# Press release

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.