John Richard Hicks (1904-1989)

Life

Hicks was the first British economist who was awarded the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel in 1972. He jointly won the prize with Kenneth Arrow “for their pioneering contributions to general equilibrium theory and welfare theory”.

He was born on 8 April 1904 at Warwick, England, where his father was a journalist at a local newspaper. From 1917 to 1922 he was educated at Clifton College, and thereafter he studied at Balliol College, Oxford. Having first specialized in mathematics, Hicks moved to the new programme in “philosophy, politics and economics” (PPE) in 1923. After working as a junior reporter for the Manchester Guardian for six months, Hicks received a temporary lectureship at the London School of Economics (LSE) in 1926, where he finally taught until 1935. It was the LSE, where Robbins in fall 1929 started a research seminar that made him an economist.

In 1935 Hicks married Ursula Webb, a distinguished scholar in public finance, who remained his closest intellectual companion until her death in 1985. Through his friend­ship with Dennis Robertson, he accepted Pigou’s offer of a university lectureship in Cambridge in summer 1935 where he stayed for three years, also as a Fellow of Gonville and Caius College. While at Cambridge he finished his work on Value and Capital (1939) but also wrote his two well-known articles reviewing Keynes’s General Theory (1936, 1937). However, Hicks was alienated by the intellectual climate and personally disharmonious atmosphere in Cambridge, and in 1938 he moved to the University of Manchester where he stayed as William Stanley Jevons Professor of Political Economy until 1946. In Manchester he did his main work on welfare economics (1981, pt I), with some application to national income accounting.

In 1946 Hicks returned to Oxford, first as a research fellow of Nuffield College, from 1952 to 1965 as Drummond Professor of Political Economy and finally, after retir­ing from teaching and administrative duties, as research fellow of All Souls College (1965-71).

Hicks became a Fellow of the British Academy in 1942, a foreign member of the Royal Swedish Academy in 1948, of the Italian Accademia dei Lincei in 1952, and of the American Academy in 1958. He was President of the Royal Economic Society from 1960 to 1962, and was knighted in 1964 when “JR” became “Sir John”. He received an honorary doctoral degree from more than a dozen universities and was made an honorary Senator of the University of Vienna in 1971. He died in his home in Blockley, Gloucestershire, on 20 May 1989.

Work

Hicks has made important contributions to various subfields of economics. His early work as a labour economist culminated in The Theory of Wages (Hicks 1932), which despite some shortcomings, later openly conceded in the commentary by the author in the revised second edition of his “juvenile opus”, introduced some innovative concepts into theoretical economics. Building on the marginal productivity theory, Hicks introduced the new concepts of the “elasticity of substitution” and “Hicks-neutral”, “labour-saving” and “capital saving” inventions in the famous chapter 6 on “Distribution and economic progress”. It was Hicks (1934) who in his joint work with Allen - which was “ Werttheorie in the sense of Menger” (1934 [1981]: 4) and thereby had an Austrian as well as a Paretian origin - building on Edgeworth’s first drawing of indifference curve diagrams, integrated indifference curves and budget constraints into standard microeconomic analysis. He demonstrated how indifference curves could be used to construct a downward-sloping demand curve for any good and to separate the income effect from the substitution effect of a price change. In part I of Value and Capital (Hicks 1939) he expanded his pioneering analysis to investigate the role of income effects and substitution effects of price changes for the economy as a whole.

In his early phase Hicks benefited enormously from the international atmosphere at the LSE and from his own language skills in French, Italian, and German which allowed him to read authors such as Walras, Pareto, Cassel, Myrdal and Wicksell in the original. During his whole life Hicks kept a strong interest in history, literature (with Dante as the poet most loved), music and philosophy. As an eminent economist he was very modest and self-reflective, constantly re-examining his own earlier work. Hicks was never a member of any school of thought nor did he intend to create his own.

