Introductory remarks

In the preface to the first edition of Value and Capital, Sir John Hicks acknowledges that he ‘profited from the constant reminder which [he] had from [Ursula's] work, that the place of economic theory is to be the servant of applied economics’ (Hicks, 1939a: v). There are several aspects of applied economics that benefited from the theoretical analysis that Hicks developed. One of the least noticed was the distinction between flex-price and fix-price markets, and their influence in the shaping of econometric models. We aim to focus on an even narrower question, which raised quite a lot of theoretical discussions in the 1930s and 1940s, but lay dormant in applied economics till the great inflation of the 1970s: the definition of income.

It was not the rate of inflation in that decade that brought the question to life; it was its persistence. The persistence of inflation, as Hicks on many occasions noticed, changed the ‘normal’ long-run rate of interest, making it diverge from the long-run real return to capital. Households started realizing that, had they consumed their total comprehensive income, they might have eaten up part of their wealth. Measuring the propensity to save and the true burden of the public debt became a problem in macroeconomic analysis. It was during those years that household disposable income started being calculated with the so-called ‘Hicksian correction.’