Sir John Hicks on Capital and Growth

Lachmann’s “Sir John Hicks on Capital and Growth” is formally a review of Hicks’s Capital and Growth, but it develops into a critique of equilibrium growth theory. He treats Hicks as a major synthesizer of modern economics, especially valuable because he can move between Marshallian, Paretian, Wicksellian, and Keynesian traditions without being confined by any one of them.

In this way he has become a prominent mediator between different strands of thought, a broker of ideas whose influence has been far greater than is often realised today.

The review follows the structure of Hicks’s book while pressing one central question: can dynamic equilibrium theory accommodate heterogeneous capital and autonomous expectations? Lachmann sees Part I, on dynamic method, as the most fertile portion of the work. Hicks distinguishes growth theory from dynamic economics as a whole, and Lachmann welcomes this caution because it leaves room for processes that are not reducible to balanced paths. The crucial issue is equilibrium through time. A momentary market equilibrium may be intelligible, but an intertemporal equilibrium requires more: plans must be mutually consistent, expectations must be fulfilled, and the inherited capital stock must fit the future path.

Chapter II, “The Concept of Equilibrium,” contains the important distinction between equilibrium at a point of time and equilibrium over a period of time.

For Lachmann, the abandonment of homogeneous capital is decisive. Once capital goods are recognized as specific and complementary, growth cannot be described simply as accumulation of an aggregate stock. The economy must have the right kinds of capital goods in the right combinations. This makes the composition of capital central to dynamic theory and exposes the weakness of models that assume the capital stock can be smoothly adapted to any equilibrium path.

There is another requirement the need for which we realise as soon as we abandon the assumption of the homogeneity of our capital stock.

Lachmann therefore admires Hicks’s analytical reach but faults him for not following his own insights far enough. Malinvestment appears as a genuine implication of capital heterogeneity and disappointed expectations, yet it is not made central to the theory. Likewise, Hicks’s discussion of modern “fixprice” markets weakens the temporary-equilibrium method of Value and Capital: if prices do not continuously adjust to clear all markets, then the neat link between current prices and coherent plans breaks down.

The key test is Hicks’s treatment of the “traverse,” the movement from one equilibrium growth path to another. Lachmann regards this as the pivot of the book because it reveals what equilibrium paths conceal. During transition, the capital stock must be reshaped; entrepreneurs must choose techniques under uncertainty; relative prices, technology, expectations, and wealth distribution may all change. There is no reason to expect that the price system needed for the new equilibrium will already be known, or that investment decisions made during the transition will create the right capital structure.

Hicks’s later discussions of optimum growth, planning, money, liquidity preference, financial intermediation, and the production function do not remove this difficulty. Lachmann notes especially that technical progress can impose losses on old specific capital, but he argues that such losses are not exceptional. They are a normal feature of a world in which expectations diverge and capital goods embody past plans.

Except for the last chapter, in which Professor Hicks shows that technical progress will cause capital losses on specific resources, this remains the only time that malinvestment is mentioned in the book!

The article’s broader methodological claim is that dynamic macroeconomic equilibrium is untenable outside the stationary state. Markets may form temporary equilibria at particular moments, and asset markets may continuously revalue claims to future income, but these processes do not generate a determinate growth path. Expectations are subjective, revisable, and causally powerful: once acted upon, they alter the capital structure and the distribution of wealth. Hicks’s achievement, for Lachmann, is that he brings capital heterogeneity, expectations, fixprices, and growth equilibrium into one framework; his failure is that their combination shows the framework’s limits. The review is thus an Austrian-inflected argument that capital theory must treat economic development as historically open-ended rather than as convergence toward a determinate intertemporal equilibrium.