The Nobel Prize

John Hicks (1904–89)

John Hicks was born in Warwick, England in 1904. As an undergraduate he attended Balliol College, Oxford where he first studied mathematics before switching to study philosophy, politics and economics. He graduated with a BA in 1925. After a year of graduate work at Balliol College, Hicks joined the London School of Economics (LSE) in 1926 as a Lecturer in Economics. In 1935 he moved to a lectureship at Cambridge University and a fellowship of Gonville and Caius College. After three years at Cambridge he left in 1938 to take up the Stanley Jevons professorship at the University of Manchester, where he remained until 1946. Hicks returned to Oxford in 1946 where he was a research fellow of Nuffield College, and then Drummond Professor of Political Economy and fellow of All Souls College from 1952 until he retired in 1965.

Among his many offices and honours, Hicks became a fellow of the British Academy in 1942, was president of the Royal Economic Society from 1960 to 1962, and was knighted in 1964. In 1972 he was awarded, jointly with the American economist Kenneth Arrow, the Nobel Memorial Prize in Economics ‘for their pioneering contributions to general economic equilibrium theory and welfare theory’ (Nobel Foundation, 2004).

Over the course of his distinguished academic career, Hicks made numerous influential contributions to the broad fields of both microeconomics and macroeconomics. In his first book The Theory of Wages, published in 1932, he presented a marginal productivity theory of distribution and introduced the concept of the elasticity of substitution to show that labour-saving technical progress will not necessarily reduce labour’s relative share of the national income. If the elasticity of substitution between the two inputs of labour and capital is large then, following labour-saving technical progress, labour will increase its relative income share. Two years later in a brace of articles published in Economica, which he co-authored with the mathematician Roy Allen, Hicks (1934) used indifference curve analysis, rather than the then-dominant marginal utility theory, to explain consumer behaviour. Furthermore, using indifference curves and a budget line, he and Allen were able to separate the substitution and income effects of a price change. Their analysis is now used as a standard diagrammatic tool in the teaching of intermediate undergraduate microeconomics.

Hicks’s most acclaimed work is undoubtedly his 1939 book Value and Capital (Hicks, 1939a), which he divided into four parts: ‘The Theory of Subjective Value’ (Chapters 1–3); ‘General Equilibrium’ (Chapters 4–8); ‘The Foundations of Dynamic Economics’ (Chapters 9–14); and ‘The Working of the Dynamic System’ (Chapters 15– 24). In this book, Hicks constructed a complete economic equilibrium model and in doing so he became one of the first to introduce Walrasian general equilibrium analysis, an approach which has come to rival and, in some areas, displace the once-dominant Marshallian partial equilibrium analysis in economic theory. In addition to his pioneering contributions to general equilibrium theory, Hicks’s Nobel Memorial citation includes specific reference to his pioneering contributions to welfare theory. This work is reflected in a series of papers, which followed the publication of ‘Foundations of Welfare Economics’ in the Economic Journal in 1939 (Hicks, 1939c) and its application to social accounting (for example, in his 1942 textbook, The Social Framework). Among his most influential contributions to welfare theory are the so-called ‘Hicks–Kaldor compensation test’, and his refinement of the concept of consumer surplus (see Hicks, 1956). In the former case, Hicks and Nicholas Kaldor (1908–86) devised a compensation criterion for welfare change. The test is positive if, following some particular economic change, those who gain can compensate the losers and still be better off than they were before the change. In the latter case, the concept of consumer surplus can be defined as the difference between the highest price a consumer would be willing to pay for a good and the price he/she would pay for the good. Both the compensation test and Hicks’s definition of the concept of consumer surplus have come to be important tools in cost–benefit analysis.