The Nobel Prize citation puts Value and Capital as Hicks’s magnum opus into the centre, the foundation of modern general equilibrium theory on which subsequent work by Samuelson, Arrow, Hahn and Debreu was built. In particular the question of stability of a general equilibrium in the presence of external shocks is at issue.

General equilibrium theory had, earlier, essentially the character of formal analysis.... Hicks abandoned this tradition and gave the theory an increased economic relevance. He presented a complete economic equilibrium model with aggregated markets for com­modities, factors of production, credit and money. The construction of this model included a number of innovations, i.e., a further development of older theories of consumption and of production, the formulation of conditions for multimarket stability, an extension of the applicability of the static method of analysis to include multiperiod analysis, and the introduction of a capital theory based on profit maximization assumptions. By being deeply anchored in theories of the behaviour of consumers and of entrepreneurs, Hicks’s model offered far better possibilities to study the consequences of changes in externally given variables than earlier models in this field, and Hicks succeeded in formulating a number of economically interesting theorems. His model became of great importance also as a con­necting link between general equilibrium theory and current theories of business cycles.

Hicks identified a certain “sterility” (1939: 60) in the Walrasian system of general equi­librium. Unlike Arrow he did not take the existence problem beyond the counting of equations and variables but entered into a pioneering analysis of the stability of a system of multiple exchange.

In parts III and IV of Value and Capital stronger elements from the Marshallian- Keynesian tradition of the short-run enter into Hicks’s formerly static analysis to create “The foundations of dynamic economics” and to analyse “The working of the dynamic system”. Most important for later economic analysis are Hicks’s method of equilibrium and the related concept of the elasticity of expectations.

Hicks re-examined “Methods of dynamic analysis” time and again until the end of his life (1956a, 1965, pt I, 1985). He came to consider perfect foresight models as essentially static and disliked steady state models as they became prominent in post-war growth economics. He confessed that he did not give a genuine definition of dynamics in Value and Capital, identified many assumptions (for example, assuming capital to be homogeneous or all capital to be circulating) how economists fall into static method, and pointed out that dynamics comprises more than that every variable must be dated. For a critical assessment of Hicks’s capital theory in Value and Capital see Garegnani (2012), for the analysis of his early advocacy and the appropriateness of his use of the method of temporary equilibrium, Hicks’s later recantation of this method owing to its elimination of dynamics and lags from analysis, that is, the impermanence problem, and the limited impact Hicks’s moving away from the temporary equilibrium method had on mainstream economics see also Petri (1991).

In his A Contribution to the Theory of the Trade Cycle Hicks (1950) combines Harrod’s growth theory with a Hansen-Samuelson model of the business cycle based on the inter­action between multiplier and accelerator.

Hicks’s seminal articles to welfare theory, mainly published in 1939-46, contain four main contributions, founding the “New welfare economics” or “Kaldor-Hicks welfare economics” (see also, Bliss 1987; and the modern reassessment by Chipman in Hagemann and Hamouda 1994). First, at a time when cardinal utility was not generally accepted by economists anymore, Hicks critically examined the compensation principle, that is, the possibility of Pareto improvements when the welfare beneficiaries fully compensate the losers and still would be better off. He later (Hicks 1981: xiii) confessed that at the time of formulating the “Kaldor-Hicks criterion” he was not aware of the Scitovsky paradox, that is, that the hypothetical compensation is not necessarily reversible. He also empha­sized that his most fundamental shortcoming of his contemporary work on welfare eco­nomics was that it fell short of the “revealed preference” theory developed by Samuelson (1948). Samuelson’s approach stimulated Hicks to write his A Revision of Demand Theory (1956b). Second, the issue of welfare improvements is closely related to the problem of measurement of real national income as an index of economic welfare. Hicks concluded that the two types of measurement of income, in terms of utility and in terms of cost, are quite different, and he rejected the utility approach to measure welfare. On the important question how to treat government expenditures and indirect taxation in the valuation of social income Hicks was engaged in a major controversy with Kuznets, which he comments ex post (1981: 96-9, 142-88). Unlike Arrow, Hicks never developed an interest in the formulation of a social welfare function, probably also due to a lack of faith in the optimality of the market process and its results.

