Hicks — “A Suggestion for Simplifying the Theory of Money”

This our weekly discussion of the price level as it relates to Perry Mehrling's money view. The price level is the average price of goods in terms of money or, equivalently, the price of money in terms of goods. But what determines the price level? Why is the price level important? And how does it fit into the money view?

This week, we are reading John Hicks' famous 1935 essay "A Suggestion for Simplifying the Theory of Money" in which he asks why people—in choosing to forgo consumption in the present—would ever choose to hold "barren money" instead of interest-bearing assets that provide a positive return. This question, of course, is related to liquidity. But where does the price level fit in?

From Perry Mehrling's "The Monetary Education of John Hicks" (2017):

Says Hicks himself in an essay written for a 1982 collection of his monetary essays: “I have, to this day, a much higher opinion of ‘Simplifying’ than of any other of these early papers; I would still stand by what I said in it, so far as it goes.” What Hicks rejected was not what he himself said, but rather what others subsequently made of what he said. He continues: “So in the end I had to go back to ‘Simplifying’, and to insist that its message was a Declaration of Independence, not only from the ‘free market’ school from which I was expressly liberating myself, but also from what came to pass as Keynesian economics” (1982, 8-9).

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