4. RICARDO AND THE RICARDIAN SYSTEM 1. MACRO INCOME DISTRIBUTION
While much of the Ricardian system turns out to be the creation of James Mill, perhaps
most of it was due to Ricardo himself, who, of course, must, in any case, bear major responsibility
for his own work. To continue the Marxian metaphor, in many ways the Mill-Ricardo relationship
might be more of a Marx-Engels than a Lenin-Marx connection.
Ricardo was born in London into a prosperous family of Spanish-Portuguese Jews who had
settled in Holland after having been expelled from Spain at the end of the 15th century.
Ricardo's father had moved to London, where he prospered as a stockbroker and had 17 children,
of whom David was the third.
At the age of 11, David was sent by his father to Amsterdam to attend orthodox Hebrew school
for two years.
At the age of 14, with only an elementary education, Ricardo began his business career,
employed by his father's stockbroker house.
It must be emphasized that with the exception of the quasi-governmental bank of England,
there were no corporations or corporate stocks in that era.
Government bonds were then called stocks, and so stockbrokers were what would now be
called government bond dealers.
Seven years later, however, David married a Quaker girl and left the Jewish faith, whereupon
he was disowned by his parents.
Eventually, he became a confirmed Quaker.
A London bank, already impressed with young Ricardo, lent him enough money to set himself
In 1799, at the age of 27, Ricardo, bored while wiling away time at a health resort, chanced upon a copy of The Wealth of Nations, and devoured it, becoming, like so many others of that era, a dedicated Smithian.
As Schumpeter points out, Ricardo's principles can only be understood as a dialogue with
and reaction to the wealth of nations. Ricardo's logical bent was offended at the basic confusion
of mind, the chaos that J.B. Say also saw in the Smithian canon, and he, like Say before
set out to clarify the Smithian system.
Unfortunately, and in deep contrast to Say,
Ricardo simplified by taking all the most egregious errors in Smith,
throwing out all qualifications and contradictions,
then building his system upon what was left.
The worst of Smith was magnified and intensified.
In his basic method, all of Smith's historical and empirical points were tossed out.
This was not bad in itself, but it left a deductive system built on deep fallacy and incorrect macro models.
In addition, while Ricardo's theoretical system might have been brutally oversimplified in relation to Smith,
his writing style was inordinately crabbed and obtuse.
The methodology of verbal mathematics is almost bound to be difficult and obscurantist, with blocks of words spelling out equilibrium mathematical relations in a highly cumbersome manner.
But on top of that, Ricardo, in contrast to his mentor, Mill, was undoubtedly one of the worst and most turgid literary stylists in the history of economic thought.
In contrast to Adam Smith, for whom the output or wealth of nations was of supreme importance,
Ricardo neglected total output to place overriding emphasis on the alleged distribution of a given product into macro classes,
specifically into the three macro classes of landlords, laborers and capitalists.
Thus, in a letter to Malthus, who, on this question at least, was an orthodox Smithian,
Ricardo made the distinction clear.
Political economy, you think, is an inquiry into the nature and causes of wealth.
I think it should rather be called an inquiry into the laws which determine the division
of the produce of industry amongst the classes who concur in its formation.
Since entrepreneurship could not exist in Ricardo's world of long-run equilibrium, he was left
with the classical triad of factors. His analysis was strictly holistic in terms of allegedly
homogeneous but actually varied and diverse classes. Ricardo avoided any say-type emphasis
on the individual, whether he be the consumer, worker, producer or businessman.
In Ricardo's world of verbal mathematics there were, as Schumpeter has astutely pointed out,
four variables.
Total output or income, and shares of income to landlords, capitalists and workers.
That is, rent, profits, long run interest and wages.
Ricardo was stuck with a hopeless problem.
He had four variables, but only one equation with which to solve them.
Total output or income equals rent plus profits plus wages.
To solve, or rather pretend to solve, this equation, Ricardo had to determine one or
more of these entities from outside his equation, and in such a way as to leave others as residuals.
He began by neglecting total output, that is, by assuming it to be a given, thereby
by determining output by freezing it on his own arbitrary assumptions. This procedure
enabled him to get rid of one variable to his own satisfaction.
Next, on to wages. Here, Ricardo took from Mill the hardcore or ultra-Malthusian view
that wages, all wages, are always and everywhere pressing on the food supply to such an extent
that they are always set and determined precisely at the level of the cost of subsistence.
Labor is assumed to be homogeneous and of equal quality so that all wages can be assumed
to be at subsistence cost.
While briefly and dimly acknowledging that labor can have different qualities or grades,
Ricardo, like Marx after him, drastically assumed away the problem by blithely postulating
that they can all be incorporated into a weighted quantity of labor hours.
As a result, Ricardo could maintain that wage rates were uniform throughout the economy.
In the meanwhile, as we have seen, food, or subsistence generally, was assumed to be incorporated
into one commodity, corn, so that the price of corn can serve as a surrogate for subsistence
cost in general.
Given these heroic and fallacious assumptions, then, the wage rate is determined instantly
and totally by the price of corn, since the wage rate can neither rise above the subsistence
level as determined by the price of corn, nor sink below it.
The price of corn in its turn is determined according to Ricardo's famous theory of rent.
Rent served as the linchpin of the Ricardian system.
