The next major stepping stone following Adam Smith in the development of economic thought was David Ricardo (1772 – 1823).
This page is structured as follows. Following the introduction, a short section describes the Social and Economic Background and Ricardo’s attitude to these issues.
There is then a short section describing Ricardo’s approach to the writing of his Principles. Next comes the coverage of the Principles themselves.
A section on Rent drawn mainly from the Principles is followed by a description of his treatment of Rent and Profit together, including a version of his Table described as the ‘clearest model that he ever produced of his economic system as a whole’.
A short section on Ricardo’s work today is followed by his views on Wages then by his Theory of Value, in the course of which he discusses Prices, and the search for a Measure of Value.
International trade is then discussed covering both Absolute Advantage and Comparative Advantage.
Coverage of the Corn Laws follows, followed by a few criticisms of Ricardo.
The idea of the Stationary State is then examined.
Followed by the issue of Says Law.
The page ends with a short conclusion and draft commentary.
Introduction
This summary, and the whole coverage of Ricardo, draws heavily on King, 2013; all page numbers are from King, unless otherwise attributed.
Much has been written about Ricardo, so what follows is a concise summary of his origin, of the society he lived in and how he came to write on Political Economy.
Ricardo was born on 18 April 1772 in City of London, the third son of devout Jewish parents (who had 17 children in all.)
Ricardo lived in a time of large scale social change in English society. During his lifetime population rose from about 6.6 million to 11.5 million. London dominated the nation, with 11% of people in 1801. Manchester came next with a population of 89,000; Manchester and the next 25 largest towns had about the same population as London.
More than a third of people were still living rurally in 1801, but rural activity was as much to do with services, commerce and new industries, as with agriculture, because the growing capitalism was rural as well as urban. Big capital played only a limited part in this stage of capitalism; enterprises remained small – the industrial world comprised ‘small masters, jobbers, traders, engineers and independent artisans’ (13).
Population grew faster than agricultural output, and not until 1850 was it clear that real wages were rising.
But there was great inequality in income and wealth. Until 1880 more than half of the really wealthy were landowners. Other wealthy people were merchants, bankers, ship owners and financiers – not in manufacturing or industry.
As these changes unfolded Ricardo was educated mainly in local schools until his father took him into his financial business.
In 1793 he married a Quaker girl, which caused a rift with his parents.
He became interested in Political Economy after a chance reading of Adam Smith, after which he began regular economic discussions with a work friend (51).
In his spare time he studied mathematics, chemistry, geology, and mineralogy. He worked in the Stock Exchange in the early 1800s and joined the Unitarian Church that attracted a small but distinguished number of ‘free thinking liberals’ with modern ideas well suited to the social changes being made around them.
In 1809 Ricardo published a series of articles on money in a newspaper. From these he developed and published a pamphlet on bullion and banknotes (51). This was noticed by, amongst others, Malthus and James Mill, with whom he engaged in a correspondence that lasted until his death.
In 1814, after making a lot of money via his financial work, he bought a 5,000 acre country estate and residence in Gloucestershire, where he would be elected High Sheriff in 1818.
At the end of 1819 he ceased his financial career and membership of the Stock Exchange. He began his political career in the same year by effectively buying the Irish ‘rotten borough’ of Portarlington, from the Lord of that name.
The Social and Economic Background
King fills in the attitudes and opinions that Ricardo brought to his economic and political views.
As the century proceeded the landed aristocracy became a socially isolated caste like class, who kept others out of their circle. After centuries of enclosure, the 17th century had seen a growth in farm size as small farms were bought up and brought into the large estates. 85% of farmland was rented out to large scale farmers by 1850. The remainder was still farmed by peasants.
As a result a three tier social structure was formed, comprising – rich landlord, substantial tenant farmer and poor landless labourer.
This social structure ‘formed the basis of all Ricardo’s economic models’ (18).
Socially all levels of the state ‘hinged on patronage’, a situation that has been called ‘Old Corruption’.
This was a parasitical political system where advantage could be gained throughout government office and parliament. It was fed by elite appetite for power and money at the expense of the people (21).
Ricardo could see that In the 3 class economy landlords and workers consumed their whole income; accumulation and growth depended on the profits made by the capitalist tenant farmers.
But, as population grew, workers conditions were stagnating. Ricardo saw that continuous increases of imported food were needed to hold off decline. The fate of society rested on the struggle over income between the landlords and the capitalists. Reform was needed to break the landlords hold over economic policy; and ‘Old Corruption’ and high taxes had to be addressed.
Ricardo’s Attitude to these Issues
[King then outlines Ricardo’s basic view of society and the economy, a view that King thinks was pretty accurate (29 to 30)).
Ricardo was a strong supporter of freedom of opinion. He was influenced by Bentham’s utilitarianism – the greatest good for the greatest number – and he was clear that political economy was a science in which he was comfortable in the use of abstract theorising.
While approving the work of his economic forerunners, like Turgot and Smith and Steuart, he felt that no one had adequately covered the ‘natural course of rent profit and wages’.
At the same time he did follow Smith in the belief that capitalism is the final stage of human history, as well as his economic liberalism and support for free trade.
But he saw Smiths view of value as lacking insofar as it comprised the ‘adding up’ of the costs of labour, land and capital used in production (50).
He wrote to Malthus in 1811 regarding free trade, defending a priori reasoning; that is knowledge drawn from theoretical deduction rather than from observation or experience.
He observed to a friend in 1815, when he was starting work on his Principles, that he and Malthus continued to differ on Rent, Profit and Wages, stressing their linked importance to ‘the science of Political Economy’.
Ricardo, however, was criticised by contemporaries, used to factual based theory, for excessive abstraction. These concerns remain amongst some today, but King (39) quotes from O’Brien (2004) who saw Ricardo as ahead of his time,
“Ricardo’s deductive method, his model building, was to be of the greatest importance. Ricardo essentially invented these techniques … as a process of heroic abstraction … Both these characteristics were to be of far greater importance for economics after the end of the Classical era”
There is also controversy about Ricardo’s political views, but King (45 – 46) lays out Ricardo’s thoughts found in his correspondence, from where it emerges that,
Politically, Ricardo saw the interests of the working class clearly corresponding to good government, in contrast to landlords and capitalists whose private interests could be opposed to those of the people.
He saw the Press and public opinion as the best check on Government, and that the people were happier when they had a voice through their representatives.
By ‘the people’ Ricardo meant ‘the reasonable part of the country’ (45); those educated enough to ‘decide correctly’ – and he opposed the vote for anyone who was against the rights of private property.
He was not a republican; he favoured the Crown, the Lords and the Commons as the best sort of Government. Reform for him was the best way to prevent revolution.
Ricardo always opposed universal male suffrage, arguing that it was not necessary for good government (46); and that asking for too much harmed the chances of necessary reforms.
For those allowed to vote, though, he argued for the ballot and more frequent elections.
Ricardo stuck to his opinions, resisting criticism from those who wanted greater reforms, and voted against Acts designed to restrict political protest – he saw these as an attack on the liberty of the people.