The four letters that students of several generations have associated with Hicks after their first basic course in macroeconomics are IS-LM (after Hansen’s modification of Hicks’s original SI-LL terminology). The IS (LM) curve is the schedule specifying the combinations of interest rates and levels of national income which ensure equilibrium in the goods (money) market. The point of intersection between the two curves determines simultaneous equilibrium on both markets but leaves the labour market outside. So is Keynesian unemployment compatible with a Walrasian interpretation, when in Walras all markets are cleared?

Despite the great influence of his interpretation of Keynes’s General Theory (1936) through the IS-LM diagram and the ensuing development of modern macroeconomic theory, and students being trained on the effects of monetary and fiscal policies on the basis of this standard model of macroeconomic textbooks, Hicks never had been con­vinced that the whole Keynesian theory could be confined to the model he was respon­sible for establishing in his “suggested interpretation”, “Mr. Keynes and the ‘classics’” (Hicks 1937).

This 1937 article, which Hicks first presented to the meeting of the Econometric Society at Oxford in September 1936, was not the first but the second interpretation of the General Theory by Hicks, after he had written his review article “Mr. Keynes’s theory of employment” for the Economic Journal of which Keynes was the editor. “I was asked because it was hoped that I should be a sympathetic but independent critic; and such, at that date, were not easy to find” (Hicks 1974: 6). Nevertheless it was his second article, which captured those parts of Keynes’s theory most accessible to formalization, which exerted the enormous influence. “Keynes’s own version of Keynesian economics, is by no means easy to determine” (ibid.: 5).

From the mid-1960s onwards Hicks came back time and again to a reinterpretation of Keynesian economics (1974, 1977: ch. VI, 1980), and he increasingly drifted away from the “neoclassical synthesis” (Samuelson) mainstream he himself had helped to established in younger years, and which was strongly disliked by Keynes’s disciples such as Kahn and Joan Robinson, who, for example, could rightly criticize that the IS-LM model with its focus on equilibrium does not capture the uncertainty that characterizes a monetary economy.

Hicks himself later pointed out that the IS-LM diagram “is now much less popular with me than I think it still is with many other people. It reduces the General Theory to equilib­rium economics; it is not really in time” (1982: 289-90). Among the three parts he consid­ered as the essential building blocks of Keynes’s theory, the marginal efficiency of capital and liquidity preference unquestionably are in time, whereas the multiplier theory is out of time. In his widely perceived article “IS-LM: an explanation” (Hicks 1980) he accordingly emphasized the hybrid character of his own construction that the IS curve is a flow relation whereas the LM curve is a stock relation referring to a point of time. The IS-LM analysis therefore could only survive “in application to a particular kind of causal analysis, where the use of equilibrium methods... is not inappropriate” (ibid.: 152). Leijonhufvud (1983) came to the conclusion that the hybrid character of the IS-LM apparatus, which ignores the sequence of events within the period, is due to the fact that it combines a Walrasian element of a simultaneous equilibrium on interdependent markets with Marshallian microfoundations. The problem was that Marshallian economics was in time, whereas theory in the Walrasian tradition was not, as Hicks only later came to recognize.

Hicks grappled with an adequate treatment of time in economic theory for almost six decades. According to him the movement of an economy through time is the central subject of macroeconomics. The relevance of the time dimension is particularly impor­tant in the taking-up process of a new technology. By the late 1960s he became fascinated by the Ricardo machinery effect, that is, the employment consequences of a different more mechanized method of production. He defended what he considered the core of Ricardo’s analysis, namely, that there exist important cases - “strongly forward-biased” innovations according to his newly developed “index of improvement in efficiency” (1973b) - that reduce real output in the short run and make the existence of temporary technological unemployment unavoidable, but the detrimental effects are overcome due to real capital formation as the consequence of higher profits resulting from the greater efficiency of the new methods of production.

