What it is:
Walras's law is the concept that a surplus in one market indicates the presence of a shortage in another.
How it works (Example):
In 1844, neoclassical French economist Leon Walras posited that the existing markets of the world economy are predisposed toward equilibrium between supply and demand. In other words, a change in either supply or demand results in a proportional shift in the other, which brings the system back into equilibrium. This idea suggests that the economy is a zero-sum world in which a measurable surplus in one market must be accompanied by a comparable deficit in another market.
Why it Matters:
By the early decades of the 20th century, Walras's law and other examples of neoclassical theory were set aside in favor of the modern economic theories of British economist John Maynard Keynes. Under Keynesian theory, markets can function and develop independently of one another. The existence of a surplus or deficit in one market is not necessarily indicative of a respective deficit or surplus elsewhere.