Oskar Morgenstern, “Professor Hicks on Value and Capital” (June 1941)

Oskar Morgenstern’s review article examines J. R. Hicks’s Value and Capital (1939) through a set of foundational questions rather than a comprehensive inventory of its results. An introductory methodological assessment leads into six sections on consumer choice, equilibrium and determinacy, dynamic plans, expectations, interest, and business cycles. Morgenstern credits Hicks with attempting a much-needed synthesis of static and dynamic economics. His central objection is that the synthesis neither establishes its mathematical claims adequately nor explains how its assumptions relate to empirical knowledge. Its advertised innovations often amount to changes of language, while its eventual account of economic fluctuations appears disconnected from the analytical apparatus supposedly supporting it.

The opening places the difficulties of reviewing economics within the discipline’s unsettled scientific condition: ambiguous concepts, competing objectives, and assumptions whose factual basis remains obscure. Morgenstern accepts pure competition as a legitimate initial restriction, but insists that its limitations must govern subsequent applications. He rejects Hicks’s claim to introduce a new logic and criticizes the combination of assertions of originality with insufficient attention to earlier research. These objections concern the standards by which a theoretical synthesis should be judged:

The value of a book of synthesis depends not only on the communication of results achieved, but also largely on whether or not it shows fruitful new methods and points toward new goals.

Section I applies this standard to indifference-curve analysis. Morgenstern regards the abandonment of measurable utility as an established development, not Hicks’s innovation. Replacing diminishing marginal utility with a diminishing marginal rate of substitution may improve theoretical language, but does not by itself change the underlying facts of consumer choice. The decisive question is whether the reformulation helps explain the economic system, particularly behavior through time. Durable goods and the timing of purchases complicate both formulations. Hicks’s distinction between substitution and income effects is valuable, but the importance assigned to income in statics sits uneasily with his later proposal to eliminate income from dynamics. Morgenstern also distinguishes consumers’ income from producers’ receipts, warning that conflating them produces substantive errors.

Section II supplies the review’s strongest technical criticism. Establishing systems of equations is a genuine achievement of “formal economics,” but counting equations and unknowns does not prove that an economically admissible solution exists. Nonlinear systems may have no solution, several solutions, or infinitely many; even a unique linear solution may contain inadmissible negative values. Production choices may also require inequalities rather than equations. Morgenstern invokes the work of Abraham Wald and John von Neumann as examples of the proofs required, while emphasizing the restrictive assumptions under which their results hold.

The upshot of all this is that we simply have not, as yet, satisfactorily proved that there exists an economic equilibrium or that the economic system is stable or unstable as a whole under conditions of varying nature.

This is an argument for more rigorous mathematics, not for retreat into verbal economics. Ordinary language cannot resolve difficulties that remain unsolved under precise formulation. Equally, assumptions selected merely to ensure mathematical solvability cannot settle the economic problem. Changes in factual knowledge require revised models and renewed proofs; claims about equilibrium must specify the relevant conditions and distinguish existence from stability.

Sections III and IV pursue the same issue within Hicks’s dynamics. Dating quantities and organizing change into successive “weeks” of temporary equilibrium do not establish that individual plans fit together in a stabilizing way. Calling plans consistent because they coexist with equilibrium risks substituting a definition for an explanation. Their horizons, definiteness, timing, and degree of execution must be specified. Parallel intentions can destabilize a system—as with simultaneous deposit withdrawals—while observed actions may be compatible with many different underlying plans.

The aggregate of the plans of all the individuals is therefore not a simple sum of an amorphous mass. They rather form a highly complex and differentiated system.

The crucial interdependence includes agents’ actual or presumed knowledge of one another’s plans. Morgenstern connects this difficulty to strategic games, identifying a problem beyond simple aggregation. Hicks’s “elasticity of expectations” likewise remains insufficient without an account of how expected price changes alter concrete plans. A producer’s response depends on whether the price concerns an output, a competing product, or a cost item, and on how far production has already progressed.

Shifts in expectations, consequently, are relevant only in so far as they induce shifts in plans; even violent changes in expectations in certain directions may fail to upset plans, if these have already progressed far and do not allow decisive adaptation.

Section V tests these criticisms against interest theory. Morgenstern welcomes Hicks’s resistance to treating “the” interest rate as a single uncomplicated quantity. Yet risk reappears in an analysis that had formally excluded it, exposing the fragility of Hicks’s separation between dynamics and an economics of uncertainty. Hicks’s asserted equivalence between loanable-funds and money-market explanations also remains unproved by equation counting. Monetary considerations cannot simply displace questions about capital valuation, durable goods, and the organization of production.

The final section calls Hicks’s business-cycle discussion an anticlimax: familiar accounts of accumulation, optimism, credit, innovation, and slump are presented without demonstrating their derivation from the preceding theory. Income and saving return despite their proposed exclusion, and pure competition ceases to operate as an explicit constraint. The review’s constructive conclusion reverses the direction of inquiry:

Would it, perhaps, be a good suggestion to start building dynamic theory on the basis of the observations of economic fluctuations rather than to try to cramp them into a helpless and vague dynamic theory whose empirical foundations lie in limbo?

Morgenstern thus makes the review a methodological intervention: dynamic economics needs empirically grounded models, explicit treatment of uncertainty and strategic interdependence, and proofs proportionate to its claims—not greater confidence in an insufficiently connected synthesis.