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TERRA ECONOMICUS

Modern microeconomic's road to irrelevance – what went wrong?

TERRA ECONOMICUS, , Vol. 13 (no. 4),

This paper shows that among the crucial reasons of the modern microeconomic theory’s irrelevance to reality is the fact that, unfortunately, it has not been developed since Walras. This paper reveals several crucial differences between Walrasian and post-Walrasian approaches to microeconomic theory: 1. Walras’ economic theory is characterized by the evolutionary approach, as it is generally compatible to the human society’s development; 2. According to Walras’ approach, the demand and supply of goods and services are obtained directly from the solution of models. In the postWalrasian economists’ approach the final endowment is directly determined, which prevent discussing employment-unemployment problem in the macro level. 3. Walras’ economy is a decentralized economy, which is opposite to the modern general equilibrium theory where the economy is a centralized; and in Walrasian approach each individual is a «price maker»; whilst the post-Walrasian approach, especially the modern approach, views individual rather as a «price taker». 4. Walras used two categories of money: first, the money as commodity numéraire (measure of value) and its price; and second, money (in circulation and for saving) and its price as the rate of interest. Post-Walrasian economists generally considered only fiat money in circulation. 5. According to Walras’ micro model for individuals, the budget constraint equation relates to the numéraire (the money as a commodity). Within the post-Walrasian economists’ approach, the budget constraint equation relates to the income (or wealth) which is generally given.


Keywords: commodity money; fiat money; microeconomic theory; Walras; modern theory

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Publisher: Southern Federal University
Founder: Southern Federal University
ISSN: 2073-6606