John Richard Hicks: father of the “principle of remuneration”

Like the economists of his day, John Richard Hicks took the time to explore fairness and the consequences of decisions made in a system.

By Anthony Kila

There is an original hypothesis that was very clear and generally accepted from the 18th to the 20th century and 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, therefore, the early founding fathers of economic studies or political economy as it was then known 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 thinkers then and perhaps even now is the “how” and rarely the “what”.

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Reminding ourselves of this original hypothesis is a useful context for appreciating how shocking, divisive and frightening the idea that labour-saving technological progress was good for capitalists but bad for workers was. Karl Marx, another of our Unforgettables. The Marxist notion of the value and reward of work, broadly defined, is that the introduction of labour-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 reduce due to technology. The terrible negative correlation with general and industrial progress is easy to deduce,

Help came, however, 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 called 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 unlike As Marx taught, labor-saving technical progress 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 ranging from estimates of labor deployment- labor or capital in organizations, compared to the effect of recruiting native or foreign personnel. labor to be used as environmental economics methods to evaluate environmentally friendly production techniques against traditional ones.

As you may have guessed, John Richard Hicks was a mathematical economist, he was 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 which paid more attention to science than to classical studies, something quite remarkable for the England of 100 years ago, he then went at Oxford University where he began his studies in mathematics for which he obtained a scholarship although he showed 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.

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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.

READ ALSO: Robert Giffen: The mathematical economist

On the IS 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 fall in interest rates will lead to an increase in GDP thanks to the increase in investment and the fall 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 and the LM relationship are opposite forces because on one side lower interest rates lead to the expansion of the economy while on the other side the expansion of the economy causes interest rates to rise. 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. A liberal economist no doubt, John Richard Hicks did not, however, turn a blind eye to the fact that in a system some could lose while others could win because of political choices and innovations and he wanted to measure the effect of the choices and policies on all.

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 can get help from John Richard Hicks’ Principle of Compensation to make their choices.

Join me on twitter @anthonykila to continue these conversations.

  • Anthony Kila is center director at CIAPS Lagos. (www.ciaps.org)

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