Review of John Hicks’ Article ‘a Suggested Interpretation of Keynes’ Sample Essay

We aim to analyze the British economic expert Sir John Hick’s article ‘Mr Keynes and the “classics” ; A suggested reading ( April 1937 ) ’ in which Hicks seeks to invent a simpler more cruder ‘classical’ theoretical account of the imperial. nevertheless complicated work of Professor Pigou’s ‘The theory of unemployment’ that will truly differ with Mr Keynes’s perplexing but accepted proposal in his ‘General theory of unemployment. ’ We seek to research the proposed theoretical account by Hicks with the support of mathematics. economic behavior and theory from his ain independent positions every bit good established economic experts.

To the amusement of the reader Hicks ab initio portrays Keynes’ work as ‘satiric’ and ‘bewildered. ’ this is a clear indicant that Hicks is non really fond of the book The General Theory of Employment. nevertheless he acknowledges many of Keynes’ positions are widely accepted by classical economic experts. This is true as many Classical positions are outdated. as when in his book Keynes attacks the positions of Classical Economists as ‘its learning is misdirecting and black if we attempt to use it to the facts of experience. ’ Sir Hicks goes on to clap Pigou’s “The Theory of Unemployment” nevertheless recognises it is “an extremely hard book. ” which is why it is non accepted by modern economic experts. Hicks differentiates Pigou’s work from Classical Economists view as being more ambitious ; Pigou’s work is described as being a ‘tour de force’ as he talks in existent footings in his Hagiographas. whereas other economic experts talk in “money footings. ”

Hick’s believes that it is difficult to compare Keynes’ work with Pigou’s as Classical economic experts would hold liked to ‘investigate many of those jobs in money terms’ so as to pull comparings. nevertheless Hicks province that although Keynes says ‘there is no classical theory of money rewards and employment. ’ he was incorrect as in those times ‘general alterations in money rewards in a closed system did non show an of import job. ’ By this he means that Pre 1930’s labor markets were a batch more flexible. It was merely in the early 1900’s that there were broad reforms that led to the formation of the Trade Boards Act of 1909. which created a minimal pay by jurisprudence – doing it a penal offense to engage labor at a lower rate than that fixed.

Hicks’ effort to invent a more simplistic “classical” theory. consequences in a mathematical building of a typical classical theory. in order to bring forth a theoretical account which would represent for a cruder ‘satisfactory footing for comparing. ’ The footing for our belief in Hicks’ actions in simplifying Pigou’s theoretical account is Hicks’ acknowledgment that Pigou’s theory has no support from the ordinary more simplistic classical theoretical accounts. ‘the ordinary classical economic expert has no portion in this circuit de force. ’ Further it can be made apparent that Hicks’ position on the Keynesian setup. as being a competent setup. is a widely accepted position as stated by Friedman – “We all use the Keynesian linguistic communication and apparatus” and moreover Hicks’ proposal to utilize Keynesian theoretical account is consistent with economic experts in this clip period. However. both Hicks and Friedman disagree with the concluding decisions of Keynesian theory. Hicks provinces ‘which do non hold with Mr Keynes’ decision. ’ where Friedman supports “none of us any longer accepts the initial Keynesian decisions. ”

This supplements Hicks’ grounds for set uping a new theoretical account based on the Keynesian theory. which adheres to some classical ideals. Prior to doing this theoretical account Hicks makes a figure of premises ; foremost being ‘dealing with a short period of clip in which the measure of physical equipment of all sorts is taken as fixed. ’ Hicks assumes ‘homogenous labour’ and ‘further that depreciation can be neglected. so that the end product of investing goods corresponds to new investing. ’ These premises as a base of building for his theoretical account will indefinitely take to less realistic consequences and truth than the complicated work of Pigou. as Pigou looked into existent rewards. in contrast to money rewards. The premise to pretermit depreciation is ‘dangerous’ as described by Sir Hicks himself.

