‘Alas Poor Hicks’, Indeed! Sixty Years of Use and Abuse—Commentary on Bromwich et al.

Alas indeed! We might well wonder whether Professor Ray Chambers (1976) would have had the same reservations about using ‘Alas poor Hicks’ to describe what he perceived to be the ‘carelessness and indifference . . . [of] . . . so many . . . who clutched [so] indiscriminately at [Hicks' notion of income]’ had he experienced the matters which Bromwich et al. (2010) explain in their ‘Hicksian Income . . .’ in this issue. In a recently discovered 1976 letter to Sir John Hicks (reproduced as an appendix to this comment—and to which there is no evidence in the Chambers Archive of any reply by Hicks) Ray Chambers commented on accountants' cavalier treatment of Hicks on Income, treatment similar to that by the IASB and FASB of which Bromwich et al. now rightly complain.

Chambers asks Hicks whether his own system of Continuously Contemporary Accounting was what Hicks had in mind with his No. 3 ex post interpretation of his central meaning of income (as outlined in Hicks, 1946). We should bear in mind that Chambers wrote against the background of the Sandilands Committee (1975) selectively using ex ante approximations of Hicks' central meaning to support their adoption of deprival value to underpin their recommendations on how to ‘account for inflation’, and most importantly Sandilands' expropriation of the initialism ‘CCA’ (which Chambers previously had used publicly for several years to describe his Continuously Contemporary Accounting) for their preferred method.

Unaware of that letter, but fully aware of the 1970s setting in which it was written, in Clarke (1988) I made observations regarding the treatment of Hicks by accountants in the thirty years from 1950 to 1980, similar to those of which Chambers complained then and of which Bromwich et al. now complain. These complaints were directed toward unmasking those who did not appear to have read the original. Many appear to have relied on secondary sources to Hicks as a strong, though spurious, ‘authoritative’ support for various asset valuation bases. Appealing to the authority of Hicks' status as a leading economist seems to have been underpinning cases for replacement cost and deprival value asset valuations being promoted strongly at the time by Sandilands and others. The objection lay primarily in what appeared at the time to be resting upon poor research—mainly secondary sources and in many instances selectivity and misquotation. Now, nearly thirty years later, Bromwich et al. find and aptly dismantle the argument of those who, using the same tactics complained of three decades back, are trying to fit Hicks into their preferred valuation method as part of the IASB and FASB Conceptual Framework exercise. Interestingly now, deprival value hardly rates a mention as the preferred measurement base under the ‘fair value’ regime (IASB, 28 May 2009). Bromwich et al. douse with considerable cold water any proposition that Hicks offers support for the IASB/FASB CF preference.

Bromwich et al. complain of the IASB/FASB cherry-picking, being selective, the product of misunderstanding and misapplying those parts of Hicks' exposition that best suit the standard setter. They mount a solid case. And neither the IASB nor the FASB is alone in its cherry-picking. Previous recourse to the ‘Hicksian income’ notion exhibited equal selectivity, misquoting, clumsiness and inaccuracy. Importantly, some (see Clarke, 1988, especially Table 1) referred to only (or predominantly) Hicks' central meaning—that income ought to be thought of as the amount an individual can consume and expect to be as well off at the end of a week as he was at its beginning. Others appealed to his ex ante approximations, some to his ex post approximations and a few vaguely to the entire exposition, namely to ‘Hicks (1946, pp. 171–8)’.

Why Hicks' definition of income should have received such acclamation or have been addressed in such a clumsy way in the past is problematic; why it continues to attract such treatment perhaps less so. Hicks had some association with accountants' ruminations—between 1945 and 1951, for example, he sat on the Joint Exploratory Committee sponsored by the Institute of Chartered Accountants in England and Wales and the National Institute of Economic and Social Research. There, we might imagine that he possibly discussed accountants' income with F. Sewell Bray (1949)—though Bray's own later references were only to Hicks' central meaning. But it seems that Hicks knew little of what accountants were about—Brief (1982) drew attention to how little attention Hicks paid to accounting—and that his central meaning had ‘breadth but little depth’. Selectivity, poor analysis, and the disservice it did to him as a modern Austrian School member were salient features of the appeal to Hicks thirty years ago.

