Hicks’s The Theory Of Wages: Its Place in the History ofNeoclassical Distribution TheoryPaul Flatau*Abstract:Argues that J.R. Hicks’s 1932 book, The Theory of Wages,foreshadows a number of important later developments in Hicks’s theory, includingsome significant contributions to neoclassical distribution theory. Thesedevelopments include a reformulation of marginal productivity theory; theintroduction of the elasticity of substitution as an analytical tool; contributions tothe product exhaustion theorem; an economic analysis of strikes; and amacroeconomic theory of relative factor shares. Concludes that Hicks’s ownsubsequent rejection of the book was unduly self-critical.1IntroductionHicks’s The Theory of Wages was published some 70 years ago now, in 1932. Atthe time of publication, Hicks believed that there had been little development, overthe preceding thirty years, in neoclassical distribution theory. He was also clear inhis view of the place of The Theory of Wages in the history of wages theory: ‘Thetask which is attempted in this book is a restatement of the theory of wages’ (Hicks1932a, p. v). He goes on to suggest that the ‘most recent comprehensive statementsof a positive theory of wages in English of anything more than an elementarycharacter are now thirty or forty years old’ (Hicks 1932a, p. v). He citesMarshall’s Principles of Economics (1890 [1961]) and Clark’s The Distribution ofWealth (1899) as his key reference points.1In contrast with this bullish contemporaneous assessment of The Theory ofWages, Hicks turned against his work, first in his paper ‘Wages and interest: thedynamic problem’ (Hicks 1935b), and then again some thirty years later in hiscommentary on his book (Hicks 1963). As he suggested in the 1963 reprinting ofThe Theory of Wages: ‘I let it go out of print because my own views upon itssubject had changed so much that I no longer desired to be represented by it’ (Hicks1963, p. v). He refers to the book as a ‘juvenile work, which (almost at once) I feltmyself to have outgrown’ (Hicks 1963, pp. 310-11). In his 1963 commentary, hedates his own revolution in thinking about wages and distributional questions (andmore besides) to 1933, the year after The Theory of Wages was published, markingoff the work as one that could safely be left to one side. His revolution relates to hismovement to a dynamic framework structured around the ‘Monday week’ model.As Samuels (1993) points out, however, Hicks consistently displayed considerablemodesty about his past contributions and was continually reassessing his past workin line with his current beliefs and interests. Unfortunately, too many commentatorshave taken Hicks at his word and tend to pass too quickly over the Hicks of TheTheory of Wages.In this paper we return once again to Hicks’s The Theory of Wages. Its aimis to provide an assessment of its importance to the development of neoclassicalwages and distribution theory. We pose two sets of questions. First, did The Theoryof Wages add significantly to extant neoclassical distribution theory? Did The

Hicks’s Theory of Wages 45Theory of Wages provide an important restatement of wages theory as claimed byHicks at the time of its publication in 1932, or did it represent a minor work? Howimportant was The Theory of Wages to the subsequent trajectory of neoclassicaldistribution theory? Second, what was the importance of The Theory of Wages tothe future development of Hicks as an economic theorist, and, in particular, to thelater development of Value and Capital? Can we largely ignore it, accepting aconclusion that the revolution in Hicks’s thinking occurred in 1933?This paper argues that Hicks’s The Theory of Wages provides importantprecursors for developments in Hicksian theory, which were soon to follow inValue and Capital (Hicks 1939a), and developed a number of significantcontributions to neoclassical distribution theory. These contributions included aresetting of marginal productivity theory, the introduction of the elasticity ofsubstitution tool, contributions to the product exhaustion theorem, the developmentof a theory of wages in the context of strike action, and the provision of amacroeconomic determination of relative factor shares. Mention should also bemade of his study of the workings of the labour market, which were, sadly, largelyignored (both by Hicks himself and other neoclassical theorists) in the continuedpush to formalism and abstraction until the New Keynesian developments in the1980s. These contributions need to be highlighted so as to balance the ledger, givenHicks’s own largely negative assessment of the work; a view, as suggested, that istoo often accepted uncritically by modern readers. 