The Nobel series: With scientific prowess
The Nobel Prize in Economics in 1988 was awarded to French economist Maurice Allais for his work on market theory and the efficient use of resources. Allais was at National School of Mines of Paris at the time of receiving the prize.
Before turning to economics, Allais had studied physics and had even published numerous research papers. He became interested in economics after a trip to the United States in 1933. Allais studied economics at the Polytechnic university (Ecole Polytechnique) then at the National School of Mines of Paris (Ecole Nationale des Mines de Paris). In 1937, he began to work for the public administration of mines and, in 1944, he became a professor at the Ecole des Mines where he continued until his retirement. From the mid-1940s, he continued his research at Scientific Research Center (Scientific Research National Center).
Allais’ main work focuses on the general equilibrium and efficiency of markets. While doing this work, he was greatly influenced by Walras, Pareto, and Fisher. During the 1940s he gave mathematical form to the work of Walras and Pareto on market equilibrium and the efficiency properties of markets. Allais’ two main works are ‘In Search of an Economic Discipline’ (1943) and ‘Economy and Interest’ (1947). A second edition of the first book appeared in 1952 under the title ‘Treaty of Pure Economy’.
His works received rather late recognition due to his reluctance to write them or translate them into English. It was only after American and British economists discovered his work that he was more widely recognized. Allais’s work on markets and the efficiency of equilibrium parallels that of Hicks and Samuelson and inspired Debreu and Arrow for their work on general equilibrium. Paul Samuelson once said: “If Allais’ early writings had been in English, a generation of economic theory would have taken a different course” and felt that he should have been awarded the Nobel Prize much earlier.
In this article, we will review Allais’s work and its relevance to public policy.
As noted above, Allais’ main works were ‘In Search of an Economic Discipline’ (1943), ‘Economy and interest’ (1947) and ‘Pure Economy Treaty’ (1952). In the first two books, Allais was essentially trying to find a solution to the “invisible hand” of the market that Adam Smith had spoken of in the 18th century. He brought the rigor of his training in physics and engineering to economic theory. Through this work, Allais extended the work of Walras and Pareto. Allais provided a rigorous mathematical formulation of market equilibrium and the efficiency properties of markets, just as Samuelson, Debreu, and Arrow did at the same time. From his model, he sketched the conditions under which there could be social efficiency coupled with a general equilibrium, which would be stable. Allais’s work was not new and many Nobel Prizes were awarded for this type of general equilibrium research (Arrow, Debreu, Samuelson to name a few). In ‘Economic and Interest ‘, Allais continued his earlier work and provided a more rigorous model of the market economy.
In ‘Pure Economy Treaty‘, Allais continued his work on general equilibrium and foresighted the two propositions of welfare economics, which Arrow described independently. According to these versions, “an economic situation with equilibrium prices is socially efficient in the sense that no one can improve without someone else being worse off. initial resources and an equilibrium price system. “We know that these proposals are important not only from the point of view of pure economic research, but also of application to planning and regulation. Allais extended these applications to other areas such as natural monopolies. As the Nobel site tells us:
Allais also formulated a generalization that covers the case where various types of returns to scale can give rise to natural monopolies. Through his analysis of market equilibrium and social efficiency, Allais laid the foundations for the school of post-war French economists who not only analyzed the conditions for an efficient use of resources in large public monopolies (such as French Electricity or SNCF, the public railway), but has also applied the theory to business management in many cases.
Allais also worked on returns to scale and incorporated them into his general equilibrium model. He contributed to the economic theory of growth and the theory of nested generations. And finally, Allais worked on the determinants of the demand for money: a theory that the American economist Baumol independently developed years later.
Allais is also known for his work on risky decision making and also the Allais paradox. The paradox simply says that even though an individual may choose one outcome over another, based on probabilities, his choice over pairs of outcomes would be inconsistent with expected utility theory. This result was prescient again and was taken up the next day by behavioral economists such as Herbert Simon, Daniel Kahneman and Amos Tversky to develop their model of individual decision-making. Recall that Kahneman and Tversky gave a model of individual decision-making (based on bounded rationality and satisficing) which was diametrically opposed to that of the neoclassical framework (which was based on rationality and maximization of utility).
In 1977, Allais published a study on the taxation of capital and monetary reform which contained sweeping suggestions such as replacing taxes on income with those on capital. Allais had previously conducted theoretical and empirical studies on the importance and determinants of the volume of money.
In the days that followed, Allais worked on determining consumer surplus and producer surplus. His ideas were summed up in his 1981 publication The General Theory of Surpluses. As the Nobel website tells us:
Over the past two decades, Allais has attempted to generalize market theory by emphasizing its dynamic aspects. The impetus for the economic behavior of consumers and producers consists of efforts to utilize surpluses that may arise in an economy through previously untapped trading opportunities. Equilibrium is reached when these surpluses have been used up. Allais summarized many of his earliest and most recent research contributions in ” The General Theory of Surpluses‘ (nineteen eighty one).
We saw above that Allais wrote in French and was not very enthusiastic about translating his works into English. As a result, his work only became known after English-speaking economists became aware of his work. Nevertheless, in France and continental Europe, his work has been applied in tariff plans and the regulation of state monopolies and public services such as railways (SNCF). In his article, The Problem of Transportation Coordination and Economic Theory (The problem of transport coordination and economic theory), published in 1947, Allais explained that pricing transport based on the value of the goods to be transported is inefficient in terms of social welfare. When he argued that railway pricing rules should take into account peak periods as opposed to regular periods; his proposal was called impracticable. However, this peak pricing is now common practice in many countries around the world, including France.
Allais also pointed out in 1953 how the cost of mining coal in some places was higher than its average price. He had extensive knowledge of the sector since he had worked in the nationalized coal mines of France. In early 1949 he wrote a report on coal pricing policy and management practices in nationalized French industry. He recommended that inefficient mining plants be closed and, if necessary, coal be imported from the United States. This recommendation sparked strong protests from communist unions that dominated the coal industry, but Allais maintained his recommendation. In the 1960s, Allais headed an EEC committee on transport infrastructure and again argued that the optimal pricing of such facilities generally had little to do with their cost but mainly with the rate of saturation of their capacity.
Allais participated in public debates on political issues and, while he believed in the power of markets, he was not a staunch supporter of laissez-faire or globalization, or even Keynesian policies. His independence of thought was well known. He once refused to sign the founding text of the Société du Mont-Pèlerin when he was a founding member. This was because he disagreed with Hayek on the principle of collective ownership and Hayek was unwilling to compromise on the issue of private property. Allais believed in the power of federalism and advocated a reasonable degree of trade protection for underdeveloped countries.
French President Mitterrand spoke extensively of Allais and said he had “contributed to the advancement of mathematical economics and founded a new school”. Allais also trained a generation of young economists – the most prominent of them being Gérard Debreu (Nobel Prize in 1983) and Edward Malinvaud. Maurice Allais amply deserved the Nobel Prize when he should have received it a long time ago. As Paul Samuelson wrote, “he would have done it if his works had been written in English.”
Allais has also received numerous honors and awards. He has been a member of several academies and learned societies, including the Institut de France, the US National Academy of Sciences, the Lincean Academy in Italy, and the Russian Academy of Sciences. In 1977, he was appointed officer of the Legion of Honor, first order of the French Republic. He was also made a grand officer in 2005.
Allais made fundamental contributions to economic theory. His work has also been useful for public policies in France and in Europe, particularly in the management of the public sector as well as in the development of regulations.
The author is an IAS Officer, working as Senior Resident Commissioner, Government of West Bengal. Opinions expressed are personal