Throughout his professional life Hicks maintained a deep interest in capital theory, as is reflected in his famous trilogy Value and Capital, Capital and Growth and Capital and Time. In his view, “[C]apital... is a very large subject, with many aspects; wherever one starts, it is hard to bring more than a few of them into view” (1973b: v). In Capital and Time Hicks switched to a neo-Austrian model to analyse the problem of a traverse caused by a change in technology, after he soon had become dissatisfied with the embry­onic theory of traverse which he studied in chapter 16 of his Capital and Growth (1965) on the basis of a two-sectoral fixed coefficient model, and the critique raised by Kennedy (1968). Implicit in Capital and Time is the concept of the “impulse”, which is developed in his Nobel lecture “The mainspring of economic growth” (1973a) and particularly in his essay on “industrialism” (1977: ch. 2).

The decisive Austrian elements in Hicks’s “neo-Austrian” theory are the focusing on the time structure of the production process and the special treatment of capital goods as intermediate products in a vertical model (see also Burmeister 1974). Capital is a medium for sequential production. By dealing explicitly with fixed capital goods Hicks’s neo-Austrian approach, in contrast to Bohm-Bawerk and Hayek, considers production processes to be of the flow input-flow output type. As has already been emphasized in his “The Hayek story” (Hicks 1967: ch. 12) not only the economics of Keynes but also the economics of Hayek were a lifelong challenge for Hicks in developing his own theory. Hicks always had been sceptical about Hayek’s claim that the economy would be in equilibrium if there were no monetary disturbances. Altough he took over from Hayek the idea that the impact of an impulse on the real structure of production is most important, he argued against Hayek that technological change is “more fundamental” (Hicks 1973b: 133-4).

As Hagemann and Kurz (1976) have shown, Hicks’s view of the choice of technique problem vis-a-vis fixed capital cannot generally be sustained. The neo-Austrian model does not contain basic products and thus does not possess a finite maximum rate of profits. The return of the same length of the production process (utilization time of the fixed capital good) at varying rates of profits is proved to be a “curiosum” only in the neo-Austrian model but not in a more general von Neumann-Sraffa model, while reswitching of processes (techniques) is perfectly normal in both models.

History had already been Hicks’s favourite subject at school and in his library (Hamouda 1993: ch. 10). With increasing age Hicks emphasized more and more the relationship between economic history and economic theory as of fundamental methodological significance. This holds in particular for fields such as monetary eco­nomics (Hicks 1967, ch. 9), but he also considered Keynes and his ideas mainly as a product of his own era. He not only had a deep sense of the historical origins and time related character of economic models, thereby also identifying their intrinsic limits, but also made ample use of the materials of economic history and the history of economic thought (see also Hicks 1983) as necessary tools in the process of economic theorizing. A good example is the chapter on the Industrial Revolution in his A Theory of Economic History (1969), which he wrote when he was on his own personal traverse to Capital and Time. The constancy of the level of wages as an important stylized fact in Ricardo’s time is referred to as a rationale for providing the fixwage path as a proper replication of Ricardo’s analysis of the machinery problem. The careful distinction between fixprice and flexprice models, as his repeated reflections on risk and uncertainty, are just two out of many topics which indicate Hicks lifelong awareness of methodological issues in economics.

Hicks has left his mark almost everywhere in the many subfields of the economic discipline, not least so in monetary economics. His achievements date from his early con­tribution to the evolution of a theory of liquidity preference and portfolio selection in “A suggestion for simplifying the theory of money” (1935) via Critical Essays in Monetary Theory (1967) to his final A Market Theory of Money (1989) in which he treated money as an integral part of the institutional framework and elaborated a neo-Wicksellian approach for a modern overdraft economy.

