. For example, I think we must carefully examine and avoid glossing over the fact that Pareto, who excluded the subjective value judgements that form the motivations behind human actions from the objects of study of economic the-ory because of a way of thinking in which the roots of human actions lurk within “instinctive, non-logical, permanent psychological states,” politically approached fascism. By engaging in such undertakings, we must elucidate the value judgements tacitly lurking within technical theories and pursue the practical roles and historical limitations of these worldviews that can be con-firmed in this manner. When it comes to these evaluations, however, it is important to make them correspond to the development of civil society, and to draw conclusions about what is practical at each stage of history on the basis of a comprehensive and wide-ranging sociological and historical understanding.

（Robert Chapeskie: Freelance Translator）（Kayoko Misaki: Professor, Shiga University）

Translated by Robert Chapeskie and Kayoko Misaki

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Transcript of Translated by Robert Chapeskie and Kayoko Misaki