The danger occurs as most investing goods may see depreciation of assets and capital. which will in bend affect the cost of production ensuing in houses holding less net income. This could be a large factor in the figure of people a house can use. accordingly impacting the unemployment rate. This shows the danger can be off huge consequence. However. the premise of such danger is of necessity to invent a simple theoretical account. Taking into history grasp of assets and goods is of excessively much complication and will be about impossible to cipher and explicate with consistence and dependability. A theoretical account characteristic Hicks seeks to avoid. The rational and just positions of Hicks’ new attack can be farther fortified where he refers to “Classical economics” and “Keynesian” in the same sentence. ‘thus I assume that I am covering with a short period in which the measure of physical equipment of all sorts available can be taken as fixed. Hicks generates ‘three cardinal equations’ denoting: w = Rate of money wages/person

There are merely 2 industries ; Investment goods and ingestion goods x = Output of investing goods ( PQx )
Y = Output of ingestion goods ( PQy )
There are 2 Factors of production in short tally ( Labour and Capital ) as Land and Enterprise are fixed. so our end product map including labor and capital is shown by: x=fx ( Nx. C )
y=fy ( Ny. C )
Nx = Number of people employed in bring forthing ten
Ny = Number of people employed in bring forthing Y
However we negate Capital as we are sing it fixed in the short tally ( from Hicks’ premises ) go forthing us with the maps: x=fx ( Nx )
y=fy ( Ny )
degree Fahrenheit has decreasing fringy productiveness ( following neoclassical theory ) . so as N increases the sum of end product ( x or y ) increases at a diminishing rate M = Given measure of money
We need M to happen Nx and Ny
Hicks denotes monetary value degree of investing goods as:
( Px ) = fringy cost of x = wdNxdx = pay • Marginal Product of Labour ( investing ) Where ;
dNx. ydx. y = fringy merchandise of labor ( labor is merely variable input ) It is the alteration in labor input ( dNx. Y ) for every alteration in end product ( dx. Y ) . Hicks denotes monetary value degree of ingestion goods as:

( Py ) = fringy cost of Y = wdNydy= pay • Marginal Product of Labour ( ingestion ) As we know: Income = Value of end product = Price • Quantity
Ix = income earned in investing trades
Iy = income earned in ingestion trades
To work out entire income we find the amount of monetary value multiplied by measure of both industries: Ix=PxQx=wdNxdxx
Here is our concluding equation for income:
I=Ix+Iy=wdNxdxx+ wdNydyy

To explicate our equations we know that money demands ( M ) = speed of money ( K ) x income ( I ) M=kI
The sum of money invested is the demand for Capital. which is dependent on involvement rates. Ix=C ( I )
Income is equal to ( Consumption + Investment ) .
Savingss is 1- Consumption
So Savings = Investment
So. the sum of money invested is nest eggs which is determined by involvement rate and degree of investing Ix=S ( i. I )
So. we have our three equations:
M=kI Ix=C ( I ) Ix=Si. I
Our equation M=kI is taken form the “Cambridge measure equation” . As k=1V and I=PY we can re-write this as:
From this equation we can deduce the degree of Inflation given the alteration in money supply and degree of GDP growing. We have built a theoretical account to show this. We can keep the speed of money as changeless due to the “Quantity Theory” Assume:

?M=6 %
?GDP=2 %
To work out the rising prices rate we find the alteration in Price degree ( P ) We take the logarithm of the Cambridge equation:


We so distinguish by T so as to happen the rate:

vitamin D logMdt+d logVdt=d logPdt+d logYdt

We know that speed is changeless:
vitamin D logVdt=0

Therefore we can cipher the rising prices rate ( % ? P overtime )

500 logMdt-d logYdt=d logPdt
6 % -2 % =4 %
Inflation rate is hence 4 % if money supply additions by 6 % and GDP growing is 2 %

Leading on from Hicks’ building he makes three considerations as ‘total money income experiences great fluctuations in the class of a trade cycle’ in which the classical theory can merely explicate with alterations in distribution by fluctuations M ( Quantity of money ) or in K ( clip before money is spent ) . The first consideration Hicks addresses is the fluctuation in M that occurs at the bank. The focal point of Hicks being the connexion between the supply of bank money and the rate of involvement is true ‘superficially satisfactory. ’ Hicks being cognizant of the unfavorable judgments. leads off from full truth and preciseness as ‘What determines the sum of money needed to bring forth a given autumn in the rate of involvement? ’ . ‘What determines the length of clip for which the low rate will last. ’ These are non inquiries that can be easy answered nor those he attempt to. Second consideration relies on alterations in K in which Hicks recognises a quandary with the “independent variable” k. as the fluctuations in the variable would be straight related to consumer assurance which is plausible as ‘rising monetary values of a roar occur because optimism encourages a decrease in balances’ and frailty versa in a slack.

