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  Helping Great Economists: Sir John Hicks

  By James Annable | Jun 26, 2020

  John Hicks was a giant of 20^th-century economics. Like a number of other great economists, he began his studies specializing in mathematics, later switching to economics.

  Hicks was knighted in 1964 and shared the Nobel Prize with Kenneth Arrow in 1972. In the aftermath of the publication of my 1984 book (The Price of Industrial Labor), I corresponded with Sir John who had a lifelong interest in labor pricing. He was a kind and insightful scholar, who understood the necessity of microfounding meaningful wage rigidity (MWR) if macro theory is to be stabilization-relevant.

  Original Great Idea

  In his 1937 Econometrica article, Hicks famously reformulated the goods and money markets in Keynes’s The General Theory to be consistent with a general-market-equilibrium framework that he generally (and casually) restricted by assumed price rigidities – his famous IS-LM model. That paper (“Mr. Keynes and the ‘Classics’”) became one of the most cited papers in the literature. A few years later, in his 1944 Econometrica article, Franco Modigliani demonstrated that Keynes’s signature labor-market failure centrally required wage rigidity. Early Keynesian analysis was constructed on IS-LM equilibrium restricted by assumed labor-price stickiness.

  GEM Helping Hand

  Some context. In their influential Lectures on Macroeconomics (1989),  Stanley Fischer and Olivier Blanchard concluded that Early Keynesian thinking, especially the Neoclassical Synthesis, was “in theoretical crisis”. In response, they organized their text around a benchmark neoclassical model featuring “optimizing individuals and competitive markets” with an important caveat. While research on microfounding wage and price rigidities evident in the data was on-going, B&F argued EK shortcut assumptions remained necessary to inform policymakers, the alternative being “a harmful utopia that leaves the real world to charlatans”. (pp.27-28) Lectures includes irrational models that are “the workhorses of applied macroeconomics”, notably featuring Hicks’s IS-LM interpretation of The General Theory that assumed non-microfounded price rigidity. B&F position their text to occupy a difficult middle ground in an increasingly contentious debate.

  New Keynesian criticism. The “charlatans”, however, won. Given that Hicks’s IS-LM...

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