2Section 2 of the paper considers Hicks’s treatment of marginal productivitytheory in The Theory of Wages. There is, perhaps, as much interest in what Hicksbrings to neoclassical distribution theory as in what he did not in the early chaptersof the book. Hicks, perhaps more than any other theorist within a broad neoclassicaltradition, emphasised the role of the substitution between methods of production(and thus between factors of production) and the distinction between scale of outputand variations in proportions of factor use for a given scale. This led to the designof the elasticity of substitution tool. Hamouda (1993), Kennedy (1994) andRothschild (1994) all provide excellent reviews of this development, and we shallhave less to say than otherwise as a result. What Hicks left out was a presentationof the marginal productivity doctrine in a generalised form, one which allowed forimperfect competition. It was Shove ([1933] 1989) who took Hicks to task for notpresenting a general marginal productivity theory of distribution, but it is thesubtext of Shove’s critique which interests us as much as anything else. Wasimperfect competition theory all there in Marshall? What exactly was JoanRobinson’s contribution to imperfect competition theory?Section 3 considers Hicks’s contributions to labour supply theory, whilehis analysis of the workings of the labour market is discussed in section 4. Thereare three crucial features of Hicks on the workings of the labour market in TheTheory of Wages. First, his emphasis on the role of adjustment processes, time andforesight, which provides an early precursor to the dynamic analysis that followedin arguably Hicks’s most famous work, the 1939 Value and Capital. Second, theimportance Hicks attaches to the social nature of the labour market, a theme Hicksreturned to but much later in his life. Third, the role Hicks assigns, in thedetermination of wage outcomes, to organisational and legal structures in the labourmarket. The linkages between Hicks’s early work on themes and subsequentdevelopments in New Keynesian theory are given some attention in these twosections.

46 History of Economics ReviewSection 5 considers the question of the importance of Hicks’s contributionto the theory of wage determination in the presence of collective bargaining and thethreat of strikes. His theory of bargaining had a significant impact on the evolutionof bargaining theory in the 1950s and 1960s.3 We review this connection in section5 and also assess Hicks’s contribution against previous studies on wages and strikeactivity, in particular, Zeuthen’s (now) well-known 1930 book, Problems ofMonopoly and Economic Warfare, and a rarely cited earlier work by Pigou (1905)on wage bargaining in the presence of strike activity.In section 6, we examine Hicks on the relationship between technicalchange and the distribution of income. This was an area of very clear importancefor the future direction of neoclassical theory: first in terms of his ‘macro’distribution theory, where Hicks introduces the concept of the elasticity ofsubstitution to explain relative shares; and, second, in terms of his introduction ofthe labour-saving capital-saving invention classification and the role of relativefactor prices in inducing inventions of these two types (as compared withautonomous inventions).While the emphasis in this review is on the place of The Theory of Wagesin neoclassical distribution theory, we briefly consider in section 7 Hicks’scontribution to pre-Keynesian macroeconomic theory. Here we argue that hismacroeconomic model, applied in the context of wages policy in chapters 9 and 10of The Theory of Wages, should receive more emphasis than it has hitherto beengiven both in treatments of pre-Keynesian macroeconomics and in studies of thehistorical roots of real business cycle theory and new classical macroeconomics.The discussion picks up on Hahn’s (1994, p. 22) insight that ‘Hicks in 1932(Theory of Wages) started more or less where the “new” macroeconomics is now’.The conclusion provides an overall assessment of the importance ofHicks’s The Theory of Wages to both neoclassical theory and to Hicks’sdevelopment as an economic theorist.2Marginal Productivity Theory and Imperfect CompetitionHicks begins The Theory of Wages in what would apparently be calm waters with adiscussion of the marginal productivity doctrine that wages tend to equal the valueof the marginal product of labour. This doctrine had, of course, been worked overin the first generation of neoclassical distribution theory and may otherwise nothave been expected to create difficulties. But, like others before him, Hicks’sdiscussion of the meaning of the ‘value of the marginal product of labour’ createsthe interest. And it is Shove’s (1933) review of The Theory of Wages that is theimmediate point of interest, rather than Hicks’s discussion itself.4 Hicks’s preciserendition of the marginal productivity doctrine is that:At any given wage it will pay employers best to take on that number oflabourers which makes their marginal product that is to say, thedifference between the total physical product which is actually securedand that which would have been secured from the same quantity ofother resources if the number of labourers had been increased ordiminished by one equal in value to the wage. (Hicks 1932a, p. 8).Hicks adopts an explanation of this marginal productivity dictum that isperfectly traditional: wages will be set equal to the price of the product multipliedby the marginal product of labour. The reason for our interest here is that Shove, inhis review of The Theory of Wages, suggests that Hicks’s specification of the

