Hicks' Value and Capital Outside Historical Time

I consider J. R. Hicks' Value and Capital (Second edition, 1946) to be one of the founding documents of post-(World) War (II) economics.

I find interesting that when Hicks wants to compare the average periods of production entrepreneurs choose to adopt, he is clear that this calculation must be at a given rate of interest (Chapter XVII, Section 4). This argument reminds me of Champernowne's chain index measure of capital, an index later promoted by Edwin Burmeister.

Anyways, in Hicks' theory of sequences of temporary equilibria, time periods are partitioned into weeks. Spot markets instantaneously come to clear on each Monday. Agents then carry out planned production, planned consumption, and contracted deliveries of commodities during the remainder of each week. It seems to me that this separation of the dynamics of reaching cleared markets and the dynamics of the transactions during the week severely limits the applicability of the model.

The time paths of prices and of quantities that agents in the model anticipate need not be stationary. They need not even be quasi-stationary, that is, all growing at a constant rate. Suppose random variation is introduced into the model. Then the agents anticipate time paths, in general, to be non-ergodic. Nevertheless, the agents in the model maximize with non-corner points in their plans exhibiting the usual marginal equalities, including intertemporal marginal equalities.

Hicks' theory could be set only in logical time, not in historical time. John Maynard Keynes, however, self-consciously tried to develop a General Theory set in historical time:

"How do we manage in such circumstances to behave in a manner which saves our face as rational, economic men? We have devised for the purpose a variety of techniques, of which the much the most important are the three following:

• We assume that the present is a much more serviceable guide to the future than a candid examination of past experience would show it to have been hitherto. In other words we largely ignore the prospect of future changes about the actual character of which we know nothing.
• We assume that the existing state of opinion as expressed in prices and the character of existing output is based on a correct summing up of future prospects, so that we can accept it as such unless and until something new and relevant comes into the picture.
• Knowing that our own individual judgement is worthless, we endeavor to fall back on the judgement of the rest of the world which is perhaps better informed. That is, we endeavor to conform with the behavior of the majority or the average. The psychology of a society of individuals each of whom is endeavoring to copy the others leads to what we may strictly term a conventional judgement.

Now a practical theory of the future based on these three principles has certain marked characteristics. In particular, being based on so flimsy a foundation, it is subject to sudden and violent changes. The practice of calmness and immobility, of certainty and security, suddenly breaks down. New fears and hopes will, without warning, take charge of human conduct. The forces of disillusion may suddenly impose a new conventional basis of valuation. All these pretty, polite techniques, made for a well-paneled Board Room and a nicely regulated market, are liable to collapse. At all times the vague panic fears and equally vague and unreasoned hopes are not really lulled, and lie but a little way below the surface.

Perhaps the reader feels that this general, philosophical disquisition on the behavior of mankind is somewhat remote from the economic theory under discussion. But I think not. Tho this is how we behave in the market place, the theory we devise in the study of how we behave in the market place should not itself submit to market-place idols. I accuse the classical economic theory of being one of these pretty polite techniques which tries to deal with the present by abstracting from the fact that we know very little about the future." -- J. M. Keynes (1936)

I think Hicks came to recognize the force of the limitations of his model with his self-declared change of name in 1975:

"J. R. Hicks [is] a 'neoclassical' economist now deceased ... John Hicks [is] a non-neo-classic who is quite disrespectful towards his 'uncle'."