In this section, the final one of the chapter, the author, Sir John Hicks, addresses the importance of the analysis in this chapter and relates it to similar work by other economists studying similar problems, namely Knut Wicksell and John Maynard Keynes.
He begins by claiming that "The proposition which we have thus established is perhaps the most important proposition in economic dynamics." He is referring, of course, to his conclusion from the previous section that the case of elasticities of expectations equal to unity marks a sort of "dividing line between stability and instability." He attributes its importance not to its assumed conditions being commonplace, nor even to their being realistic. (He does assert, however, that its assumptions are "quite plausible" simplifications of the sort that economists commonly make when constructing an analytical model.) The importance of the proposition is, instead, a consequence of its having "a strong bearing upon one's whole conception of the economic system, considered as a process in time."
I think it's reasonable to say that the second paragraph of this section is one of the more important paragraphs in the entire book:
So long as economists were content to regard the economic system in static fashion, it was reasonable to treat it as a self-righting mechanism. A static economy is inherently stable; small causes produce small effects; the system is therefore not liable to large disturbances, excepting those which originate definitely outside itself. But this appearance of stability was only achieved by leaving out part of the problem. As soon as we take expectations into account (or rather, as soon as we take the elasticity of expectations into account), the stability of the system is seriously weakened. Special reasons may indeed give it a sufficient amount of stability to enable it to carry on, ... but it is not inherently and necessarily stable. It is henceforth not at all surprising that the economic system of reality should be subject to large fluctuations, nor that these fluctuations should be so very dangerous.
Hicks goes on to note that his proposition is an extension of a similar proposition by Wicksell, regarding his 'cumulative process.' He notes, however, that it is more widely associated with Keynes, and his arguments in The General Theory of Employment. Keynes's proof "assumes a unity elasticity of expectations only for prices expected to rule in the near future; for prices expected in the further future he assumes that they move with money wages." Hicks argues that this makes Keynes's proof less general than his own: "Expected prices can depend on current prices in any way whatsoever—so long as a proportionate rise in all current prices raises all expected prices in the same proportion—and my proof holds."
Hicks also explains that his proof makes it clear that the instability is not due to Keynes's assumptions about expectations and their connection with money wages. "The instability is not a property of wages; it is a property of money and of securities, those awkward things which are not demanded for their own sake, but as a means to the purchase of commodities at future dates."
In a footnote at the end of this section, Hicks mentions two lines of relevant research that appeared after the publication of the first edition of Value and Capital. One is by Oskar Lange and Jacob Mosak who examined the arguments in this chapter. From their work, Hicks concludes that his treatment could be improved, but he chose to leave the current chapter unaltered and has "set out the qualifications I should now desire to make in an additional note at the end of the volume."
A separate line of inquiry that Hicks considers potentially relevant is that of Paul Samuelson in addressing "process analytics." He states that "I am still not convinced that it has a very close relevance, but it deserves more discussion than I gave it in 1938. I have therefore included a further note on this subject."
I plan to address each of these additional notes in upcoming posts.
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