This leads Hicks to the inquiry whether K can carry through its function as an independent variable in the equation. Although this point is of pragmatism ; to hold different indications of K to mirror the degrees of consumer assurance within a trading rhythm would take to more complication than the original job in which it’s best to hold k as independent to take Hicks off from the complication he frowns upon from Pigou. Third is based on pure value theory derived from Lavington. “Lavington focused on the formation of rational behavior under uncertainness. In the Marshallian tradition. this was an plus ( money and security ) demand theory. which accordingly led to Keynes’ liquidness penchant. 1921. ” – Lavington argued that the single demand for money was influenced non merely by an individual’s income but besides by the rate of involvement and the province of his/her outlooks.

In Hicks’ comparing of the classical equation and the Keynes equation he focuses to a great extent on the unfavorable judgment of Keynes’ work as he crudely describes Keynes’ equation as ‘queer tricks’ due to Keynes pretermiting the influence of the rate of involvement on the sum saved out of a given income. From Keynes ‘starling’ proposal Hicks concludes that an addition in the incentive to put. or in the leaning to devour. will non be given to raise the rate of involvement. but merely to increase employment. Here Hicks is typically pessimistic of the work of Keynes as he scorns his work farther by suggesting his book should be renamed ‘the particular theory’ instead than general theory as its work is more irregular than in general. As Keynes goes farther into his work he revises his equation. in which Hicks doesn’t halt minimizing his work by saying. ‘Mr Keynes takes a large measure back to the Marshallian orthodoxy’ declaring the revised work of Keynes is non new and ‘closely analogue. in this regard to the invention of the Marginalists. ’ This indicates that the work of Keynes is an imitation and what ab initio should hold been a comparing of the two equations became a changeless clump to one. Mr Keynes.

No brakes are applied to the changeless onslaughts thrown by Sir Hicks at Keynes’ book as he scrutinizes Keynes’ comments that ‘an addition in the incentive to put non raising the rate of interest’ . Incomes and employment will increase the rate of involvement when the IS curve is raised due to a rise in the fringy efficiency of capital ; the country Hicks deems to be of most importance in Mr. Keynes’ Book. When looking at this we see that the expected rate of return on investing would convey about a displacement to the right for the IS curve. associating to outlook in future outputs and the existent monetary value of the capital good. Hicks progresses to the kineticss of the LL curve. ‘nearly horizontal on the left. and about perpendicular on the right. ’ Associating to approach adequate two radical positions upon where an economy’s equilibrium could lie on the LL curve. It would be merely executable to discourse both countries of the curve and explicate why they are of such gradient. Hicks suggests this is down to the ‘minimum below which the rate of involvement is improbable to travel. ’ suggesting a certain degree at which involvement rates can non travel below until it would be improper for loaners to impart ( mention to calculate 1 ) Fig [ 1 ]

This is a liquidness trap within a depression ; we find the supply of money increasing and the rate of involvement so low that the pecuniary policy wouldn’t be effectual ( classical economic expert beliefs ) . The short-run involvement rates would be low but ne’er zero as ‘the rate of involvement must ever be positive. ’ Peoples assume that in the short term involvement rates are low. but their outlooks of the rate of involvement will lift in the long term. When in such state of affairs persons would happen it appropriate to salvage and expect the low rate of involvement. We can see that the horizontal line represents Keynes theory of how employment additions. nevertheless the pecuniary policy would be uneffective due to the low involvement rate and therefore the economic system would stay in stagnancy.