He opposed the Poor Laws too, seeing them as form of workers imprisonment; and he continued to oppose Old Corruption. He was also firmly against imperialism and slavery.
But he had little to say about socialism or the way women were treated, never recognising that women’s domestic labour made male labour possible (48).
Ricardo recognised the good intentions of Robert Owen, but thought that his proposals would cause ‘infinite mischief’ seeing them to be unrealistic about human nature and based on regard for the community.
Ricardo himself supported self interest based on the ‘experience of ages’ (49). But he was not a methodological individualist, concerned with distribution and growth and therefore focussing on social classes not on individuals.
The Approach to Ricardo’s Principles
After his introduction to political economy, Ricardo wrote more pamphlets until in 1815 Malthus, Edward West and Robert Torrens almost simultaneously produced accounts of rent as “a price determined surplus due to diminishing returns”.
Until this time Ricardo was working on his theory of profit and had barely mentioned rent. Here though he saw that this theory of rent fitted nicely with his own profit theory (Dobb (1973, 68).
Within a few days Ricardo produced his own essay, the important ‘Influence of a Low Price of Corn on the Profits of Stock’ (usually known as his ‘Essay on Profits) (60).
Later that year James Mill began to press and encourage Ricardo to produce a book – an economic treatise. Ambivalent at first, but saying that he differed from both Smith and Malthus on rent, profit and wages he said he would attempt the writing of the treatise for his own satisfaction (52).
The finished manuscript was published on 19 April 1817. Two more editions followed, the first in February 1819 with minor additions, the second in May 1821 with significant revisions.
King describes several problems with the book, citing organisation, writing quality and – as Ricardo was too early for diagrammatic and algebraic analysis – he described formal models in the book in words and numerical examples that are not always properly specified or explained (53).
While working on the book and subsequent editions, Ricardo published more pamphlets. At the time of his illness and death in 1823 he was working on a paper regarding the establishment of a national bank that was published posthumously in 1824.
Several editions of the Principles, and other work, were reprinted over the following century. On the centenary of his death the Royal Economic Society appointed an editor to produce a complete edition of Ricardo’s work.
This task passed to a highly thought of protégé of Keynes, Piero Sraffa, in 1930. Sraffa worked on the project for more than 25 years, helped by Maurice Dobb in the later stages. Between 1951 and 1955 ten volumes of the works and correspondence of Ricardo were published, followed by a volume of indexes and even later an 11th volume (53 -54).
Ricardo’s Principles
Most important for Ricardo was the distribution of the social product, because he held that economic growth depends crucially on the rate of profit (57).
Moreover, the theory of value was useful and necessary to him as it gave him an objective and consistent measure of the distributional magnitudes in which he was interested.
King outlines Ricardo’s preface, paraphrased here, that sets out his priorities clearly and explicitly.
The produce of the earth, he says, derived by the application of labour, machinery and capital, is divided between the three classes of landlord and capitalist and labourer.
The nature of this division, called rent, profit and wages, differs depending on the fertility of the soil, the accumulation of capital, the population size and on the machinery, skill and ingenuity employed in agriculture.
To determine the laws which regulate this distribution, is the principal problem in Political Economy (Ricardo Page 1).
So Ricardo’s focus is on agriculture and the laws regulating the distribution of the social product between rent, profit and wages; and crucial for Ricardo is that he held that economic growth depends crucially on the rate of profit (57).
Ricardo’s theory starts with his view on Profits. He argued that as a result of diminishing returns in agriculture there was a natural tendency for the rate of profit to fall, eventually stopping all accumulation at the stationary state.
This fall in profit could be forestalled, however, by improvements in the machinery used to produce the goods needed by labourers – thus reducing the costs of those goods; and by improvements in the science of agriculture that would lower the number of labourers needed in agricultural production. This would mean a twofold reduction in the labour cost of production. (58).
He argued too that the rate of profit in agriculture regulated the rate of profit in all other trades. This was only true, says King, in a self contained agricultural sector where the only produced input is its own output – corn – and there are no wage goods other than corn (the corn model) (59).
King continues that here Ricardo became more interested in the theory of value as an aid to extending this argument to a more realistic economy with agriculture not entirely self contained.
Ricardo had continued to support this aspect of the rate of profit throughout 1814 arguing that the rate of profit and interest depended on the relation between the total produce and the consumption of provisions needed to secure that produce; the level of wages being regulated by the cheapness of those provisions.
This difference between total output and the consumption needed to produce it being the surplus product (that he sometimes called ‘net revenue’), which he firmly saw as the source of profit. Ricardo’s surplus theory was thus much more explicit than that of Adam Smith, and he repeated it time after time (60).
Ricardo on Rent
Whilst Ricardo now saw the theories of Rent and Profit dovetailed together in a complimentary way, it will be helpful to first look at his ideas on Rent alone, before considering both matters together as they were laid out in his 1815 paper – “An Essay on the Influence of a low Price of Corn on the Profits of Stock”; from now on referred to as his “Essay on Profits”.
Much of this Section is drawn directly from Ricardo’s ‘Principles, Chapter 2 ‘on Rent’
Ricardo very clearly lays out his views on rent in Chapter 2 of his Principles. First, (Principles, Page 40), he defines rent as
“Rent is that portion of the produce of the earth, which is paid to the landlord for the use of the original and indestructible powers of the soil.”
He distinguishes this from payments that are sometimes added to genuine rent for improvements made to land, such as drainage, application of manure, erection of fences, walls and buildings etc. These additional sums are in fact payments made for the capital used to make the improvements.
However, these two elements together are often called ‘rent’, when in fact true rent is as defined above, and the second part is a payment for capital improvements.
Ricardo starts by pointing out that if all land was of equal quality and unlimited in extent, then no rent could be charged for its use, in the same way as no charge can be made for use of the air around us. It is only because land is of different quality and limited in extent that rent can be charged for the use of the best available land.
He then describes (41) a situation where, initially, land of the first quality is providing adequate produce for the local population without rent; but then, because of a rising population,
“… land of the second degree of fertility is taken into cultivation [and] rent immediately commences on that of the first quality, and the amount of that rent will depend on the difference in the quality of these two portions of land”
Moreover,
“When land of the third quality is taken into cultivation, rent immediately commences on the second, and it is regulated as before, by the difference in their productive powers. At the same time, the rent of the first quality will rise, for that must always be above the rent of the second, by the difference between the produce which they yield with a given quantity of capital and labour.”
In summary Ricardo argues that when land is plentiful and able to provide for all, no rent is paid. When population rises and it is necessary to bring land of lesser fertility and yields into production – with the same level of capital and labour – rent becomes due on the first land at the rate that the two lands differ in fertility and yields.
When even higher population means that land of even less fertility comes into production, rend on land 2 begins at the rate of fertility difference, and rent on land 1 increases because it’s rent must stay higher than land 2. The rate of rent always equals the difference in fertility and yields of the different grades of land.
He then (41 to 42) puts numbers to this situation such that, with the same capital and labour, Land 1 produces 100 units, Land 2 90 units and Land 3 80 units.
