I have asserted that the distribution of income is determined by political power, not by intertemporal utility-maximization. Interest rates are not the result of individual decisions trading off consumption at future dates against consumption now.
Is it not a consequence of this view that Walras's law does not apply to capitalist economies?
2.0 On the Derivation of Walras's Law
Walras's law states that the sum of excess demand across all goods is zero:
p z(p) = p1z1(p) + p2z2(p) + ... + pnzn(p) = 0The excess demand for the jth good is the difference between the demand and supply of that good at the set of prices at which these functions are being evaluated:
zj(p) = dj(p1, p2, ..., pn) - sj(p1, p2, ..., pn)And supply and demand functions for each market are found by summing over the supplies and demands for all individuals. But individual supply and demand functions are derived from the theory of utility-maximization, given the initial distribution of the endowments of all goods.
3.0 Macroeconomic Reasoning With Walras's Law
Don Patinkin considered an economy in which n - 1 commodities and "money" are traded.
"For the amount of excess demand for money equals the aggregate value of the amounts of excess supplies of commodities." -- Don Patinkin, Money, Interest, and Prices (2nd edition, Harper and Row, 1965)I believe Patinkin's approach can be seen as building on J. R. Hicks's Value and Capital (2nd edition, Oxford University Press, 1946). Hicks included demands for both money and other securities in his General Equilibrium approach.
One can argue that the world economy is currently in a disequilibrium; both labor and produced commodities are in excess supply. Thus, by Walras's law, there must be an excess demand for money. And it is the job of monetary authorities, such as the United States's Federal Reserve, to meet that demand, by flooding the market with money while this disequilibrium exists. At least, this is the argument of prominent mainstream "Keynesians", such as Brad DeLong and Paul Krugman (suggestions for links to their blogs here are welcome).
Keynes's emphasis on fundamental uncertainty is arguably incompatible with the explanation of the demand for money by intertemporal utility-maximizing in a model of General Equilibrium. Thus, the above justification of "Keynesian" monetary policy, based on Walras's law, does not harmonize with Keynes's theory.