‘Rise in the agenda of the fringy efficiency of capital merely increases employment. and does non raise the rate of involvement at all. ’ Bespeaking ‘if point P lies to the left of the LL curve… . Keynes is valid’ . therefore we assume that Keynes’ reading of the LL Curve is where Hicks see his work every bit acceptable to an extent. but merely to a universe where we are ‘completely out of touch with the classical. ’ Furthermore. Keynes’ usage of the long rate as “the” rate of involvement in the General Theory did non intend a representative rate but a peculiar rate. which raised Hicks’ ( 1974. pp. 32-33 ) unfavorable judgment. This follows our point of how Hicks disregards Keynes’ premise as his defect was that of. it did non stand for the existent universe. he followed one way that lead to uncertainties. it was undependable to Hicks as he did non believe consumers had “no alternate but to keep money. ”

Second. we look at the other side of the LL curve spectrum of which takes the classical position that ‘nearly perpendicular on the right’ Hicks informs us that this is because of ‘a upper limit to the degree of income which can perchance be financed with a given sum of money. ’ We see that from an addition in the IS curve would convey about a rise in investing and the rate of involvement. therefore increasing employment and income. Hicks is walking down the way that all classical theoretician took. The economic system is runing at a close full capacity in relation to employment. as entire income can non be increased due to the inelasticity of the line. ( Refer to calculate 1 ) This leads us to the belief that if we were to be at a point on the left of the LL curve we would happen ourselves at an ongoing conflict of depression. as injections into the round flow would be halted due to the sum of salvaging. But with an addition in the supply of money. we can ever see investings increasing. Yes involvement rates would increase. but our economic system would see growing annually as employment and both incomes increased doing us at a better-off place than earlier. ( Refer to calculate 2 )

Sir Hicks holding critiqued his ain premises is now uninterrupted to reason his setup in the 4th subdivision. Hicks reinserts I being involvement in the 3rd equation and allows for any possible consequence of the rate of involvement on salvaging. He so debates whether Keynes was right to disregard income in his 2nd equation although being allowed to due to his equation presuming measuring in ‘wage units. ’ However. although Keynes ignored I. Hicks agrees I to be a creditable variable in the 2nd equation as it allows for addition in a demand for consumers goods. therefore increasing employment. hence increasing investing. Hicks does nevertheless highlight that the consequence on I on fringy efficiency of capital will be spasmodic and irregular. get the better ofing the intent of making a petroleum theoretical account. Hicks so re-establishes his theory utilizing his and Keynes IS LM theoretical account which incorporates all aspects of his maps and variables for his setup. He highlights how the pecuniary system is still assumed. which means an consequence on involvement rates therefore set uping investing which is a constituent of AD. set uping income presuming a certain multiplier.

Hicks high spots nevertheless that the incline of the IS curve is determined by the snap of the pecuniary system intending the alteration in the liquidness penchant will switch the LL curve – which may raise the investing rate above the money rate. therefore. income will be given to lift ; in the contrary scenario income may fall. the extent relation to the snap. Hicks states when comparing Keynes. that when generalised in this was Keynesian fits the “wicksellian building. ” but goes on to sketch Wicksells theoretical account as “one particular case” as it refers investing to go Wicksells natural rate. Hicks concludes his reappraisal by accepting the variable of I to hold been exhausted in his experimentation of his petroleum theoretical account. Hicks acknowledges that income is cardinal to his theoretical account and non all implicit in determiners of income such as the ‘relation between monetary value system and the system of involvement rates’ can be shown together on a graph.

Hicks further acknowledges the earlier dismissal of depreciation which will stifle the complexness of set uping the investing degree. therefore latter set uping income so involvement rate 5 income. ‘The General Theory of Employment is a utile book ; but it is neither the beginning nor the terminal of dynamic economic sciences. ’ concludes by underscoring Keynes book developing our apprehension. nevertheless it is non a unequivocal usher as dynamic economic sciences provides a invariably go arounding economic system in footings of behavior of markets. concern and general economic system so seeking to make a rough theoretical account opens the new setup up for much examination as many premises that are assumed or ignored are extremely volatile and could move to the theoretical accounts hurt.