Hicks himself made his conversion from J.R. to Sir John public:

Clearly I need to change my name. Let it be understood that Value and Capital was the work of J.R. Hicks, a “neoclassical” economist now deceased; while Capital and Time - and A Theory of Economic History - are the work of John Hicks, a non-neoclassic who is quite disrespectful towards his “uncle”. (1975: 365)

He did not become a “revolutionary” as Keynes in his General Theory but he remained an independent mind considering his 1956 contribution to the Lindahl Festschrift (Hicks 1956a) as the “turning-point” (1982: 217) for the development of his own thinking. Thereafter he increasingly kept at a distance from his earlier works, but more for the use American and other neoclassicals (who never liked the work of Sir John) made of them than for the ideas he had developed himself and continuously re-examined and modified. Nevertheless it is characteristic that Hicks dedicated his Nobel lecture to “The main­spring of economic growth” and not to the two topics, general economic equilibrium and welfare theory, for which the prize was awarded.

Harald Hagemann

See also:

Kenneth Joseph Arrow (I); Eugen von Bohm-Bawerk (I); Economic dynamics (III); General equilibrium theory (III); Nicholas Kaldor (I); John Maynard Keynes (I); Vilfredo Pareto (I); David Ricardo (I); Paul Anthony Samuelson (I); Marie-Esprit-Leon Walras (I); Welfare economics (III); Knut Wicksell (I).

References and further reading

Bliss, C. (1987), ‘Hicks, John Richard’, in J. Eatwell, M. Milgate and P. Newman (eds), The New Palgrave. A Dictionary of Economics, vol. 2, London: Macmillan, pp. 641-6.

Burmeister, E. (1974), ‘Synthesizing the neo-Austrian and alternative approaches to capital theory’, Journal of Economic Literature, 12 (2), 413-56.

Collard, D.A., D.R. Helm, M.F.G. Scott and A.K. Sen (eds) (1984), Economic Theory and Hicksian Themes, Oxford: Clarendon Press.

Garegnani, P. (2012), ‘On the present state of the capital controversy’, Cambridge Journal of Economics, 36 (6), 1417-32.

Hagemann, H. and O.F. Hamouda (eds) (1994), The Legacy of Hicks. His Contributions to Economic Analysis, London and New York: Routledge (with full bibliography).

Hagemann, H. and H.D. Kurz (1976), ‘The return of the same truncation period and reswitching of techniques in neo-Austrian and more general models’, Kyklos, 29 (4), 678-708.

Hagemann, H. and R. Scazzieri (eds) (2009), Capital, Time and Transitional Dynamics, London and New York: Routledge.

Hamouda, O.F. (1993), John R. Hicks: The Economist’s Economist, Oxford: Blackwell.

Hicks, J.R. (1932), The Theory of Wages, 2nd edn 1963, London: Macmillan.

Hicks, J.R. (1933), ‘Gleichgewicht und Konjunktur’, Zeitschriftfur Nationalokonomie, 4, 441-55, trans. 1980, ‘Equilibrium and the trade cycle’, Economic Inquiry, 18, 523-34, reprinted in J.R. Hicks (1982), Money, Interest and Wages, Collected Essays on Economic Theory, vol. 2, Oxford: Basil Blackwell, pp. 28-41.

Hicks, J.R. (1934), ‘A reconsideration of the Theory of Value’, part I, Economica, New Series, 1 (February),

52-76, part II by R.G.D. Allen, Economica, New Series, 1 (May), 196-219, reprinted in J.R. Hicks (1981),

Wealth and Welfare. Collected Essays on Economic Theory, vol. 1, Oxford: Basil Blackwell, pp. 5-29, 30-55.

Hicks, J.R. (1935), ‘A suggestion for simplifying the theory of money’, Economica, New Series, 2 (February), 1-19.

Hicks, J.R. (1936), ‘Mr Keynes’s theory of employment’, Economic Journal, 46, 238-53, reprinted in J.R. Hicks (1982), Money, Interest and Wages, Collected Essays on Economic Theory, vol. 2, Oxford: Basil Blackwell, pp. 84-99.

Hicks, J.R. (1937), ‘Mr. Keynes and the “classics”’, Econometrica, 5 (2), 147-59.

Hicks, J.R. (1939), Value and Capital, Oxford: Clarendon Press.

