Revival of Political Economy: The Old and the New

Clearly I need to change my name. Let it be understood that Value and Capital (1 939) was the work of J. R. Hicks, a ‘neoclassical‘ econo- mist now deceased; while Capital and Time (1973) - and A Theory of Economic History (1969) - are the work of John Hicks, a non-neo- classic who is quite disrespectful towards his ‘uncle’. The latter works are meant to be read independently, and not be interpreted, as Harcourt interprets them, in the light of their predecessor.

They themselves do however belong together. They are both of them fruits of a historical approach. In A Theory of Economic History this is explicit (and developed much further than the economists whom Harcourt admires have ever developed it); in Capital and Time it is implicit, and no doubt less obvious. Yet the purpose of Capital and Time can still be explained in terms which historians could understand. For it is now widely accepted, among them, that the course of events in history can only be explained by what they call counter-factual analysis; by sup- posing that something which did happen did not happen, and asking what dBerence that would have made to the course of events. This is just the kind of thing which I describe in the passage which Harcourt quotes from my Menger paper. The passage is not repeated in Capital and Time (I expect it should have been) but the whole of the book is written in its spirit.

Thus it is quite beside the point to argue that the assumptions which are made for my Full Employment path are unrealistic. They are meant to be unrealistic. I have deliberately removed a number of obvious ob- stacles to the smooth working of an economy, in order to see if these are the only obstacles. I have cut out money; I have cut out monopolies (of capital and of labour); I have cut out government; I have even, ex- cepting in a concluding passage (in Chapter XII) cut out natural scarci- ties. I suppose that if I were a real neoclassic, I should then be jumping to the conclusion that of course my economy would be working quite smoothly; there would be a ‘smooth convergence to equilibrium’. But I do not jump to that conclusion; I regard the matter as requiring further investigation. I therefore attempt that investigation; it was quite a job. It takes up the whole of Part I1 of my book and of the Mathematical Appendix which is an integral part of it.

The results which emerge (still very tentative results, for I am very conscious that I am embarking on a voyage of exploration) c o n h my suspicion that convergence may not be smooth at all, even on all the

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366 THE ECONOMIC RECORD SEF‘T.

favourable assumptions just described. A good deal more is required. I do indeed begin with a case in which convergence turns out to be its- sured - the ‘Standard Case’ which occupies a good’deal of my attention. It was a natural case witb which to begin, and even that case needed a lot of working out. Even there, there is the possibility that technical pro- gress may have drastic, and very likely unacceptable, effects on dis- tribution - the possibility that was already conjectured by Ricardo. (The conditions for this can be defined by my method more precisely than they were by Ricardo, and more precisely than they were in A Theory of Economic History; the numerical example which is given in the Appendix to that book being shown by the further work to be not fully satisfactory.)

But the Standard Case is itself a simplification; when we pass beyond it the prospects for convergence look much less good. At least two further obstacles appear. One is the possibility of disturbances arij- ing from shortening and lengthening of the construction period (the PO:+ sibility that was first brought to the attention of economists in the Prictps and Production of Professor Hayek); the other, which I am more inclined to believe to be of realistic importance, is a matter of the time- shape of the normal productive process itself. It is only when produci:- ive processes have the convenient time-shape of the Simple Profile that they can be relied upon to fit comfortably together.’

My results, so far (or so arranged), have been negative; but I think that something more positive emerges by the way. ‘Convergence to equilibrium’ has been shown to be dubious; but it has also been shown to be unimportant. Even at the best, it will take a long time; and in most applications before that time has elapsed, something else (some new exogenous shock) will surely have occurred. It is therefore of the first importance that something can be said, by my method of analysis, about the short-run and the medium-run effects of an exogenous disturbance -- what I call the Early Phase. (In fact, the Early Phase is much easier to deal with than the Late Phase; and it is only in the Late Phase that any question of convergence to equilibrium can arise.)

The Early Phase is the Phase when the new machines have already begun to operate, but the old machines, which they will eventually replace, have not yet (all of them) been scrapped. It is itself preceded! by what I call the Preliminary Phase, that during which the new mach- ines (the first of the new machines) are being constructed. I contend that in the Preliminary Phase nothing need happen except that the re- sources which would have made old machines (if the new machines had not been invented) are transferred to make the new machines. There is thus in this Phase no change in final output and there need be no change in real wages. Thus it is quite consistent, if one maintains static expectations, to suppose that the new technique is chosen (initially) on the basis of unchanged real wages. That is what I do; and (insisting that I am not talking about optimum growth paths) I am prepared to defend it.

Capital and Time, pp. 135-7.

1975 REVIVAL OF POLITICAL ECONOMY 367 A word, in conclusion, about re-switching. It is demonstrated,

within my model, that in the Standard Case there can be no re-switching; but that outside the Standard Case re-switching can theoretically occur. Yet if the technical conditions of production are at all similar to those of the Standard Case, it would seem to be unlikely that re-switching would occur. I would myself judge that this rather weak condition may quite probably be realized in practice - ‘usually’. That is all I intended to convey in the passage from my Nobel lecture’ to which Harcourt objects.

Nevertheless, on the main issue, I would go further. I have become very suspicious, not only of the ‘production function’ but also of the technology frontier which many anti-production function people still maintain. The distinction between substitutions along the frontier and changes in technology, which shift the frontier, I would now abandon. It is useful as a piece of scaffolding, but when we come to application, it must go. Substitutions, the most important substitutions at least, are irreversible. For by the substitution something is learned; so that if input-prices reverted to their old ratios, it is not the old technique which would be reintroduced, but something new. Once that is granted (and we have to grant it if we are to keep in touch with what is being learned from modem studies in the history of technology)’ there can, by defin- ition, be no re-switching.

JOHN HICKS All Souls College, Oxford Date of Receipt of Typescript: March 1975

2 ‘The Mainspring of Economic Growth’, (Nobel Memorial Lecture, April 27, 1973), Les Prix Nobel, 1972. (Stockholm, Imprinerie Royale F. A. Norstedt, 1973). p. 240.

See, for instance, N. Rosenberg, ‘Science, Invention and Economic Growth’, Economic Journal, Vol. 04, March 1974, pp. g+Io8.

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