The Validity of Walras’ Law in a Monetary Exchange Economy: Money, Prices and the Integration of Monetary and Value Theory

Walras’ Law is one of the most important tenets of Neo-liberal economics. It is supposed to be a Tautological Identity according to which disequilibrium in market economies has a compensatory nature. Hence, disequilibrium in any market would imply an opposite imbalance somewhere else in the system. However, in monetary systems commodities do not buy commodities, i.e. they are not substitutes of money. When budget constraints take into account the realization problem associated with the violation of the Classical Gross Substitution Axiom, disequilibrium turns out to be non-compensatory. This paper shows that Walras’ Law does not always hold