With each increase in population level it becomes necessary to use land of lesser quality, which raises rent on all the more fertile pieces of land.
To begin, this community is supplied all it needs in the 100 units from abundant Land 1, where the whole produce belongs to the farmer and becomes the source of profit, and no rent to the landlord is possible.
When population rises and Land 2 has to be brought into cultivation, only 90 units is added. Therefore a rent of 10 units becomes due from Land 1, such that both lands supply the cultivators with the equal produce of 90 units (with 10 units going as rent to the landlord of Land 1). In this way a single rate of profit is maintained on the two pieces of land and the 2 produces can fetch a single price.
Similarly, when it becomes necessary to cultivate Land 3 and 80 units are added, rent on Land 2 commences at 10 units and raises to 20 units on Land 1. Land 3 remains rent free, and all three pieces of land provided their cultivators with the same 80 units, profits and prices remain uniform and the landlord or landlords get a rent of 30 units.
Ricardo then introduces a complication. It is also possible that before land of lesser quality is brought into cultivation; more capital can be used on the Land 1 that is already in cultivation (42).
For example by doubling the original capital used on Land 1, produce may be raised by 85 units, a little short of doubling. This being greater than that obtainable by using the same capital on Land 3.
Consequently it would be better to use the capital on the old Land 1 than on new less fertile land, as it will also raise a rent
“…for rent is always the difference between the produce obtained by the employment of two equal quantities of capital and labour (42)”
Therefore, if the second amount of capital raises the return by 85 units, the landlord could require a rent of 15 units (the difference between the original 100 units and the additional 85).
“In this case … the capital last employed pays no rent. For the greater productive powers of the first [capital] fifteen quarters is paid for rent, for the employment of the second [capital] no rent whatever is paid (42).”
If a third equal amount of capital is then used on the same land returning an extra 75 units of produce, an extra rent of 10 units will be payable, the difference in the extra produce between capital 2 and 3.
As before the ten units of rent will be added the rent of the first capital, and also applies to capital 2, while capital 3 will pay no rent (42-43).
Given the basic examples just described, Ricardo then begins to generalise about the real world.
If, he says, good land were available in much greater quantity needed, or if capital could be used without limit without a diminishing return there could be no rise of rent, because,
“ … rent invariably proceeds from the employment of an additional quantity of labour with a proportionally less return (43)”
Note that he now talks of quantities of labour, rather than capital.
“The most fertile, and most favorably situated, land will be first cultivated, and the exchangeable value of its produce will be adjusted in the same manner as the exchangeable value of all other commodities, by the total quantity of labour necessary in various forms, from first to last, to produce it, and bring it to market. When land of an inferior quality is taken into cultivation, the exchangeable value of raw produce will rise, because more labour is required to produce it.”
Still on page 43, he then makes the important point that the exchange value of all commodities from factory, mine or land is always regulated not by the quantity of labour required in the most favourable circumstances of production, but by the quantity of labour necessary in the most difficult and least favourable circumstances of production.
Ricardo points out that when commodities are produced in very favourable circumstances by charitable organisations and their products sell on the open market alongside those of ordinary producers, the normal workings of the market can be disrupted (44).
He then clarifies the fact that rent does not add to the cost of production, but is a transfer from the profit of the cultivator (capitalist farmer) to the landlord. This,
“… is because more labour is employed in the production of the last portion obtained, and not because a rent is paid to the landlord. The value of corn is regulated by the quantity of labour bestowed on its production on that quality of land, or with that portion of capital, which pays no rent. Corn is not high because a rent is paid, but a rent is paid because corn is high … (44).
For the rest of the chapter Ricardo consolidates what he has just established.
He repeats that if land were limitless in abundance then no rent would ever be paid; and that rent in the country is a sign of wealth not a cause of it – and it is also a sign of difficulty in providing food for the population.
General wealth, he adds, increases fastest in countries where land is most fertile and imports are least hindered, when rent is stationary or falling, and production can be increased without any corresponding increase in the quantity of labour (45).
He summarises his Chapter on rent by saying,
“I hope enough has been said to show, that whatever diminishes the inequality in the produce obtained from successive portions of capital employed on the same or on new land, tends to lower rent; and that whatever increases that inequality, necessarily produces an opposite effect, and tends to raise it (50).”
Having seen Ricardo’s views on rent it will now be useful to return to King’s account of Ricardo’s 1815 paper – the ‘Essay on Profits’ where he considers rent and profit together.
The Essay is clearly an important part of Ricardo’s whole system and King notes that in his final Principles he draws heavily on the Essay’s discussion of profits and rent (61).
Moreover the Essay contains a Table with 24 columns stretching over two pages where Ricardo aims to show the progress of rent and profit under an increasing amount of capital used in production.
King (61) says that although Ricardo was writing before the advent of advanced mathematics in economics the “table is much more elaborate than anything that can be found in the literature of economics before 1815 … [and] … the best available illustration of Ricardo’s theory of distribution, and the clearest model that he ever produced of his economic system as a whole” (emphasis added).
The purpose of this table is very clear. Ricardo intends to show, with given technology, how the use of more capital in agriculture will increase rent and reduce profit, both as a share in output and eventually also in absolute terms, as well as reducing the rate of profit (62).
However, despite King’s admiration of the Table, he finds that Ricardo wasn’t consistent in his terminology and that the Table itself was not fully specified. King therefore produced a more complete and consistent version of the table himself. The King table, though, follows Ricardo in essence and adds nothing to change its findings.
Here, a copy of Kings Table will be used to demonstrate the essence of Ricardo. King starts by introducing the table and the categories used.
First the table is describing an agricultural capitalist process that produces nothing but corn (wheat). All numbers refer to quarters of corn – that is a quarter of a hundredweight or 28 pounds, or approx 12.5 kilograms.
Second these terms were defined by Ricardo as follows,
Gross Product = the Total Harvest
Net Product = the Gross product minus the non labour inputs used to produce it
Surplus Product = the Net Product minus the labour costs (wage bill) of the labour force
These definitions show that Ricardo had a clear understanding of capitalist production and the inputs needed to produce the Surplus Product, the source of profit – but he didn’t uncover how capitalist production can produce a surplus when all inputs are paid at their true value. It was Marx who later revealed the source of the surplus and of profit.
Kings Version of Ricardo’s Table
In King’s table, columns and values 1,6, 7,8 and 9 are Ricardo’s; and columns 2,3,4 and 5 have been added by King for clarity. All values are in quarters of wheat, except in column 1 and 9; the former being the amount of capital, and the latter the percentage rate of profit.
All of King’s additions are in line with Ricardo’s intentions and their purpose is to make the table fully complete and consistent.
King has set x to equal 200 to make the column 2 numbers fit with Ricardo’s intentions; had any other value of x been set nothing of consequence would change.
