Introduction - by Stephen Meardon
The five letters reproduced here are a correspondence between Don Patinkin and John Hicks from July 1957 to December 1958. The contributions of both economists were numerous, but foremost among them were their contributions to the `neoclassical synthesis'. That literature began with an attempt to represent the economic model of Keynes's General Theory as a system of mathematical equations, and was later concerned with working out the microeconomic foundations of the system and clarifying its implications regarding the persistence of unemployment.
Hicks's 1937 article in Econometrica, "Mr. Keynes and the Classics: a Suggested Interpretation", was the early formalization of Keynes's theory along the lines sketched above. In slightly altered form it is still taught in economics principles courses. Other contributions to the literature followed, but the one most relevant to the correspondence is Patinkin's 1956 book Money, Interest, and Prices: an Integration of Monetary and Value Theory. In that book, which became a staple of economic theory for years afterwards, Patinkin reconstructed Hicks's model from a foundation of many interdependent markets, utility maximizing agents, and profit maximizing firms. The modeling techniques had been developed during the `marginal revolution' in economic theory of the mid to late 19th century; the latter two in particular were cornerstones of the influential `neoclassical' tomes of Marshall and Pigou. It was the macroeconomic implications of the Marshall-Pigou tradition in economics which Keynes opposed. Thus Patinkin's book, which fused the techniques of neoclassical economics with a macroeconomic model thought to be faithful to Keynes, is the foremost representative of a body of theory known as the `neoclassical synthesis'.
Although one might expect the contrary of a work described as `synthesis', Patinkin's book generated immediate controversy. Most notably he found that if, at the microeconomic level, real money holdings were considered a utility-generating commodity like all others, then, at the macroeconomic level, the possibility of unemployment in long-run equilibrium vanished. The deflation that would eventually accompany unemployment would raise the real value of money holdings, which would raise the desired levels of consumption of other goods, which would in turn eliminate the unemployment.
Patinkin's conclusion met resistance because the primary motivation of Keynes's theory (as well as Hicks's reformulation of it) was to understand the causes of unemployment as a long-run phenomenon. One of the first shots was fired by Hicks himself, who was charged with reviewing Patinkin's book for the Economic Journal, formerly edited by Keynes. His review was published in 1957 under the title "A Rehabilitation of Classical Economics?". The title reveals that Hicks, like many others, considered Patinkin's conclusion of the non-existence of a long-run unemployment equilibrium an affirmation of classical (or neoclassical) theory, and therefore a disavowal of Keynesian theory. The question mark in the title reveals that Hicks doubted the validity of the conclusion -- or at least doubted that it was as robust as Patinkin claimed.
Patinkin replied to Hicks's critique in the same journal two years later, in 1959. He held the (decidedly minority) view that his conclusion actually contributed to the objectives of Keynesian economics rather than undermining them, by redirecting the discussion of unemployment as a more general, dynamic, disequilibrium phenomenon rather than a static equilibrium phenomenon. For that reason he entitled his response "Keynesian Economics Rehabilitated". Although Patinkin may not have convinced the profession of this point, he was very convincing with regards to his main point: that the model constructed by Hicks in 1937, once undergirded by the microeconomic foundation in Money, Interest, and Prices, led logically and unambiguously to the aforementioned conclusion.
For the contemporary reader of these published articles, there remains one mystery. Patinkin's reply was no more than a restatement of things he had already written in his book. Why then was it any more convincing than the book itself?
The correspondence between Patinkin and Hicks reproduced on this website solves that mystery. The letters are from the interim between Hicks's review of Money, Interest, and Prices and Patinkin's response. In these letters Hicks formulates his objections more clearly than he did in his review, and Patinkin answers the objections more thoroughly than in his response.
The first letter (July 6, 1957) is little more than a friendly request by Hicks that Patinkin help him clear up the questions raised in the review. The second letter (Aug. 19, 1957), from Patinkin to Hicks, is notable in that it already contains the content of the reply that would be published in 1959. It is interesting, then, that any more correspondence would be necessary.
The third letter (Nov. 13, 1957) is a short note from Hicks apologizing for his delay in replying to the previous letter from Patinkin, and promising that he would get around to it soon. He did so in the fourth letter (Dec. 31, 1957). This letter, together with the fifth, Patinkin's reply (Jan. 27, 1958), reveals technically what underlay Hicks's critique of Money, Interest, and Prices -- and where he went wrong. The model that both Patinkin and Hicks were using can be expressed as a system of equations that can be solved simultaneously for the macroeconomic variables. The system can be reduced for convenience to two equations, but this can be done in various ways. Essentially, Hicks had reduced the system in a way that implied deflation was reflected in one of his equations differently than in the analogous equation in Patinkin's system. This is what led Hicks to claim in his review that under some conditions deflation might not in fact eliminate unemployment in the long-run.
The problem with Hicks's argument was that he thought his (legitimately) different set of equations would yield a solution different than Patinkin's. This, Patinkin showed mathematically in his final letter, was false: the long-run solution to the model was unique and independent of the solution method. Thus Patinkin's conclusion regarding the disappearance of unemployment in long-run equilibrium remained valid, even under Hicks's method of solving the model. Surely it was this correspondence -- in particular the last letter -- that silenced Hicks's criticism, not the reply published in 1959 in the Economic Journal.
May 12, 1998