By John R. Hicks, Oil Subsidy and the “Compensation Principle” – Businessamlive


There is an original hypothesis which was very clear and generally accepted from the 18th to the 20th century, but which is almost completely lost today. The assumption was that economics as a discipline was designed and dedicated to finding the means for a more prosperous and just society. Regardless of their different conclusions or prescriptions, the early founding fathers of economic studies, or political economy as it was then called, were all concerned with those moral and welfare issues that will affect everyone. Sure, there were more than slight nuances in depth, viewpoints, and impact, but overall each of them wanted a better society for most if not all; the real difference that really separated the thinkers of then and perhaps even of today is the “how”, rarely the “what”.

Reminding ourselves of this original hypothesis is a useful context for appreciating the shocking, divisive and frightening impact of the idea that labour-saving technological progress was good for capitalists but bad for workers, as Karl Marx muted. , another of our Unforgettables. The Marxist notion of the value and reward of work, broadly defined, is that the introduction of labor saving techniques into production will also reduce the input, importance and reward of work. It has been argued that the amount of national income due to labor will decrease due to technology. The terrible negative correlation with general and industrial progress is easy to deduce.

Rescue, however, came from the discovery of the theory of elasticity of substitution which measures what happens in a system when switching between factors of production. The savior was a man named John Richard Hicks. As many students will attest, his salvation and his message did not come in easy and loving terms, they came in very complex but effective mathematical formulas with which he showed us that contrary to what Marx taught, technical progress able to save labor does not automatically lead to a reduction in labor’s share of national income.

His theory of direct elasticity of substitution, also known as Hick’s elasticity, went beyond Marx and Marxists to find applications in a wide range of scenarios, from assessments of labor deployment- labor or capital in organizations, to the comparison of the effect of recruiting indigenous workers or foreign labor to be used as methods of environmental economics to assess environmentally friendly production techniques by compared to traditional techniques.

As you may have guessed, John Richard Hicks was a mathematical economist, born in Warwick in 1904 and died in Blockley in 1989. His father, Edward Hicks was a local journalist and his mother was Dorothy. John Richard Hicks had his secondary education at Clifton College, a school that paid more attention to science than to classical studies, which is quite remarkable for England 100 years ago. He then went to Oxford University where he began his studies in mathematics for which he obtained a scholarship, although he showed an interest in history and literature. He finished his studies being one of the first graduates of Philosophy, Politics and Economics. He would later remark that he obtained “no adequate qualification in any of the subjects” he studied.

Another important contribution that makes John Richard Hicks unforgettable to many is his well-known IS-LM macroeconomic model with which he graphically presented the economic ideas articulated by John Maynard Keynes in his 1936, “The General Theory of Employment, Interest and Money”. . The model gives us a pictorial dynamic of the intersection of goods and the money market. By placing investment and savings on one side and liquidity and money on the other in relation to interest rates on government bonds, the IS-LM model teaches us how we can maintain the equilibrium of the economy via an equilibrium of the money supply with respect to interest rates. A simple key to reading the IS-LM is to note that the IS curve represents the good markets while the LM curve represents the money market.

On the CIT side, individuals and businesses tend to invest more in durable and capital goods when interest rates fall and consumers tend to save less and spend more money on consumer goods; the consequence is that a drop in interest rates will lead to an increase in GDP thanks to the increase in investment and the drop in family savings that goes with it.

On the LM side, we are shown that as the economy grows, banks and other financial operators will need funds to support additional investments and to obtain such funds, they will have to convince more consumers to put their money in longer-term instruments such as bonds or certificates of deposit.

Yes, you are right, the IS relationship and the LM relationship are opposing forces because, on the one hand, lower interest rates cause the economy to expand; while on the other side, the expansion of the economy leads to higher interest rates. These contradictory movements meet at a point that allows John Richard Hicks to show us graphically where and when the economy is in equilibrium. The model remains one of the favored tools of many economists to assess the fluctuations of an economic system and to evaluate macroeconomic policies.

Although not emphasized in general education, it is worth mentioning here that it was John Richard Hicks who used mathematics to show us how consumer preferences, price changes and income changes all interact to influence and determine the demand for goods and services as we are. taught in microeconomics as the fundamental elements that form the theory of prices. This model is often called the Hicksian price and utility models.

Like the economists of his day, John Richard Hicks took the time to explore fairness and the consequences of decisions made in a system. An arguably free-market economist, John Richard Hicks, however, did not condone the fact that in a system some may lose while others may gain as a result of policy choices and innovations; and he wanted to measure the effect of choices and policies on everyone.

He showed us with his compensation principle, called the Hicks compensation principle, that a decision can be judged good if the direct beneficiaries can create benefits for those who will directly lose because of such policies. To that extent, keeping domestic markets open to the influx of cheaper goods can be seen as a good thing if domestic producers of more expensive and therefore uncompetitive goods can be helped to switch to producing other competitive goods.

Readers in countries debating the propriety, consequences, and method of handling the removal of oil subsidies and other policies may find the Hicks Compensation Principle helpful in making their choices.

Join me if you can @anthonykila to continue these conversations.

Anthony Kila is Jean Monnet Professor of Strategy and Development. He is currently center director at CIAPS; the Center for International Advanced and Professional Studies, Lagos, Nigeria. He is a regular BBC commentator and works with various organizations on international development projects across Europe, Africa and the United States. He tweets @anthonykila, and can be reached at [email protected]
I’m on business. is committed to posting a diversity of views, opinions and commentary. He therefore welcomes your reaction to this article and to any of our articles by e-mail: [email protected]

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