The economics of David Ricardo 0802054382

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STUDIES IN CLASSICAL POLITICAL ECONOMY / II

SAMUEL HOLLANDER

The economics of David Ricardo

UNIVERSITY OF TORONTO PRESS

Toronto and Buffalo

,oU

© University of Toronto Press 1979 Toronto

Buffalo

London

Printed in Canada

Library of Congress Cataloging in Publication Data Hollander, Samuel. The economics of David Ricardo.

(Studies in classical political economy; 2) Bibliography: p. Includes index.

1. Ricardo, David, 1772-1823. 2. EconomicsGreat Britain - History. I. Title. II. Series.

hb103.r5h72

330.15'3

79-4392

ISBN 0-8020-5438-2

The photograph of David Ricardo, on the title page and on the jacket, is from a marble bust made at Florence in 1822 in the studio of Vincenzo Bonelli; the photograph was taken in November 1978 and is reproduced by kind permission of Mr Peter W. Ricardo.

DEDICATED WITH LOVE TO MY PARENTS AND TO MY TEACHER LIONEL ROBBINS

Digitized by the Internet Archive in 2019 with funding from Kahle/Austin Foundation

https://archive.org/details/economicsofdavidOOOOholl

CONTENTS

PREFACE ACKNOWLEDGEMENTS

xi xiii

The Edinburgh Review

55

James Mill and J.R. McCulloch

57

Two contributions to the INTRODUCTION

3

corn law debate of 1815:

Scope and objective

3

West and Torrens

60

Summary

65

The analytical core: a summary statement Plan of work

5 13

I / Aspects of the Smithian legacy

17

2 THE LAW OF MARKETS

67

Lord Lauderdale’s critique

68

James Mill and the law of markets

73

1

J.B. Say and the law of markets

79

VALUE AND DISTRIBUTION

Summary: the matter of‘priority’ 95

ANALYSIS, 1776-1816

19 II / The economics of

The Smithian theory of value and distribution

19

The uses of economic theory

26 33

Two early critics of Smith’s ‘applied’ economics

36

THE NEW THEORY OF PROFITS

101

On ‘Value’ and ‘Price’

103

An early statement of

Ricardo as Smithian economist:

diminishing returns and

early allusions to value and

differential rent

41

The reception of Smithian economics, 1800—15

99

3

Some reactions to Smithian ‘system-building’

David Ricardo

44

distribution

105

The new theory of profits

113

The corn law debate

118

viii CONTENTS

4

Profits as an ‘exploitation’

THE ESSA T ON PR OF ITS

income?

AND RICARDO’S DEFENCE

123

Conclusion: the inverse

The theory of profits, 1814

124

profit-wage relation a‘truism’?

the Essay on Profits

134

6

The general rate of profit

138

ALLOCATION MECHANISMS

The nature of the wage basket

145

The principle of profit rate

The Malthusian challenge

146

equalization and some

261 267

The analytical core of

The defence: rejection of the corn model

154

The defence: the principle of

applications

271

Demand theory

273

Cost price

280

population

164

The workings of the

The defence: the law of markets

166

competitive process

172

pricing

293

Resource allocation and factor

On the ‘desirability’ of a high corn price

285

Resource allocation and factor

A note on wage rate determination

270

174

pricing: two extensions

298

The profit rate in agriculture

Summary: the inverse profit-wage relation

175

does not determine the

Prelude to the Principles

183

general profit rate

301

The fundamental theorem on distribution once again

5

302

On Wicksell, Hayek, and the

Ct THE THEORY OF VALUE AND DISTRIBUTION

191

fundamental theorem

305

Value and distribution (1817)

191

Conclusion

306

differences between editions

208

7

The measure of value

218

CAPITAL, EMPLOYMENT,

The labour theory of value:

On the neglect of exogenous

AND GROWTH

308

changes in the time period of

Capital and savings

310

Capital supply conditions

316

investment

221

The measure of value and substitution relations

Accumulation in conditions 223

of labour scarcity: some

227

wage-fund theory

implications regarding the

Ricardo’s defence of the measure of value The inverse profit-wage

Accumulation and employment

relation and money supply

capacity

conditions

242

Implications regarding distribution and pricing The inverse relation and

339

The development of Ricardo’s position on machinery

250

326

346

A restatement of the problem of machinery: further

subsistence wages

254

implications regarding the

A corn model in the Principles?