For according to Ricardo's rather bizarre theory, only land differed in quality.
Labor, as we have seen, was assumed to be uniform, and therefore wage rates are uniform.
And as we shall see, profits are also assumed to be uniform because of the crucial postulate
of the economy's always-being and long-run equilibrium.
Land is the only factor which miraculously is allowed to differ in quality.
Next, Ricardo assumes away any discovery of new lands or improvements in agricultural
productivity.
This theory of history therefore concludes that people always begin by cultivating the
most fertile lands.
And as population increases, the Malthusian pressure on the food supply forces the producers
to use ever more inferior lands.
In short, as population and food production rise, the cost of growing corn must inexorably
rise over time.
Rent, in Ricardo's phrase, is payment for the use of the original and indestructible powers of the soil.
This hints at a productivity theory, and, indeed, Ricardo did see that more fertile and productive lands earned a higher rent.
But, unfortunately, as Schumpeter put it, Ricardo then embarks upon his detour.
Remember, in the first place, Ricardo made the assumption that at any moment the poorest
land in cultivation yields a zero rent.
He concluded from that alleged fact that a given piece of land earns rent not because
of its own productivity, but merely because its productivity is greater than the poorest,
zero rent land under cultivation.
Remember that for Ricardo, labor is homogeneous, and hence wages uniform and equal, and as
we shall see, profits are also uniform and equal.
Land is unique in its permanent long-run structure of differential fertility and productivity.
Hence to Ricardo, rent is purely a differential, and land A earns rent solely because of its
Differential Productivity compared to land B, the zero rent land in cultivation.
To Ricardo, several important points followed from these assumptions.
First, as population inexorably increases, and poorer and poorer lands are used, all
the differentials keep increasing.
Thus, say that at one point of time, corn lands, which sums up all land, range in productivity
from the highest, land A, through a spectrum down to land J, which, being marginal, earns
a zero rent.
But now population increases, and farmers have to cultivate more and poorer lands, say
Say, K, L and M. M now becomes the zero rent land, and land J now earns a positive rent,
equal to the differential between its productivity and that of M. And all the previous inframarginal
lands have their differential rents raised as well. It becomes ineluctably true, therefore,
over time, as population increases, rents and the proportion of income going to rent
increase as well. Yet, though rent keeps increasing, at the margin it always remains zero. And,
as Ricardo put it in a crucial part of his theory, being zero rent does not enter into
Put another way, quantity of labor cost, being allegedly homogeneous, is uniform for each
product, and profits, being uniform and fairly small throughout the economy, form a part
of cost that can be basically neglected.
Since the price of every product is uniform, this means that the quantity of labor cost
on the Highest Cost or Zero Rent Land uniquely determines the price of corn and of every
other agricultural product. Rent, being inframarginal in Ricardo's assumptions, cannot enter into
cost. Total rental income is a passive residual determined by selling prices and total income,
And selling prices are determined by quantity of labor cost and, to a small extent, the
uniform rate of profit.
And since the quantity of labor needed to produce corn keeps rising as more and more
inferior lands are put into production, this means that the cost of producing corn and
hence the price of corn keep rising over time.
And paradoxically, while rent keeps rising over time, it remains zero at the margin,
and therefore without any impact on costs.
There are many flaws in this doctrine.
In the first place, even the poorest land in cultivation never earns a zero rent, just
as the least productive piece of machinery or worker never earns a zero price or wage.
It does not benefit any resource owner to keep his resource or factor in production unless
it earns a positive rent.
The marginal land or other resource will indeed earn less of a rent than more productive factors,
but even the marginal land will always earn some positive rent, however small.
Second, apart from the zero-rent problem, it is simply wrong to think that rent or any other factor return is caused by differentials.
Each piece of land or unit of any factor earns whatever it produces.
Differentials are simple arithmetic subtractions between two lands or other factors, each of which earns a positive rent of its own.
The assumption of zero rent at the margin allows Ricardo to obscure the fact that every piece of land earns a productive rent, and allows him to slip into the differential as cause.
We might just as well turn Ricardo on his head and apply the differential theory to wages and say with Schumpeter that one pays more for good than for bad land exactly as one pays more for a good than a bad workman.
Third, in discussing the rise in cost of producing corn, Ricardo reverses cause and effect.
Ricardo states that increasing population obliges farmers to work land of inferior quality,
and then causes a rise in its price.
But as any utility theory analyst would realize, the causal chain is precisely the reverse.
When the demand for corn increases, its price would rise, and the higher price would lead
farmers to grow corn on higher-cost land.
But this realization, of course, eliminates the Ricardian theory of value, and with it,
the entire Ricardian system.
And fourth, as numerous critics have pointed out, it is certainly not true historically
that people always start using the highest quality land and then sink gradually and inevitably
down to more and more inferior land.
Historically, there have always been advances and enormous ones in the productivity of agriculture,
in the discovery and creation of new lands, and in the discovery and application of new
and more productive agricultural techniques and types of products.
Defenders of Ricardo counter that this is a purely historical argument, ignoring the
logical beauty of the Ricardian theory.
But the whole point is that Ricardo was, after all, advancing a historical theory, a law
of history, and he certainly claimed historical accuracy for past and future predictions for
his theory.