Hicks’s Theory of Wages 47marginalist equation is at odds with Marshall in a decisive way. The crux of thepoint is whether or not Hicks recognised the implications of non-competitivemarkets for marginal productivity theory. Marshall, Shove suggests, did fullyaccount for the impact of a non-competitive market, even though he spelt out hisversion of marginal productivity doctrine in the context of a competitive market.Hicks did not.It is the manner of Shove’s presentation and its timing that is of mostinterest here. Shove is claiming for Marshall a place in the imperfect competitionaccount of the marginal productivity theory of distribution. Shove suggests thatMarshall’s presentation of the marginal productivity doctrine was that employerswould employ labour up to the point where the marginal outlay on labour (i.e., theaddition to outlays from a small increment to labour) was equal to the additionalreceipts from employing it. He interprets this to mean that Marshall had in mind, touse modern terminology, a ‘marginal factor cost’ equals ‘marginal revenue product’construction and was well aware that differences between price and marginalrevenue (in the product market) and the wage and marginal factor cost (in the factormarket) could be significant in a single-price market. This has, as is well known,enormous implications for the way in which we see factor rewards and Shove spellsout these implications in some detail. He suggests that if the product market is noncompetitive, prices are higher than ‘marginal revenue’ (Shove uses the term) andworkers, consequently, will be paid less than the value of their marginal product.5As a result they will be exploited (from product market influences). Likewise, if thefactor market is non-competitive, marginal factor cost will be greater than the wageand workers will be exploited in the sense that the profit-maximising wage underthese conditions will be less than the competitive wage.What Shove was perhaps doing in his review at this point was not onlyattacking Hicks and bolstering Marshall’s position but also indicating that theessence of the distribution theory in Joan Robinson’s Economics of ImperfectCompetition, which had just appeared in print, was already there in the Marshalliancanon. Shove was claiming that a marginal revenue product/marginal factor costinterpretation of the traditional neo-classical statement of factor returns was part ofthe Marshallian tradition. This, of course, reduces the contribution Robinson (1933)was making. An interesting feature of Shove’s 1933 review is that he acknowledgesthat Robinson had indeed just published the Economics of Imperfect Competitionbut that his review was written before its publication. He goes on to suggest thatshe ‘analyses the tendency to exploitation along lines similar to those followedhere. Her treatment is more elaborate than is possible in a notice such as this, but italso presents certain differences of detail. It has therefore seemed worth while to letthe above paragraphs stand’ (Shove [1933] 1989, p. 11). In short, Shove suggeststhat he had no reason to amend what he has written on the Marshall versus Hicksinterpretation of marginal productivity now that Robinson had published her book.Letters in the Joan Robinson archives held at Kings College reveal that Shove hadbeen involved in a heated exchange with Robinson on elements of Robinson’simperfect competition work prior to the publication of Economics of ImperfectCompetition6, and this snipe at Robinson was the public face of this exchange.Hicks himself remained a little ambivalent on the relative importance ofthe imperfect competition revolution. On the other hand, he wrote to Robinsonfollowing the publication of her book (and their ‘recent rather surlycorrespondence’) to say how much he admired it. He indicated that he had recentlybeen lecturing on monopoly (see his survey on monopoly theory for Econometrica

48 History of Economics Reviewin 1935 — Hicks 1935a) and had arrived at many of the same conclusions, butsuggested that Robinson had taken the matter much further than he had been able totake it.7 He goes on to indicate that Robinson’s book had cleared up for him thedistinction between the ‘entrepreneur-monopolist who can exploit others byrestricting his demand for their services, and a factor-of-production-monopolist,who can only exploit by restricting the supply of his own.’ As for the role ofimperfect competition analysis generally, however, Hicks suggests that ‘for longperiod analysis, it is fair to assume that the elasticity of demand to the individualseller is very high (apart from the cases of “bilateral monopolies”), andconsequently the competitive analysis, (which, as you agree, is so much easier tohandle in problems of production and distribution) is a fair approximation’.8 Thiswas a point Hicks was continually to return to in later published work.The main contribution that Hicks makes to the demand side of neoclassicaldistribution theory is quite clearly not in the area of imperfect competition doctrinebut in terms of the role to be played in neoclassical distribution theory by thesubstitutability of factors of production. The emphasis on substitutability isomnipresent in The Theory of Wages and is a clear hallmark of the Hicksianmethod at this point. What is ‘helpful’ for Hicks in emphasising substitutability atthis stage of his theory development is the assumed pure malleability of capital. InThe Theory of Wages, it is if anything labour that is problematic, as a result ofdifferences between individual workers. Capital appears as a homogenousmalleable factor of production. Even more than this, Hicks drifts at will between a‘realist’, or as he later preferred to call it, a ‘materialist’ conception of capital (seeHicks 1974) and a funds-based approach to capital as the conditions suit and theproblem at hand requires. Rothschild (1994, p. 67) has previously commented thatHicks’s treatment of capital ‘deliberately excludes a special consideration of capitalproblems’ and is ‘completely flat’, while Hamouda (1993) provides a detailedhistory of Hicks’s attempt to grapple with capital after his inauspicious beginningin The Theory of Wages.9The key assumptions of the Hicksian approach to marginal productivitytheory are that firms adopt a minimum-cost method of production, input prices aregiven, marginal products are known and continuous, and firms may vary factorswhen minimum cost is not achieved. Firms are assumed to adopt that method ofproduction (i.e., that combination of factors) that ensures minimum costs ofproduction. For given marginal products of the factors and input prices, theminimum cost of production is given by the now familiar formula as:MPa/Pa MPb/Pb.When input prices change, firms alter factor proportions so as to maintain theminimum-cost formula. Hicks shows that his minimum cost of productionapproach, in equilibrium, is consistent with the traditional marginal productivitydoctrine that factors are paid according to their marginal products.Hicks utilises the minimum cost equilibrium tool in the context of theWicksteed product exhaustion debate, making an important contribution to this ongoing controversy within the neoclassical tradition (Wicksteed 1894, Jaffé ([1964]1992), Flux 1894, Walras [1926] 1954, Wicksell 1893, 1900, 1901, 1902). Here hefollows Wicksell’s insights, and proves in a mathematical appendix that, on thebasis of cost-minimisation, total product will be exhausted without recourse to aconstant returns to scale assumption. The discussion reflects Hicks’s clear earlyawareness of the work of both Walras and Wicksell (introduced to him by Robbins

Hicks’s Theory of Wages 49at the LSE).10 Hicks does make brief reference to the problems of monopolyrevealed in the famous note by Sraffa (1926), but, in the main, ignores the difficultypresented by his minimum cost equilibrium condition that minimum-cost is not anecessary condition for profit maximisation.One further use of the Hicksian substitution method should be mentioned.That is in terms of his analysis of wage indeterminateness, which represented afollow-up to his earlier paper on the subject (Hicks 1930b). The principal argumentconcerning wage indeterminateness was based on the indivisibility of labour (wemust often employ a ‘whole’ worker than a part of one) and the likely distancebetween the ‘internal’ and the ‘external’ marginal product of labour in the event ofindivisibility. The internal marginal product of labour is the additional productgenerated by the last worker employed, the external marginal product is theadditional product generated by the next worker that the firm could employ. Wagesmust lie between these points but are indeterminate within this range. Hickssuggests, however, that the degree of indeterminateness falls significantly when wetake seriously the options for substitutability available to firms, with which it maybe possible for them to add on different types of labour (labour is heterogeneous inHicks), switching from labour of one type to labour of another. Likewise, firmsmay switch from employing an additional unit of labour to employing capitalinstead. Both of these points of substitution may mean that the gap between theinternal and external marginal product may be relatively large for a given set ofwage-earners but not be relevant when options exist across different types ofworkers or between capital and labour. Hence, with the ‘external’ margin becomingever more pliable, the gap between it and the existing internal margin becomessmaller. Hicks returns to the theme of determinateness in wage outcomes when heconsiders the determination of wages in the context of strike activity andbargaining, where he again pushes against prevailing orthodoxy in