255

wage-fund theory

367

CONTENTS ix

‘Demand for commodities is not demand for labour’

Contemporary prospects for rising living standards

555

Labour supply conditions:

Poor law policy

563

evidence from wage taxation

Long-run effects of repeal

566

Short-run effects of repeal

572

‘On gross and net revenue’

582

analysis

373

375

The secular pattern of the wage and profit rates

395

The secular pattern of class distribution

404

Some implications of the machinery problem

584

Ricardo as ‘radical’

586

The principle of utility

593

8

11

MONEY, BANKING, AND TRADE

412

‘Depreciation’ and general price inflation

414 425

experience

605

Evaluation of future prospects

608

Ricardo in Parliament:

The process of international

the case for repeal

adjustment to money supply

The case for repeal continued:

increase

435

corn price stability

The transfer mechanism

442

The case for repeal continued:

Some methodological

efficiency gains

implications

Summary: Ricardian theory as

457

Comparative costs and specie distribution

599

Evaluation of British

Smithian banking principles and Ricardo’s position

THE CORN LAW ISSUE

615 629 632

predictive engine

637

CONCLUSION

643

459

9

Some problems of

THE QUANTITY THEORY

interpretation

643

AND THE LAW OF MARKETS

474

Was there a Ricardian

The quantity theory

475

‘revolution’?

652

Early reactions to Ricardianism

660

The effects of money supply contraction The law of markets

488

Ricardian economics and

500

general equilibrium

673

Postscript: Ricardo and Sraffa

684

APPENDICES

691 693

The post-war depression: Ricardo’s position

514

The post-war depression: the Ricardo-Malthus debate

523

A Biographical data

Summary of issues

535

B ‘Agricultural’ models of

distribution and growth

10

695

C On some details of

James Anderson’s case for

THE THEORY OF ECONOMIC POLICY

540

The role of government

542

The ends of economic activity

544

intervention

706

D A note on corn trade

legislation

711

X

CONTENTS

E Statistical data

713

poor relief

F The Ricardo Papers,

Cambridge

H A further note on

723

717 BIBLIOGRAPHY OF

G Malthus and the

measure of value

Ricardo’s position on

719

WORKS CITED

725

INDEX

743

PREFACE

There are several substantive matters which it may be helpful to deal with at the very outset. A great deal of attention will be paid in the present work to the role of the price mechanism in Ricardian theory. It turns out that there is less of a distinction between this corpus of doctrine and subsequent (neo-classical) doctrine than is sometimes believed. In short, Marshall’s conviction that his economics was in the Ricardian line seems to be borne out. This is one of the surprising outcomes (to me at least) of my researches; my contribution to the Mill conference held at Toronto in 1973 — ‘Ricardianism, J.S. Mill and the Neo-Classical Chal¬ lenge,’ in James and John Stuart Mill: Papers on the Centenary Conference, ed. J.M. Robson and M. Laine (Toronto 1976), especially pp. 79-85 - shows how much my thinking has changed on this difficult issue. I shall also be much preoccupied by the Ricardian analysis of the secu¬ lar pattern of wage and profit rates. A statement of the main propositions in this regard has already appeared in a joint paper - John Hicks and S. Hollander, ‘Mr. Ricardo and the Moderns,’ Quarterly Journal of Economics (Aug. 1977). I wish to draw attention here to the relevance of the materials in Chapter 6 for the argument as formulated in the paper. In the paper every point on the ‘path’ is a position of long-period equilibrium in Mar¬ shall’s sense; the capital structure is appropriate all the time. What I am now suggesting is that Ricardo understood enough of‘Marshallian’ eco¬ nomics, including the distinction between ‘short run’ and ‘long run,’ for it to be justifiable to ascribe to him an appreciation of the intermediate stages after a disturbance (say a change in the wage rate), namely the situation before the capital structure has settled down into a new pattern. To this extent the accuracy of our paper as a reflection of Ricardo’s posi¬ tion is further enhanced, although it remains true that Ricardo did not choose to enter into the details of the short run in the secular context.

