Launhardt's Model of Exchange

This paper explores C. F. W. Launhardt's (1885) model of exchange and his associated welfare analysis. Launhardt's analysis, starting from the exchange models of W. S. Jevons and Leon Walras, is noteworthy for his derivation from explicit utility functions of algebraic forms of general equilibrium supply and demand curves expressed as functions of relative prices. Whereas Jevons and Walras concentrated on the pricetaking equilibrium properties of their exchange models, Launhardt explored a process of disequilibrium trading in which successive trades take place at the “short end” of the market, that is, the minimum of supply and demand at a price. His main concern was, however, to examine the welfare aspects of exchange, comparing the gains from trade under competitive and monopolistic behavior. Launhardt has been criticized for suggesting that aggregate utility, and thus the aggregate gain from trade, is maximized at the price-taking equilibrium (see for example, Wicksell 1954, p. 76, n. 2; 1934, p. 81, n. 1). He nevertheless showed that a process of disequilibrium trading, in which the price initially favors the relatively poorer individual, can improve the aggregate gains from trade as compared with the equilibrium with no disequilibrium transactions, subsequently called a price-taking equilibrium.