Kaldor hicks. The Hicks' Theory of Business Cycles (Explained With Diagrams) 2022-10-10
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Kaldor-Hicks efficiency, also known as compensation principle, is a concept in welfare economics that is used to evaluate the potential gain or loss of a policy or project. It was developed by economist Nicholas Kaldor and John Hicks in the 1930s and has since become an important tool in cost-benefit analysis and policy making.
The Kaldor-Hicks criterion states that a policy or project is efficient if the total net gain to the winners could be used to compensate the losers and still leave some surplus. In other words, if the net benefit to the winners is greater than the net cost to the losers, then the policy or project can be considered efficient.
One way to understand the Kaldor-Hicks criterion is through the example of a market transaction. Suppose person A sells a good to person B for a certain price. If the price that person B is willing to pay is greater than the cost to person A to produce the good, then the transaction is considered efficient according to the Kaldor-Hicks criterion. This is because person B is willing to pay more for the good than it cost person A to produce it, meaning that there is a net gain to person B that could potentially be used to compensate person A for the cost of production.
However, it is important to note that Kaldor-Hicks efficiency is not the same as Pareto efficiency, which states that a policy or project is efficient if it is not possible to make any party better off without making another party worse off. Kaldor-Hicks efficiency only requires that the net gain to the winners is greater than the net cost to the losers, and does not consider the distribution of the costs and benefits among the parties involved.
Despite this limitation, the Kaldor-Hicks criterion is widely used in policy making and cost-benefit analysis because it allows for the comparison of potential gains and losses across different policies or projects. It is a useful tool for policymakers to consider when deciding whether to pursue a particular policy or project, as it provides a way to evaluate the potential net gain or loss to society as a whole.
In conclusion, Kaldor-Hicks efficiency is a concept in welfare economics that evaluates the potential net gain or loss of a policy or project. It is an important tool in cost-benefit analysis and policy making, and is used to determine whether the net gain to the winners is sufficient to compensate the losers for the net cost. While it is not the same as Pareto efficiency, it is widely used in policy making and can provide valuable insights into the potential costs and benefits of a given policy or project.
Modern Welfare Criteria
In his trade cycle theory Kaldor provides for investment being directly related to the level of income and inversely related to the stock of capital. In this case, point C is a clear improvement over point B. Therefore, for steady state growth: In the long-run, for steady-state, it must be that the rate of accumulation must be equal for both capitalists and workers, i. Summary The article covered the topic of Modern Welfare Criteria. The core focus of the capability approach is on what the individuals can do, which is their capability. And that it will be labeled as a change even if it makes the poor the poorer.
Criticism of the Compensation Principle It is said that the model is not free from the value judgments since the compensation is merely hypothetical. Any movement on UPC from inside the UPC is a Kaldor movement. In this figure, AA line represents autonomous investment. In form, it is also a compensation criterion, but in spirit, it differs markedly from the earlier Kaldor-type criteria. Hicks assumes that the full employment ceiling grows at the same rate as autonomous investment. FF is the full employment ceiling.
This rate of growth as before induces investment and both the multiplier and accelerator come into operation and the economy will move towards Q 3 and the full employment ceiling CC. And at the same time, the losers are not able to bribe off the winners to accept the change. Whereas the upswing was limited by the output ceiling set by the full employment of available resources, in the downswing the national income cannot fall below the level of output represented by the floor. Por exemplo, não ser uma melhoria em relação a C. It examines the conditions for economic efficiency in the production of output, exchange of commodities, and equity in distribution. Hicks calls this the floor line as this sets the lower limits below which income output cannot fall because of a given rate of growth of autonomous investment and the given size of the multiplier.
The Hicks' Theory of Business Cycles (Explained With Diagrams)
Instead, his claim was that these quantities tend to be constant when averaging the data over long periods of time. As melhorias segundo Pareto exigem que todas as partes envolvidas fiquem melhor ou pelo menos nenhuma fique pior. ADVERTISEMENTS: When during downswing such conditions arise, accelÂerator becomes inoperative. Economic Analysis of Law Seventh ed. The Economic Journal, Vol. Hicks assume that autonomous investment, depending as it is on technological progress, innovations and population growth, grows at a constant rate.
A look at the above investment function used by Kaldor will reveal that investment is directly related to the income and inversely related to the stock of capital. Autonomous investment is that investment which is not induced by changes in income and is made by entrepreneur as a result of techÂnological progress or innovations or population growth. Thus with the sharp decline in induced investment when national income and hence consumption ceases to increase rapidly, the contraction in the level of the income and business actually must begin. On the one hand, he introduces output ceiling when all the given resources are fully emÂployed and prevent income and output to go beyond it, and, on the other hand, he visualises a floor or the lower limit below which income and output cannot go because some autonomous investment is always taking place. With further assumptions of stable multiplier and accelerator, equilibrium income will grow at the same rate as autonomous investment.
Compensation Principle of Kaldor, Hicks and Scitovsky
He pointed out that in any policy proposal there are two parties, one gainers and the other loses. We talked about what modern welfare means to different economists and how they have defined it through their theorems and diagrammatic representations. It is necessary that workers be paid a rate of interest on their capital just in the same manner as capitalists receive a rate of profit on theirs. It further looks upon the optimal allocation of inputs among the commodities and of the commodities among the consumers in the market. Kaldor—Hicks does not require compensation actually be paid, merely that the possibility for compensation exists, and thus need not leave each at least as well off.
It is implied that although social welfare depends on the level of distribution and the level of production, it is possible to study only the changes in the level of production. We can see in the figure that, G is a Kaldor improvement over Q. Movement from P 0 to P 1 represents the upswing or expansion phase of the business cycle. Generalized Lorenz dominance A generalized Lorenz dominance is when one generalized curve GL1 lies above another GL2 and it does not lie below another GL1. Another source of difficulty in the literature on the Kaldor-Pasinetti model is the tremendous confusion between interest and profit. The rise in autonomous investment due to external shock causes national income to increase at a greater rate than that shown by the slope of EE. The second objective of the paper is to show that the treatment just outlined makes a tremendous difference as to the influence of the interest rate on the distribution of income and in particular on the profit rate.
If the rigid form of acceleration principle is not valid, then the interaction of the multiplier and accelerator which is the crucial concept of the Hicksian theory of trade cycles is not valid. However, the Kaldor movement does not require B to compensate A. However, it is possible to move C to A by a mere redistribution of income. But induced investment has not yet been taken into account. This article includes a list of general it lacks sufficient corresponding Please help to April 2012 A Kaldor—Hicks improvement, named for A situation is said to be Kaldor—Hicks efficient, or equivalently is said to satisfy the Kaldor—Hicks criterion, if no potential Kaldor—Hicks improvement from that situation exists. Based on these value judgements, the criterion can be stated in this way: An economic change constitutes social improvement a if the resulting redistribution is no worse than the old and b if it is impossible to make the community as well off in the initial position as it would be after the change.
It is assumed that inter-personal comparisons of welfare are inadmissible. Kaldor, Hicks and Scitovsky have given their tests for judging an increasing in welfare. Now if a change is proposed from Q to T, it means that the utility of B will increase and that of A will decrease. In case values of these parameters lie in the region C, they produce cyclical movements i. Under Kaldor—Hicks efficiency, an improvement can in fact leave some people worse off.