Hicks, J.R. (1942), The Social Framework: An Introduction to Economics, Oxford: Clarendon Press.

Hicks, J.R. (1950), A Contribution to the Theory of the Trade Cycle, Oxford: Clarendon Press.

Hicks, J.R. (1956a), ‘Methods of dynamic analysis’, in Twenty-Five Economic Essays in Honour of Erik Lindahl,

Stockholm: Ekonomisk Tidskrift, reprinted with addendum in J.R. Hicks (1982), Money, Interest and Wages, Collected Essays on Economic Theory, vol. 2, Oxford: Basil Blackwell, pp. 219-35.

Hicks, J.R. (1956b), A Revision of Demand Theory, Oxford: Clarendon Press.

Hicks, J.R. (1965), Capital and Growth, Oxford: Clarendon Press.

Hicks, J.R. (1967), Critical Essays in Monetary Theory, Oxford: Clarendon Press.

Hicks, J.R. (1969), A Theory of Economic History, Oxford: Oxford University Press.

Hicks, J.R. (1973a), ‘The mainspring of economic growth’, Swedish Journal of Economics, 75 (December), 336-48.

Hicks, J.R. (1973b), Capital and Time. A Neo-Austrian Theory, Oxford: Clarendon Press.

Hicks, J.R. (1974), The Crisis in Keynesian Economics, Oxford: Basil Blackwell.

Hicks, J.R. (1975), ‘Revival of political economy: the old and the new’, Economic Record, 51 (September), 365-7.

Hicks, J.R. (1977), Economic Perspectives: Further Essays on Money and Growth, Oxford: Clarendon Press.

Hicks, J.R. (1979), Causality in Economics, Oxford: Basil Blackwell and New York: Basic Books.

Hicks, J.R. (1980), ‘IS-LM: an explanation’, Journal of Post Keynesian Economics, 3 (2), 139-54.

Hicks, J.R. (1981), Wealth and Welfare. Collected Essays on Economic Theory, vol. 1, Oxford: Basil Blackwell.

Hicks, J.R. (1982), Money, Interest and Wages, Collected Essays on Economic Theory, vol. 2, Oxford: Basil Blackwell.

Hicks, J. (1983), Classics and Moderns, Collected Essays on Economic Theory, vol. 3, Oxford: Basil Blackwell.

Hicks, J.R. (1985), Methods of Dynamic Economics, Oxford: Clarendon Press.

Hicks, J.R. (1989), A Market Theory of Money, Oxford: Clarendon Press.

Helm, D.R. (ed.) (1984), The Economics of John Hicks, Oxford: Basil Blackwell.

Kennedy, C. (1968), ‘Time, interest and the production function’, in J.N. Wolfe (ed.), Value, Capital and

Growth. Papers in Honour of Sir John Hicks, Edinburgh: Edinburgh University Press, pp. 275-90.

Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, London: Macmillan.

Leijonhufvud, A. (1983), ‘What was the matter with IS-LM?’, in J.-P. Fitoussi (ed.), Modern Macroeconomic Theory, Oxford: Blackwell, pp. 64-90.

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Nobelprize.org (1972), ‘The Prize in Economics 1972 - press release’, Nobelprize.org, 25 October, Nobel Media

AB 2014, accessed 8 December 2015 at http://www.nobelprize.org/nobel_prizes/economic-sciences/laure- ates/1972/press.html.

Petri, F. (1991), ‘Hicks’s recantation of the temporary equilibrium method’, Review of Political Economy, 3 (3), 268-88.

Samuelson, P.A. (1948), ‘Consumption theory in terms of revealed preference’, Economica, New Series, 15 (November), 243-53.

Scazzieri, R., A. Sen and S. Zamagni (eds) (2008), Markets, Money and Capital. Hicksian Economics for the Twenty-First Century, Cambridge: Cambridge University Press.

Wood, J.C. and R.N. Woods (eds) (1989), Sir John Hicks: Critical Assessments, 4 vols, London: Routledge.