Alfred Marshall, the Frenchman Leon Walras, the Italian Vilfredo Pareto, and the American John Bates Clark-built the assumption of a static system into their theory. They viewed the whole economy as like a street market where the buyers calculate what combination of goods gives them the best value for the money they have got in their pockets, while the stallholders calculate the best price they can get for each of their goods. The mutual adjustment of the price each seller is willing to accept and each buyer is willing to pay leads to all the goods being sold. And, since each seller is in turn the buyer from someone who has bought from someone else, a whole network of prices is set up which ensures that what is produced is exactly what people want. Walras claimed to show how this works for a national economy with hundreds of pages of equations and graphs.
Inbuilt into the whole approach was a very unreal view of capitalism. For, whatever else capitalism is, it is not static. In a real street market, people do not agree instantaneously on the prices for buying and selling. But neoclassical theory assumed that through the mediation of a central auctioneer they could arrive at agreed prices instantaneously. Real life haggling often takes quite a long time, with prices across the market as a whole being arrived at through a process of successive adjustments. Once that is taken into account divergences open up between the actual prices of goods and those presupposed in the theory. The actual production of goods that are to be sold is always a process taking place in time. "Price signals" do not tell you what will be wanted when production is finished, but what was wanted before it began. The simultaneity of the theory is a myth, and the simultaneous equations developed on the basis of its assumptions bear little relation to really existing capitalism.
Faced with the reality that production occurs over time, how did the founders of neoclassical economics react? They did not allow it to affect their theory one iota. Walras, for instance, recognised that "production requires a certain lapse of time". But he then wrote he would deal with the "difficulty purely and simply by ignoring the time element at this point";1 and when he returned to the issue it was to assume that "data" remained "constant for a given period of time" ,2 as if the transformation of the whole productive apparatus with economic growth would not mean continual transformation of the structure of supply and demand. Marshall went as far as to admit that "time is the source of many of the greatest difficulties in economics" ,3 since "changes in the volume of production, in its methods, and its costs are ever mutually modifying one another. " This did not, however, stop him teaching the theory and a whole generation of mainstream economists taking it as proof of the efficacy of market capitalism. An updated version of Walras's mathematical model was produced in the early 1950s by Kenneth Arrow and Gerard Debreu which attempted to take time into account. But Arrow himself recognised that the model only works "if you assume no technological progress, no growth in population and lots of other things" .4
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Understanding the System: Marx and Beyond