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Presentation Speech - The Sveriges Riksbank (Bank
of Sweden) Prize in Economic Sciences in Memory of Alfred Nobel
KUNGL. VETENSKAPSAKADEMIEN THE ROYAL SWEDISH ACADEMY OF SCIENCES
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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