The temporary equilibrium method: Hicks against Hicks

Abstract

Hicks is renowned for having introduced the temporary equilibrium framework in his book Value and Capital. Subsequently, however, he partially recanted this framework by rejecting the market clearing idea while still keeping the week device. The aim of this paper is to assess whether this change was right. My answer will be broadly negative. To make my point, I will ponder on the meaning and implications of the week device, assess the validity of Hicks' claim that slow adjustment can cause market rationing, examine his claim that the possibility of market clearing depends on the prevailing market form and, finally, assess his twofold filiations towards Marshall and Walras.

Keywords:

• Hicks
• temporary equilibrium

Notes

∗ This work was supported by the Belgian French-speaking Community (Grant ARC 03/08-302) and the Belgian Federal Government (Grant PAI P5/10). Comments by anonymous referees are gratefully acknowledged.

1 The same dismissing views were conveyed by Hicks when receiving the Nobel Prize in 1972 for his work on general equilibrium and welfare economics. ‘[This work] was done a long time ago, and it was with mixed feelings that I found myself honored for that work, which I felt myself to have outgrown’ (Hicks 1977: V).

2 See also his paper, IS-LM – an explanation (Hicks 1980 – 1 1982).

3 Hence my doubt as to Hamouda's characterization of Hicks as ‘the economists’ economist’ in the title of one of his books (Hamouda 1993).

4 The present paper elaborates on views presented earlier in De Vroey (1999a) and De Vroey (2001).

5 For the opposite viewpoint, see Petri (1991).

6 Lindahl's seminal paper was published in Swedish in 1929. It was translated into English under the title: The Place of Capital in the Theory of Price and published as part three of Lindahl's (1939) book Studies in the Theory of Money and Capital. Hayek's paper is ‘Intertemporal price equilibrium and movements in the value of money’, published in German in 1928 and reprinted in Hayek (1984).

7 ‘Since production and consumption plans extend beyond one week, the determination of prices in each temporary equilibrium depends, among other things, on expectations as to the future value of the price variable that contributes in each market to determine the agents’ current supply and demand. The co-ordination of buying and selling plans obtaining on a single market day at equilibrium prices does not guarantee the coherence of such plans for future dates, formulated as they are on the basis of the not necessarily compatible and coherent expectations of the agents. Therefore the tâtonnement of prices leading to the temporary equilibrium of the single week does not guarantee the compatibility in time of the optimising decisions of consumers and producers' (Ingrao and Israel 1990: 239 – 40).

8 See also Hicks (1946: 131).

9 Hicks' model, which remained very rudimentary, was taken up by Patinkin (1965) and later revived in the 1970s by Jean-Michel Grandmont (1977).

10 cf. Hicks (1977: IX).

11 ‘Marshall's way out of this dilemma was to concentrate on a particular market, where he could show that if the marginal utility of one of the commodities exchanged could be treated as constant, then the final rate of interchange would be independent of the path followed to reach it. But this solution – which is, after all, only a very particular solution – is usually not available in the case of General Equilibrium’ (Hicks 1934 1983: 91).

12 In Hicks' words: ‘I think we may reasonably suppose that the transactions which take place at ‘very false’ prices are limited in volume. If any intelligence is shown in price-fixing, they will be (Hicks 1946: 129). This stance prompted Clower's scathing commentary, that: ‘It is heartening to know that income effects can be ignored if they are sufficiently unimportant to be neglected’ (Clower 1965 1984: 44).

13 The same point is made a few pages later: ‘The fundamental weakness of the Temporary Equilibrium method is the assumption, which it is obliged to make, that the market is in equilibrium – actual demand equals desired demand, actual supply equals desired supply – even in the very short period, which is what its single period must be taken to be. This assumption comes down from Marshall, but even in a very competitive economy, such very short-run equilibration is hard to swallow; in relation to modern manufacturing industry, it is very hard to swallow indeed. It was inevitable that the time should come when it has to be dropped’ (Hicks 1965: 76).

14 Hicks was of course not the first author to try to explain market rationing in terms of slow adjustment. His most outstanding predecessor was Patinkin in Money, Interest and Prices (Patinkin 1965; first edition 1956).

15 This point was made recurrently by Hicks. See, for example, Hicks (1956 1982: 234), (1965: 55, 73 – 4).

16 He did not claim that the flexible prices assumption had become entirely irrelevant but rather that the proportion of flexprice markets compared to fixprice ones had tremendously decreased.

17 See also Hicks (1976 1982), (1977: IX and seq.).

18 Hicks admits that when prices are fixed in the above sense, the price that will prevail at the end of the unitary period can no longer be determined theoretically. In his terms: ‘If we abandon the demand-supply equation, how are prices to be determined? The answer, which must be faced, is that the new method does not have any way of determining prices. There must be some way by which they are determined, but it is exogenous. The determination of prices is taken right outside the model. All that is said about prices is that they must cover costs; more strictly, that a thing will not be produced unless it is profitable to produce it. Subject to this condition prices can be what they like. … If there is no more to be said about prices, it is natural to assume that they remain unchanged throughout the sequence that is being analysed. If prices are fixed exogenously, one will naturally begin by assuming them to be constant. The model becomes a fix-price model’ (Hicks 1965: 77).

19 cf. Donzelli, (1989: 27 – 8).

20 Here again Hicks departs from his initial definition by identifying the week with the interval between two Mondays rather than with the Monday plus this interval.

21 Whereas it is true that the higher equilibrium concept can be studied in isolation, in as far as attention is concentrated on existence only, the reverse is not true.

22 As pointed out effectively by Leijonhufvud, Hicks'originality may have its roots in the fact that his education as an economist was largely autodidact. ‘When it came to learning economics, he [Hicks] set about it as a task of creating a personal synthesis, making up his own mind through wide and eclectic reading about what were the best elements, how they might be improved and how they might fit together. The personal synthesis of economic theory that he was building had far more of Lausanne, Chicago, Vienna and Stockholm than of Cambridge in it’ (Leijonhufvud 1994: 149). See also Hick's (1982) LSE and the Robbins Circle. Where I depart from Leijonhufvud is in his belittling of Marshall's influence on Hicks.

23 For example, ‘It was John Hicks who linked up the Marshallian tradition with the Walrasian heritage and thus became the founder of modern general equilibrium theory’ (Niehans 1994: 357).