Professor Hicks' Revision of Demand Theory

Fritz Machlup’s review presents J. R. Hicks’s A Revision of Demand Theory as both a technical reconstruction and a methodological experiment: Hicks is not writing welfare economics, empirical demand analysis, or policy doctrine, but trying to rebuild the deductive core of consumer theory on weaker assumptions.

The “demand theory” which Hicks is revising in his new book¹ is that of the first three chapters of his Value and Capital,² published in 1939.

Machlup’s admiration is chiefly methodological. Hicks rejects cardinal utility and avoids treating observed choice as a simple revelation of strict preference. Instead, he begins from a preference hypothesis framed in ordinal terms and then asks how much of standard demand theory can be derived from weak ordering, transitivity, and the assumption that more money is preferred to less. For Machlup, this is not empirically dramatic but logically important: Hicks shows that familiar propositions need not depend on the older apparatus of measurable utility.

The methodological position underlying Hicks’ approach is eminently sound.

The review’s first major theme is the difference between strong and weak ordering. Strong ordering would let economists infer definite preference from every act of choice; weak ordering allows that rejected alternatives may have been merely indifferent, so choice alone cannot disclose all preference relations. Machlup emphasizes that Hicks’s theory therefore resists a crude revealed-preference interpretation while still preserving enough structure to derive the main propositions of demand analysis.

Weak ordering implies that rejected positions need not be inferior to a position actually chosen, but may have been indifferent; hence, actual choice fails to reveal definite preference.

Machlup then follows Hicks through the derivation of the law of demand. A fall in price is decomposed into substitution and income effects. The substitution effect must increase demand for the cheaper good when real income is held constant in the relevant sense; the income effect usually reinforces this, though inferior goods make exceptions possible. The Giffen case is thus treated not as a collapse of demand theory but as a narrow possibility requiring inferiority, a weak substitution effect, and a large share of expenditure.

Much of the review is devoted to clarifying Hicks’s many income variations: compensating and equivalent variations, Laspeyres and Paasche comparisons, and the several meanings of consumer’s surplus. Machlup reorganizes this material to show that the separation between income and substitution effects depends on the hypothetical compensation path chosen. He particularly stresses Hicks’s correction of an earlier confusion between compensating variation and consumer’s surplus: the latter belongs to a quantity-into-price analysis, asking what would be paid for a specified quantity, not merely how expenditure changes after a price movement.

In the more general theory, Machlup explains Hicks’s treatment of simultaneous price changes and the substitution theorem: when income is adjusted so that the consumer remains on the same indifference level, the total substitution effect cannot be negative. This leads to reciprocity conditions and to a more careful account of substitutes and complements. Machlup especially values Hicks’s distinction between price-based and quantity-based substitution, since relations among goods can be altered by the presence of third goods and by technical substitution within household activity.

The final judgment is balanced but severe. Machlup does not claim that Hicks’s revision will change forecasting, policy, or ordinary empirical explanation. Its achievement is theoretical economy: standard results are obtained from fewer and less restrictive assumptions. Yet this gain comes at the cost of forbidding exposition, proliferating terminology, and arguments that demand unusual logical patience.

An important book is sometimes enjoyable to read. Unfortunately this cannot be said about this book.