Full text of DOI:10.1162/003355300555006

WALRASIAN ECONOMICS IN RETROSPECT*
SAMUEL BOWLES AND HERBERT GINTIS
Two basic tenets of the Walrasian model, behavior based on self-interested
exogenous preferences and complete and costless contracting have recently come
under critical scrutiny. First, social norms and psychological dispositions extend-
ing beyond the selfish motives of Homo economicus may have an important bearing
on outcomes, even in competitive markets. Second, market outcomes depend on
strategic interactions in which power in the political sense is exercised. It follows
that economics must become more behavioral and more institutional. We can
return to these themes of the classical tradition, now equipped with the more
powerful mathematical tools developed over the past century.
I. INTRODUCTION
What do we know that a century ago Alfred Marshall did not?
Marshall’s Principles, first published in 1890, became the
‘‘Samuelson’’ of an entire generation of English-speaking econo-
mists, and bristles with ideas anticipating late twentieth century
economics. Marshall’s text touches on increasing returns, now
central to endogenous growth theory, the importance of nonselfish
motives and other preferences that are unknown to Homo economi-
cus, now staples of behavioral and experimental economics, and
the relevance of the biological (rather than ‘‘mechanical’’) analo-
gies, now key elements in the burgeoning field of evolutionary
game theory.
But Marshall failed to make much of these modern ideas, and
as the century progressed, his insightful but frumpy Victorian
economics was supplanted by a more elegant and thoroughly
continental Walrasian model that dropped them altogether. Two
basic tenets of this model, behavior based on self-interested
exogenous preferences and complete and costless contracting,
underpin the distinctive analytical results of what came to be
known as neoclassical economics. They also influenced the subject
matter of ‘‘political economy,’’ which soon was to drop the adjective
and become ‘‘the relationship between given ends and scarce
means . . .’’ to use Lionel Robbins [1935] famous phrase.
The reader who doubts the centrality of these tenets might
*
We would like to thank Kenneth Arrow, Robert Barro, Larry Blume, Ernst
Fehr, Nancy Folbre, Karla Hoff, Robert Solow, Alessandro Vercelli, Elisabeth
Wood, and the editors of this J ournal for helpful comments, and the MacArthur
Foundation for financial support. Themes touched on here are developed at length
in Gintis [2000] and Bowles [2001].
2
000 by the President and Fellows of Harvard College and the Massachusetts Institute of
௠
Technology.
The Quarterly J ournal of Economics, November 2000
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consider, for instance, how different post-World War II textbooks
would have looked if they had addressed, as the standard case,
individuals with socially formed, and not always selfish, prefer-
ences, whose exchanges are governed by incomplete contracts
requiring strategic interaction in markets that need not clear in
competitive equilibrium.
The Walrasian assumptions about preferences and contract-
ing have recently come under scrutiny, and now command less
assent than in the days when the Marshallian variant of neoclas-
sical economics was rejected in favor of Walrasian wisdom. We
here explore recent contributions to economic theory that attempt
to correct the weaknesses of Walrasian economics. The lack of
realism of the complete contracting assumption is hardly in doubt,
and we will do little more than mention the now familiar
consequences of the failure of this Walrasian assumption, among
them the fact that competitive equilibria may be Pareto-
inefficient, and include credit-constrained borrowers and unem-
ployed (or misemployed) workers unable to make the transactions
they desire at the going rates of interest and wages. We will focus
instead on some unexpected implications of abandoning the
familiar terrain of complete contracts.
The first implication (Section II) is that where some aspect of
an exchange is not subject to a costlessly enforceable contract,
social norms and psychological dispositions extending beyond the
selfish motives of Homo economicus may have an important
bearing on outcomes, even in competitive markets. The second
implication (Section III) is that market outcomes depend on
strategic interactions in which something akin to ‘‘power ’’ in the
political sense is exercised. Where contracts are complete, as
Oliver Hart remarked, there is nothing for power to be about, but
where much remains to be determined after the handshake, the
institutional details of the exchange process determine the strate-
gic opportunities and effectiveness of the parties concerned. The
result of these two consequences of incomplete contracts is that
economic analysis must become more social and psychological in
its treatment of the human actor, more institutional in its
description of the exchange process, yet no less analytical in its
model-building and no less dedicated to the construction of
general equilibrium models. In Section IV we discuss the problem
of public policy and institutional design, observing that we must
judge policies and institutions not by how closely they approxi-
mate the assumptions of the fundamental theorems of welfare

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economics, but rather according to their ability to function
effectively in the second-best world of ineradicable state and
market failures. Section V suggests that Walrasian economics was
a detour, avoiding the hard problems in economic theory and
failing to elucidate the central issues of policy and institutional
design. We close with some thoughts on the challenge of acquiring
and teaching the economists’ craft.
II. INDIVIDUAL BEHAVIOR AND ITS EVOLUTION
In the opening pages of the Principles, Marshall dismissed
the idea that economics should model the individual as a selfish
calculating machine. ‘‘Attempts have been made,’’ he wrote in the
preface of the first edition, ‘‘to construct an abstract science with
regard to the actions of an ‘economic man’ who is under no ethical
influences and who pursues pecuniary gain warily and energeti-
cally, but mechanically and selfishly. But they have not been
successful . . .’’ adding ‘‘nor even thoroughly carried out’’—
acknowledging that the economic man of neoclassical theory,
although calculating and selfish, was also a perfect gentleman, for
whom a handshake was a handshake and who thus would not
consider behaving opportunistically by shirking on the job, default-
ing on a loan, or otherwise taking advantage of contractual
incompleteness, simply because it suited him to do so.
Instead of the abstract ‘‘economic man’’ of Walrasian theory,
Marshall advocated empirically based assumptions concerning
the heterogeneous but ‘‘regular ’’ behaviors and cognitive orienta-
tions of members of distinct social groups (among which were
women, about whom Marshall’s views were anything but mod-
ern). He also stressed that these behavioral regularities are
shaped by the economic circumstances under which they live and
work. The third sentence of the Principles states that: ‘‘. . . man’s
character has been moulded by his everyday work and the
material resources which he thereby procures more than by any
other influence unless it be that of religion . . .’’ and later on the
same page he adds an idea taken from Smith, that ‘‘his character
is formed by the way he uses his faculties in his work, by the
thoughts and feelings which it suggests, and by his relations to his
associates in work, his employers or his employees.’’ Subsequent
generations, however, were ushered past these guideposts and
offered an analytically more tractable but empirically ungrounded
conception of human behavior. The economic man known to

