John Hicks Temporary Equilibrium

John Richard Hicks Temporary Equilibrium

Equilibrium is temporarily achieved over a Hicksian 'week' by the accommodation of supply and demand to the set of price expectations in force on 'Monday'. If some of these expectations prove to be false they can only be revised on 'Monday week' and then, together with demand and supply, establish an equilibrium path for production and consumption the following week. Obviously this construction is very artificial (indeed the Elder Hicks is very critical of it) but the method did in fact entail an immense step forward because it specifically highlighted those areas in which the future impinges on the present, e.g. the method attempted to take into account stores of value such as money, capital and securities - things which are not wanted for their own sake but as a means to future consumption.
For example, an expectation that prices will fall next week would encourage some individuals to store their wealth until 'Monday week'. This would then influence current prices and future prices and alter the temporary equilibrium. Consumption and production may then converge over time or, of course, they may diverge depending upon people's expectations - specifically on the elasticity of price expectations, defined as the percentage change in the expected price over the percentage change in the current price. The stability of temporary equilibrium over time is then shown to depend on the value of this ratio. Convergence requires it to be less than unity, i.e. expectations to be inelastic. Thus Hicks concludes, 'As soon as we take expectations into account (or rather the elasticity of expectations into account) the stability of the system is seriously weakened'.

This analysis can be viewed as an important step forward in the sense that no-one attempted to expand or improve upon this analysis for nearly 30 years. Hicks, it should be noticed, was here attempting to grapple with the difficult problems which arise in general equilibrium analysis whenever explicit account is taken of expectations and stores of value. Because of these difficulties, later researchers progressively limited their analysis and moved away from temporary equilibrium in the direction of proving the existence and stability of a full competitive equilibrium in the absence of complications such as money, uncertainty and expectations. However, even this proved far more difficult to formalise than it appeared in 1946. The existence problem itself was not solved until the 1950s when Arrow and Debreu applied the Brouwer fixed-point theorem (basically a mapping device) to the problem. Then another mathematical technique-the Liapunov method-was introduced in the late 1950s by Arrow, Hurwicz and Hahn to solve the stability problem by taking proper account of the economic properties of the system. Basically they specified a tatonnement process and placed a number of economic restrictions on the actions of the agents of the system in order to produce sufficient conditions for stability. However, these breakthroughs were much more limited in scope than Hick's original objective because they took no account of expectations or historical time and very little account of false trading, money and other stores of value. It is true that Hicks overlooked some of the problems of existence and stability and this can be regarded as a weakness of his earlier work, but later research became too immersed in rectifying this weakness and did not pay enough attention to the insights into real-world problems that Hicks at the time demonstrated. (These problems were only really being tackled in the latter half of the 1970s). Indeed, the developments by Samuelson, Arrow, Hahn et al. did nothing to . 'dynamise' the theory in the directions that Hicks (correctly) felt were important - i.e. grounding the analysis in historical time and taking explicit account of expectations and money. (The very concepts, of course, that were the hallmark of Keynes's economics). Thus a distinguished general equilibrium theorist could admit that 'The Arrow-Debreu model describes a world in which none of the problems which interested Keynes can occur' (Hahn 1975).

The consensus suggests that the general equilibrium model has not progressed significantly after Hicks's contribution. Thus Morishima (1977) refers to the great tradition of general equilib­rium theorists from Walras to Hicks and laments that 'This tradition changed entirely after the Second World War. ... It seems that general equilibrium theorists are now only interested in proving, reproving or generalising the theorems or laws discovered by their predecessors.' Indeed, there is nothing available in the modern economics literature to match Hicks's grand scheme. Value and Capital remains a classic in every sense of the word: 'To this day there have been few works so grand in conception or so pregnant with new ideas about the basic structure of economic theory . . . The identification of temporary equilibrium alone was an intellectual triumph of the first order' (Weintraub 1979).

This completes our discussion of the contribution of Hicks the Younger.