The Nobel series: With scientific prowess

The Nobel Prize in Economic Sciences in 1988 was awarded to the French economist Maurice Allais for his work on the theory of market and efficient utilisation of resources. Allais was at the Ecole Nationale Supérieure des Mines de Paris at the time of receiving the prize.

Before turning to economics, Allais had studied physics and even published many research articles. He acquired interest in economics after a trip to the US in 1933. Allais studied economics at the Ecole Polytechnique (Polytechnic School) and then at the École Nationale Supérieure des Mines de Paris (National School of Mines in Paris). In 1937, he began working for the state-owned mines administration and, in 1944, he became a professor at the École des Mines where he continued till retirement. From the mid-1940s on, he carried out his research at the Centre de la Recherche Scientifique (National Centre for Scientific Research).

Allais' main work was in the area of general equilibrium and the efficiency of markets. While doing this work, he was greatly influenced by Walras, Pareto and Fisher. During the 1940s, he gave a mathematical shape to Walras's and Pareto's work on market equilibrium and the efficiency properties of markets. Allais' two main works are 'A la Recherche d'une Discipline Économique' (1943) and 'Economie et Intérêt' (1947). A second edition of the first book appeared in 1952 under the title 'Traite d'Économie Pure'.

His works received a rather late recognition because of his reluctance to write or translate them into English. Only after American and British economists came across his work, did he get wider recognition. Allais' work on markets and the efficiency of equilibrium paralleled that of Hicks and Samuelson, and inspired Debreu and Arrow for their works in general equilibrium. Paul Samuelson had once said: "Had Allais earliest writings been in English, a generation of economic theory would have taken a different course" and felt the Nobel Prize should have been awarded to him much earlier.

In this article, we shall review the works of Allais and their relevance in public policy.

Main works

As noted above, the main works of Allais were 'A la Recherche d'une Discipline Economique' (1943), 'Economie et Interet' (1947) and 'Traite d'Economie Pure' (1952). In the first two works, Allais was basically trying to get a fix on the 'invisible hand' of the market that Adam Smith had spoken of in the 18th century. He carried forward the rigour of his training in physics and engineering studies to economic theory. Through this work, Allais was carrying forward the works of Walras and Pareto. Allais provided a rigorous mathematical formulation of market equilibrium and the efficiency properties of markets, much as Samuelson, Debreu and Arrow did around the same time. Based on his model, he outlined the conditions under which there could be social efficiency coupled with general equilibrium, which would be stable. Allais' work was not new and many Nobel prizes have been awarded for this kind of research on general equilibrium (Arrow, Debreu, Samuelson to name a few). In 'Economic et Intérêt', Allais carried forward his earlier work and provided a more rigorous model of the market economy.

In 'Traite d'Economie Pure', Allais continued his work on general equilibrium and presciently laid out the two propositions of welfare economics, which Arrow outlined independently. According to these versions, "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". We know that these propositions are important not only from the point of pure economic research but also the application for planning and regulation. Allais extended these applications to other areas like natural monopolies. As the Nobel website tells us:

Allais also formulated a generalisation that 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 foundation for the school of post-war French economists who not only analysed the conditions for efficient use of resources in large public monopolies (such as Electricité de France or SNCF, the state-owned railroad), but also applied the theory to business management in many instances.

Allais also worked on returns to scale and incorporated them in his model of general equilibrium. He contributed to the economic theory of growth and the theory of overlapping generations. And finally, Allais worked on the determinants of demand for money: a theory that the American economist Baumol developed independently years later.

Allais is also known for his work on decision-making under risk and also the Allais paradox. The paradox simply says that while an individual may choose one outcome over another, depending on the probabilities, her choice over pairs of outcomes would be inconsistent with the expected utility theory. This result was again prescient and was picked up the day later by behavioural economists such as Herbert Simon, Daniel Kahneman and Amos Tversky to develop their model of individual decision-making. It may be recalled that Kahneman and Tversky had given a model of individual decision-making (based on bounded rationality and satisficing) which was diametrically opposite to that of the neoclassical framework (which was based on rationality and utility maximisation).

In 1977, Allais published a study on Capital Taxation and Monetary Reform which contained radical suggestions like the replacement of income taxes with those on capital. Allais had earlier carried out theoretical and empirical studies on the significance and determinants of volume of money.

In the days that followed, Allais worked on how the consumer surplus and producer surplus is determined. His ideas were summarized in his 1981 publication La Théorie Générale des Surplus. As the Nobel website tells us:

During the past two decades, Allais has tried to generalize market theory by emphasizing its dynamic aspects. The impetus for consumers' and producers' economic behaviour 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).

Public policy

We saw above that Allais wrote in French and was not very enthusiastic to translate his works into English. As a result, his works became known only after English-speaking economists became aware of his works. Nevertheless, in France and mainland Europe, his work was applied in the pricing plans and regulation of state-owned monopolies and utilities such as the railways (SNCF). In his article, The Problem of Transportation Coordination and Economic Theory (Le Problème de la Coordination des Transports et la Théorie Économique), published in 1947, Allais explained that pricing transportation in terms of the value of the goods to be carried is inefficient in terms of social welfare. When he argued that pricing rules of railways should take into account the peak-load periods as opposed to ordinary periods; his proposal was termed impractical. However, today such peak-load pricing is common practice in many countries across the world, including France.

Allais also outlined in 1953 how the cost of extracting coal in certain places was greater than its average price. He had an in-depth knowledge of the sector since he had worked in the nationalised coal mines of France. Earlier in 1949, he wrote a report on the pricing policy of coal and the management practices in the nationalised French industry. He recommended that inefficient mining plants should be closed and, if necessary, some coal be imported from the United States. This recommendation attracted strong protests from the Communist trade unions which dominated the coal sector, but Allais stood by his recommendation. In the 1960s, Allais headed a committee of the EEC on transportation infrastructure and again argued that optimal pricing of such facilities had usually little to do with their cost but mainly with the rate of saturation of their capacity.

Allais participated in public debates on policy matters and, while he believed in the power of markets, he was not an unabashed supporter of laissez-faire or globalisation, or even of Keynesian policies. His independence in thought was well known. He once refused to sign the founding text of the Mont-Pelerin Society despite being a founding member. This was because he disagreed with Hayek on the principle of collective ownership and Hayek was not willing to compromise on the issue of private property. Allais was convinced of the power of federalism and advocated for a reasonable degree of protection in trade for the underdeveloped countries.

Conclusion

The French President Mitterand spoke richly of Allais and said that he had "contributed to the advancement of mathematical economics and founded a new school". Allais also trained a generation of young economists — the most prominent among them being Gerard Debreu (the Nobel winner in 1983) and Edward Malinvaud. Maurice Allais richly deserved the Nobel Prize though he should have received it a long time ago. As Paul Samuelson wrote, "he would have, if his works had been written in English".

Allais also received numerous honours and awards. He was a member of several academies and learned societies, including the Institut de France, the US National Academy of Sciences, Lincean Academy in Italy and the Russian Academy of Sciences. In 1977, he was named an officer of the Legion of Honour — the premier order of the French republic. He was also made a grand officer in 2005.

Allais made fundamental contributions to economic theory. His works were also useful in public policy in France and Europe, particularly in the management of the public sector as well as in crafting regulation.

The writer is an IAS officer, working as Principal Resident Commissioner, Government of West Bengal. Views expressed are personal