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students of Walrasian economics acts on the basis of preferences
that are self-regarding—excluding such intrinsic values as altru-
ism, fairness, and vengeance—and are defined over a restricted
range of outcomes—excluding honesty as well as concerns about
the process rather than simply the outcome of exchange per se.
This view has always had its critics, of course, from the
sociological insights of Thorstein Veblen concerning conspicuous
consumption through the attempts of J ames Duesenberry to
explain consumption/savings patterns in terms of ‘‘keeping up
with the J oneses,’’ to J ohn Kenneth Galbraith’s notion that
consumer tastes are created by advertising. Doubtless the most
recognized of such critics is Herbert Simon, whose concept of
‘‘bounded rationality’’ has motivated considerable research in
institutional economics, most notably in the work of Oliver
Williamson. In addition, Armen Alchian [1950] and Gary Becker
[1962] wrote pioneering papers on how what would now be called
adaptive agents—namely firms and consumers with limited cogni-
tive capacities—might give rise to competitive market outcomes
similar to those of fully informed utility-maximizing agents.
Yet, until recently these critics induced few economists to go
beyond the conventional notion of preferences in the Walrasian
model. Human capital theory in the 1950s and 1960s, and the
economics of education in the ensuing years, might have been the
occasion for a sustained investigation of how social institutions
shape preferences and human character. But the pioneers of this
field preferred to leave the ancient de gustibus non est disputan-
dum canon undisturbed. Our dissenting view, presented in Gintis
[1972] and Bowles and Gintis [1975, 1976], had little impact
within economics.
At an accelerating pace over the closing fifteen years of this
century, however, an empirically grounded view of economic
behavior—one increasingly subject to analytical modeling—has
arisen to challenge the Homo economicus of the Walrasian model,
amending and augmenting the conventional view, as it happens
along the lines suggested by Marshall. The approach draws on
insights and empirical results from biology, psychology, sociology,
and experimental economics. We refer to the approach as ‘‘behav-
ioral,’’ for lack of a better term. The primary contribution of the
behavioral approach to economics is to understanding the diver-
sity and context-dependent nature of human preferences, how
elements of this repertoire of preferences become salient in
particular strategic interactions, how they have evolved over the

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long run, and how individuals form the beliefs that along with
their preferences explain what people do. The behavioral ap-
proach is not a critique of optimizing subject to constraints. It
takes for granted that people are purposeful and have reasons for
what they do—although it recognizes that individuals may have
internal conflicts and time-inconsistent preferences. Rather, it
challenges conventional accounts of the content and origins of
preferences. Important early contributions here include Akerlof
[1984], Tversky and Kahneman [1974], and Kahneman, Knetch,
and Thaler [1986].
Everyday observation as well as introspection suggests that
other-regarding and process-regarding preferences may be impor-
tant in explaining behavior. Experimental evidence confirms
these impressions. The commonly observed rejection of substan-
tial positive offers in ultimatum games is an example. The
ultimatum game pairs subjects (usually anonymously) one being
randomly designated the ‘‘responder,’’ the other the ‘‘proposer.’’
The proposer is provisionally awarded a sum of money with
instructions to divide it between proposer and responder. If the
responder accepts the offer, the responder gets the proposed
portion, and the proposer keeps the rest. If the responder rejects
the offer, both get nothing. The prediction based on conventional
preferences is, of course, that the proposer, knowing that the
responder will accept any positive offer as preferable to nothing,
will offer the smallest possible positive amount, which will be
accepted.
But in experiments conducted in the United States, J apan,
Israel, Europe, Russia, China, and Indonesia, the vast majority of
proposers offer between 40 and 50 percent of the pie, and offers
lower than 30 percent of the pie are often rejected [Camerer and
Thaler 1995; G u¨ th and Tietz 1990; Roth, Prasnikar, Okuno-
Fujiwara, and Zamir 1991]. These results have occurred in
experiments with stakes as high as three months’ earnings, and
they are unlikely to reflect subjects’ misunderstanding of the
game, as they have been replicated for repeated one-shot play. We
have recently replicated these experimental results in a number
of hunter-gatherer, pastoral, and other simple societies [Boyd,
Henrich, Bowles, Fehr, and Gintis, forthcoming; Henrich, 2000].
The substantial offers made by proposers need not imply an
ethic of fair division. They could be due to the prudence of
self-interested proposers anticipating rejection of low offers. But
self-regarding motives can hardly explain the respondents’ com-

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mon rejection of substantial offers. We are persuaded by the
interpretation of these results as reflecting strong reciprocity,
namely a propensity to reward those who have behaved coopera-
tively and correspondingly to punish those who have violated
norms of acceptable behavior, even when reward and punishment
cannot be justified in terms of self-regarding, outcome-oriented
preferences.
Strong reciprocity is unlike the self-serving kindness of
reciprocal altruism studied by biologists [Trivers 1971], popular-
ized by the success of tit-for-tat in Axelrod’s [1984] simulation
tournaments, and embodied in cooperation-inducing ‘‘trigger strat-
egies’’ in the theory of repeated games. The key difference is that
strong reciprocity is not rewarded by higher payoffs in subsequent
play and hence is not readily explained by outcome-oriented
behavior. By contrast, reciprocal altruism, tit-for-tat, and coopera-
tion in repeated games are fully consistent with conventional
self-regarding preferences. Strong reciprocity also differs from the
simple altruism studied by Becker [1981], Barro [1974], Hamilton
[1975], and others, as it is conditional on the norm-observing
behaviors of others. While unconditional altruism describes some
observed behaviors among family members and intimates (al-
though rarely of the complete form assumed by Barro and Becker)
and it is sometimes extended to strangers, we find little evidence,
experimental or other, of its generality as a robust and widespread
motive among nonkin, especially by comparison with strong
reciprocity.
Additional experimental evidence for the importance of strong
reciprocity comes from public goods games in which subjects
engage in costly punishment of noncontributors even on the final
round of the game, where the possibly self-interested objective of
improving the behavior of the slackers cannot be germane [Os-
trom, Walker, and Gardner 1992; Fehr and G a¨ chter 2000].
Corroborating evidence is to be found in sources ranging from
descriptive accounts of collective action and vendettas to anthropo-
logical studies of norm enforcement in social groups lacking
states, such as foraging bands [Boehm 1993].
A remarkable regularity in these experimental results is the
substantial effect on subjects’ behaviors induced by ostensibly
irrelevant differences in experimental protocols. Hoffman and her
collaborators varied two aspects of the experimental environment
of the ultimatum game: proposers either won their position by
doing well on a trivia quiz or were randomly assigned, and their