And yet, it is all a purely arbitrary, and hence largely untrue, assumption of his logical
Doctrine in the guise of what was making cavalier and untrue historical or empirical generalizations
the building blocks of his logical system, from which he drew self-confident and seemingly
apodictically true empirical and political conclusions.
Yet from false assumptions only false conclusions can be drawn, regardless how imposing the
Ricardo's differential rent theory has been widely hailed as the precursor of the neoclassical
law of diminishing returns, which the neoclassicals were supposed to have generalized from land
to all factors of production.
But this is wrong, since the law of diminishing returns applies to increasing doses of a factor
to Homogeneous Units of Other Logically Fixed Factors, in this case, land.
But the whole point of Ricardo's differential rent theory is that his areas of land are
not homogeneous at all, but varying in a spectrum from superiority to inferiority.
Therefore, the law of diminishing returns, as grasped by Turgot and rediscovered by the
of the neoclassicals simply does not apply. Rent, though increasing, is then effectively
zero and not part of expenses or costs. Rent is disposed of in the Ricardian equation,
but we have not yet finished the determination of wages, which so far we have said is precisely
fixed at the subsistence level.
What will happen to the costs of subsistence over time?
They will rise as the cost of production of corn rises with the increasing population,
forcing the cultivation of ever more inferior lands.
Over time, in the slow-moving, long-run, Ricardian equilibria, the cost of food will rise, and
Since wages must always be at the subsistence level, wages will have to rise to maintain
real wage rates equal to the cost of subsistence.
Now we begin to close the Ricardian Circle.
Rents are in effect zero, and wage rates, always at subsistence, must rise over time
as the cost of food increases, in order to keep precise pace with the rising cost of
of Subsistence.
But then, voila!
We have finally determined all the variables except profits, at least to Ricardo's satisfaction.
And since total income is given or kept frozen, this means that profits are the residual from
total income.
With rents out of the picture, if wage rates have to keep rising over time, this necessarily
Theory means that profits or profit rates have to keep falling, hence the Ricardian
doctrine of the ever-falling rate of profit, that is, long-term rate of interest.
Note that this is not the same as Adam Smith's view that the profit rate falls over time
because and in so far as capital continues to accumulate.
was supposed to be an inverse function of the stock of capital.
Ricardo's doctrine of the falling rate of profit follows by triumphant tautology from
his attempt to determine the other factor shares of total income.
When profits fall to zero, or at any rate to a low level, capital will cease to accumulate
and we arrive at Ricardo's stationary state.
So even more than Smith totally leaves out the entrepreneur.
There can be no role for the entrepreneur, after all, if everyone is always in long-run
equilibrium and there is never risk or uncertainty.
His profits, as in Smith, are the long-run rate of return, that is, the rate of interest.
In long-run equilibrium, furthermore, all profits are uniform, since firms rapidly move
out of low-profit industries and into high-profit ones, until equalization takes place.
We then have profits at a uniform rate throughout the economy at any given time.
A plausible insight into Ricardo's habitual confusion of long-run equilibrium and instantaneous
Fetter points out that Ricardo's practical familiarity was not with business and industry,
as was, we might note, J.B. Say, but with the bond and foreign exchange markets.
Ricardo usually assumed that even in industry and agriculture adjustment took place on the
The basis of his small price differences and almost as quickly as did arbitrage in government
securities and in foreign exchange.
To return to the Ricardian world, note that Ricardo does not say that the cost of corn
rises over time because rents keep rising on corn land.
He must get rid of the rent variable, and he can only do so by assuming that rent is
zero at the margin, and therefore never forms any part of costs. Rent, then, is effectively
zero. Why, then, does the cost of corn rise? As we have indicated, because the quantity
The theory of labor needed to produce corn, and hence the cost of producing corn, rises
over time.
This brings us to Ricardo's theory of cost and value.
Rents are now out of it.
Wages are not costs either because a key to Ricardo's system is that rising wages lead
only to lower profits and not to higher prices.
If rising wages meant that costs increased, then Ricardo, who as we shall see had a cost
theory of value and price, would have to say that prices rose rather than that profits
would necessarily fall.
Wages he treated as uniform, since Ricardo, like Marx after him, maintained that labor
was homogeneous in quality.
Not only did that mean that wages were uniform, but Ricardo could then treat, as the crucial
part of its labor cost, the quantity of labor embodied in any product.
Differences in quality or productivity of labor could then be dismissed as simply trivial
and as a slightly more complex version of the quantity of labor hours.
has been quickly and magically transformed into quantity.
We have reached the edge of the Ricardian and Marxian labor theory of value.
So far we just have a labor quantity theory of cost.
Ricardo vacillated at this point between a strict labor theory of cost and a labor quantity
theory plus the uniform rate of profit.
But since the uniform rate of profit, presumably around three to six percent, is small compared
to the quantity of labor hours, Ricardo may be pardoned for dismissing the profit rate
part of cost as of trivial importance.
And since all profit rates are assumed to be uniform, and as we shall see, Ricardo had
a Cost Theory of Value or Price, he could easily dismiss the uniform and small proportion
profit as of no account in explaining relative prices.
It is, of course, peculiar to consider profits, even profits as long-run interest, as part
of the costs of production.