Alexander's 1950 Five Monographs on Business Income emerges as the most likely entry of Hicks' income into the mainstream English-language accounting literature. That appears to have provided an initial impetus for selective discussion and reference to Value and Capital. There, Alexander (p. 15) seeded the idea that corporate income may be defined as the increment in its well-offness during an accounting period—‘the amount a corporation can distribute . . . and be as well-off at the end of a year as at the beginning’ (emphasis added).

Table 1 illustrates the higgledy-piggledy references in the accounting literature to Hicks' income over the next thirty years. Notable is the difference there between the function served by that thirty-odd years' fixation by accounting writers on Hicks' exposition and that which Hicks attributed to it in his Value and Capital. For Hicks his thoughts were merely procedural, a step toward gaining a better understanding of the rough approximations that a businessman might use in steering himself through the bewildering situation that may confront him (p. 172). It is to be noted they are rough approximations to a central meaning, not logical categories. Arguably for Hicks these were immature, tentative, experimental notions. He unmistakably floated his central meaning, but it lacked operational finesse. From a pedagogical perspective it was bankrupt. The individual could consume what? How were expectations of an individual in relation to future consumption to be operationalized? And what was the well-offness to which Hicks referred?

Why Hicks should have attracted so much specialized attention is puzzling. Prior to Hicks there is an extensive discussion of income in, or translated into, English.² Perhaps it has something to do with those economists favouring what might loosely be regarded to be a concept closer to supporting the idea of income being an overall increase in general purchasing power contradicting the push for replacement price or reproduction cost that found favour in many of those up to 1980 pushing Hicks' ex ante approximations, including Sandilands.

In doing so the selectivity and misquoting in the latest Conceptual Framework exercise that Bromwich et al. properly complain of was rife at the time. The integrity of the sources was a methodological issue then of mammoth proportions. Appeals to Hicks almost universally underpinned cases for current cost accounting entailing the valuation of physical assets at replacement price or reproduction cost. Possibly the present liking for fair value provides the current motivation.

Strong evidence of secondary referencing ought to be noted too, if only to add predictive force to the likelihood of the referencing pattern having been a contributing factor in the development of Anglo-American ideas on accounting income.

Instances of imprecision and misinterpretation in accountants' referencing of Hicks were common. Imprecision in the widely used texts was likely to have far-reaching pedagogic consequences. In Australia at the time, for instance, Henderson and Peirson (1975) was a case in point. In the US, there was Hendriksen's persistent misquotation of Hicks in successive editions of his Accounting Theory. In the 1961 Price Level book and in the 1965 first edition of Accounting Theory (p. 103), Hendriksen ‘quoted’ Hicks as having stated: ‘income is the amount that a person can consume . . . and be as well off at the end’ (emphasis added).

In consequence of the reference being to ‘J. R. Hicks, Value and Capital . . . p. 172’, doubtless Hendriksen was referring there to Hicks' central meaning. At no point, however, in either his central meaning or in any of the approximations to it, did Hicks state ‘and be as well off’ . . . it was ‘and still expect to be as well off’ in each. Hendriksen's version certainly contradicted Hicks' stated proposition at that point. Hicks was unequivocal regarding his ‘and still expect to be’ in all seven versions of income in Value and Capital. Hendriksen repeated the misquotation in his following editions of Accounting Theory (1970, p. 131; 1977, p. 146; 1982, p. 143). Although the educational consequences of successive generations of accounting students being misled in that fashion cannot be evaluated quantitatively, it might reasonably be considered very likely to be far reaching. It is not difficult to contemplate the implications. Gynther (1966, p. 69), for example, declared ‘Hendriksen (1961)’ the declared source of his reference to Hicks in his own frequently made case for replacement price accounting. It is unlikely that there would be much argument that Accounting Theory was a widely used text in English-speaking countries then, and later.