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relationship to their game partner was either described as an
‘exchange’’ (with prices elicited by the experimenter) or simply as
‘divide $10’’ [Hoffman, McCabe, Shachat, and Smith 1994]. De-
‘
‘
spite the fact that the experimental situation was otherwise
identical, the ‘‘earned status’’plus ‘‘exchange’’combined experimen-
tal condition protocol yielded significantly smaller offers. Blount
[1995] found that respondent rejection rates fall dramatically
when they are told that the offers are generated by a computer
rather than a person, suggesting that the desire to punish a
norm-violator, not simply rejecting a bad deal, is at work. The
importance of context in cueing behaviors is further suggested by
the fact that defection rates in the prisoner ’s dilemma game are
substantially higher if the game is explained to subjects as the
‘
‘Wall Street Game’’ rather than the ‘‘Community Game’’ [Ross and
Ward 1996].
Economic behaviors are apparently strongly affected by what
Homo economicus would consider irrelevant details. In some
experiments, anonymity generates behaviors differing from those
induced by more personal settings, even when the subjects are
very unlikely ever to meet again. Communication, a reduction in
social distance among experimental subjects, or other conditions
contributing to group identity increases contributions in public
goods games [Sally 1995; Ledyard 1995; Dawes, Van de Kragt, and
Orbell 1988] and induces cooperative play in prisoner ’s dilemma
interactions [Kollock 1997]. G a¨ chter and Fehr [2000] find that in a
public goods interaction even brief experimentally induced famil-
iarity among subjects enhances the impact of social approval
incentives. Combining familiarity and the public revelation of
one’s contributions leads to a significant increase in prosocial
behavior.
Extending the behavioral foundations of economic theory
cannot be done on the basis of experiments alone, of course. We do
not know whether experimental results are robust indicators of
behavioral traits in real world situations [Loewenstein 1999]. Do
those who reject low offers in ultimatum games also vote for
programs that would more equally distribute income? Are defec-
tors in the prisoner ’s dilemma experiments less cooperative in the
community or workplace? There is some evidence that experimen-
tal subjects who display trust in the laboratory also are more
willing to engage in trusting behaviors in their daily lives
[Glaeser, Laibson, Scheinkman, and Soutter 2000]. The experimen-
tal results are suggestive, however, in that they often document

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behaviors that, if common in real life, would resolve widely
recognized anomalies within the conventional preference para-
digm. Included are such basic behaviors as voting, self-destructive
revenge, and the vagaries of support and opposition among the
well-off for income transfers to the poor [Fong 2000; Bowles and
Gintis 2000].
It appears, then, that concerns about others and about the
processes generating economic results—sometimes codified as
ethical norms—are important sources of behavior, and that
behavior is often context-specific. It follows that because economic
institutions shape the structure of social interactions, they also
differ in the types of situation-specific behaviors that they may
motivate. Moreover, anthropological and social psychological evi-
dence, some of it summarized in Bowles [1998], suggests that
behavioral orientations are learned under the influence of eco-
nomic institutions, are generalized to other noneconomic areas of
social life, and persist from generation to generation.
Economic institutions shape preferences by influencing who
interacts with whom, who performs which tasks, and with which
behaviorally conditioned payoffs. As Gintis [1972] and Becker
[1996] have stressed, individuals often deliberately alter their
preferences, adopting the traits of their happier and more success-
ful neighbors, for example. But in addition to such conscious
processes, preference change often works sub rosa through psycho-
logical mechanisms of dissonance reduction or conformism. Ex-
amples include studies from both simple and advanced societies
on the effects of the ways that adults make their living on
child-rearing practices and values and on general psychological
makeup [Barry III, Child, and Bacon 1959; Kohn 1969; Edgerton
1
971; Kohn et al. 1990]. The importance of the nonintentional
aspect of cultural updating differentiates our approach from
Becker ’s [1996] valuable contribution on the deliberate alteration
of one’s preferences.
Those who doubt the importance of strong reciprocity some-
times claim that nonselfish human motivations could not have
evolved under the influence of Darwinian natural selection, and
hence are likely to be of limited importance. But while the
evolution of a genetically transmitted altruism (the most studied
case) is indeed unlikely, the skeptic’s claim is uncompelling. First,
preferences are the result of cultural as well as genetic inheri-
tance and one can demonstrate that prosocial traits (i.e., traits
that are nonselfish and promote the well-being of others) could

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1419
have evolved under the joint influence of cultural and genetic
transmission [Boyd and Richerson 1985; Sober and Wilson 1998;
Bowles 2000]. And second, highly developed human capacities for
insider-outsider distinctions and cultural uniformity within com-
munities greatly increase the likely importance of group selection
of genetically transmitted traits and hence the evolutionary
viability of group-beneficial traits. Indeed, for reasons presented
in Bowles and Gintis [1998], it is plausible that strong reciprocity
and the other behavioral orientations we have described could
have evolved by this route.
This evolutionary approach to preferences sees human behav-
ior as the result of individuals’ adherence to behavioral rules that
have proved successful by comparison with other behavioral rules
and that as a result replicated and hence diffused throughout
populations [Cavalli-Sforza and Feldman 1981; Boyd and Richer-
son 1985; Durham 1991]. The context-specific and diverse human
behaviors we seek to understand are the result of the repertoires
of these behavioral rules that have proved evolutionarily robust
(which is not to say ‘‘socially optimal’’). This approach displaces
attention from cognitive and affective dispositions of individuals
to the behavioral rules themselves and how they both replicate
over time and combine in complicated ways to explain how people
behave in particular situations.
III. CONTRACTS AND SOCIAL STRUCTURE
While Marshall’s neglected endorsement of an empirically
based approach to economic behavior now commands consider-
able assent, little in his writings, or for that matter in the writings
of the founders of the Walrasian model, anticipates the modern
theory of contracts. It is true, of course, that Marshall knew that a
wage increase might increase worker effort—he used the term
‘‘efficiency wages’’—but as with so many of his modern insights, he
did not develop the theoretical ramifications of this fact. Walras
showed even less interest in the strategic aspects of exchange,
writing [Walras 1954 [1874]]: ‘‘. . . the pure theory of economics . . .
resembles the physico-mathematical sciences in every respect. . . .
Assuming equilibrium, we may even go so far as to abstract from
entrepreneurs and simply consider the productive services as
being, in a certain sense, exchanged directly for one another . . .’’
[pp. 71, 225]. Marshall and his contemporaries adopted the
classical theory of contracts, according to which every aspect of