He has also assumed that the capital of column 1 is made up of fixed capital such as farm machinery, and an equal amount of circulating capital made up of wages. He has set the annual depreciation of fixed capital (column 3) to be equal to the annual wage bill (column 5). Again, different assumptions would have made no important difference.
| 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
| Capital | Gross Product | Capital Depreciation | Net Product | Wages | Surplus Product | Rent | Profit | Rate of Profit % |
| (2–3) | (=3) | (4-5) | (6-8) | (6-7) | (8/1) | |||
| 200 | 200 | 50 | 150 | 50 | 100 | 0 | 100 | 50 |
| 410 | 400 | 105 | 295 | 105 | 190 | 14 | 176 | 43 |
| 630 | 600 | 165 | 435 | 165 | 270 | 42 | 228 | 36 |
| 860 | 800 | 230 | 570 | 230 | 340 | 81 | 259 | 30 |
| 1100 | 1000 | 300 | 700 | 300 | 400 | 125 | 275 | 25 |
| 1350 | 1200 | 375 | 825 | 375 | 450 | 180 | 270 | 20 |
| 1610 | 1400 | 455 | 945 | 455 | 490 | 248.5 | 241.5 | 15 |
| 1880 | 1600 | 540 | 1060 | 540 | 520 | 314.5 | 205.5 | 11 |
King explains the table like this, partly quoting from Ricardo,
“Ricardo’s intention is to illustrate the effect of capital accumulation on the assumption that ‘no improvements take place in agriculture’, so that it is necessary that ‘more capital should be employed to obtain the same produce’. The implication is that the gross product increases proportionately (from x, to 2x, to 3x …), while the capital employed increases more than proportionately (from 200, to 410, to 630 … in column 1, which reproduces Ricardo’s own numbers) (63).”
The table clearly demonstrates that increasing amounts of capital (column 1) are needed to secure subsequent equal additions of product (column 2); and as capital input rises the rent share of both the net product (column 4) and surplus product (column 6) increases rapidly.
Moreover, the share of profit falls faster still, and the rate of profit (column 9) falls throughout. Although the wage share of the net product also increases steadily, it is assumed that the real wage (the amount the wage will buy) remains constant.
Ricardo’s Work Today
King then discusses the interest in and development of Ricardo’s system in the work of modern writers. He quotes Kurz (2006, p. xxiv) who argued that Ricardo was an inspiration for the development of modern mathematical economic theory. And those applying modern methods to Ricardo’s work include Kaldor (1950, 1956) and Samuelson (1978).
King himself concludes that the implications of Ricardo’s analysis are clear,
“The general profits of stock depend wholly on the profits of the last portion of capital employed on the land’ (IV, p. 21)”
And also that social conflict is inevitable as,
‘the interest of the landlord is always opposed to the interest of every other class in the community. His situation is never so prosperous, as when food is scarce and dear; whereas, all other persons are greatly benefited by procuring food cheap’ (IV, p. 21; cf. I, p. 335).
Ricardo, however, identified three ways in which the rate of profit could be maintained (slightly different to those described above). These were,
The introduction of improved agricultural methods
A reduction in real wages
The importation of cheap corn from abroad
Ricardo, says King, has little to say about agricultural improvements, but he says a lot about the benefits of free trade (68).
Elsewhere Ricardo clarifies the effect of improvements on the income of landlords. The short term effect of improvements is to lower rents; but in the longer term,
“… they give a great stimulus to population, and at the same time enable us to cultivate poorer lands, with less labour, they are ultimately of immense advantage to landlords. A period however must elapse, during which they are positively injurious to him.” (Note 12, Page 316, Ricardo’s ‘Principles’, Edition 3)
Wages
The level of wages was a tricky subject for Ricardo. King describes Ricardo’s position on wages like this. Real wages depend on relative growth rates of capital and labour; Ricardo argued that experience showed that sometimes one of these grows relative to the other, and sometimes the opposite occurs. As a result wages can sometimes be high and sometimes low. Ricardo concluded that nothing can be positively be concluded about the effect of profits on wages. (King 69),
In correspondence with Malthus, Ricardo argued that wage levels do not depend on the daily amount of produce turned out by labour. Instead they depend on the supply and demand for labour and the cost of necessities that wages are spent upon; and both of these factors may also be affected by profits sometimes raising them sometimes the opposite (69).
For Ricardo the level of wages was very important, being the difference between net and surplus product. His scheme needed the real wage to be, in effect, fixed; if it varied the definition of the surplus product would be compromised and his conclusions concerning profit and economic growth would be undermined.
King (70,71) describes Ricardo’s treatment of wages in his Principles like this.
He begins by saying that ‘the natural price of labour’ is that which allows labourers to buy the essentials of life to allow their families to subsist. This price though, could be raised or reduced by the supply and demand of market forces; but there was a tendency of the market price to conform to the natural price.
Ricardo also made it clear that the natural price was not a physical minimum. The natural price could vary according to according to the ‘customs of the people’. Today’s luxuries might be seen as essentials in the future.
In the long term though, Ricardo argued that real wages depend on the related growth of capital and of population.
Therefore, in a growing economy the market rate could stay above the natural rate for an indefinite period of time; as capital continues to need more labour, then more, then more and more labour at an increased wage could result.
Ricardo adds that ‘friends of Humanity’ might wish that an increase of income could improve the ‘habits and customs’ of workers, together with tastes for ‘comforts and enjoyments’. He adds that this could be the best safeguard against a ‘superabundant’ population.
Later in his Principles though, Ricardo looks at things differently. Discussing Malthus in his Chapter 32, he argues that the enjoyments higher wages bring – better furniture, clothes, more sugar, more tobacco etc. – might produce a better domestic life that invariably results in an increase in population.
Simon Clarke (1991) picks this up and argues that,
“… if wages rose above the subsistence minimum, as a result of legislative or charitable intervention or as a result of an increased demand for labour, there would be an increase in population as more affluent workers would marry earlier and have more children and more of these children would survive. This population increase would increase the supply of labour until the wage was forced back to the subsistence minimum.” (32)
Clarke goes on to add that as a consequence,
“Wages cannot be increased by the Poor Law, by charity, by trade unions or by co-operation. The reactionary implications of the theory at a time of considerable distress among the working class were clear and were especially attractive to politicians whose instinctive response to the problems so caused was repressive rather than reformist.” (33).
Later, Clarke calls this Ricardo’s proof of the futility of reform (67).
Clearly, those who favour political and economic reformism may think the word ‘futility’ is too strong; but Malthus and Ricardo were analysing the effects of supply and demand on the labour market, and if their analysis is still valid today then the consequences of supply and demand may sometimes support reforms and at others may counteract them.
Ricardo has been severely criticised regarding his views on wages; King quotes Hutchison (1952, P 420) who accuses Ricardo of ‘ambiguity, pessimism and pious hopes’.
This perhaps is not very fair; it seems that Ricardo was trying honestly to make sense of different aspects of the influences affecting wages, instead of ignoring matters that did not fit comfortably with his own views.
However he does add that nowhere does Ricardo mention the widespread food riots that were taking place at that time. Such protests against the high price of bread suggest that in bad harvests the consequences fell on workers rather than on capitalists or landlords.
Ricardo’s treatment of value also threw up complex influences, all of them seemingly highlighted by King.