Again, this usage stems from eliminating any consideration of entrepreneurial profits and losses,
and focusing on interest as a long-run cost of inducing savings and the accumulation of capital.
If profits for Ricardo are always uniform, how is this uniform profit determined?
Curiously, profits are in no way related to savings or capital accumulation.
For Ricardo, they are only a residual left over after paying wages.
In short, to hark back to our original equation of Ricardian distribution, total output or
income equals rent plus profits plus wages.
Remarkably, Ricardo has attempted to determine all the variables with only one variable explicitly determined.
Output, as we have seen, was assumed as mysteriously given from outside the Ricardian system.
Wages, the uniform wage throughout the economy, is the only explicitly determined variable,
determined completely to equal the cost of subsistence, embodied in the cost of producing
corn.
But that leaves two residuals, rents and profits, to be determined.
The way Ricardo tries to get around that problem is to dispose of rents.
Rents are the differential between the lands in cultivation and the least productive zero-rent land in use.
The cost of producing corn is equal to the quantity of labor hours embodied in its production.
Since rents are zero at the margin, they do not enter into costs and are passively determined.
At the no-rent margin, labor and capital shares exhaust output.
And since wages are supposedly determined by the cost of raising corn, this means that
profit can only be a truistic residual of wages.
Otherwise the variable would be over-determined and the system would evidently collapse.
The alleged historical laws follow from the model.
Since increasing population forces more and more inferior land into cultivation, the cost
The cost of labor in producing corn, that is, the quantity of labor hours needed to produce it, must keep rising.
And since price is determined by cost, supposedly boiled down into the quantity of labor hours to produce the good,
this means that the price of corn must keep rising over time.
But since real wage rates are fixed always at the cost of subsistence, and this is assumed
to be the price of corn, money wage rates must keep rising over time while workers remain
at the subsistence level, and therefore profits must keep falling in the course of history.
Adam Smith believed that the rate of profit, or the long-run rate of interest return, is
is determined by the quantity of accumulated capital, so that more capital will lead to
a falling rate of profit.
While this theory is not fully correct, it at least understands that there is some connection
between saving, capital accumulation and long-run interest or profit.
But to Ricardo, there is no connection whatever.
Based on capital is only a residual.
By a series of fallacies and holistic locked in assumptions, trivial conclusions are at
last ground out, all with a portentous air, allegedly telling us conclusive insights about
the real world.
As Schumpeter scornfully puts it, propositions such as, profits depend upon wages and the
The Falling Rate of Profit are excellent examples of that art of triviality that ultimately
connected with the Ricardian vice leads the victim step by step into a situation where
he has got either to surrender or to allow himself to be laughed at for denying what,
by the time that situation is reached, is really a triviality.
5. Ricardo and the Ricardian System 2. The Theory of Value
This brings us to Ricardo's theory of value, or price. While Ricardo formally admitted
that supply and demand determine day-to-day market pricing, he tossed that aside as of
of No Consequence and concentrated solely on long-run equilibrium, that is, natural price
and the alleged macro distribution of income in that equilibrium. Utility Ricardo brusquely
disposed of as ultimately necessary to production but of no influence whatever on value or price.
In the value paradox, he embraced exchange value and abandoned utility completely.
Not only that, he frankly and boldly discarded any attempt to explain the prices of goods
that are not reproducible, that could not be increased in supply by the employment of
labor.
Hence, Ricardo simply gave up any attempt to explain the prices of such goods as paintings,
which are fixed in supply and cannot be increased.
In short, Ricardo abandoned any attempt at a general explanation of consumer prices.
We have arrived at the full-fledged Ricardian and Marxian labor theory of value.
The Ricardian system is now complete.
Prices of goods are determined by their costs, that is, by the quantity of labor hours embodied
in them, trivially, plus the uniform rate of profit.
Specifically, since the price of each good is uniform, it will equal the cost of production
on the highest cost, that is, zero rent or marginal land in cultivation.
In short, price will be determined by cost, that is, the quantity of labor hours on the
and the zero-rent land used to work on the product.
As time goes on then and population increases, poorer and poorer soils must be brought into
use so that the cost of producing corn continues to increase.
It does so because the quantity of labor hours needed to produce corn keeps increasing, since
labor must be employed on ever poorer soil.
As a result, the price of corn keeps increasing. Since wage rates are always kept precisely
at the subsistence level, the cost of growing corn, by population pressure, this means that
money wage rates must continue to increase over time in order to keep real wage rates
in pace with the ever-rising price of corn. Wage rates must increase over time, and hence
Profits must keep falling until they are so low that the stationary state is reached.
To return to the idea of rent as not entering into cost, if we focus, as we should, on the
micro, on the individual farmer or capitalist, it should be clear that the individual must
pay rent in order to gain use of any particular plot of land in the productive process. To
To do so, he must outbid other firms in his own as well as other industries.
Ricardo's refusal to even consider the individual firm and his focus on holistic aggregates
enables him to overlook the fact that rents, even if differentials, enter into costs the
way every expense on factors of production enters into them.
This is the only way that is real and that counts in the real world, the point of view
of the individual firm or entrepreneur.
There is, in fact, no social point of view since society as an entity does not exist.
Ricardo's system is both gloomy and rife with allegedly inherent class conflict on the free
market.