We commend Yokels on his antic article. We feel he has given a good reading of both Classical and Keynesian schools of idea. In drumhead Hicks says that if the “IS curve lies good to the right” the classical position that pecuniary policy is the lone policy for increasing incomes and employment. This is because it will switch the LM curve and lower the rate of involvement and besides increase the sum of income. Classical economic experts believe that utilizing financial policy would merely force the rate of involvement higher and non increase incomes much at all. However if our economic systems IS curve lies to the left so credibleness starts edifice for Keynes. This would do Keynes’s book “The General Theory of Employment. Interest and Money” as being the “economics of depression” ; where the LM curve is horizontal. Keynes says that to increase incomes and employment Fiscal Policy should be the chief tool by take downing revenue enhancements and increasing authorities outgo to increase ingestion and stimulate Aggregate demand. This will increase incomes and employment and will non hold so much inflationary force per unit areas as there are many unemployed resources doing Aggregate provide really elastic. As we know entire Incomes in a closed economic system are a amount of Consumption outgo. Investment outgo and Government outgo. shown: Y=C+I+G

Keynes gives us the ingestion map:
C=a+b ( Y-T ) a & gt ; 0. 0 & lt ; b & lt ; 1
And we can set together an equation for working out entire revenue enhancement: T=d+tY vitamin D & gt ; 0. 0 & lt ; t & lt ; 1
Y=National Income
C=Planned Consumption Outgo
I=Investment Outgo
G=Governemnt Outgo

Endogenous Variables: Y. C. T
Exogenous Variables: I. G
a=autonomous ingestion
b=marginal leaning to devour
d=non-income revenue enhancement
t=income revenue enhancement
These equations show equilibrium of an economic system.
To work out to happen out what Y. C and T are we re-arrange expression: Y-C+0T=I+G

These systems of equations can be written in Matrix signifier
Using Cramer regulation to work out:
Ddoesnt equal 0 because B is between 0 and 1 and T is between 0 and 1 Solving to happen Yttrium:

Solving to happen C:
Solving to happen Thymine:

Given the two different methods for increasing Incomes and employment. which both purpose on traveling us closer to economic prosperity. Hicks doesn’t trade with the construct of Income distribution. If incomes rise it does non needfully intend that employment will lift. as if income distribution worsens so we could be sing high degrees of unemployment alongside lifting entire incomes.


[ 1 ] JM Keynes ( 1936 ) . The General Theory of Employment. Interest. and Money.
London: Palgrave Macmillan. p11.

[ 2 ] Sidney Webb. ( 1912 ) . The Economic Theory of a Legal Minimum Wage. The Journal of Political Economy. 20 ( 10 ) . 973.

[ 3 ] Lavington 1921. pp. 82–3 ; 1925/26. p. hypertext transfer protocol: //www. econ. ryukoku. Ac. jp/activity/images/activity03. pdf

[ 4 ] Lavington 1921. pp. 82–3 ; 1925/26. p. hypertext transfer protocol: //www. econ. ryukoku. Ac. jp/activity/images/activity03. pdf
[ 5 ] Mauro Boianovsky. ( 2003 ) hypertext transfer protocol: //e-groups. unb. br/face/eco/cpe/TD/282Mar03MBoianovsky. pdf

[ 6 ] Mauro Boianov-sky. ( 2003 ) hypertext transfer protocol: //e-groups. unb. br/face/eco/cpe/TD/282Mar03MBoianovsky. pdf

[ 1 ] . JM Keynes ( 1936 ) . The General Theory of Employment. Interest. and Money. London: Palgrave Macmillan. p11. [ 2 ] . Sidney Webb. ( 1912 ) . The Economic Theory of a Legal Minimum Wage. The Journal of Political Economy. 20 ( 10 ) . 973. [ 3 ] . Lavington 1921. pp. 82–3 ; 1925/26. p. hypertext transfer protocol: //www. econ. ryukoku. Ac. jp/activity/images/activity03. pdf [ 4 ] . Lavington 1921. pp. 82–3 ; 1925/26. p. hypertext transfer protocol: //www. econ. ryukoku. Ac. jp/activity/images/activity03. pdf [ 5 ] . hypertext transfer protocol: //www. George. irvin. com/MASD1/session4. htm

[ 6 ] . hypertext transfer protocol: //krugman. web logs. nytimes. com/2011/10/09/is-lmentary/ [ 7 ] . Mauro Boianovsky. ( 2003 ) hypertext transfer protocol: //e-groups. unb. br/face/eco/cpe/TD/282Mar03MBoianovsky. pdf [ 8 ] . Mauro Boianovsky. ( 2003 ) hypertext transfer protocol: //e-groups. unb. br/face/eco/cpe/TD/282Mar03MBoianovsky. pdf