Secondary sourcing by some of those listed in Table 1 reinforces that pattern: for example, the references to Alexander's 1950 recourse to Hicks by Solomons (1961), Edwards and Bell (1961), Backer and Bell (1966), Shwayder (1967) and Revsine (1973). Shwayder (1967) and Barton (1974) had referred to Solomons' 1961 discussion of income; Stamp (1971) referred to Wright (1970) who had referred to Solomons, to Shwayder (1967) and to Alexander (1950). In turn, the Sandilands Committee drew upon Stamp (1971) for support and both the Richardson Report (1976) and the Ontario Report (1977) referred to the Sandilands Committee's 1975 deliberations on the matter. Shwayder (1967, p. 23) referring to the ‘Hicks . . . p. 172’ noted that Goldberg (1965) had reported Hicks' (1946, p. 176) doubt about whether his concept of income was a ‘will-o'-the-wisp’. But Goldberg had referred to No. 2 ex ante in that context, not the central meaning. In further contrast, Hicks had those doubts regarding each of his ex ante notions. His doubt was the motivation for devising the ex post definitions. Revsine's observation (1981, p. 348) caps the secondary referencing with his implication that following Edwards and Bell (1961), virtually everyone referred to them. Backer and Bell (1966) drawing upon Value and Capital was another instance. Through the use of quotation marks, they implied that Hicks had declared (supposedly at p. 180) that the concept of income was unsuitable for ‘advanced theoretical analysis’. The words, in fact, originated in Alexander's paraphrasing of Hicks' explanation that the ex ante approximations were of little use in allaying the ‘peril’ to which ‘positive theoretical economists’ were exposed when using notions and calculations of individuals' incomes. The words were Alexander's, not Hicks'.

Of course, a substantial web of referencing is to be expected in the academic and practitioner attempts to account for price and price-level changes in a literature as voluminous as that dealing with the varied notions of income. But, bearing in mind the importance at the time of the authority drawn from Hicks being such an important feature of the case for CCA, it is significant that early instances of clear misinterpretation and omission went unchecked at the time. Significantly, now they are being unashamedly repeated.

Perhaps, a defensible inference is that the readily available Value and Capital was not directly referred to as much as it ought to have been because of the academic status of many of those in the referencing loop. But, the repetitive, unqualified, selective references to Value and Capital evoke a strong inference that virtually no recourse has been had to Hicks' complementary works. Bromwich et al. are clearly of this mind regarding the current offenders.

There also was a tendency for authors to quote the central meaning (or to imply it by making a sole reference to ‘Value and Capital, p. 172’) and then reword it, supposedly so as to apply to a corporation rather than an individual. That Alexander (1950) appears to have been one of the first was noted above. Curiously, Alexander had not referred to Hicks by name up to that point, but had just previously noted that ‘an individual's income’ might be thought of in terms similar to Hicks' ex ante notions (pp. 13–15). His only reference to Hicks came on page 74. That discussion suggests that his modification to slot into a ‘corporate context’ ought to have had ‘expect to be’ inserted immediately before ‘as well off’, in a manner similar to Hicks' ex ante No. 2 approximation. In the wash-up, Alexander's words or their import were used by others subsequently to give Hicks' central meaning its corporate persona.

A similar flow-on consequence is applicable to Alexander's extrapolation of Hicks' central meaning to a ‘corporate’ setting. Arguably, its spread was wide: by Johnson (1954) in the United States, for example; by Stamp (1971) in the United Kingdom; the Sandilands Committee Report (Inflation Accounting, 1975, para. 98); in the Corporate Report (of which Stamp was one of the authors) (1976), and Scapens (1977); in Australia by the Mathews Committee enquiring into Inflation and Taxation (Report of the Committee of Enquiry Into Inflation and Taxation, 1975, p. 398); ‘from’ Australia, by Barton in The Accounting Review (1974); in the Report of the Committee of Enquiry Into Inflation Accounting (1976) chaired by Justice Richardson, in New Zealand; and in Canada by the Ontario Committee of Inflation Accounting (1977). In each ‘expect to be as well off’ (or similar words) have been substituted for Alexander's ‘be as well off’.