The Theory of Value
King covers Ricardo’s value theory on pages 72 to 80, first asking why Ricardo dealt with value before distribution of the social product; the latter being the most important to him.
A number of reasons are considered including that he may have decided to tackle value first because he found it to be the most difficult and intellectually complicated matter.
He briefly touched on value in a letter to James Mill in 1811, when he criticised Mill for using ‘value’ and ‘price’ as synonymous when, he argued, the two words have very different meanings.
Then in 1815 he wrote to Say, the French political economist, criticizing the latter’s utility theory of value. While a commodity must be useful to have value, he argued, the difficulty of production is the true source of its value.
Nonetheless, he usually avoided the question of value in his early work by using his ‘corn model’. In late 1815 he was still about to write his principles without a detailed treatment of value.
It seems (Peach 1993, 27 – 28) that in 1816 he was using an unmodified theory of value, when he had not addressed the issues involved. By the time of the third edition (1819) he had incorporated modifications associated with different aspects of capital.
King says by that time Ricardo was clear enough about value, and quotes O’Brien (2004, P 100), who noted the following.
Ricardo’s value theory featured two main aspects; first primacy was given to labour – secondly four complications caused by capital were recognised.
First there were clear differences in the amounts of fixed and circulating capital (the latter comprised mainly wages). This led to differences in capital to labour ratios.
Secondly, fixed capital was of different durability in different settings.
Thirdly, there were differences in time before products came to market.
Finally, the time to return capital to employers varied.
Ricardo saw that all of these differences reduced to the common problem of time.
King then follows Ricardo’s treatment of value in the Principles (3rd Edition).
Following Smith, he covers ‘value in use’ and ‘value in exchange’- and the ‘paradox of value’, where water and air have no exchange value but are extremely useful; gold however, with little use compared to water and air, has a high exchange value.
From this he concludes that utility (usefulness) is not the measure of exchange value, but it is essential to it. He then argues that commodities with utility get their exchange value from their scarcity and from the amount of labour needed to produce them.
[He adds later that use value cannot be measured by any ‘known standard’ as it is estimated differently by different people.]
Ricardo then identifies the bulk of commodities that can be freely reproduced without limit, and are subject to competition, as those to which he applies his theory of value. Items such as works of Art that get their value from scarcity alone are outside that scope. (75)
King then finds additional points in the Principles that Ricardo could have added with the matters just dealt with.
He deals first with market prices. In Chapter 4 of the Principles Ricardo identifies labour as the foundation of commodity values, where the quantity of labour needed to produce different commodities is the ‘rule’ that determines the relative values of commodities in exchange for one another.
This being the ‘primary and natural price’ of a commodity must be distinguished from ‘actual or market price’.
Market prices can deviate from natural prices by either accidental or temporary factors (Chapter 4) or by the balance of supply and demand (Chapter 30). In both of these cases he argues that the constant pressure on capitalists to move to more profitable businesses results in the equalisation of profits across businesses, and this soon eliminates differences between natural and market prices, as does the situation of free competition in supply and demand (75).
He argues against those who propose a general supply and demand theory of all prices. This is only true for commodities in a monopoly situation, he says. (75 – 76).
Then, in Chapter 5, Ricardo repeats that his theory of value does not apply to human labour, because it is not produced for profit and in fact the market price can exceed the natural price ‘for an indefinite period’. (76).
Back in Chapter 1 Ricardo raises two issues with Adam Smith.
First he criticises Smith for his proposal that the quantity a commodity can command in the market as an alternative to the labour embodied within it, as a measure of its value. Smith, he says, argues that ‘labour commanded’ and ‘labour embodied’ are two equivalent expressions when they are clearly not.
Ricardo says that Smith, having accurately defined exchange value as resulting from the labour taken to produce a commodity, should be consistent and stick with that definition.
Secondly Ricardo considers the consequences of Smiths view that in the ‘early stages’ of society, the value of objects depends on the comparative labour used to produce each of them; whereas matters change once capitalism has taken hold.
He begins by considering the issue of wage differentials for labour of different qualities. His response is that the issue can be ignored as such inequalities change very slowly and can only have small effects for short periods on the relative values of commodities.
He next considers the more challenging argument that not only the labour immediately applied to objects affect their value, but the labour used to produce tools, buildings, machines also adds to value. This second source is essentially that of fixed capital, that can also be of varying durability.
King describes how Ricardo considered the case of brewers and shoemakers (and other pairings) needing either a lot or a little fixed capital. He then produced a numerical examination of the significance of the differing amounts of fixed capital.
He concluded that the effect of these different amounts of capital is rather small, and could not be more than 6 or 7 percent.
This proposal by Ricardo has thrown up much scepticism. Famously Stigler (1958) wrote an article on Ricardo’s ‘93% labour theory of value’, which seems on the face of it to be rather sarcastic. Others have asserted the 7% figure only results from the particular assumptions made by Ricardo in his numerical example, and that other algebraic models suggest an 80% labour theory as being equally plausible to Ricardo’s ‘guess’.
(Dobb 1973, P 80) calls this admission of a second cause of value a contradiction no different in essence from Adam Smith’s proposals of the component parts of price.
Ricardo himself strongly argued against any such criticism made at the time, and in fact said his numerical analysis actually undermined Smiths ‘Adding Up’ theory of value (78).
He attacked the Adding Up theory elsewhere in the Principles too. For example we have seen that he argued that Rent is determined by price and does not add to price as the Adding Up theory holds.
The Measure of Value
Ricardo was to go on to search for an absolute measure of value, because he wanted a reliable means of measuring the variables involved in the distribution of the social product. However he never found the perfect candidate. He held that gold, although subject to changes in value itself and therefore not perfect, was as good as anything could be to use as a measure of value, as changes in its own value only happen very slowly.
He eventually called value the most difficult problem in Political Economy (79). But King (80) emphasises a number of issues on which Ricardo never wavered. Before leaving the discussion of value; these are,
He rejected supply and demand and utility based theories of value
He insisted on ‘natural prices’ (based on labour) over and above ‘market prices’
He continued to reject Adam Smith’s ‘Adding Up’ theory
His primary interest remained the distribution of the social product, where he saw profit as central to British economic growth
To study this he needed to know the best way to measure economic variables, and to analyse changes; for this he remained committed to the labour theory of value.
International Trade
Absolute advantage
Before Ricardo the main preoccupation amongst classical political economists was that of absolute advantage. O’brien (1975, 170 – 172) argues that classical trade theory (and modern trade theory) stems from the work of Adam Smith.
Smith, he argued, proposed a model of trade linked to economic growth. This derived from his proposal that division of labour drove growth; but this required a wide market outlet for goods, which itself implies trade. Smith seems to have assumed that factors of production (for example capital) were mobile internationally as well as within nations, making international trade much the same as trade within nations.
The international mobility of factors of production means that trade will be based on absolute advantage. O’brien (1975, 170) explains the concept thus,
“… commodities will be produced where their resource inputs are absolutely lowest, each country having particular absolute advantages in the production of particular commodities. The advantage of trade then lies in buying commodities cheaper abroad than at home.”