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concern to one or more parties to an exchange is subject to a
contract that is enforceable by a third party (the courts) at zero
cost to the exchanging parties. The early neoclassical economists,
and especially Marshall, did not ignore cases where markets were
incomplete, as for example with environmental and training
externalities. But they regarded as exceptional the fact that
liabilities from environmental spillover, for example, are not
generally subject to contractual compensation.
Ronald Coase [1937], by contrast, made incomplete contracts
central to economics, noting that economic transactions take place
within the firm when they can be effected at lower cost through
hierarchical command, in which the employee carries out the
employer ’s directives, rather than through a market exchange.
Karl Marx had presented an analogous view of the capitalist firm
a century before, distinguishing between what is contracted for
(
the wage) and the service delivered (the activity of work itself),
which is not subject to contract but rather, as Marx put it, is
‘extracted’’ by the employer ’s exercise of authority. The verbal
‘
arguments of Marx and Coase were cast in analytical form by
Herbert Simon [1951], thereby highlighting two serious lacunae
in Coase’s analysis: what determines who is the employer, and
why should the employee obey the employer?
Armen Alchian and Harold Demsetz [1972] answered the first
question by claiming that only the owner of the firm’s assets, as
residual claimant on the firm’s income, has an incentive to
monitor employee behavior, and hence must be the hierarchical
superior. Stephen Marglin [1974] offered a famous alternative
answer, in which the owner of capital assets must also control the
production process in order to generate a flow of profits. Herbert
Gintis [1976], Carl Shapiro and J oseph Stiglitz [1984], and
Samuel Bowles [1985] answered the second by showing that if
labor markets failed to clear, the employer could induce worker
performance with the threat of dismissal, and conversely, when
labor contracts take the form of long-term contingent renewal
contracts, equilibrium unemployment can result even with com-
petitive markets. Finally, Oliver Williamson [1984] expanded
Coase’s framework to handle a wide variety of contractual and
institutional relations, including partnerships and nonprofit firms,
vertical and horizontal integration, and a theory indicating which
agents will fill the role of residual claimants in the firm.
Assuming that the reader is familiar with principal-agent
and transactions costs models [Williamson 1985; Stiglitz 1987],

WALRASIAN ECONOMICS IN RETROSPECT
1421
we will explore some broad implications of contractual incomplete-
ness.
To fix ideas, consider a case where a principal P benefits from
an action a, which is costly for an agent A to perform and about
which information is either costly for P to acquire or cannot be
used by P to enforce a contract. P often addresses the problem by
offering A a payment in excess of A’s reservation price, promising
to renew the transaction in subsequent periods unless A’s perfor-
mance is found to be inadequate. If this should occur, the
transaction will be terminated, and A will receive a reservation
asset z, less valuable than v, the present value of the expected
utility of having the transaction. The quantity v Ϫ z may be
termed an enforcement rent, as it is a payment above A’s next best
alternative, and along with the threat of termination it is used by
P to enforce claims against A when these are not third-party
enforceable.
These so-called contingent renewal models of principal-agent
relationships generate competitive equilibria consistent with an
economywide zero profit condition in which principals offer posi-
tive enforcement rents and agents perform a level of the action
greater than they would choose in the absence of the threat.
Models of this type have been applied to labor markets, credit
markets, contracts for residential and agricultural tenancy, and
the exchange of variable quality goods, among others [Gintis
1
1
976; Calvo 1979; Stiglitz and Weiss 1981; Shapiro and Stiglitz
984; Bowles 1985; Banerjee and Ghatak 1996]. In these cases,
markets do not generally clear in equilibrium, and one side of the
market is quantity constrained—some agents are unable to
secure the level of transactions they would prefer under the going
terms. The quantity constrained may be either suppliers (work-
ers, for example, in the case of the labor market) or demanders
(borrowers in the case of the credit market).
While modeling strategies differ, a large class of similar
approaches supports two conclusions. First, those on the short
side of the market—employers and lenders in these examples,
who are not quantity constrained—advance their interests by
using the credible threat of a sanction to alter the behavior of the
quantity-constrained agents on the long side of the market. Short
siders can in this sense be said to exercise short-side power over
the long siders with whom they interact.
Second, the exercise of short-side power is generally Pareto-
improving, since both parties are better off than in a situation in

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which principals are constrained to offer agents contracts equal to
their next best alternative. But the resulting equilibrium is
Pareto dominated by an outcome in which the agent provides
more of the noncontractible service to the principal and the
principal provides a higher payment. Of course, this Pareto
superior outcome is not feasible unless the information and
incentive structure of the problem can be altered, as it may, for
example, by collective bargaining, cooperative workplace prac-
tices (the handshake), or redistribution of property rights, a
possibility to which we will return in the next section.
This approach casts new light on the relationship between
wealth and power, and allows a more satisfactory understanding
of why the wealthy not only have ample budget sets (purchasing
power) but frequently direct the actions of others through com-
mands. We are not here concerned with the political influence of
the wealthy or the fact that owners of firms in highly concentrated
industries may alter prices to their advantage (market power).
Rather, our point is that the wealthy have power (in the sense
defined above) because they tend to be located on the short side of
nonclearing markets: as lenders in credit markets and as employ-
ers in labor markets—employers are more likely to be wealthy
because lack of wealth generally precludes access to funds on
terms consistent with survival in business.
The fact that power may be exercised in competitive equilib-
rium provides a valuable link between the process of exchange
and the exercise of authority. In the quite different markets versus
hierarchies approach pioneered by Williamson, the exercise of
authority is a nonmarket phenomenon—attributable to the struc-
ture of organizations. But the contingent renewal model shows it
to be a consequence of the ways the organizations and markets
interact. If markets cleared and hence enforcement rents were
zero, then, barring specialized ad hoc assumptions, individuals
would be unconcerned about the prospect of termination, so
sanctioning would be impossible no matter how ‘‘hierarchical’’ the
organization. The phenomenon of short-side power, by contrast,
explains why those in authority in firms may reasonably expect to
be obeyed, namely because they are in a position to deprive the
employee of a substantial enforcement rent, even where no
transaction-specific assets are involved. It thereby resolves what
we call the puzzle of obedience thrown up by the Coasian theory of
the firm.
Suitably elaborated models of this type provide a compelling