First, there is tautological conflict, because given the fixed total, the income shares of one macro group can only increase at the expense of another.
But the point of the free market in the real world is that generally production increases, so that the total pie tends to keep rising.
Banking, and, second, if we focus on individual factors and how much they earn, as does the
later marginal productivity theory, and as did J.B. say, then each factor tends to earn
its marginal product, and we need not even concern ourselves with the alleged but nonexistent
laws and conflicts of macro class income distribution.
Ricardo kept his eye unerringly on the radically wrong problem, or rather, problems.
But there is even more class conflict here than implied by Ricardo's tautological macro
approach.
For if value is the product solely of labor hours, then it becomes easy for Marx, who
who was, after all, a neo-Ricardian, to call all returns to capital exploitative deductions
from the whole of labor's product.
The Ricardian socialist call for turning over all of the product to labor follows directly
from the Ricardian system, although Ricardo and the other orthodox Ricardians did not,
of course, make that leap.
Mario would have countered that capital represents embodied or frozen labor.
But Marx accepted that point and simply reposted that all labor producers of capital or frozen
labor should obtain their full return.
In fact, neither was right.
If we wish to consider capital goods as frozen anything, we would have to say, with the great
and Austrian Boehm-Bawerk that capital is frozen labor and land and time.
Labor then would be earning wages, land would earn rent, and interest or long-run profits
would be the price of time.
Recent analysts in an attempt to mitigate the crude fallacy of Ricardo's labor theory
of Value, have maintained, as in the case of Smith, but even more so, that he was attempting
not so much to explain the cause of value and price, but to measure values over time,
and labor was considered an invariable measure of value.
But this hardly mitigates Ricardo's flaws.
Instead, it adds to the general fallacies and vagaries of the Ricardian system, another
important one, the vain search for a non-existent chimera of invariability.
For values always fluctuate, and there is no invariable fixed base of value from which
other value changes can be measured.
Thus, in rejecting Say's definition of the value of a good as its purchasing power of
other goods in exchange, Ricardo sought the invariable entity, the unmoved power.
A franc is not a measure of value for any thing, but for a quantity of the same metal
of which francs are made, unless francs, and the thing to be measured, can be referred
to some other measure which is common to both. This I think they can be, for they are both
the result of labor, and therefore labor is a common measure by which their real as well
as their relative value may be estimated. It might be noted that both products are the
result of capital, land, savings and entrepreneurship as well as labor, and that in any case their
Their values are incommensurable except in terms of relative purchasing power, as Say
had in fact maintained.
Part of Ricardo's impassioned quest for an invariable measure of values undoubtedly stemmed
from his deep-dyed scientism.
Ricardo was almost as interested in the natural sciences as in economics.
From his early youth, Ricardo was keenly interested in the natural sciences, in mathematics, chemistry,
mineralogy and geology.
He joined the Geological Society in his thirties shortly after it was founded.
It is probable that Ricardo's quest for an invariable measure of values was based on
the physical science model.
If scientific in the physical sciences meant measurement, then surely this would be required
in the human sciences as well.
As Emil Couter wrote, I venture to say that Ricardo and his contemporaries believed that
economics could only reach the dignity of a science if it could be based on objective
measures like the Newtonian physics.
An even stronger and more direct class struggle than that implied by the labor theory of value
stemmed from Ricardo's approach toward landlords and land rent.
Landlords are simply obtaining payment for the powers of the soil, which, at least in
the hands of many of Ricardo's followers, meant an unjust return.
Furthermore, Ricardo's gloomy vision of the future held that labor must be kept at subsistence level.
Capitalists must see their profits inevitably falling, these two classes doing as badly as ever, labor, or always worse, capital,
while the idle and useless landlords keep inexorably adding to their share of worldly goods.
The productive classes suffer, while the idle landlords charging for the powers of nature benefit at the expense of the producers.
If Ricardo implies Marx, he implies Henry George far more directly.
The specter of land nationalization, or the single tax absorbing all land rent, follows straight from Ricardo.
One of the greatest fallacies of the Ricardian theory of rent is that it ignores the fact that landlords do perform a vital economic function.
They allocate land to its best and most productive use. Land does not allocate itself.
It must be allocated, and only those who earn a return from such service have the incentive, or the ability,
to allocate various parcels of land to their most profitable and hence most productive and economic uses.
Ricardo himself did not go all the way to government expropriation of land rent.
His short-run solution was to call for lowering of the tariff on corn or even repeal of the corn laws entirely.
The tariff on corn kept the price of corn high, and ensured that inferior, high-cost
domestic corn land would be cultivated.
Repeal of the corn laws would enable England to import cheap corn, and thereby postpone
for a time the use of inferior and high-cost land.
Corn prices would for a while be lower.
Any wage rates would therefore immediately be lower, and profits would rise, adding to
the accumulation of capital.
The dread stationary state would be put further off onto the horizon.
Ricardo's other anti-landlord action was political.
By entering parliament, by joining Mill and the other Benthamite radicals in calling for
for Democratic Reform, Ricardo hoped to swing political power from the grip of the aristocracy,
which meant in practice the landlord oligarchy to the mass of the people.
But if Ricardo was too individualistic or too timorous to embrace the full logical consequence
of the Ricardian system, James Mill characteristically was not.