Although Hicks first gained international recognition for his work in the field of microeconomics, he also made a number of important contributions to macroeconomics. Foremost among these is his celebrated 1937 Econometrica article entitled ‘Mr. Keynes and the “Classics”: A Suggested Interpretation’, one of the most cited and reprinted papers in macroeconomics. In the article he introduced the IS–LL diagram, subsequently labelled the now famous IS–LM diagram by Alvin Hansen (1887–1975). The IS and LM curves trace out a locus of combinations of the interest rate and income associated with equilibrium in the goods and money markets, respectively. Equilibrium in both markets is simultaneously attained where the two curves intersect. In this article, Hicks used the diagram to explain the conflict between Keynes’s General Theory (published in 1936) and what Keynes referred to as ‘classical economics’ in terms of different beliefs about the slopes of the two curves. The IS–LM diagram came to dominate the teaching of Keynesian economics above the introductory level and still occupies a space, more than 65 years after its invention, in most intermediate macroeconomics textbooks.

While the IS–LL diagram is Hicks’s most famous innovation in macroeconomics, he also made a number of other important contributions. Three examples will suffice. First, in a 1935 article in Economica, ‘A Suggestion for Simplifying the Theory of Money’, he applied portfolio theory to the demand for money involving a choice-theoretic approach. Second, his discussion of the theory of interest in much of his work (see, for example, Chapters 11–13 of Value and Capital) acted as a catalyst to subsequent research on the term structure of interest rates. Third, in his 1950 book, A Contribution to the Theory of the Trade Cycle, Hicks developed the ideas of the British economist Roy Harrod (1900–1978) on growth and cycle theory, and the interaction of the multiplier and accelerator, by introducing a ceiling and floor which constrained the problem of instability in the form of explosiveness and accounted for turning points in the cycle. In addition to his work in microeconomics and macroeconomics, Hicks also contributed to other fields of study including: growth theory (for example, Hicks, 1965, in which he developed the concepts of and distinction between ‘fix-price’ and ‘flex-price’ markets – see also Hicks, 1974) and capital theory (for example, Hicks, 1973, in which he considered a neo-Austrian approach to capital theory); as well as co-authoring works on public finance with his wife Ursula (for example, Hicks and Hicks, 1939b), who was also an economist. Hicks will be remembered as one of the most influential and outstanding economic theorists of the twentieth century. His work has had a profound influence on the content and direction of contemporary economic theory and the concepts and diagrams he developed have become an integral part of the toolkit used by economists today. His Collected Essays on Economic Theory have been gathered together in three volumes: ‘Wealth and Welfare’; ‘Money, Interest and Wages’; and ‘Classics and Moderns’ (Hicks, 1981; 1982; 1983).

Main Published Works
(1932), The Theory of Wages, London: Macmillan; expanded edition published in 1963. (1934), ‘A Reconsideration of the Theory of Value’ (with R.D.G. Allen), Economica, 1, February and May, pp. 52–76 and 196–219.
(1935), ‘A Suggestion for Simplifying the Theory of Money’, Economica, 2, February, pp. 1– 19.
(1937), ‘Mr. Keynes and the “Classics”: A Suggested Interpretation’, Econometrica, 5, April, pp. 147–59. (1939a), Value and Capital: An Inquiry into Some Fundamental Principles of Economic Theory, Oxford: Clarendon Press; 2nd edn 1946. (1939b), ‘Public Finance in the National Income’ (with U.K. Hicks), Review of Economic Studies, 6, February, pp. 147–55. (1939c), ‘The Foundations of Welfare Economics’, Economic Journal, 49, December, pp. 696– 712.
(1942), The Social Framework: An Introduction to Economics, Oxford: Clarendon Press. (1950), A Contribution to the Theory of the Trade Cycle, Oxford: Clarendon Press.
(1956), A Revision of Demand Theory, Oxford: Clarendon Press.
(1965), Capital and Growth, Oxford: Oxford University Press.
(1973), Capital and Time: A Neo-Austrian Theory, Oxford: Clarendon Press.
(1974), The Crisis in Keynesian Economics, Oxford: Basil Blackwell.
(1981), Collected Essays on Economic Theory, vol. 1, Oxford: Basil Blackwell.
(1982), Collected Essays on Economic Theory, vol. 2, Oxford: Basil Blackwell.
(1983), Collected Essays on Economic Theory, vol. 3, Oxford: Basil Blackwell.
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