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1423
account of many aspects of modern economies, going some way to
make sense of empirical regularities that are anomalous, or are
resolvable only at the cost of ad hoc reasoning, in the Walrasian
model. The empirically observed inability of the unemployed to
underbid the employed and to drive wages to market-clearing
levels, the covariance of real wages with the level of employment,
the high-employment profit squeeze, and the end-of-expansion
productivity slowdown are standard predictions of the incomplete
contracting models while less readily explained within a complete
contracting framework [Bowles, Gordon, and Weisskopf 1983;
Bowles, Gordon, and Weisskopf 1989; Blanchflower and Oswald
1
994].
It has been objected, however, that if enforcement rents were
substantial, principals could profit by charging an up-front fee for
the right to transact with them (e.g., Carmichael [1985]). Employ-
ers, for example, would charge prospective employees a fee
sufficient to make them indifferent to taking the job, but not
indifferent to losing it once the fee had been paid (the ex ante rent
is thus zero, appropriated by the employer, but the ex post rent
remains, and the threat of its removal continues to motivate the
employee). The fact that such fees, or their surrogates such as
steep tenure-earnings profiles, are not widespread is taken to
mean that models of the contingent renewal type are flawed.
While it is possible to model contingent renewal and bonding
assuming agents have self-regarding preferences over outcomes
[Dickens, Katz, Lang, and Summers 1989; MacLeod and Malcom-
son 1993], we think that the behavioral approach provides a more
compelling explanation. J obs are not sold because doing so would
violate the norms of reciprocity and incur retaliation on the part of
workers in the form of reduced effort or care. In experimental
labor markets ‘‘firms’’ offer wages well above the supply price of
‘‘workers,’’ and the latter then choose to incur a cost of effort well
above the minimum, even in one-shot interactions. In these
experiments the few ‘‘firms’’ embracing the simplistic view of
Homo economicus assume that ‘‘workers’’ will perform the mini-
mal effort in any case and hence offer them the minimal wage
[Fehr and Falk 1999; G a¨ chter 1998]. These ‘‘firms’’ do poorly
compared with those relying on strong reciprocity. Moreover, even
when a labor market is operative in such laboratory experiments,
reciprocity and gift exchange produce an equilibrium that is far
from market clearing [Fehr, G a¨ chter, Kirchler, and Weichbold
1
998b; Fehr, Kirchsteiger, and Riedl 1998]. Wage setting therefore

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appears to reflect the importance of reciprocity norms, once
summarized in the phrase ‘‘a fair day’s work for a fair day’s pay.’’
We mention the job fees objection not only because it is
important but because it indicates a complementarity between
the agent-based economists’ reconsideration of preferences and
modern contract theory. The symbiosis is not accidental. The
theory of incomplete contracts suggests that spot markets among
anonymous actors will fail to solve incentive problems where
longer term interactions may succeed. But the durable face-to-
face interactions that result from long-term contracting are
precisely the kinds of social situations shown to evoke the
behavioral motives that the Homo economicus fiction assumes
away. Siamwalla’s [1978] study of the rice and raw rubber
markets in Thailand, for example, found long-term trust-based
exchanges where quality variations make contracts incomplete
(in rubber) but anonymous relations where quality is easily
determined and complete contracts were therefore possible (in
rice). Similarly, Kollock [1994] found that trust and commitment
evolve in experimental exchanges with unobservable and noncon-
tractible quality differences in the goods, but not when quality is
given.
The incomplete contracting framework thus provides a set-
ting in which issues not only of efficiency, but also of fairness,
trust, and reciprocity (long stressed by sociology’s theory of social
exchange) arise, and where the beliefs and preferences of employ-
ees—their views on fairness, the extent of their identification with
the organization or their degree of solidarity with other employ-
ees—may, like employees’ skills, influence the wage-setting pro-
cess [Blau 1964; Solow 1990; Bewley 1995]. The complementarity
between the theory of incomplete contracts and behavioral ap-
proaches to preferences is demonstrated clearly by the fact that
experimental markets with complete contracts quickly converge
to the equilibria predicted by the conventional theory [Smith
1
982], while experimental markets with incomplete contracts
(such as those described above) generally exhibit behaviors that
are anomalous in the conventional paradigm. Indeed, it is pre-
cisely the social preferences revealed in these experiments that
sometimes allow individuals to surmount the obstacles of contrac-
tual incompleteness to exploit mutually beneficial gains from
trade. Arrow long ago stressed this connection: ‘‘In the absence of
trust . . . opportunities for mutually beneficial cooperation would
have to be foregone . . . norms of social behavior, including ethical

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1425
and moral codes (may be) . . . reactions of society to compensate
for market failures’’ [Arrow 1971, p. 22].
IV. ECONOMIC POLICY AND INSTITUTIONS
Contrary to the claims of many of its critics, Walrasian
economics never had a policy agenda. From Walras to the present,
the policy positions of its leading exponents ranged from a
confidence in the ability of government to implement a social
optimum, without markets, by a state functionary acting as the
Walrasian ‘‘auctioneer ’’ on the one hand, to an equally unbounded
faith in the ability of markets to achieve a social optimum without
state intervention on the other. While policy debates still occasion-
ally turns on this dichotomy, there have been important advances
in the study of economic institutions and policy since Marshall
and Pigou inaugurated welfare economics in the 1930s.
First, market failures and state failures are now analyzed in
a common framework rather than from competing viewpoints, due
to development in information economics, and especially the
modeling of relations between principals and agents. Moreover,
public choice theory has given us a unified approach covering the
actions of government officials and market actors alike. As a
result, the state is no longer the exogenous instrument wisely
implementing some concept of social well-being, and attention has
shifted from picking the right policy, to setting up the right rules so
that the imperfect interplay of incentives of all the relevant actors
will support socially desirable, if not optimal, outcomes.
This common framework, as well as a century of historical
learning, from the Great Depression and the fall of Communism,
has dashed utopian assumptions. Many are now convinced that
J ohn Stuart Mill’s injunction that we must devise rules such that
the ‘‘duties and the interests’’ of government officials would
coincide should be shelved in the museum of utopian designs,
along with the assumptions of the Fundamental Theorem of
Welfare Economics. Most modern economists see both market
failures and state failures as common rather than exceptional.
Further, market failures are no longer considered curiosa having
to do with bees and lighthouses, but occur in the major markets of
a modern economy, namely credit markets and labor markets.
Thus, markets and states are now seen not as competing but as
complementary institutions in the quest to ‘‘get the rules right,’’
and many formulations see a broader range of institutions of

