Hicks, John R.

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Hicks, John R. 1904-1989

Sir John R. Hicks, a British economist and author of twenty books, was knighted in 1964 and received the 1972 Nobel Prize for his contributions to general equilibrium theory and welfare economics. After graduating from Oxford University in 1925, he taught at the London School of Economics (LSE), where he formulated concepts on the elasticity of substitution, relative income shares of labor and capital, and liquidity. At LSE Hicks came under the influence of Lionel Robbins and Friedrich Hayek but broke away from their thinking in his book The Theory of Wages (1932), in which he considered unions as monopolies in the sense of rigid wages in a discrimination setting. He joined Cambridge University (1935–1938), where he was swayed by John Maynard Keynes’s (1883–1946) writings. Afterward, he was chair of political economy at the University of Manchester. He became a fellow at Nuffield College, Oxford, in 1946 and was the Drummond Professor of Political Economy from 1952 until his retirement in 1965. Hicks continued his work in the areas of fixprice and flexprice markets, liquidity, and inventions.

Hicks’s contributions stand out in the areas of applied economics, Keynesian economics, value theory, and technological progress. His method was to modify a theory to fit the facts. Facts are linked to events of the day and have a history that can become dramatic at times. According to Hicks, these dramatic facts are like blinkers waiting to be simplifed, theorized about, and selected to explain topical events. Hicks continually revised his theories because economic facts are less permanent and less repeatable than facts in the natural sciences.

Hicks viewed welfare economics as an application of demand theory, focusing on efficient and optimal cost and use of the social product. An efficiency test for welfare benefits tells us how to acquire more of one thing without having less of another thing. Demand theory makes sure that what we are getting more of is not detrimental. A welfare optimum may not be attained in a market with uniform prices, making room for cost-benefit analysis.

Hicks’s IS and LL curves represent Keynes’s ideas of equilibrium in the goods and money markets, respectively. Alvin Hansen later suggested the label LM for LL (Hansen 1953, p. 144). Darity and Young (1995, pp. 1–14, 26–27) clarified that Hansen’s contribution emphasized one sector, while Hicks’s contribution emphasized two sectors. Hicks developed a four-equation system representing liquidity preference, M = L (r, Y ); investment, I = I (r, Y ); savings, S = S (r, Y ); and saving-investment equilibrium, S = I, where M is money, I is investment, S is savings, Y is income, and r is the rate of interest. The first equation yields the LM curve. If the interest rate rises, the alternative cost of holding money relative to other assets becomes higher, lowering the demand for money. A rise in income will increase the demand for money. The other three equations yield the IS curve, which shows how income and interest rates adjust to make savings equal to investments. By making unsold inventories depend on the future, the model accommodates short period expectations. In the short term, such as a day, expectations do not change, so the condition for saving to equal investment in the model is achieved. The IS-LM curves can take on special shapes that would prevent automatic adjustments from occurring. Hicks later thought that the IS curve represents a flow concept, and the LM curve, a stock concept. In his Capital and Growth (1965), he proceeded to show that a stock equilibrium over a period would require a flow equilibrium over that period.

Hicks argued against the cardinal view, where utility is added, and for the ordinal view of value, where consumers rank their tastes and preferences. Alfred Marshal and the founders of the marginal revolution examined value with a given utility function. They required a utility surface for consumer maximization. Hicks’s value theory examined “what adjustments in the statement of the marginal theory of value are made necessary by Pareto’s discovery” (Hicks 1981, p. 7). Vilfredo Pareto postulated a scale of preferences concept, which represented value only by indifference curves. Hicks transformed the cardinal concept of total utility to the marginal rate of substitution between two commodities on an indifference curve. Similarly, he transformed the idea of diminishing marginal utility to diminishing marginal rate of substitution measured by the convex shape of the indifference curve. Following Hicks’s work, comparative static analysis that allows prediction from demand analysis can be performed. One of his predictions states that if demand shifts from good 1 to good 2, then the relative price of 2 in terms of 1 would increase, except if 2 is a free good.

On the technology side, Hicks classified inventions as neutral, labor saving, or capital saving. When inventions change the marginal productivity of labor and capital in the same proportion, the invention is called neutral. Hicks predicted that if wages increase, labor’s share of output would rise, and that would encourage inventions to replace labor, making them labor saving. In an analogous manner, the same can be argued for capital-saving inventions. In general, when changes in relative prices of factors occur, they induce inventions; otherwise inventions are autonomous. Autonomous inventions are likely to be randomly distributed, while induced inventions are likely to be labor saving.

SEE ALSO Capital; Economics; Economics, Keynesian; Economics, Nobel Prize in; IS-LM Model; Technological Progress, Economic Growth; Utility, Subjective; Value; Value, Subjective; Welfare Economics