James Mill was the first prominent Georgist, calling frankly and enthusiastically for a
single tax on land rent. In his high office in the East India Company, Mill felt able
to influence Indian government policies. Before obtaining this post, Mill had characteristically
presumed to write and publish A Massive History of British India, 1817, without ever having
Land rent would have no bad effect on production. It would only have the effect of eliminating
the ill-gotten gains of the landlords. In effect, a tax on land rent would be no tax
at all. The land tax could be up to and including 100% of the social product caused by the differential
fertility of the soil. The State, according to Mill, could then use this costless tax
for Public Improvement, and largely for the function of maintaining law and order in India.
We see now the pernicious implications of the fallacious view that any part of the expense
of production is in some way, from a holistic or social point of view, really not a part
of cost.
For if an expense is not part of cost, it is in some sense not necessary to the factors
Richard's Contribution to Production, and therefore this income can be confiscated by the government with no ill effect.
Despite the deep pessimism of Ricardo about the nature and consequences of the free market,
he oddly enough cleaved strongly, and more firmly than Adam Smith, to laissez-faire.
Probably the reason was his strong conviction that virtually any kind of government intervention could only make matters worse.
Taxation should be at a minimum, for all of it cripples the accumulation of capital and diverts it from its best uses, as do tariffs on imports.
Poor laws, welfare systems, only worsen the Malthusian population pressures on wage rates.
and, as an adherent of Say's law, he opposed government measures to stimulate consumption as well as the national debt.
In general, Ricardo declared that the best thing that government can do to stimulate the greatest development of industry
was to remove the obstacles to growth which government itself created.
While Adam Smith's free-market views concentrated on the sinister nature of predatory government action, Ricardo was particularly struck by government's pervasive ineptness and counter-productivity.
A typical and charming note was struck in a letter from Germany by Ricardo to James Mill in 1817.
We were very much delayed by the dilatoriness of the German post, which being a monopoly is, of course, very much mismanaged.
The paradox of Ricardo's gloom about the alleged class conflict on the free market and his determined opposition to virtually all government intervention was best and most wittily described by Alexander Gray.
Such is the Ricardian scheme of distribution. In the place of the old harmony of interest, he has placed dissension and antagonism at the heart of things.
The interest of the landlord is always opposed to that of the consumer and manufacturer.
So also the interests of the worker and the employer are eternally and irreconcilably opposed.
When one gains, the other loses. Further, the outlook for all except the landlord is a process of continual pejoration.
Yet Ricardo remains immovably non-interventionist.
These then, he says, are the laws by which wages are regulated.
And, he adds, inconsequently, like all other contracts, wages should be left to the fair and free competition of the market,
and should never be controlled by the interference of the legislature.
In a world of Ricardian gloom, one might ask, and did in effect ask, why there should not
be interference.
An optimist caroling that God's in his heaven and that all's right with enlightened self-interest
has a right to nail the laissez-faire flag to the mast.
But a pessimist, who merely looks forward to bad days and worse times, ought not in
principle to be opposed to intervention, unless his pessimism is so thorough going as to lead
to the conviction that, bad as all diseases are, all remedies for all diseases are even
worse.
Finally, a fundamental and fatal flaw in Ricardo's whole approach in his system was that he started
at the Wrong End.
He began with his overriding focus on the laws of macro-income distribution.
His theory of value and price was only a subsidiary appendage, enabling him to maintain that wages
are not a part of cost, and therefore that the only influence of rising wages was to
cause profits to fall.
Ricardo, in short, never grasped the crucial point understood by his continental counterpart, J.B. Say, that there are no laws of macro-income distribution.
Economics only establishes micro-laws determining price, including the prices of the various factors of production.
In a sense, of course, the distribution of income in practice is a spin-off of market-determined factor prices, but this distribution also depends on entrepreneurial profits and losses, in short, on entrepreneurial responses to risk and uncertainty, and on the supplies at any time of the respective factors.
None of the latter can be determined by economic theory.
Once again, David Ricardo was pursuing a chimera, and in doing so took British economic theory
off on a detour, or rather, into a dead end.
Put another way, the French Catillon-Tourgaux-Say analysis of the free market demonstrated
that on the market there is no separate distribution of income process, as there indeed would be
under a State-controlled or socialist economy.
Distribution is the indirect consequence of free production, exchange and price determination.
All of this escaped David Ricardo, who had little or no conception of the economy as
a web of micro-relations linking together individual utilities, exchanges and prices.
As Frank Knight has pointed out, Ricardo, in a letter to his disciple McCullough, denied
that the great questions of macro-income distribution were essentially connected with the theory
of value.
And further, Ricardo and his followers gave practically no hint of a system of economic
organization worked out and directed by price forces.
There is another point that needs to be made about Ricardo's basic economic goal.
Chiding Adam Smith for being primarily interested in the total wealth of the nation rather than
in the macro distribution of income, Ricardo pursues his Malthusian hostility to population
growth by asking what is the point of looking at gross rather than net income.
As Ricardo puts it in a famous and astonishing passage,
What would be the advantage resulting to a country from the employment of a great quantity
of productive labor, if, whether it employed that quantity or a smaller, its net rent and
profits together would be the same?