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economic governance as essential in this task, including small-
scale communities—neighborhoods, nongovernmental associa-
tions, and the like—as well as families [Hayami 1989; Ostrom
1
990; Aoki 1995; Taylor 1996].
Second, policies and institutions are no longer evaluated as
though preferences are exogenous. David Hume [1754 (1898), p.
17] thought that ‘‘in contriving any system of government . . .
1
every man ought to be supposed to be a knave and to have no other
end, in all of his actions, than his private interest.’’ Generations of
economists believed that the right institutions—notably well-
defined property rights and competitive markets—could meet
Hume’s challenge. But economists are now turning their attention
to the ways in which institutions and policies can not only harness
self-interested motives, but also evoke other-regarding motives
and influence individual preferences in socially desirable ways.
Discussions of policy measures addressed to crime, the envi-
ronment, schooling, discrimination, and welfare reform now com-
monly treat preferences as endogenous, as do studies of the impact
of markets and other modern institutions on indigenous cultures
[Becker 1996; Kahan 1997; Bowles and Gintis 2000]. Attempts to
enhance what is widely (and vaguely) termed social capital reflect
this new way of thinking. The theory of implementation—which
conventionally has sought policies to implement socially desirable
outcomes as Nash equilibria where agent ’s preferences are given—
must now consider the effects of the policies on the preferences,
with an equilibrium now requiring stationarity of preferences as
well as individual actions.
Third, the economist’s canonical desire to separate the issues
of distribution from those of efficient allocation—dating back to
Mill—now seems quixotic. The separation is formalized in the
Fundamental Theorem’s affirmation that (under suitable assump-
tions) any Pareto-optimal distributional outcome can be achieved
through an appropriate choice of initial endowments followed by
Walrasian exchange. But recent research in credit and labor
markets as well as other principal-agent relationships identifies
violations of the Fundamental Theorem’s complete contracting
assumptions indicating that wealth endowments may have sub-
stantial effects on allocative efficiency [Loury 1981; Stiglitz 1994;
Aghion and Bolton 1997; Laffont and Matoussi 1995; B e´ nabou
1
996; Banerjee and Ghatak 1996; Hoff and Lyon 1995]. The reason
is that the incentives, sanctions, and other contractual provisions
that may be deployed in any particular exchange depend on the

WALRASIAN ECONOMICS IN RETROSPECT
1427
wealth level of the parties to the exchange, and an agent’s lack of
wealth—by a sharecropping farmer, a wage employee, or a
residential tenant for example—may preclude the use of efficient
contracts [Bardhan, Bowles, and Gintis 2000].
These cases are policy relevant where it is possible to devise
redistributive strategies that are implementable in the above
sense, and improve the contractual environment by making
agents residual claimants on the consequences of their noncon-
tractible actions. Examples include insurance and credit market
policies to allow the wealth-poor to overcome their limited ability
to borrow and to bear risk and thus to acquire productive assets.
While the importance of the incentive costs of poorly designed
egalitarian redistributive programs is in no way diminished,
these results do suggest the existence of a class of egalitarian
wealth redistributions that may improve allocative efficiency. If
so, the canonical efficiency equity trade-off—whose ineluctable
logic is given prominent place in most introductory texts—may be
up for reconsideration.
V. THE WALRASIAN DETOUR
In retrospect, the Walrasian model, with its canonical assump-
tions—complete contracting and the conventional preferences of
Homo economicus—was an intellectually exciting detour whose
glamour hid the fact that it cast little light on the time-honored
questions of economic institutions, policy, and the wealth of
nations. Many economists believe that the canonical Walrasian
assumptions are the unavoidable price to be paid for clarity and
rigor in more abstract reasoning, while accepting that more
empirically grounded assumptions should inform practical inves-
tigations in particular applied topics. Others recognize that the
time may have come to reconsider the Walrasian approach and its
assumptions, but regard it not as a detour but as having provided
essential foundations for our current knowledge. We disagree
with both views. We need different (but not necessarily fewer)
abstractions, and we need not have taken the circuitous Wal-
rasian route to the present.
Our view that the Walrasian model is wrong not in the details
but in its basic abstractions is suggested by its inability to cast
light on such fundamental questions as the recent contrasting
growth trajectories of China and Russia or of the smaller East
Asian economies and those in Africa and Latin America in the

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980s and 1990s. But let us consider an equally telling failure: its
surprising inability to understand the shortcomings of the main
competitor to capitalism in this century, state ownership and
central planning. The basic problem with the Walrasian model in
this respect is that it is essentially about allocations and only
tangentially about markets—as one of us (Bowles) learned when
he noticed that the graduate microeconomics course that he
taught at Harvard was easily repackaged as ‘‘The Theory of
Economic Planning’’ at the University of Havana in 1969.
The Walrasian model is often taken to justify the private-
ownership market economy. But in fact, as Oskar Lange and
others demonstrated in the famous ‘‘planning versus markets
debate’’ with Hayek and other supporters of laissez-faire capital-
ism in the 1930s, these principles can just as easily be used to
justify the social ownership of property and the control of the
economy by the state [Lange and Taylor 1938; Schumpeter 1942].
Indeed, the Fundamental Theorem asserts that any pattern of
ownership is compatible with economic efficiency, as long as prices
are chosen to equate supply and demand.
Lange pointed out that markets and private property play a
purely metaphorical role in general equilibrium theory. There is
no competition in the sense of strategic interaction, since agents
never meet other agents and agents do not care who other agents
are or what they are doing. The only factors determining indi-
vidual and firm behavior are prices. Nor do markets have any
function in the Walrasian model. In Walras’ original description,
market clearing was not effected by markets at all, but rather by
an ‘‘auctioneer ’’ who assumed that all economic agents revealed
truthfully their personal knowledge and preferences. Thus, prices
need not be set by market interactions or any other particular
mechanism. From the standpoint of the Walrasian model, a
central planner could play the part of Walras’ auctioneer, setting
prices to clear markets in a manner that is perfectly compatible
with economic efficiency. Moreover, to this day no one has suc-
ceeded in producing a plausible decentralized alternative to the
auctioneer—for instance, a dynamic model of market interaction
in which prices move toward their market-clearing levels. We
contrast this with contemporary agency theory, in which in the
absence of complete contracting, informational asymmetries are
key impediments to economic efficiency, and competitive interac-
tions play a central role in revealing private information.
Thus, it is hardly surprising that Lange and the other

