The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1988
Presentation Speech by Professor Ingemar
Ståhl of the Royal Swedish Academy of Sciences
Translation from the Swedish text
Your Majesties, Your Royal Highnesses,
Ladies and Gentlemen,
In 1943, during the dark years of German occupation, a remarkable work in economic theory was published in France. The title was A la Recherche d'une Discipline Economique and the author was a 32 year old engineer, Maurice Allais, with degrees from the Ecole Polytechnique and Ecole Superieure des Mines.
After his academic studies and a short period of war service, he had been appointed to the regional administration of state enterprises in Nantes. Along with his administrative work he had begun serious studies of economic theory - with the aim of using this theory to increase economic efficiency.
But the engineer and scientist Allais also felt dissatisfied with the economic theory which he had studied previously and which he was in the process of examining. In principle, economic theory should be formulated with the same mathematical rigour that was used in the natural sciences, especially in physics. Such rigour would make it more meaningful to conduct statistical and empirical measurements. The young engineer committed himself to a very ambitious research program. This was the start of lifelong - and still continuing - research work that has offered many important and highly original results.
Allais' point of departure was the important intuition as to how a market system works, originally formulated by Adam Smith in his book The Wealth of Nations in 1776. According to Smith there is no contradiction between the fact that consumers and firms act in their own self-interest and that all economic decisions are coordinated. The invisible hand will create equilibrium by means of a well-functioning price system. A century later, Smith's intuition, which had been formulated in a literary style, was reformulated in mathematical terms by the French economist Leon Walras. He described the market system as a large equation system with different equations for the demand and supply of each commodity. The solution of this equation system could be interpreted as a set of equilibrium prices. Leon Walras' work was later continued by the Italian economist Vilfredo Pareto. But Allais was also influenced by earlier great French economists such as Augustin Cournot and Jules Dupuit. As early as in the middle of the 19th century Dupuit had developed a theory of pricing and investments in public enterprises with returns to scale.
Allais' earlier work constitutes important contributions in the field of basic and theoretical economic research. The market system is an integral part of almost all highly developed economies, while there is an ongoing discussion in many other countries regarding the choice of economic system. By formulating rigorous mathematical models, it is possible to investigate the conditions under which social efficiency, equilibrium and stability can be attained in an economy with decentralised decisions made by independent consumers and producers. It is thus no coincidence that for 20 years many of the prizes in economic science have been awarded to pioneers in this area of basic research. It is also of interest to observe that economic science has not been able to produce a coherent and rigorous mathematical model for any other type of economic system. But this mathematical line of research has to be supplemented by other analytical approaches such as comparative and empirical studies of economies, which belong to different economic systems. Another alternative is an approach based on economic history to focus on the emergence of important institutions in the market economic system, e.g. the modern corporation or financial-market institutions.
Along with a new extensive study published in 1947 entitled Economic et Intérêt, his work from 1943 constituted a more complete, more rigorous and more generalized mathematical description of a market economy than anything published earlier by economic scientists or at about the same time, but independently, by previous laureates, the British economist Sir John Hicks and the American economist Paul Samuelson.
In his earlier writings, Allais discovered many important results, which had great significance for what is now generally accepted economic theory. One such result, formulated with more rigour by Allais than in previous analyses, is that each market equilibrium is socially efficient in the sense that no one can become better off without someone else becoming worse off. In addition, any socially efficient solution can be achieved as a market equilibrium after redistribution of initial resources.
Another contribution of Allais was to include returns to scale - or what can be interpreted as investments in infrastructure - in his model of general equilibrium. He also provided a formulation, which can be used to study an economy over time and thus to integrate capital and investment theory with the theory of general equilibrium. His work from 1947 also contains pioneering contributions to the economic theory of growth and the theory of overlapping generations.
Allais carried out an early analysis of the theoretical determination of the demand for money that foreshadows later theories developed by the American economist William Baumol. But Allais did not limit his studies to a static equilibrium; he also included an analysis of how an equilibrium is achieved through a pricing process similar to an auction and the conditions under which this pricing process is stable. Later on, many of these discoveries were published independently by Anglo-Saxon economists.
Although Allais' contributions were not immediately known to economists outside France, he had a considerable impact on French development. There is in fact what may be called a French school founded on Allais' rigorous methods and his requirements regarding empirical relevance. Not only does Allais have strong intellectual ties to an older, established French tradition, but he is also the most prominent economist in the development of economic research in post-war France.
This year's Prize in Economic Science has been awarded to Maurice Allais for his pioneering contributions to the theory of markets and efficient resource allocation. However, after these early contributions, Allais has continued to carry out distinguished and often highly original research in other areas of economic science. Through his theoretical and empirical studies of the determination of the demand for money, he became an early explorer of what could be called monetary macrodynamics.
Outside of the economics profession Allais is perhaps best known for his studies of decision-making under risk and what is generally known as the Allais paradox. He used this paradox to show that the theory of maximization of expected utility developed by John von Neumann and Oscar Morgenstern, which had been accepted by economists for more than forty years, is contradicted by empirical observations of human behaviour in some important decisions under risk. On the basis of these observations, Allais formulated a more general theory.
During the last two decades, Allais has tried to find some new ways of describing the basic features of a market economy - or rather an economy of markets - to use Allais' own emphasis on the plural inflection. The force, which underlies the behaviour of consumers and producers in markets is to take advantage of any surpluses that may exist through opportunities of exchange that have not yet been fully exploited. There is no longer a unique equilibrium and exchanges leading to an equilibrium take place successively at different prices. His main work in this new area is Théorie des Surplus from 1981, based on the surplus concept developed in 1943. This is further indication of the richness and originality of his early and prize-winning works.
From Nobel Lectures, Economics 1981-1990, Editor Karl-Göran Mäler, World Scientific Publishing Co., Singapore, 1992
Copyright © The Nobel Foundation 1988