18 October 1988

The Royal Swedish Academy of Sciences has
decided to award the 1988 Alfred Nobel Memorial Prize in Economic
Sciences to

Professor **Maurice Allais**, Ecole Nationale Supérieure des Mines
de Paris, France,

**for his pioneering contributions to the theory of markets and
efficient utilization of resources.**

One of the principal tasks of basic research in economics is to
formulate a rigorous model of equilibrium in markets and examine
the efficiency of this equilibrium. The problem dates back to
Adam Smith and his theory of the "invisible hand" which
coordinates - to all appearances - a chaotic structure comprised
of a multitude of independent and individual decisions based on
self-interest. Paradoxically, this chaos gives rise to
coordinated equilibria based on market prices. Firms' production
decisions will correspond to consumers' planned
consumption.

Adam Smith formulated his theory in the verbal and somewhat
expository manner that was common in the social sciences during
the latter part of the 18th century. About a hundred years later,
other scholars tried to reformulate Smith's basic problems in
mathematical terms. As a result, modern price theory as it
emerged in the late 19th century, differed radically from
previous conceptions of "just" prices or prices based exclusively
on production costs for labor.

The missing link in the development of a more rigorous theory was
provided in the 1870s by the French economist Léon Walras.
He formulated his model ot the economic system as a large system
of equations which described individuals' demand for goods and
services and their supply of labor and other productive input
along with firms' supply of goods and their demand for various
factors of production. A set of prices which gave rise to
equilibrium between supply and demand could, in fact, be regarded
as a solution to this extremely large and complex system of
equations. Later on, Walras's model was developed further by,
among others, the Italian economist and sociologist Vilfredo
Pareto. The Swedish economist Gustav Cassel formulated a somewhat
simplified version which had a significant impact
internationally.

The foremost contribution of **Maurice Allais** was made in
the 1940s when he continued to develop Walras's and Pareto's work
by providing increasingly rigorous mathematical formulations of
market equilibrium and the efficiency properties of markets. On
the basis of mathematical models of households' and firms'
planning and choice, he introduced a very general formulation of
the conditions for market equilibrium. Allais's two pioneering
works are *A la Recherche d'une Discipline Economique*,
published during the war in 1943, and *Economie et Interet*,
1947. A second edition of the first book appeared in 1952 as
*Traite d'Economie Pure*. Each of these studies was
extensive; the first comprised about 900 pages and the second
approximately 800.

*Traite d'Economie Pure* contains a general and rigorous
formulation of the two basic propositions of welfare theory. An
economic situation with equilibrium prices is socially efficient
in the sense that no one can become better off without someone
else becoming worse off. In addition, under certain reasonable
conditions, each such socially efficient situation can be
achieved through redistribution of initial resources and a system
of equilibrium prices. These propositions are important not only
as results of basic research, but also as guidelines for planning
in *e.g.*, the public sector by means of prices (instead of
direct regulation). Allais also formulated a generalization which
covers the case where various kinds of returns to scale may give
rise to natural monopolies. Through his analysis of market
equilibrium and social efficiency, Allais laid the foundations
for the school of postwar French economists who not only analyzed
the conditions for efficient use of resources in large public
monopolies (such as Electricité de France or SNCF, the
state-owned railroad), but also in many instances applied the
theory to business management.

Allais's two monumental works also contain many results which
represent very early contributions in areas that were not
explored until much later on. He used new mathematical methods to
analyze the stability of equilibria, *i.e.*, the conditions
under which an economy - after a disturbance - will return to
equilibrium through price formation. In his 1948 study, Allais
anticipated important results in research which led to the modern
theory of economic growth in the late 1950s and early
1960s.

Allais's distinguished contribution may, to some extent, be
regarded as a parallel to two important works published around
the same time in the Anglo-Saxon research community: *Value and
Capital* (1939) by Sir John
Hicks, and *Foundations of Economic Analvsis* (1947) by
Paul A. Samuelson. Hicks was
awarded the Nobel memorial prize in economic sciences in 1972 and
Samuelson in 1970. The similarity lies primarily in the objective
of providing a comprehensive and rigorous interpretation of
economic theory. The main difference is perhaps that Allais's
formulation is more general and includes an analysis of,
*e.g.* households' and firms' long-run (or intertemporal)
planning. The work of Allais served as a basis for the analysis
of market equilibrium and social efficiency using more advanced
mathematical methods carried out by his pupil, Gerard Debreu (laureate in 1983),
concurrently, and sometimes in collaboration with, Kenneth Arrow (laureate in 1972).

Allais's outstanding achievements may be characterized as basic
research in economics. By his links to an older French tradition
in economic research, Maurice Allais is the most prominent figure
in modern economic research in France as regards basic theory and
applications to public-sector planning. Even though his
fundamental research has been relatively little known beyond the
French-speaking sphere, Allais has had a far-reaching indirect
impact through younger French economists who have been strongly
influenced by his work.

Maurice Allais has also made distinguished, pioneering and often
highly original contributions in other areas of economic
research. At an early stage, he carried out theoretical and
empirical studies on the significance and determinants of the
volume of money. He was thus an initiator of monetary
macrodynamic analyses. Outside of a rather small circle of
economists, he is perhaps best known for his studies of risk
theory and the so-called Allais paradox. He has shown that the
theory of maximization of expected utility, which has been
accepted for more than forty years, does not apply to many
empirically realistic decisions under risk and uncertainty.

During the past two decades, Allais has tried to generalize
market theory by emphasizing its dynamic aspects. The impetus for
consumers' and producers' economic behavior consists of efforts
to use any surpluses that may arise in an economy through
previously unexploited exchange opportunities. Equilibrium is
reached when these surpluses have been exhausted. Allais
summarized many of his early and more recent research
contributions in *La Theorie Générale des Surplus*
(1981).

The sum ot Allais's productive achievements
in economic theory is considerable. Moreover, he has carried out
various applied studies in, *e.g.*, operations research and
has participated extensively in debates in the French press.
Alongside his accomplishments as an economist, Allais has
published studies in history and physics, particularly
geophysics.

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