WALRASIAN ECONOMICS IN RETROSPECT
1429
socialist economists won the academic debate of the 1930s. J oseph
Schumpeter ’s classic Capitalism, Socialism and Democracy [1942],
in which this staunch supporter of capitalism predicts its immi-
nent demise, is perhaps the greatest tribute to the socialist
intellectual victory. ‘‘Can socialism work?’’ Schumpeter asked. ‘‘Of
course. . . . There is nothing wrong with the pure theory of
socialism’’ [pp. 167, 172].
The late-classical (and socialist sympathizer) contemporary
of Marx, J ohn Stuart Mill [1976, pp. 115–136] had more to say
about the incentive and information problems of socialism than
did the conservative neoclassical Schumpeter. Hayek himself
apparently concluded that it had been a mistake to conduct the
debate in Walrasian terms, and in the late 1930s and early 1940s
developed the analytical foundations of a more plausible Austrian
alternative to the Walrasian model [Hayek 1945]. In a footnote to
this paper Hayek claims that ‘‘Professor Schumpeter is . . . the
original author of the myth that Pareto and Barone have ‘‘solved’’
the problem of socialist calculation.’’ Hayek’s appreciation of the
importance of information allowed him to pinpoint a decisive
weakness of central planning unavailable to the Walrasian econo-
mist, namely the planners’ inability to acquire the information
necessary to determine socially efficient prices. Recent ap-
proaches using principal-agent models have illuminated other
socialist shortcomings obscured by the Walrasian model. Summa-
rizing these insights, J oseph Stiglitz [1994, p. 10] wryly observed,
‘‘if the neoclassical model . . . were correct, market socialism
would have been a success [and] centrally planned socialism
would have run into far fewer problems . . .’’
The record of the Walrasian model is no better in explaining
the wealth and poverty of nations and people. But did it not lay
the foundations for a more adequate approach? Perhaps the full
development of the Walrasian model was a necessary precondition
for developing analytical models of incomplete contracts and
broader models of human behavior. Perhaps such modern notions
as costly contracting, asymmetric information, endogenous prefer-
ences, and strategic interaction were widely appreciated by
neoclassical economists, but they lacked the tools to model such
phenomena. But the founding contributions to incomplete con-
tracts, game theory, and behavioral economics did not await the
development of the Walrasian model. Rather, the foundations of a
non-Walrasian approach laid down by prominent economists in
the period from 1937 to 1957, precisely the period in which the

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Marshallian paradigm was displaced by the nascent Walrasian
paradigm, subsequent to which two generations of economists
were taught Walrasian general equilibrium as the core of modern
economic theory. Ronald Coase’s seminal analysis of the interplay
of market exchange and hierarchical command appeared in 1937
(‘‘The Nature of the Firm’’), and F. A. Hayek clearly expressed the
problem of incomplete information in his 1945 American Eco-
nomic Review article, ‘‘The Uses of Knowledge in Society.’’ J ohn
Nash’s solution concept appeared in Econometrica in 1953, and R.
Duncan Luce and Howard Raiffa’s quite sophisticated Games and
Decisions was published in 1957. Finally, Herbert Simon’s ‘‘A
Formal Theory of the Employment Relation,’’ appeared in 1951,
and his Models of Man in 1957. In short, all of the underpinnings
of a non-Walrasian economics had been set in place by 1960.
Walrasian economics was not the precondition of these innova-
tions—it was their competition.
Most neoclassical economists in the postwar period were
actively hostile to broader models of human behavior and to
introducing strategic interaction into economic theory. We do not
recall our teachers bringing these issues to our attention in the
early 1960s, and when some years later, Becker and Stigler wrote
their famous paper [1977], we do not recall any of the greats
disputing the assertion that ‘‘de gustibus non est disputandum.’’
None of these ideas made it into the curriculum—not even, Bowles
recalls, when he cotaught the graduate Ph.D. microeconomics
course with Tibor Scitovsky, whose subsequent J oyless Economy
would mount a compelling critique of the behavioral assumptions
of economics. When Gintis used Coase, Simon, and Marx to
challenge exogenous preferences—the relevant portion eventu-
ally appearing as Gintis [1972]—Paul Samuelson singled out this
work for criticism in his 1970 Nobel Prize speech in Stockholm. In
response to the proposal that a notion of power be introduced into
economic theory, Abba Lerner [1972, p. 259] responded by saying
‘‘An economic transaction is a solved political problem. Economics
has gained the title of Queen of the Social Sciences by choosing
solved political problems as its domain.’’ Lerner went on to explain
that third-party enforceable contracts make the exercise of power
irrelevant.
Our preferred explanation of the Walrasian Detour involves a
confluence of forces. Perhaps most important, midcentury neoclas-
sical economists, while aware of the degree of abstraction of their
model of the economy, believed that transaction costs, asymmetric

WALRASIAN ECONOMICS IN RETROSPECT
1431
information, endogenous preferences, and the like, were of minor
importance in a competitive economy, and were accustomed to
treating unemployment, inertial prices, the business cycle, credit
rationing, and similar phenomena as disequilibrium phenomena
explicable by Keynesian and other short-term models. Moreover,
they doubtless expected ‘‘normal science’’ to add such elements of
realism to their models, just as they expected a reasonable
treatment of the stability of general equilibrium to emerge. If this
is what they expected, they were wrong. The reader might
complain that we do an injustice to Walrasian theory by not
recognizing the strides taken in recent years in modeling incom-
plete contracts (see Magill and Quinzii [1996], Geanakoplos and
Polemarchakis [1996], and the references cited therein). However,
these contributions deal almost exclusively with financial mar-
kets, whereas our concern is with the portrayal of real markets in
general equilibrium theory. Here there have been few contribu-
tions that model strategic interaction within a general equilib-
rium setting.
The absence of such developments, as well as the collapse of
the Keynesian paradigm in the late 1970s, suggested to a younger
generation of economists that the Walrasian model should be
taken with a grain of salt. Thus, while during the 1960s and 1970s
only a few economists developed the insights of Coase, Simon,
Nash, and other midcentury forerunners (among them Kenneth
Arrow, Gary Becker, Armen Alchian, Harold Demsetz, J oseph
Stiglitz, and Oliver Williamson), in the 1980s and 1990s the
trickle of post-Walrasian models swelled to a flood. It is too early to
treat these heterogeneous contributions, some of which we have
summarized above, as a new paradigm, but the return from the
Walrasian detour has already yielded important insights.
As we have seen, principal-agent models of the employment
relationship, together with gift-exchange explanations of the
absence of bonding, explain the widely observed excess supply of
labor in equilibrium—including open unemployment and a gen-
eral excess of agents competing for desirable career-enhancing
positions. Second, they provide a plausible account of why cen-
trally planned economies eventually failed, one stressing informa-
tion asymmetries in principal-agent relationships. Third, they
provide a reasonable, if not fully documented as yet, account of
why the relationship between equality and efficiency (or productiv-
ity growth) may be of either sign, in contradiction to the conven-
tional trade-off. Fourth, Walrasian models have difficulty explain-

