Abraham Wald

Born on October 31, 1902, Abraham Wald was a pioneer in the fields of
Statistics, Economics as well as Mathematics. Born in present –day Cluj,
Romania to Jewish parents Abraham Wald was tutored privately. However in
1927, he enrolled with the University of Vienna and received his PhD in
mathematics. Although he studied Mathematics but did not attend many
courses and instead spent time solving open mathematical problems.
Major Works
In the course of this study, Wald was introduced to Karl Menger and attended
the latter’s maths colloquium. This was the period that saw most of his work on
geometry and topology working on Steinitz theorem and a characterization of
Lebesgue measure as a measure which assigns the value 1 to every unit cube. .
After obtaining his PhD in 1931, Wald applied for a position at the University of
Vienna but due to the adverse political and economic situation and Karl
menger’s intervention , Wald became a private lecturer in mathematics to karl
Schlesinger. Schlesinger introduced Wald to the idea of Walrasian equation
systems, the period characterizing his fascination with general Equilibrium
theory with the publication of three of his major works on the same. These were
as listed below:-

 "On the Unique Non-Negative Solvability of the New Production

Functions (Part I)", 1935, in Menger, editor, Ergebnisse eines
mathematischen Kolloquiums, 1934-35..
 “On the Production Equations of Economic Value Theory (Part 2)", 1936,
in Menger, editor, Ergebnisse eines mathematischen Kolloquiums, 1934-35.
 "On Some Systems of Equations of Mathematical Economics", 1936, ZfN.
(translated, 1951, Econometrica.)

Wald’s Work on general equilibrium theory is remarkable in the sense that it

corrected the major follies of the Walras-Cassel Model by employing the
‘Duality principle’ and developing Slackness conditions for the model; gave the
field of economics an initial favour of the Weak Axiom of Revealed Preference,
and gave proof for the existence and uniqueness of the Equilibrium.

Eventually Wald got a position as a consultant in the Austrian Institute for

Business Cycle Research then headed by Oskar Morgenstern. Morgenstern
acquainted him with the problem of seasonal adjustment of time series thus
starting of Wald's statistical contribution . During this time he also developed
his Theory of Statistical Decision which is the core of most econometric
modelling in the present day. Wald’s work on the seasonality of time series in
context of person’s method was published in his book "Berechnung und
Ausschaltung von Saisonschwankungen" (1936),where Wald explains in depth
every single step of this procedure and care-fully accounts for the various
approximations that appear along the line of calculations. Wald also worked on
price index numbers and the philosophical idea of randomness, thereby linking
pure theory to empirical concepts.
After the Nazi occupation of Austria, the Vienna Colloquium was dispersed and
Wald was dismissed. Forced to leave his homeland Austria, Abraham Wald
joined the Cowles Commission. He eventually gravitated to Columbia
University, where he continued his work on statistical theory, making several
seminal contributions, such as the development of "sequential analysis" (1947)
and the famous "Wald Test" (1939). His major works in the field of
econometrics were:-

 "Contributions to the Theory of Statistical Estimation and Testing

Hypothesis", 1939, Annals of Mathematical Statistics.
 Sequential Analysis, 1947- Wald’s most famous work summarised all
results in sequential sampling upto 1947.
 Statistical Decision Functions, 1950. – the book highlighted Wald’s ideas
on statistical decision theory and hypothesis testing

General Equilibrium theory

The basic objection to Cassel’s work on the Walrasian system of general
equilibrium was in terms of the determinacy of the system. By introducing, the
notion of relative prices in the system (as well as Walras’s law) Cassel had
managed to show that the number of equations equal number of unknowns but
it does not guarantee the existence of a meaningful solution. For instance a
linear and a quadratic equation may not have a real solution.

Another problem with Cassel’s model was the manner in which the production
side was incorporated. Pointed out by Stackelberg in 1937, a case where the
number of industries exceeded the number of factors, the system would once
again become indeterminate as there could be multiple solutions. Even if the
number of industries is more than the total inputs the system would only be
determinate if all inputs are used by all industries.

The Walras- Cassel model as pointed out by Neisser also did not take into
account the notion of free goods and free services for which equilibrium prices
are either negative or zero. On the same lines Zeuthen pointed out the implicit
assumption of the model that all factors have prices because they are scarce is
essentially incorrect owing to the fact that for many factors of production
supply is typically more than demand at every positive price.