pressing for adeterminate wage rather than a range of possible wage outcomes.3Labour Supply TheoryWe now turn from Hicks’s discussion of labour demand to that of labour supply.His treatment of labour supply theory is relatively standard for the time. He has yetto build the standard choice framework of Value and Capital, which allowed for theanalysis of labour supply in terms of income and substitution effects. Thearguments on labour supply are, therefore, presented in very general terms.However, the interesting part of Hicks’s labour supply presentation is that of theemphasis, both in his labour supply chapter and throughout the work as a whole(including the macroeconomic model of the final chapters of The Theory of Wages),on efficiency wage effects.11The incorporation of efficiency wage effects in modern labour economicsand macroeconomics can be traced to a series of works by Akerlof and Yellen(among many others) in the 1980s.12 As Hicks himself observed in The Theory ofWages, however, the ‘Gospel of High Wages’ had been around for some time.Allusions to efficiency wage effects can be discerned in the work of Marshall,Walker, Hobson, Pigou and Wicksteed, and Hicks’s discussion of efficiency wagecan be characterised as lying squarely within this older tradition.13 Our interest inhis discussion of efficiency wage effects lies, therefore, not in their absolutenovelty. Rather, it lies primarily in the fact that, as with so many other componentsof The Theory of Wages written in an informal style, the efficiency wage material is

50 History of Economics Reviewleft to lapse as Hicks further develops his formalist structure in the 1930s (of whichValue and Capital is the prime standard bearer). Interestingly, efficiency wageeffects returned to the canon in the 1980s only when they were given a more formalmathematical treatment.One interesting feature of Hicks’s efficiency wage arguments, which is notreflected in the modern efficiency wage theories (nor the older ‘Gospel of HighWages’ tradition), concerns the impact of high wages on the internal structure ofthe household of the employee. For Hicks, higher wage rates feed through to betteropportunities for recreation and self-improvement and for the specialisation oflabour in the household. This gives to the (mainly male) worker (for Hicks) greateropportunities for genuine leisure, thus providing an improved platform forenhanced work effort. As with the earlier neoclassical authors, Hicks refers to thecumulative causation processes involved. High wages increase efficiency, whichthen promote high wages. Another feature of the cycle is the diminishing returns toefficiency of high wages. In other words, at low wage levels an increase in wageshas greater positive efficiency effects than an increase in wages at a higher wagelevel. More generally, the efficiency effects may provide a floor to wages in adownturn. Employers may be reluctant to allow wages to fall too far because theadverse efficiency effects that may result.4The Workings of the Labour MarketHicks’s chapter on the workings of competition and the labour market (chapter IV)goes well beyond a simple rendition of how changes in labour demand or supplyfeed through into new labour market equilibrium outcomes. Rather it emphasises amultiplicity of forces and reflects his recent past interest in labour history andapplied labour issues (see Hicks 1928, 1930a). There is a strong role for theimportance of social custom, particularly in relation to attitudes towards fairness, inaffecting labour market outcomes. This is an area of his work in the early 1930swhich, like that of efficiency wage effects, he lets lapse in his formalistdevelopments later in the decade. There is also considerable discussion of labourmarket questions in light of real-world firm and labour market institutionalarrangements (e.g., his emphasis on the regular and casual employment distinction)and adjustment costs. A final important facet of the working of the labour marketthat Hicks refers to, but which he certainly did extend in the 1930s and thenreturned to in a different form much later in his life, was that of the role of time,expectations, and uncertainty.In his 1963 commentary, Hicks referred to the fact that The Theory ofWages adopted an essentially static equilibrium framework. That might be true interms of a structured model involving capital and time (Value and Capital providessuch a framework). However, The Theory of Wages provides a good ‘unstructured’discussion of dynamics (in the sense of adjustment, time, expectations, anduncertainty) that can be viewed as a precursor either to Value and Capital or to amuch later Hicks, whom Collard (1993) refers to as ‘Deep Hicks’, whereequilibrium and change are dealt with in terms of a ‘true dynamics in historicaltime’.Hicks pays special attention to the adjustment process in labour markets.This is, of course, not the first time that economists had touched on this question.Treatments of the adjustment process are available in Marshall’s discussion ofearnings and labour markets in the Principles (Marshall, 1890 [1961]), which are