Buying goods from the cheapest source abroad gave nations a major trading advantage. In addition they could buy goods unobtainable from home production, and could dispose of surplus produce abroad too. This whole situation was of course based on free trade and absolute advantage.
While this way of trade supported the need for freedom of trade, it also carried a downside such that exported commodities could be imitated. This could dilute the original advantage of the exporting nation, but it did serve to spread technological expertise wider than previously.
This whole situation supported the drive for free trade, it stimulated production and economic growth and saw to it that capital flowed to uses that were most productive in increasing the division of labour, just as Adam Smith argued for.
Comparative Advantage
From this basis arose the development of the idea of comparative advantage. Whilst this idea is mostly attributed to Ricardo, other classical writers aired the topic before him; but O’Brien (1975,175) feels that it was Ricardo who secured the ‘appreciation and acceptance of the idea’.
Ricardo explained the concept with a two nation, two commodity example in Chapter 7 of his Principles, as follows.
“England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time. England would therefore find it her interest to import wine, and to purchase it by the exportation of cloth.
To produce the wine in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England. Though she could make the cloth with the labour of 90 men, she would import it from a country where it required the labour of 100 men to produce it, because it would be advantageous to her rather to employ her capital in the production of wine, for which she would obtain more cloth from England, than she could produce by diverting a portion of her capital from the cultivation of vines to the manufacture of cloth.
Thus England would give the produce of the labour of 100 men, for the produce of the labour of 80. Such an exchange could not take place between the individuals of the same country. The labour of 100 Englishmen cannot be given for that of 80 Englishmen, but the produce of the labour of 100 Englishmen may be given for the produce of the labour of 80 Portuguese, 60 Russians, or 120 East Indians. The difference in this respect, between a single country and many, is easily accounted for, by considering the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the activity with which it invariably passes from one province to another in the same country.”
This is usually expressed in the following small table to simplify the explanation.
| Cloth | Wine | |
| England | 100 | 120 |
| Spain | 90 | 80 |
We should remember that we are talking about fixed quantities of cloth and wine applicable to both countries, and to the labour of so many workers for one year needed to produce those quantities.
Following Ricardo, from England’s point of view the production of cloth is more efficient than that of wine. It would thus be in England’s interest to make no wine at all and use all the workers on the production of cloth; some of the cloth could therefore be exchanged with Portugal for the quantity of wine.
From Portugal’s perspective she is more efficient at producing wine than cloth. It would therefore be in her interest to use all her workers on wine production and to import cloth from Britain.
These processes mean that Britain would exchange the produce of 100 cloth workers for the produce of 80 Portugese wine workers. Similarly, even though Portugal exchanged wine produced by 80 workers for the cloth produced by 100 cloth workers, she did this instead of producing her own cloth with 90 workers – instead those 90 workers would be producing wine at the more efficient rate.
So England produces only cloth, some of which is exchanged for wine; she thus has the same produce as she made before, but has the work of 20 cloth makers more than before.
And Portugal produces only wine, some of which she exchanges for cloth; again she has the same produce as she made before, but has the work of 10 wine makers more than before.
As O’Brien (175) points out (173) Ricardo has demonstrated that it can benefit a country to import commodities in which it has an absolute advantage; that is a theory of gain from trade completely different from trade based on absolute advantage.
He adds that Ricardo established that there was an advantage in trade even when a country is absolutely more efficient in both commodities – as long as it is more efficient in one commodity than the other.
While King observed that Ricardo’s analysis made social conflict inevitable, Screpanti and Zamagni (2005) argue that in this period two forms of class conflict ensued. On the one hand conflict occurred between landowners and the growing capitalists over the Corn Laws, and on the other there was conflict between capitalists and the working class.
The Corn Laws
Ricardo is generally linked to the issue of the Corn Laws; these were passed in 1816, and repealed in 1846. Screpanti and Zamagni, (2005, 91) refer to the intervening 30 years as the Age of Ricardo, in that ‘all the English economic research of those years was involved with it.
They also see the disagreements over the Corn Laws as an example of class conflict between the landowners and the new capitalist class, in a battle for control of Parliament. In this period Ricardo proposed his economic theory, which was accepted gladly by some economists and rejected by others.
During the Napoleonic Wars that ran from 1803 to 1815 imports of food supplies were substantially reduced, resulting in large price rises in the cost of imported Corn (wheat). English landlords responded by extending corn cultivation to less than optimum lands; this resulted – as we have seen above – in a rise in the cost of local corn and a rise in the rents Landlords were able to charge capitalist farmers.
“In 1816, … the landowners managed to convince Parliament to approve the famous new Corn Laws; tariffs were fixed at such a high level that corn, the foreign prices of which were much lower than the internal ones, could not enter the country at all” (92).
As a result high land rents were maintained and, given the maintenance of real wages, profits were reduced.
This situation was opposed by capitalist manufacturers whose operations were hampered by this protectionism. Eventually however, 30 years later, the capitalists managed to secure the complete repeal of the Corn Laws, helped by Ricardo’s theoretical contribution.
This was an event which marked the overturn of the old rule of the landowners and its replacement by the dominance of the capitalists in English society.
But before this outcome King points out that the Napoleonic wars and the Corn Laws that followed interrupted the trade liberalisation that had begun between Britain and France in the late eighteenth century.
So for much of the Nineteenth Century Britain was not a free trade nation, to which Ricardo objected.
His principal opponent in the theoretical battle was Malthus, who supported the landowners’ point of view throughout (92). Ricardo wrote to Malthus in 1814 – 3 years earlier than his views on Comparative Advantage were published – expressing his opposition to the Corn Laws.
He rejected the argument that free trade in Corn would destabilise food prices – pointing to the example of Holland with steady prices even though almost all Corn was imported.
Instead he argued that free trade would raise the real wages of labour and raise the profits of al capitalists, even though rents would suffer. He accepted that farmers of the poorer lands would suffer, but claimed that most farmers would benefit considerably as would everyone else in society, other than landlords.
Ricardo recognised the problem of transitional hardships and suggested support for farmers negatively affected. He also promoted free trade and again suggested gradual changes away from protected trade. Thus he argued for unlimited imports of wheat once the price reached a certain point including an import duty of 20 shillings to be reduced by 1 shilling per year down to a final level of 10 shillings (91).
His campaign against the Corn Laws came to nothing, though. But King produces empirical data that showed there was a sharp decline in the share of food imports throughout the 30 years of the Corn Laws, suggesting that Ricardo had been right to oppose them (93).
Criticisms of Ricardo
King then describes various criticisms of Ricardo’s approach to Trade, free trade and comparative advantage. In the last two sections of his Trade chapter he covers Politics and Ricardo’s trade theory today.
With regard to the first issue King writes that Ricardo took it for granted that a world of ‘independent and equally powerful nations existed to make the benefits of free trade available to all’ (102). In fact the power differential between England and Portugal was so great at that time that some argue that Portugal was in a semi colonial position to England.
