Fifteen years after the Global Financial Crisis: Recessions and Business Cycles in the History of Economic Thought

The Speculator and Equilibrium: Pareto and Pigou

McLure Michael, University of Western Australia
Stevens Riko, University of Notre Dame Australia

The Lausanne School and the Cambridge School are commonly regarded as the two great mainstream approaches of neoclassical economics. The relationship between the ideas of the two founding figures of these schools of thought, namely Léon Walras at the University of Lausanne and Alfred Marshall at the University of Cambridge, has been the subject of considerable scholarly investigation over many years (Hicks 1939; Colander 1995; Kregel 1992, De Vroey 1999a, 1996b, 2004; Donzelli 2008; Arena and Caldari 2019). The relationship between the ideas of their successors, Vilfredo Pareto in Lausanne and A. C. Pigou in Cambridge, has also received consideration in the secondary literature (McLure 2010, 2013), but it has been much less extensive than that of their predecessors. This paper, which is being prepared for a forthcoming special issue of the "Revue Européenne des Sciences Sociales" commemorating the centenary of Pareto’s death, extends the secondary literature by comparing Pareto’s analysis of the speculator and equilibrium relative to that of Pigou. While both of these thinkers devoted considerable attention the speculator in their works, fundamental differences in their conceptions of economic science give rise to substantial differences in the roles ascribed to that economic agent in their analyses. Whereas Pigou’s speculator appears only within his economics, however widely defined that is, Pareto’s speculator plays an important role in both economics and sociology. But despite the differences in theoretical function ascribed to the speculator by Pareto and Pigou, both characterised that agent as confronting uncertainty and exhibiting less than perfect rationality. Pareto only analysed the equilibrating function of the ‘commercial’ speculator to illustrate to importance of general equilibrium for the framing of pure economic theory. In addition, he also considered the effects of interactions between speculators and political elites on the social equilibration within his sociology. Pigou confined his analysed of the speculator to the economic framework established by his welfare economics. In contrast to Pareto, Pigou paid particular attention to the influence of institutional arrangements on the equilibrating behaviour of speculators. The paper demonstrates that, despite their vastly different views regarding the boundaries of economic science and the roles ascribed to the speculator therein, the treatments of the speculator and equilibrium by Pareto and Pigou are complementary rather than inconsistent. [note: the paper is co-authored with Riko Stevens]

Area: Eshet Conference

Keywords: Equilibrium, Pareto, Pigou, Speculator

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