8 Major Criticisms of Hick’s Theory of the Trade Cycle

The following points highlight the eight major criticisms of Hick’s theory of the trade cycle. Some of the criticisms are: 1. Founded on the Acceleration Principle in a Rigid Form 2. Assumption of a Constant Multiplier 3. Invalidity of the ‘No Excess-capacity’ Assumption 4. A Mechanical Explanation and Others.

Hick’s Theory of Trade Cycle Criticism # 1. Founded on the Acceleration Principle in a Rigid Form:

According to Kaldor, the major weakness of the theory is its use of the acceleration principle with a fixed value.

It also implies a constant capital-output ratio throughout the business cycle.

In practice, the induced investment depends as much upon the availability of finance, expectations of businessmen, the nature and composition of autonomous investment.

Experience shows that short-term investments become more attractive towards the ceiling and long-term investments during the slump. In the opinion of R.S. Eekaus, the statistical findings of Simon Kuznets and Jan Timbergen point to the extremely weak acceleration effects during cyclical fluctuations.

Hick’s Theory of Trade Cycle Criticism # 2. Assumption of a Constant Multiplier:

In assuming a fixed value of multiplier, Hicks assumed a stable consumption function. Many recent empirical studies have shown that the value of the MPC changes from one stage of the cycle to another. In Friedman’s view, there is no certain or predictable relationship between the transitory income and MPC. Therefore, the multiplier-accelerator interaction constituting the core of Hicks’ theory is not acceptable.

Hick’s Theory of Trade Cycle Criticism # 3. Invalidity of the ‘No Excess-capacity’ Assumption:

Professor Nicholas Kaldor considers the use of accelerator misleading in that it presupposes absence of excess capacity in capital-goods industries and permanent nature of demand for capital goods. In Kaldor’s view the evidence is on the contrary. Industries subject to cyclical fluctuations maintain excess capacity as a normal routine for they face variable demand.

Hick’s Theory of Trade Cycle Criticism # 4. A Mechanical Explanation:

Hicks fail to take note of the psychological factors of uncertainty and expectations. These play an important role in the dynamics of investment. As Duesenberry has put it, “The basic concept of multiplier-accelerator interaction is an important one but we cannot really expect to obtain observed cycles by a mechanical explanation of that concept.”

Hick’s Theory of Trade Cycle Criticism # 5. Resource Limitation cannot form a ‘Ceiling’:

Duesenberry has also attacked the concept of the ceiling to the expansion set by resources limitations. In his view, the experience of the 1953-54 recession in the U.S.A. casts doubt on the assumption. Only resource shortages cannot cause a very large and sudden crash in investment.

Hick’s Theory of Trade Cycle Criticism # 6. ‘Floor’ Expansion not Convincing:

Professor Harrod has doubted that autonomous investment is likely to be advancing in a slump. The possibility is more that the depression retards it. In his study of the American business cycles in the nineteenth century Readings Feels noted that the revivals were not due to the wearing out of excess capacity; the upturns did not wait for induced investment falling to zero. Rather in many cases expansion started in spite of the existence of excess capacity.

Hick’s Theory of Trade Cycle Criticism # 7. Invalid distinction between Autonomous and Induced Investment:

Some writers have questioned the validity of the distinction on empirical level. In the short period much of investment is autonomous which induced investment from the long-period viewpoint becomes. This seriously limits the possibility of confronting the theory with facts.

Hick’s Theory of Trade Cycle Criticism # 8. Artificiality of the Separation of Exogenous and Endogenous Factors:

According to Hicks, the ceiling is independent of the path the output follows in the course of a cycle. This is because the ceiling is made to depend on such exogenous factors as population growth and technological progress. But it depends also on the magnitude of available resources one of which is the capital stock.

Therefore, the ceiling is raised during the period of increasing capital stock. Since the rate at which income increases influences the rate at which the capital stock changes, the ceiling level of output would be determined also by the time path of income. It is thus improper to separate the long-run trend growth from what happens during a cycle.

While critics have highlighted the deficiencies of Hicks’ theory, they have also highly praised his work. For example, Kaldor has referred to the “many brilliant and original pieces of analysis” found in Hicks’s theory. Duesenberry has described it as an “ingenious picce of work” and “the first coherent theory of the cycle to appear in some years”.

Similarly, Shapiro praises Hicks’s work by saying that “despite the tremendous amount of work done on business cycles after Hicks gave his contribution, Hicks’s model remains, in a sense, the last word in business cycle theory.”