The Concise Encyclopedia of Economics

John R. Hicks

A British economist, John Hicks is known for four contributions. The first was his introduction of the idea of the elasticity of substitution. While the concept is difficult to explain in a few words, Hicks used it to show, contrary to the Marxist allegation, that labor-saving technical progress—the kind that we generally have—does not necessarily reduce labor's share of national income.

His second major contribution was his invention of what is called the IS-LM model. The IS-LM model is a graphical depiction of the argument Keynes gave in the General Theory about how an economy could be in equilibrium with less than full employment. Hicks published it in a journal article the year after Keynes's book was published. It is reasonably certain that most economists became familiar with Keynes's argument by seeing Hicks's graph.

Hicks's third major contribution was his book Value and Capital. In it he showed that most of what economists understood and believed about value theory (the theory about why goods have value) can be derived without having to assume that utility is measurable. His book was also one of the first works on general equilibrium theory, the theory about how all markets fit together and reach equilibrium.

Hicks's fourth contribution was the idea of the compensation test. Before his test economists were hesitant to say that one particular outcome was preferable to another. The reason was that even a policy that benefited millions of people could hurt some people. Free trade in cars, for example, helps millions of American consumers at the expense of thousands of American workers and owners of stock in U.S. auto companies. How did an economist judge whether the help to some outweighed the hurt to others? Hicks asked, Could those helped compensate those hurt to the full extent of their hurt and still be better off? If the answer was yes, then the policy passed the "Hicks compensation test," even if the compensation was never paid, and was judged to be good. In the auto example economists can show that the dollar gains to car buyers far outweigh the dollar losses to workers and stockholders, and therefore, by Hicks's compensation test, free trade is good.

In 1972 John Hicks and Kenneth Arrow jointly received the Nobel Prize for economics. Hicks was recognized for his theories of welfare and resources allocation and his macroeconomic studies of general equilibrium. Educated at Balliol College, Oxford, John Hicks returned there as the Drummond Professor of Political Economy, a post he held until his retirement in 1965. In 1935 he married the economist Ursula Webb. He was knighted in 1964.

Selected Works

Capital and Growth. 1965.

Capital and Time: A Neo-Austrian Theory. 1973.

The Crisis in Keynesian Economics. 1974.

"The Foundations of Welfare Economics." Economic Journal 49 (December 1939): 696-712.

"Mr. Keynes and the 'Classics.' "; Econometrica 5 (April 1937): 147-59.

"The Valuation of the Social Income." Economica 7 (May 1940): 105-24.

Value and Capital. 1939.

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