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

Léon Walras’ Études d’Économie Politique Appliquée Influence on Schumpeter’s Theory of Bank and Crisis

Velardo Tristan, Sciences Po Bordeaux - Centre Émile Durkheim

The influence of Léon Walras on Joseph A. Schumpeter is well known and documented (Berthoud 1996; Schefold 1997). The latter considers the former to be “the greatest of all economists”. Most scholars working on the links between Walras and Schumpeter rightly emphasize the influence of general equilibrium theory and the Élément d’Économie Politique Pure (EEPP) (1874) on Schumpeter’s work (Arena 1992; 2002; Shionoya 1997; Andersen 2009): the circular flow, the concept of exchange and generalized interdependence, mathematization, etc. In doing so, the existing scientific literature replicates the valuation that Schumpeter undertakes of the “pure” dimension of Walrasian economics. Indeed, Schumpeter downplays Walras’ contributions to social economics and applied economics. Schumpeter ignores the studies in économie sociale by reducing them to “questionable philosophies” (Schumpeter [1954] 2009, 795). Instead, he repeatedly refers to the work on money, banking, and credit in Études d’Économie Politique Appliquée (EEPA) (1898) and considers it of primary importance alongside statics and equilibrium theory. This paper proposes a reappraisal of the links between Walras and Schumpeter by showing the influence of the EEPA and more particularly of a text entitled “Théorie Mathématique du Billet de Banque” (TMBB) (1880) on Schumpeter’s theory of banking, credit and crisis. In so doing, this paper highlights an underestimated aspect in the scientific literature: Schumpeter is indebted to Walrasian applied economics. The place of money in Walras’s theoretical system has been the subject of an extensive scientific literature (Morishima 1977; Blaug 1986; Rebeyrol 1999, 2000; Boyer 2000; Gomez-Betancourt and Vila 2019). In this paper, it is less about the theory of money in the various editions of EEPP, but about the theory of banking and credit in EEPA (Bauvert 2002; Baranzini 2005). In the TMBB, Walras foresaw the possibility of creating money (in the form of banknotes) beyond the banks’ own fund reserves. This phenomenon destabilizes the economy and causes currency crises and credit crises, which is why Walras disapproves them. Schumpeter took up these developments in his own theory of capitalism: but Schumpeter made banking and credit a normal aspect of the functioning of capitalism, insisting precisely on credit and money creation and on the role of the bank as a “manufacture of means of payment”, thereby assuming the dynamic character of capitalism. Like Walras, he established a link between credit and “new capital” and the crises that punctuated capitalism. The divergent conclusions of Walras and Schumpeter regarding the technical possibility given to banks to create money stem from their different conception of economics: the former considers political economy under three branches: pure, social and applied (Baranzini 2014); the latter reduces economics to its analytical dimension (Velardo 2021).

Area: Eshet Conference

Keywords: Walras ; Schumpeter ; bank ; credit ; money

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