King quotes from Joan Robinson regarding the use of such power in trade. Such imbalance she argues enables ‘the use of power to foster economic advantage’.
In the case of Portugal she continues (Robinson 1974, P1-6)
“…in real life Portugal was dependent on British naval support, and it was for this reason that she was obliged to accept conditions of trade which wiped out her production of textiles and inhibited industrial development, so as to make her more dependent than ever”
And
“…‘it is evident that Portugal is not going to benefit from free trade. Investment in expanding manufactures leads to technical advance, learning by doing, specialization of industries and accelerating accumulation, while investment in wine runs up a blind alley into stagnation”
So while Ricardo’s comparative advantage might be of benefit in a perfect world of nations of equal power and free trade, in reality the more powerful nations are able to benefit by imposing conditions to the detriment of less powerful nations.
When considering modern trade the same issues continue. For example Anwar Shaikh (2007, 51 – 56) argues that classical competitive advantage,
“…generally favours the developed over the developing, and the rich over the poor … free trade does not make all nations equally competitive, as is argued within standard trade theory. Rather, it exposes the weak to the competition of the strong. And as in most such cases, the latter devour the former”
And
“… the fundamental problem of standard trade theory is that it is wrong on its own terms. That is to say, it is flawed at its very root, in the analysis of competitive free trade between nations: the very principle of comparative costs is wrong even under competitive conditions.”
The problems of ‘free trade’ for poorer nations thus seem to persist in the modern world, and may be a crucial factor in their continued economic disadvantage, with the glaringly obvious consequences for their populations.
The Stationary State
King covers Ricardo’s position on growth and the stationery state on pages 108 to 112, and this section is drawn from there.
King begins by describing the views of modern commentators on this issue. First Ricardo (and Malthus) is accused of not recognising the rise in agricultural yields and the growing population (mainly due to a falling death rate] after 1815 despite the Corn Laws. This neglect it is suggested was due to Ricardo’s support for free trade, and these figures could have undermined free trade theory.
He is also criticised for not taking account of the changing relationship between population and subsistence costs.
For 250 years to 1800, it is noted, there was an unchanging relationship between the rate of population growth and the rate of change in the cost of subsistence. But that relationship disappeared in the 19th century and the connection broke suddenly at about 1811.
But this pessimistic view of Ricardo was challenged by others who saw him as a long run optimist; thus if the Corn laws were to be repealed then profits need not fall because of continued economic growth.
Again the 1970’s and 1980’s saw a new view of Ricardo as an optimist regarding wages as the standard of living of workers was seen to have responded to the Industrial Revolution. A number of writers now accounted for Ricardo’s view of the Stationary State as – a fiction – an analytical device, not a view of reality, an aside.
Ricardo was seen to be of the view that economic growth could continue without limit, as long as ‘good government’ was established, trade restrictions were abolished and the national debt reduced or removed. A few critics remained though.
King then turns to what Ricardo himself wrote about these matters. First he notes that Ricardo saw wages varying at different times, depending on the ‘habits and customs of the people’. He saw too, that many everyday items would have been viewed as luxuries in the past.
This was a trend he wanted to see continue, that workers should develop tastes for ‘comforts and enjoyments’ and that they should be stimulated to work hard for them. But he felt that ‘if our progress should become more slow’ then the stationary state could be arrived at, ‘from which I trust we are yet far distant’.
King then looks at Ricardo’s correspondence. In December 1814 he wrote to Malthus arguing that the accumulation of capital has a tendency to lower profits, because,
“every accumulation is attended with increased difficulty in obtaining food, unless it is accompanied with improvements in agriculture; in which case it has no tendency to diminish profits … If with every accumulation of capital we could tack a piece of fresh fertile land to our Island, profits would never fall.” (See King, 110).
These are grounds for optimism says King, who then quotes another letter to Malthus from October 1815. Here he says that technical progress in agriculture might be beneficial in all but the very long run. By this he suggests it could be 900 years of benefits from agriculture ran out, therefore forestalling any possibility of the stationary state.
He did feel however that this depended on good legislation by Parliament, and that this could be doubted due to the power of the landlords.
King finishes by agreeing with Joan Robinson, who saw Ricardo’s stationary state as ‘not an equilibrium, but an awful warning’ (Joan Robinson 1978, 15).
Says Law
O’brien (1975, 41), in his discussion of Ricardo describes Says Law like this. It is
“… the doctrine of the impossibility of failure of effective demand ..”,
and that it stated,
“ … that production of commodities constituted demand for commodities”.
Stated more roughly, the Law is often represented as – ‘Supply creates its own demand’.
In fact O’Brien calls Ricardo’s connection to Says Law ‘rather dubious’. However he also says that Ricardo did make use of the Law but only because it provided a mechanism that could produce declining profits, whereas theories of overproduction could not explain a decline in profits.
He then briefly describes the core of Ricardo’s system that also involves the Corn Laws. So,
“.. the Corn Laws, which hindered the import of corn, caused resort to inferior land at home, involving a fall in the average and marginal products of labour and capital and hence bringing about a stationary state..”
This would result because profit levels would be so low that they no longer provided an incentive for further accumulation or the future employment of labour. At that point, which Ricardo painted as a fairly imminent likelihood, accumulation stops, population stops growing, wages are at a bare minimum and the economy become stationary.
Says Law is covered more extensively by O’Brien later, in his discussion of James Mill; and it is contrasted to those writers who saw the maintenance of sufficient demand in the economy as a problem.
O’Brien (160) includes a long quotation from Mill that lays out his explanation of ‘Says Law’. Parts of the quotation are included here.
“A commodity which is supplied is always …. a commodity which is the instrument of demand. A commodity which is the instrument of demand is always … a commodity added to the stock of supply … Of two men who perform an exchange, the one does not come with only a supply; the other with only a demand; each of them comes with both a demand and a supply … and … demand and supply are of course exactly equal to one another.
But if the demand and supply of every individual are always equal to one another, the demand and supply of all the individuals in the nation, taken aggregately, must be equal. Whatever, therefore, be the amount of the annual produce, it can never exceed the amount of the annual demand.”
O’Brien points out that what Mill and Say were stressing ‘was the circularity of the economic system’, and this, he says, was ‘a major analytical insight’. To the extent, he also says, that the proposition points to the impossibility of a shortfall in aggregate demand; it was also aimed at writers like Malthus who argued that economic growth would produce such a lack of demand.
O’Brien explains this lack of demand argument – clearly at odds with the ‘Says Law’ theory – later in his discussion of economic growth (229 – 230). Briefly the argument goes like this.
Given a national economy ‘ticking over’ nicely; with full employment, industries are making profits and the economy is growing steadily. Underlying that situation there exists an optimum ratio between invested capital and the level of income; just enough capital is invested to enable the population to buy the commodities produced.
The second given is that saving and investment are the same thing. That is saving made in the conventional way by deposits in banks for example; the banks will take those deposits and invest the money to produce their own income.
Now suppose for some reason, there is an upsurge in saving/investment. Industries find themselves with more investment than they expected; with that extra capital they might introduce more advanced machinery resulting in higher turnout of commodities.
