Need for Revision of Hick’s Logical Ordering Theory of Demand

Prof. Hicks brought out a book 1955 which he revised his demand theory which he presented in his earlier work Value and Capital.

Now, the question that arises at the very outset is what prompted Professor Hicks to undertake the revision of his earlier demand theory?

Among the chief reasons for undertaking the revision are the emergence of Samuelson’s “Revealed Preference Approach”, the rise of econometrics, the appearance of mathematical theories of strong and weak orderings, and the discovery of a more closely reasoned derivation of demand from a few simple propositions of logic.

Hicks was deeply influenced by the revealed preference hypothesis and the logic of strong ordering used by Samuelson and his followers (Arrow, Little and Houthaker) to derive theory of demand. It may, however, by pointed out that though Hicks’ revision of demand theory was greatly influenced by the works of Samuelson and his followers, he was nevertheless sceptical about the ‘revealed preference’ approach. He thus remarks, “All this I owe to Samuelson and the Samuelsonians, though I can hardly count myself of their member since I retain a considerable scepticism about the Revealed Preference Approach.

Prof. Hicks in his revision of demand theory emphasises econometric approach to the theory of demand. He holds that the demand theory which is useful for econometric purposes is definitely superior to the one which does not serve such purposes. “There can be no doubt that econometrics is now a major form of economic research; a theory which can be used by econometrists is to that extent a better theory than one which cannot Prof. Hicks says that the demand theory which he represented in his book Value and Capital contained only potential econometric reference.

The defect of demand theory in Value and Capital was that econometric reference was not made explicit. It was in Samuelson’s revealed preference theory, he says, that econometric reference was made explicit. But Hicks wants to make econometric reference of his new theory of demand more explicit than Samuelson’s theory. “In Samuelson, the whole form of the theory is allowed to be dictated by the reference to econometrics. Great and beautiful simplifications follow. But I am not convinced that even in Samuelson the econometric reference is quite explicit as it should be, so that the present work, deeply influenced by Samuelson as it is, will not follow him at all exactly. In technique we shall keep quite close to him, but our methodology will be more explicitly econometric even than his.”

It is important to note that Hicks in his ‘A Revision of Demand Theory’ once again rejects the concept of cardinal utility and the hypothesis of independent utilities. He continues to believe that utility is purely ordinal. Prof. Hicks holds that more elementary parts of the theory can be established almost as well by the cardinal method as by the ordinal method but in the more difficult branches of the theory cardinal utility becomes a nuisance.

Further, he holds that if one rejects the hypothesis of independent utilities and if one admits the possibility and usefulness of breaking up the effect of a price change into those of substitution effect and income effect one has in effect eliminated the cardinalism from the argument. He, therefore, continues to make use of the concept of ordinal utility in his Revision of Demand Theory as well.

But it is important to remember that Hicks who popularised the use of indifference curves in demand theory has given them up in his Revision of Demand Theory.

He discusses even his conceptof consumer’s surplus without the help of indifference curves. He now points out the various disadvantages of the indifference curves technique. First, he points out that this geometrical method of indifference curves is fully effective and useful for representing only quite simple cases, especially, those in which the choice concerns two commodities.

When the analysis is extended to three commodities, complicated three-dimensional diagrams are to be drawn and if analysis is extended to more than three commodities, then recourse has to be made to elaborate mathematics which often conceals the economic point of what is being done.

The second disadvantage of the geometrical method of indifference curves, according to Hicks, is that “it forces us at the start to make assumptions of continuity, a property which the geometrical field does have but which economics in general does not.” He therefore gives up the assumption of continuity in his revision of demand theory.

However, Hicks thinks that neither of these disadvantages provides sufficient reason to abandon the indifference curves method which has its own advantages and which has been widely used by economists. Now, what prompted Hicks to adopt a new method is that it is more effective in clarifying the nature of preference hypothesis.

“The consideration which decides me in favour of the new method, at least as an essential complement to the old, if not as a substitute, is its greater effectiveness in clarifying the nature of the preference hypothesis itself”.We shall now explain below howHicks develops his new method of preference hypothesis and bases his new demand theory on it.

Any factual or empirical data regarding the demand for a good is determined by non- economic factors (such as population changes, age distribution of population, social habits etc.) as well as by economic factors (such as current prices and incomes). The task of the econometrists is to estimate the effects on the empirical data of demand which are due to the changes in current prices and incomes.

But to make such estimates, the econometrist needs a technique for separating out the effects due to current prices and incomes from those due to the non-economic factors. But “such a technique cannot be provided without a theory. The econometric purpose of the theory of demand is to give assistance in making this separation.”

The theory of demand which is useful for econometric purposes is, therefore, one which will tell us something about the ways in which consumers will likely to react if variations in current prices and incomes were the only causes of changes in consumption. Such a demand theory starts by assuming an ideal consumer who by definition is influenced by the current prices and incomes alone and then proceed to show how such a consumer is expected to behave.