Abraham Wald and Karl Schlesinger took up this critique of the Walras- Cassel
system and introduced inequalities in the system to make it determinate and
prove the existence and uniqueness of the so determined equilibrium. As
regards the indeterminacy, Wald dealt with the issue by introducing an
inequality wherein the supply of a factor of production has to be greater than or
equal to its demand. The insertion of the case where there is excess supply at
any price implies that wages to the factor or factor price is in effect zero, given
the basic condition that only non-negative price vectors are considered in the
model. Inspired from this correction , later on Jon Von Neumann introduced
another inequality that required price of each commodity to be less than or
equal to the cost of production, thereby incorporating the case of free goods as
well.

Walras had also realised the same problems but perhaps found the use of
inequalities rather cumbersome and detrimental to the solution of the system.
However Wald provided necessary and sufficient conditions to prove the
existence of a unique equilibrium. The Existence proof was based on an
assumption of the Weak Axiom of Revealed preference at the individual level as
well as the market level. He also employed the methodology of linear
programming with a primal and a dual, the underlying notion being that of
induction of n number of commodities. Wald also coined the Complementary
slackness conditions that require the Lagrangian multipliers for both the primal
and the dual to be solution vectors to the other. These conditions established
that at positive prices, factor markets clear and that a good is produced only if
price is greater than the cost of production. In this manner it was ensured that
there were no free foods per se because for every commodity with a zero
equilibrium price Wald had proved there was zero excess demand.

Wald’s work also was hailed as a resurrection of the marginal productivity

theory of distribution, for the use of Lagrangian multipliers as shadow prices
are nothing but the marginal products. The use of the Weak axiom of revealed
preference was used in terms of the direct demand function to prove the
uniqueness of the equilibrium.

The impact of Wald’s work was so crucial that even today it is the Wald system
which we study in order to understand the Walrasian system in complete detail.
Abraham Wald was an economist dedicated to his work, made tactful by his
knowledge of mathematics and famed by his work in Statistics. The
combination of these qualities can be used to judge his clarity of thought as is
also hailed by his fellow economists- evident in Morgenstern’s 1950 article on
Wald in Econometrica.

Abraham Wald died at a rather early age in 1950 in a plane crash, while flying
over India.

Box 2

A chronology of Wald’s major works is given below:-

 "On the Unique Non-Negative Solvability of the New Production Functions

(Part I and 2)", 1935, in Menger, editor, Ergebnisse eines mathematischen
Kolloquiums, 1934-35.
 "On Some Systems of Equations of Mathematical Economics", 1936, ZfN.
(translated, 1951, Econometrica.)
 ÄUber einige Gleichungssysteme der mathematischen ÄOkonomie,
ZeitschriftfÄur NationalÄokonomie 7 (1936), 637-670.
 Berechnung und Ausschaltung von Saisonschwankungen, (1936) Springer,
Wien.
 Zur Theorie der Preisindexzi®ern, Zeitschrift fÄur NationalÄokonomie 8 (1937),
179-219.
 Die Widerspruchsfreiheit des Kollektivbegri®es derWahrscheinlichkeit-
srechnung, Actualit¶es Scienti¯ques et Industrielles 735
(1938),ColloqueConsacr¶e µa la Th¶eorie des Probabilit¶es, Hermann et Cie.,
79-99.
 A new formula for the index of cost of living, Econometrica 7 (1939a),319-331.
 Contributions to the theory of statistical estimation and testing hypotheses,
Annals of Math. Stat. 10 (1939b), 299-326.
 The fitting of straight lines if both variables are subject to error, Annals of
Math. Stat. 11 (1940), 284-300.
 On the statistical treatment of linear stochastic di®erence equations(with H. B.
Mann), Econometrica 11 (1943a), 173-220.
 Tests of statistical hypotheses concerning several parameters when the
number of observations is large, Trans. Am. Math. Soc. 54 (1943b),426-482.
 Sequential Analysis, (1947) John Wiley, New York.
 Statistical Decision Functions, (1950) John Wiley, New York.
 The publications of Abraham Wald, Ann. Math. Statistics 23 (1952), 29-33.