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ing why Homo economicus would vote and what he votes for when
he does. For example, there are significant levels of support for
redistributive expenditure among people who are sufficiently rich
that they do not anticipate becoming recipients of programs that
they support. By contrast, behavioral models explain such phenom-
ena by demonstrating that under a variety of conditions (e.g., in
the Dictator Game often studied by experimentalists) economic
actors choose to share gains with other, even unrelated and
unknown, individuals. Finally, these models allow a natural
representation of markets as disciplining devices, an aspect of
markets that is obscured in Walrasian reasoning. In the modern
approach [H o¨ lmstrom 1979, 1982], by contrast, firm managers
have private information concerning their behavior that they can
be induced to provide to outsiders—firm owners, consumers, and
government—in a least-cost manner by rewarding them accord-
ing to their relative success in a competitive framework. Similarly,
the disciplinary nature of markets gives us a much richer theory
of consumer sovereignty based on the notion of endogenous
quality enforcement, which implies that consumers have short-
side power in dealing with their suppliers, much as employers
have short-side power in dealing with their employees [Gintis
1
989; Bowles and Gintis 1993].
VI. CONCLUSION: THE ECONOMIST’S CRAFT
The intellectual and practical lessons of the twentieth cen-
tury have enriched the discipline, but also immeasurably compli-
cated the task of becoming a good economist, or learning the
economist’s craft. After decades of Walrasian respite, complex
institutions and multifaceted people again intrude on our think-
ing, forcing a retreat from the elegant but misleading abstractions
that once monopolized economic theory.
Recent decades have seen a significant increase in economic
inputs and outputs that are difficult to contract for—quintessen-
tially information, but services more generally, forcing incomplete
contracting and strategic interaction to center stage. Moreover,
economists are increasingly concerned with social problems reflect-
ing dimensions of human behavior and well-being that are not
captured by conventional models of ‘‘economic man,’’ and hence for
which Homo economicus offers a limited and sometimes mislead-
ing basis for social policy. Among these are the management of
common pool resources, the nature and value of social capital,

WALRASIAN ECONOMICS IN RETROSPECT
1433
crime, addiction, discrimination, risky behaviors, and welfare
dependency. These new interests are partially due to Gary
Becker ’s influence, but doubtless more important, economists are
increasingly called upon to offer economic advice in these areas,
where the limitations of Homo economicus as a model of behavior
are particularly transparent.
Partly as a result of these changes, many economists have
shifted their attention from markets in general to the peculiari-
ties of particular markets, each governed by distinct rules and
evoking particular behavioral responses from their participants.
This move returns us to Marshall, who was the last great
nineteenth century economist to attend to the particularities of
human motivations and institutions. Increasing recognition of the
importance of positive feedback effects and generalized increasing
returns—in areas such as growth divergence among nations,
neighborhood effects, and technological lock-ins—has motivated a
concern with the multiplicity of equilibria and the likelihood that
many outcomes are path dependent [Arthur 1994; Durlauf 1996].
As a result, contemporary economic history may exhibit an
interplay of local uniformity coupled with global institutional and
behavioral diversity rather than global convergence and unifor-
mity [Young 1998].
As a consequence, the economist’s craft has been transformed
in two ways. First, the disciplinary boundaries between economics
and the other behavioral sciences, including biology, as well as
history, now appear more to impede rather than promote learning.
Behavioral economics draws on all of the social sciences and
biology as well, and the modern theory of contracts is hobbled
without the insights of political science, sociology, and social
psychology. The reader may wonder why we do not just pack up
and become sociologists. The answer, we think, is that the
distinctive strengths of economics—explaining prices and quanti-
ties, as well as exploring the complex and often unexpected ways
that countless uncoordinated actions generate sometimes unantici-
pated aggregate outcomes and dynamics—is no less relevant
today than when it was pioneered by the classical economists two
centuries ago. The inadequacy of Walrasian general equilibrium
in no way diminishes the importance of general equilibrium
thinking.
Second, taking account of the institutional and behavioral
peculiarities defining a problem, as well as the possibility of many
equilibrium outcomes, often requires close attention to empirical

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details that were abstracted from in the Walrasian approach. We
suspect that continuing progress in economic theory will draw
more heavily on historical, econometric, and experimental data
for the simple reason that we may be encountering sharply
diminishing returns in generating valuable insights from just a
few abstract assumptions about behavior and institutions. Know-
ing a lot about how some part of the economy actually works or
about some aspect of economic behavior may provide both a
stimulus to good theory and a valuable discipline to theory
building.
The imperative for a more multidisciplinary and empirically
based knowledge has obvious implications for the recruitment and
education of the next generation of economists. The discrepancy
between these imperatives and the common practice of graduate
and undergraduate education in economics hardly needs to be
pointed out.
We have stressed progress in economics over the past century,
but there is much that we have not learned. Over a century ago in
the opening pages of his Principles, Marshall defined one of the
chief tasks of our discipline this way:
Now at last we are setting ourselves seriously to inquire whether it is
necessary that there should be any so called ‘‘lower classes’’ at all: that is
whether there need be large numbers of people doomed from their birth to
hard work in order to provide for others the requisites of a refined and
cultured life; while they themselves are prevented by their poverty and toil
from having any share or part in that life . . . the answer depends in a great
measure upon facts and inferences, which are within the province of
economics; and this is it which gives to economic studies their chief and their
highest interest [1930 (1890), pp. 3–4].
We suspect he would be disappointed in what economics has
accomplished toward this end over the intervening century,
particularly if he considered the poor and low paid workers
throughout the world. That governments resist economic advice
can hardly be the reason, for there is all too much evidence that
they avidly implement policies designed by economists—whether
interventionist or market-based—sometimes with disastrous con-
sequences. Economics is still far from mastering the problem of
alleviating poverty and providing economic security for the least
well off, although it is closer today than when Marshall wrote.
DEPARTMENT OF ECONOMICS
UNIVERSITY OF MASSACHUSETTS
AMHERST, MASSACHUSETTS 01003

WALRASIAN ECONOMICS IN RETROSPECT
1435
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