To an individual with a capital of twenty thousand pounds, whose profits were two thousand
Inhabitants.
The difference between 10 and 12 million may not make any difference to David Ricardo,
but it makes a considerable difference, I should think, to the two million who would
not have been around, and to their parents, friends and relations.
There is no better example of the aggregative utilitarian economist looking upon the economy
from the holistic viewpoint of a social slave master, rather than from the point of view
of individuals on the market.
As Alexander Gray, in his witty and perceptive way, puts it, Ricardo's logic would lead
to the desirability of the population being reduced to one, and that last remnant producing
a vast net surplus with the aid of sorcery and mechanical contrivances.
The repellent doctrine that man exists for the production of wealth, rather than that
wealth exists for the use of man, here finds its classical utterance.
6.
The Law of Comparative Advantage.
Even the most hostile critics of the Ricardian system have granted that at least David Ricardo
made one vital contribution to economic thought and to the case for freedom of trade, the
law of comparative advantage.
In emphasizing the great importance of the voluntary interplay of the international division
of labor, free traders of the 18th century, including Adam Smith, based their doctrines
on the law of absolute advantage.
That is, countries should specialize in what they are best or most efficient at, and then
exchange these products, for in that case the people of both countries will be better
off.
This is a relatively easy case to argue.
It takes little persuasion to realize that the United States should not bother to grow
bananas or rather to put it in basic micro-terms that individuals and firms in the United States
Bananas should not bother to do so, but rather produce something else, for example, wheat,
manufactured goods, and exchange them for bananas grown in Honduras.
There are, after all, precious few banana growers in the United States demanding a protective
tariff.
But what if the case is not that clear-cut, and American steel or semiconductor firms
are demanding such protection?
The law of comparative advantage tackles such hard cases, and is therefore indispensable
to the case for free trade.
It shows that even if, for example, country A is more efficient than country B at producing
both commodities X and Y, it will pay the citizens of country A to specialize in producing
Making X, which it is most best at producing, and by all of Commodity Y from Country B,
which it is better at producing but does not have as great a comparative advantage as in
making Commodity X. In other words, each country should produce not just what it has an absolute
Advantage in Making, but what it is most best at, or even least worst at, that is, what
it has a comparative advantage in producing.
If then, the government of country A imposes a protective tariff on imports of commodity
Y, and it forcibly maintains an industry producing that commodity, this special privilege
Advantage will injure the consumers in country A, as well as, obviously, injuring the people
in country B. For country A, as well as the rest of the world, loses the advantage of
specializing in the production of what it is most best at, since many of its scarce
resources are compulsorily and inefficiently tied up in the production of commodity Y.
The Law of Comparative Advantage highlights the important fact that a protective tariff
in country A wreaks injury on the efficient industries in that country, and the consumers
in that country, as well as on country B and the rest of the world.
Another implication of the Law of Comparative Advantage is that no country or region of
of the Earth is going to be left out of the international division of labor under free trade.
For the law means that even if a country is in such poor shape that it has no absolute
advantage in producing anything, it still pays for its trading partners, the people
of other countries, to allow it to produce what it is least worst at.
In this way, the citizens of every country benefit from international trade.
No country is too poor or inefficient to be left out of international trade, and everyone
benefits from countries specializing in what they are most best or least bad at.
In other words, in whatever they have a comparative advantage.
Until recently it has been universally believed by historians of economic thought that David
Ricardo first set forth the law of comparative advantage in his Principles of Political Economy
in 1817.
Recent researches by Professor Thwait, however, have demonstrated not only that Ricardo did
not originate this law, but that he did not understand and had little interest in the
in the law, and that it played virtually no part in his system.
Ricardo devoted only a few paragraphs to the law and his principles.
The discussion was meager, and it was unrelated to the rest of his work
and to the rest of his discussion of international trade.
The discovery of the law of comparative advantage came considerably earlier.
The problem of international trade sprang into public consciousness in Britain when Napoleon imposed his Berlin decrees in 1806,
ordering the blockade of his enemy, England, from all trade with the continent of Europe.
Immediately, young William Spence, 1783-1860, an English physiocrat and under-consumptionist who detested industry,
published his Britain Independent of Commerce in 1807 advising Englishmen not to worry about the blockade since only agriculture was economically important and if English landlords would only spend all their incomes on consumption, all would be well.
Spence's tract caused a storm of controversy, stimulating early works by two noteworthy British economists.
One was James Mill, who critically reviewed Spence's work in the Eclectic Review for December 1807,
and then expanded the article into his book, Commerce Defended, the following year.
It was in rebuttal of Spence that Mill attacked under consumptionist fallacies by bringing Say's Law to England.
The other work was the first book of young Robert Torrens, 1780-1864, an Anglo-Irish officer in the Royal Marines, in his The Economists Refuted, 1808.
It has long been held that Torrens first enunciated the law of comparative advantage, and that
then, as Schumpeter phrased it, while Torrens baptized the theorem, Ricardo elaborated it
and fought for it victoriously.
It turns out, however, that this standard viewpoint is wrong in both its crucial parts.
That is, Torrens did not baptize the law, and Ricardo scarcely elaborated or thought for
it.
For first, James Mill had a far better presentation of the law, though scarcely a complete one,
in his Commerce Defended, than did Torrens later the same year.
