John Hicks, The İmpulse Theory of Growth and The Traverse

Hicks's theory of growth differs fundamentally from other contributions in this area. In the first place he notes, The theory as I understand it is in essentials a mathematical theory; but I have been anxious that in my statement of it I should keep myself writing economies' {Capital and Growth, 1965). He is also very critical of steady-state, equilibrium growth theory because 'it has encouraged economists to waste their time upon constructions that are often of great intellectual complexity but which are so much out of time, and out of history, as to be practically futile' (1976). However, he was not fully aware of this sterility when he wrote Capital and Growth and therefore he tried to develop an equilibrium growth model that would be capable of describing real-world changes. He now admits that the model was basically a failure because it could not deal with unexpected changes and it did not make adequate allowance for flexibility - it was too dependent on the technical characteristics of the capital stock.

However, in Capital and Growth Hicks did make a start on breaking out of the equilibrium straitjacket imposed by steady-state theories and he now sees the book's most important contribution as its introduction of the concept of the Traverse -the movement from one growth path to another when the steady state is disturbed by an innovation. This concept was further developed in Capital and Time (1973) where he showed that the prospects for a smooth convergence from one equilibrium growth path to another were exceedingly slim. Therefore the analysis of the short run, disequilibrium effects of the innovative process is vitally important - Hicks calls this the 'Early Phase'.

Half of the book 'Capital and Time\ is devoted to the Traverse and a neo-Austrian growth theory is adopted in an attempt to analyse the growth process sequentially. Here Hicks was attempt­ing to say something about the impact of change upon an economy which is not initially in a steady state. However, one reviewer at least was not very impressed with Hicks's neo-Austrian theory. 'Professor Hicks is an illustrious addition to the ranks of those who have not got very far with non-steady-state capital theory . . . [even though] Hicks tries skilfully to plug [the gaps in his analysis] with the concept of "minor switches", alternative possible endings to a process already in midstream. That helps but not very much' (Solow, 1974).

Perhaps in response to criticisms of this sort Hicks has delved deeper into these disequilibrium growth situations and restated the process in terms of his concept of the Impulse (1977, Chaps. 1, 2 and 9). The main distinction that is here introduced is the old one between autonomous and induced invention (first introduced in 1932). However, he now sheds some new light on this distinction by illustrating it in a dynamic context.

The Impulse traces out a sequential process initiated by an autonomous invention and carried forward by induced inventions which are made possible by price changes (these price changes in turn are caused by the scarcities which are thrown up by the original invention). The process is one in which a major technical innovation widens the range of technical possibilities, raises profitability in many areas and induces further expansion. The scarcities encountered in the process of this expansion will then induce further changes in technical methods.

As Hicks puts it: 'this sequence may be rather fundamental. The mainspring of economic progress it suggests is invention; invention that works through the rate of profit. Each invention gives an Impulse . . . but the Impulse of any single invention is not inexhaustible. The exhaustion is marked by falling profit (and scarcities but) . . . substitution on the spectrum of techniques is just one way of overcoming the scarcities that arise out of the Impulse' (Hicks, 1977, pp. 15-16). He therefore calls for a study of past Impulses to help throw light on the growth process (with a major new technical innovation, the micro chip, already at hand, the importance of this aspect of Hicks's recent work should be readily apparent).

Causality

Hicks's latest work Causality in Economics (1979a) seems to have developed from his analysis of stock-flow relations in sequential processes (as illustrated in our previous discussion of the multiplier, liquidity and growth). As its title implies, the book is concerned with causal relationships and Hicks identifies three distinct types - static, contemporaneous and sequential. The first refers to long-run classical theories, e.g. to what extent are good transport facilities the cause of the higher relative wealth of certain areas? The second refers to Marshallian and Keynesian period analysis - relationships based upon facts gleaned from the past which are used to predict the future, e.g. the demand for X is taken to be a function of price, incomes, etc. but where the former is taken to be the dependent variable (effect) and the latter the independent variable (cause). The third refers to the more popular sort of causality in which effect follows cause—the former is dated later than the latter. It is concerned with the time lags that inevitably surround decisions, e.g. to what extent did a prior rise in costs cause a rise in prices?

In this (very brief) summary we have used mostly economic examples to indicate the main ideas involved. Hicks, however, gives illuminating examples from many branches of the social sciences, history, and the natural sciences —it is a most interesting book. Its main concern (as it appears to this reader) is to distinguish between contemporaneous and sequential causality and to indicate the conditions under which one or other is a legitimate exercise. Again the main points can be brought out in relation to Keynes's model of the General Theory.

As pointed out above that model was a stock-flow model. The consumption function relates to flows, the Marginal Efficiency of Capital schedule relates to both stocks and flows and liquidity preference schedule relates to a stock. Hicks points out that it is exceedingly difficult to trace out causal relationships in a situation in which stock and flow relationships have to be fitted together. This is especially the case where contemporaneous causality is being attempted. The problem is that most of the model is stated in terms of flow equilibrium (i.e. / = S) but the stock relations cannot be reduced to the equilibrium method without making fairly drastic assumptions about expectations. He therefore insists that the causal relations must be deduced sequentially.

The important thing to note about sequential causality is that between cause and effect there is an intermediate stage in which economic decisions are made. The analysis of this intermediate stage is vitally important to understanding the process of change in economics. The time lag involved can be split into (at least) two parts - the prior lag between cause and decision and the posterior lag between decision and effect. The cause is the signal to react but the reaction is not normally compelled — the decision can be delayed and therefore so will be the effect. Only in special cases will cause and effect be immediate, e.g. when wages fall and borrowing power and savings and zero expenditure must be reduced. The time lag between cause and effect therefore will often depend on the availability of reserves (liquid assets, stocks of goods etc.). Again, it is the integration of stocks and flows that is crucial to the analysis. Indeed, liquidity in its most general sense is here seen as the major ingredient in sequential causality because liquidity is synonymous with freedom - freedom to postpone undesired action or to respond immediately to encouraging signals.

Finally, it is worth pointing out one common theme. The proper integration of stock-flow analysis within a historical setting, which Hicks feels is so important for resolving issues of causality also plays an important part in his analysis of the multiplier process, the liquidity spectrum and the impulse. Taken together they are indicative of the 'general theory' towards which the Elder Hicks is progressing. It is a theory that aims to offer solutions to real-world problems by tracing through causal sequences using properly specified economic relations. Much of his insights into these processes he admits he has obtained from the work of Keynes. However, 'in all this I have been in a wide sense, but only in a wide sense, Keynesian; not in the sense of any literal adherence to his work, but in the sense of trying to do what I think he would have tried to do, if confronted with different real problems from those with which he was confronted' (1979b).