But this creates a problem; income remains the same but it is unable to buy the whole of the larger volume of produce. The optimum ratio of capital to income has been breached. Industries cannot sell all of their produce and may have to lay off some of their workers – the economy goes through a crisis as a result of the reduced demand for consumption goods and therefore investment opportunities.
He also cites two remedies to all this. First government could tighten its spending to lower the savings/income ratio in order to add to demand. Secondly, longer term, property and wealth distribution could be widened, removing restrictions on economic growth.
Kings discussion points out that there are various interpretations of ‘Says Law’.
He outlines the original meaning, which was ‘a simple denial of the possibility of demand deficiency as a cause of recession and unemployment, and a rejection of the claim (e.g. made by Malthus) that unproductive consumption was needed to ensure prosperity by maintain demand’ (112).
This, says King, seems to be what Ricardo believed, as did John Stuart Mill too, at a later date..
Following from this belief Ricardo adopted a strict Quantity Theory of Money and the neutrality of money too. He therefore thought that different quantities of circulating money only affected price levels, and that output and unemployment problems are caused only by ‘real factors on the supply side of the economy – inputs of land, labour and capital, together with technology and other factors relevant to the organization of production’ (113).
This position adopted by Ricardo came in for various criticisms after the publishing of Keynes ‘General Theory’. For example he is accused of only a long term view (that could be consistent with shorter term unemployment and excess capacity) and that he lacked any theory of output from production.
King concludes that these views, and Ricardo’s adherence to the ‘real physical cost’ of production, does,
“constitute a real problem for any attempt to reconcile Ricardo and Keynes, since for the latter the beliefs and expectations of business people operating in an environment of fundamental uncertainty are crucially important.(114)”
King turns to Ricardo’s own statements on the subject, either in his Principles or in letters to others. For example, in Chapter 21 of his principles he lays out his view of Say’s own views,
“Mr. Say has, however, most satisfactorily shewn, that there is no amount of capital which may not be employed in a country, because demand is only limited by production. No man produces, but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person. (Principles 290).
King goes on to say that Ricardo is explicit in denying the possibility of a general glut,
‘Too much of a particular commodity may be produced, of which there may be such a glut in the market, as not to repay the capital expended on it; but this cannot be the case with respect to all commodities’ (Principles 292).
Only in one place – in an 1819 letter to his neighbour – does he seem to accept the possibility of a general glut,
“You will find the politicians of this country in a very gloomy mood. Commerce is languishing – merchants and manufacturers are failing – overtrading has become general and all our markets are glutted with goods … A cloud is certainly passing over us, but I cannot help anticipating with confidence that we shall speedily resume our wonted energy and vigour” (Heertje and Weatherall 1978, p. 570)
King is unsure whether this is excess irony, or Ricardo changing his mind; in all his other statements he seems to King to be ‘entirely consistent’ that general gluts do not occur (116).
For example he quotes from a letter to Malthus in 1814,
“We agree too that effectual demand consists of two elements, the power and the will to purchase, but I think the will is very seldom wanting where the power exists, – for the desire of accumulation will occasion demand just as effectually as a desire to consume, it will only change the objects on which the demand will exercise itself … In short I consider the wants and tastes of mankind as unlimited.” (116)
King also finds in Ricardo’s ‘Notes on Malthus’ from 1819 (116 to 117),
“Mr. Malthus’ error is in supposing that cheap corn, and cheap commodities, necessarily imply a glut of corn and commodities. We agree that a glut is an evil … It arises always I think from a bad selection in the object produced, but cheapness from facility of production, which I think is the only legitimate cheapness, never fails of being attended with the happiest effects, and is as different from a glut, as light is from darkness.”
This he says is a clear statement that partial over- production is possible, but general over – production is impossible.
King concludes that Ricardo did have a theory of aggregate output – and he communicated this to almost all other classical economists. Summarised it goes like this, ‘Output is always constrained by the amount of capital available; output is not constrained by lack of demand.’ (117).
He then clarifies that Says Law does not apply to what later came to be called the ‘labour market. He quotes Kurz who states that,
“ The classical authors envisaged Say’s Law to apply to capitalistically produced commodities only. Since labour, although a particular kind of commodity is not produced and reproduced in a capitalistic way, Say’s Law was not applicable.” (See King, 118).
Later economists have questioned the veracity of Ricardo’s position on this. But Green, quoted by King is more tolerant,
‘at the time when Ricardo wrote, major crises affecting the world market were as yet unknown; his denial of their possibility therefore seemed plausible’, especially when ‘more visible factors’ like bad harvests, the wartime blockade, and what Ricardo described as ‘sudden changes in the channels of trade’ could be invoked instead (Green 1992, p. 97)
King adds that Marx would have concurred with this as he dated the onset of modern periodic business cycles to 1825, two years after Ricardo’ death. (119).
Conclusion
Coverage of Ricardo will end here. King goes on to discuss a few other aspects of Ricardo that may be picked up later.
Commentary
This will not be a full commentary; it will be expanded later. A few statements about Ricardo will be listed for now.
Robbins said of Ricardo on value and distribution,
“And I shall be concentrating principally on Ricardo here, not merely because Ricardo is so much more difficult than the other writers on the subject, but because, whether he reached the right conclusions or not, which is a controversial matter, he was so much more profound, so much more worthwhile puzzling your heads about—difficult though he may be” (185) – Emphasis added.
Later on Page 305 Robbins agrees with another economist that,
“..’ the origins of Marshalls Principles was the translation of Ricardo and Mill into algebra and geometry.”
Marshall (1842 to 1924) was the very highly regarded Professor at Cambridge where he taught, amongst many others, both Keynes and Joan Robinson.
Robbins adds that.
“As regards the history of economic thought since the eighteenth century, it really is a case of Adam Smith – Ricardo – John Stuart Mill – Marshall.” (304)
O’Brien (2004), discussing Ricardo on Comparative Advantage in trade said that,
“… as is so often the case with Ricardo there is so much more implied here … But he had gone far enough to establish a theory of the gain from trade which was clearly distinguished from that based upon absolute advantage.” (173)
And
“Ricardo’s deductive method, his model building, was to be of the greatest importance. Ricardo essentially invented these techniques … as a process of heroic abstraction … Both these characteristics were to be of far greater importance for economics after the end of the Classical era.” (See King, 39).
Screpanti and Zamagni describe the impact of Ricardo’s work like this,
“In England, the thirty years from the passing of the Corn Laws (1816) to their repeal (1846) can be defined, in terms of economic theory, as ‘the Age of Ricardo’. It was at the beginning of this period that David Ricardo proposed his own economic theory; and whether the economists of the period exalted, discussed, misrepresented, or criticized the Ricardian approach, it is a fact that all the English economic research of those years was involved with it.”(91)
King ends his book like this.
Ricardo was, ‘just another genius’ and, “ Ricardo’s Principles is up there with the Wealth of Nations, Das Kapital and The General Theory as the four truly great works in the history of economic thought. And that is surely enough” (212).
Profit, Wealth and Value 