Moreover, in his treatment, Torrens, and not Mill, committed several egregious errors.
First, he claimed that trade yields greater benefits to a nation that imports durable goods and necessities as against perishables or luxuries.
Second, he claimed also that advantages of home trade are more permanent than those of foreign trade,
and also that all advantages of domestic trade remain at home,
in Rome, whereas part of the advantages of foreign trade are siphoned off for the benefit
of foreigners.
And finally, following Smith and anticipating Marx and Lenin, Torrens asserted that foreign
trade, by extending the division of labor, creates a surplus over domestic requirements
that must then be vented in foreign exports.
Six years later, James Mill led Robert Torrens again in presenting the rudiments of the Law
of Comparative Advantage.
In the July 1814 issue of the Eclectic Review, Mill defended free trade against Malthus support
for the Corn Laws in his observations.
Mill pointed out that labor at home will, by engaging in foreign trade, procure more
or by buying imports than by producing all goods themselves.
Mill's discussion was largely repeated by Torrens in his Essay on the External Corn Trade,
published in February of the following year.
Furthermore, in this work, Torrens explicitly hailed Mill's essay.
Meanwhile, at the very time when this comparative cost ferment was taking place
and his friends and colleagues, David Ricardo displayed no interest whatever in this important
line of thought.
To be sure, Ricardo weighed in to second his mentor Mill's attack on Malthus' support
for the Corn Laws in his Essay on Profits, published in February 1815, but Ricardo's
His line of argument was exclusively Ricardian, that is, based solely on the distinctive Ricardian
system.
In fact, Ricardo displayed no interest in free trade in general, or in the arguments
for it.
His reasoning was solely devoted to the importance of lowering or abolishing the tariff on corn.
This conclusion, as we have noted, was deduced from the distinctive Ricardian system, which
was to be fully set forth two years later in his principles.
For Ricardo, the key to the stifling of economic growth in any country, and especially in developed
Britain, was the land shortage, the contention that poorer and poorer lands were necessarily
being pressed into use in Britain.
In consequence, the cost of subsistence kept increasing, and hence the prevailing, which
must be the subsistence money wage, kept increasing as well.
But this inevitable secular increase of wages must lower profits in agriculture, which in
turn brings down all profits.
In that way, capital accumulation is increasingly dampened, finally to disappear altogether.
Abolishing or abolishing the tariff on corn or other food was, for Ricardo, an ideal way
of postponing the inevitable doom.
By importing corn from abroad, diminishing fertility from corn land is deferred.
The cost of corn, and therefore of subsistence, will fall sharply, and therefore money wage
Large rates will fall pari passu, thereby raising profits and stimulating capital investment
and economic growth.
There is no hint in any of this discussion of the doctrine of comparative cost or anything
like it.
But how about the mature Ricardo, the Ricardo of the principles?
Once again, except for the three paragraphs on comparative advantage, Ricardo displays
is no interest in it, and he instead repeats the Ricardian system argument for repeal of the Corn Laws.
Indeed, his discussion in the rest of the chapter on international trade is couched in terms of the Smithian theory of absolute advantage,
rather than of the comparative advantage found in Torrens and especially in Mill.
The three paragraphs on comparative advantage, furthermore, were not only carelessly worded and confused, they were the only account, brief as they were, that Ricardo would ever write on comparative advantage.
Indeed, this was his only mention at any time of this doctrine.
Even Ricardo's sudden reference to Portugal and his absurd hypothesis that the Portuguese
had an absolute advantage over Britain in the production of cloth seemed to indicate
his lack of serious interest in the theory of comparative cost.
Furthermore, Ricardo's views on foreign trade in the principles received almost no comment
at that time.
Richard's concentrated on his labor theory of value and his view that wage rates and
profits always move inversely with the former determining the latter.
If Ricardo had no interest in the theory of comparative advantage and never wrote about
it except in this single passage in the principles, what was it doing in the principles at all?
Another Thwaites convincing hypothesis is that the law was injected into the principles
by Ricardo's mentor, James Mill, whom we know wrote the original draft as well as the
revisions for many parts of Ricardo's magnum opus. We know also that Mill prodded Ricardo
on including a discussion of comparative cost ratios. As we have seen, Mill originated the
The Doctrine of Comparative Cost and led in developing it eight years later.
Not only that, while Ricardo dropped the theory as soon as he enunciated it in the principles,
Mill fully developed the analysis of comparative advantage further, first in his article on
Colonies for the Encyclopedia Britannica, 1818, and then in his textbook, The Elements
of Political Economy, 1821. Once again, Robert Torrens tailed after Mill, repeating his discussion
with no additional insights in 1827 in the fourth edition of his 1815 essay on the external
corn trade. Meanwhile, George Grote, a devoted million disciple, wrote in 1819 an important
un-published essay setting forth the million view on comparative advantage.
And so, once again, James Mill, by the force of his mind as well as his personal charisma,
was able to foist an original analysis of his own onto the Ricardian system.
It is true that Mill was every bit a fan of the Ricardian system, as Ricardo himself,
But Mill was a man of far broader scope and erudition than his friend, and was interested
in far more aspects of the disciplines of human action.
It seems possible that Mill, the inveterate disciple and number two man, was number one
One man far more often than anyone has suspected.