The Richardson Committee (1976) was representative of the prevailing view: ‘We are satisfied that this concept is the only valid general approach to the problem of the definition of profit’ (paras 4.02–4.04). Only Stamp (1971) within that group explained ‘how’ Hicks' central meaning could be translated into the ‘distribute . . . and expect to be as well-off’ format. A connection between the translated ‘distribute’ and the central meaning's notion of ‘consume’ was not apparent. No specific ex ante approximations were referred to for support. Yet by the inclusion of ‘spend . . . and expect to be able to spend’ No. 2 ex ante would appear to have been closer to the idea of a ‘corporate distribution’ than the central notion per se. By specifying ‘expect to be able to pay the same dividends in each ensuing year’, explaining that such ‘is equivalent to Income No. 2 in Hicks’, Barton (1974) appeared to have followed that reasoning.

Earlier, others had referred to Hicks' ex ante notions, but not to his ex post definitions. A general reference by Edwards and Bell (1961) only to ‘Hicks pp. 171–188’ by implication implied that they had rejected, missed or ignored his ex post approximations. They were pursuing support for the possibility of measuring income through a comparison of ‘subjective values’ at the beginning and end of each period, based upon what ‘managers expect to earn on the firm's existing net assets’ (p. 25). Yet ‘pp. 171–188’ of Value and Capital comprises the entire Chapter XIV on ‘Income’; from the foot of page 178 to 181 Hicks' exposition deals almost exclusively with extensions of his central meaning to his ex post approximations.

Revsine (1973) had also referred to the entirety of Hicks' Chapter XIV for illustration and support of notions of ‘expected income’ and ‘unexpected income’ (p. 96). ‘Unexpected income’ is possibly similar to the ‘windfall’ gains and losses Hicks tried to have his ex post definitions capture. If, as he later (pp. 101–4) implied, at that point by ‘economic income’ Revsine is referring to ‘replacement price income’, arguably his reference might more correctly have been only to Hicks' ex ante approximations. Revsine's explanation that the ‘unexpected income component of economic income . . . develops as a result of changes in expectations’ (pp. 96–7) was a purely ex ante notion. Hicks' ‘windfalls’ by contrast were the differences between what was ‘expected’ and what was ‘realized’ (p. 178).

Alas, Indeed!

We are unaware whether Hicks replied to Chambers' 1976 query, which primarily centred on a possible verification that he understood Hicks' intentions correctly. There is no response letter in the Chambers Archive. Chambers' contention was that it was Hicks' ex post Income No. 3 that was needed to operationalize accounting in a corporate setting. However, we should note that Chambers was not suggesting Hicks favoured the former's CoCoA mode of accounting so much as that CoCoA aligned with Hicks' depiction of the No. 3 ex post approximation to his central meaning of income. We might imagine that had a confirmation been forthcoming from Hicks, Chambers would have remained confident to argue that accounting should conform to CoCoA, irrespective of whether Hicks appeared confident that any of his income depictions were suitable for decision making—the point that Bromwich et al. pursue. We know from Hicks (1979) that he had not anticipated that accountants would strive, some diligently, but so many carelessly, so cavalier-like, and continue to do so as now Bromwich et al. so aptly show.

And whereas knowing what Hicks might have replied to Chambers would be fascinating, perhaps we might content ourselves with what we can safely salvage from ‘Hicksian income’. Bromwich et al. note (p. 355), ‘Hicks does not find a satisfactory, practical way of defining a business firm's income that could be used in accounting, whether ex ante or ex post’.

Unquestionably Hicks' central meaning of income struck a chord with Alexander sixty years ago. Perhaps that broad central meaning of income and particularly the capital maintenance idea which accountants grasped thereafter is what we should be contented to take from Hicks.

Unquestionably, the use and abuse of his contribution to economic theory in the manner accountants have employed over (at least) the past sixty years should stop.