Hicks’s Theory of Wages 51extended in Pigou’s early works, including Wealth and Welfare, his pre-warUnemployment and, most importantly, The Economics of Welfare. Both Marshalland Pigou consider the process by which the labour market adjusts to themovements of labour from ‘trade to trade and from place to place’ (Marshall 1890[1961], p. 573) and both made much of the fact that the labour market was quitedifferent from the market for commodities (see, for example, Marshall 1890 [1961],p. 336). However, Hicks’s treatment is certainly more developed than that of hispredecessors in combining adjustment costs, expectations and uncertainty in a fluiddynamic environment.He begins with a discussion of how shocks feed through the labour market.From a given equilibrium, an event shocks the system so that it is necessary forworkers to consider a possible move from one employment position to another andfor employers to consider a change to their methods of production. These changestake time and are accompanied by costs. The time and cost taken in the adjustmentprocess may have important implications for the trajectory of the labour market. Ifadjustment costs are relatively large, moves to alternative methods of production,which would otherwise be profitable, are suspended. In other words, adjustmentcosts may generate a wedge between the existing structure and some alternativestructure.Adjustment costs per se for Hicks are not necessarily the most importantproblem facing labour market participants. Adjustment costs can potentially bedefrayed over a relatively long time period if change is of a ‘once-and-for-all’ formor follows some set (e.g., seasonal) pattern, with a relatively clear understanding ofits effects. It becomes more of a problem, however, if there is no strong expectationthat change will be maintained. In conditions of flux, adjustment costs can be acritical determinant of the path the labour market can take. To provide a concretecontext to potential difficulties, Hicks gives the example of new orders that a firmreceives. What does this mean for the firm? It might mean that ordinary orders havebeen brought forward, or that a special order has taken place, or that demand hasrisen to a new level at which it will stabilise or that demand is on a growth path.Which of these possibilities actually holds cannot, of course, be known for certainin advance.Hicks continues to stress the role of expectations and uncertainty in hisdiscussion of unemployment. In this discussion, he compares the case of ananticipated temporary downturn to that where there is genuine uncertainty as to thelength of the downturn. In the former case, wages and employment may be keptrelatively constant. Employers, who take advantage of an anticipated temporarydownturn by cutting wages, may find that it comes at a significant cost in terms oflabour relations in the firm and its future ability to attract good workers. This cost islikely to deter many firms from cutting wages during a period of anticipatedtemporary decline. Hence there can be some rigidity in the downward movement ofwages, but this rigidity comes from employers and not from workers or unions (atleast in the early parts of The Theory of Wages). There may be some upwardrigidity in wages as well. Firms may be reluctant to raise wages when there is ananticipated temporary upturn, as the shortage pressures they face in the labourmarket are likely to be short-lived. As Hicks puts it, ‘although each firm’s demandfor labour fluctuates continually, a change in wage-rates would affect, not thepresent, but the future supply of labour’ (Hicks 1932a, p. 67).It is a somewhat different matter when either the downturn is expected tolast a long time or there is uncertainty as to the length of the downturn. In the

52 History of Economics Reviewformer case, the movement to an immediate generalised cut in wages may be fairlyquick. In the latter case, the movement to lower wages may be a relatively longone. Firms may initially assume that the downturn is relatively short and somaintain wages for a period. As the duration of the downturn increases, some firmswill begin cutting wages. Those firms that do not cut wages will find it increasinglymore difficult to maintain a higher wage. As a greater proportion of firms cutwages, the ‘bad employer’ effect of immediately taking action to reduce wagesbecomes less important in the market and ‘good employer’ firms believe that theywill no longer have signalling problems when the labour market improves.The distinction Hicks makes between anticipated and unanticipated eventsand temporary and permanent ev

Hicks's The Theory of Wages to both neoclassical theory and to Hicks's development as an economic theorist. 2 Marginal Productivity Theory and Imperfect Competition Hicks begins The Theory of Wages in what would apparently be calm waters with a discussion of the marginal productivity doctrine that wages tend to equal the value