xii PREFACE The question of Ricardo’s ‘legacy’ is taken up in the final chapter but mainly in so far as concerns reactions during the lifetime of Ricardo. The interested reader may find a fuller discussion in my ‘The Reception of Ricardian Economics,’ Oxford Economic Papers (July 1977). To reduce the plethora of notes, references in general have frequently been combined throughout this work. Samuel Hollander Toronto, July 1978

ACKNOWLEDGEMENTS

I have contracted many debts during the long course of my work on this book: to Vincent Bladen at Toronto, William Jaffe and Ian McDonald at York, and Scott Gordon at Queen’s, who have been constant sources of encouragement and good advice over the years and have helped me far more than they are aware; to my colleagues Joel Amernic, Robert Fenn, and Dusan Pokorni, and my students Tom Kompas, Mark Lovewell, and Tim Tutton; to Piero Barucci, Piero Roggi, and Vani Malagola of the University of Florence where I began my research during the academic year 1973-4; to Marian Bowley, Walter Eltis, and Sir John Hicks, who made my stay in the United Kingdom the following year so worthwhile. I have learned much from correspondence and discussion with William Baumol, R.D. Collison Black, Mark Blaug, Carlo Casarosa, Neil de Marchi, Barry Gordon, Geoff Harcourt, Terence Hutchison, David Levy, Larry Moss, Denis O’Brien, Gerald O’Driscoll, G.S.L. Tucker, and Donald Winch. It is unnecessary to add the standard caveat. I much appreciate the assistance of J.H. Burns, John Eatwell, A.B. Lowe, and the late Maurice Dobb regarding the matters discussed in Appendix F. Peter Ricardo very kindly arranged for a new photograph of the bust of Ricardo in his possession and permitted its use on the dustjacket of this book; I would also like to thank David Weatherall for his assistance. I have been blessed with efficient typists: Shirley Mills in Florence, Betty Stevenson in London, Gloria Rowe and Z. Alpar in Toronto. They have patiently tolerated and transformed the most horrendous manu¬ scripts and for this I shall always be grateful. Sally Mott has been as reliable a research assistant as anyone could ask for. Thanks are due to the editors of Economica, History of Political Economy, and Oxford Economic Papers for permission to draw upon some already published work.

xiv ACKNOWLEDGEMENTS The award by the Canada Council of a generous Killam Senior Research Scholarship allowed me to take an extended leave of absence (1973-5); and grants in aid of research provided by the Humanities and Social Sciences Committee of the University of Toronto (drawing from funds provided by the Canada Council) hastened the completion of my work. This book has been published with the help of a grant from the Social Science Federation of Canada, using funds provided by the Social Sciences and Humanities Research Council of Canada, and a grant to the University of Toronto Press from the Andrew W. Mellon Foundation. Congratulations are due to me and my editor, Gerry Hallowell, for maintaining at least the outward appearance of sanity and good humour despite the massive size of the manuscript. Time will tell whether any permanent damage has resulted. My undergraduate students must have been reading the Theory of Moral Sentiments (in addition, let us hope, to The Wealth of Nations). I am deeply touched by their sympathetic and benevolent response to my appeal for help with proofreading. My most sincere thanks to David Atlin, Dana Boyko, Michael FlintofF, Vicki Fowles, Diane Groome, Peter Haidelmayer, Jennifer Harris, Jim McSherry, Paul Potvin, Gerry Rocchi, Jack Slaughter, Anthony Stehouwer, Janina Walker, and one anony¬ mous aid. My children, too, Frances and Isaac, have borne part of the burden. My wife came to the rescue in that most trying of tasks - the making of the index - as in much else since the inception of this project.

THE ECONOMICS OF DAVID RICARDO

INTRODUCTION

SCOPE AND OBJECTIVE

The growing volume of journal and monograph literature devoted to expositions of ^Ricardian’ economic theory, particularly the analysis of distribution in a context of economic growth, and the appearance even in elementary textbooks of simplified versions of the ‘Ricardian* system, are welcome signs that the economics profession still finds the classical litera¬ ture to be of profound importance. Unfortunately, in many cases the attributions are loosely made; it is with Ricardo-like models rather than with the economics of Ricardo that the interest lies,1 and, however interest¬ ing the models may be in their own right or as pedagogical devices, little help is given to the student who wishes to evaluate their status as accu¬ rate representations of the historical Ricardo. Moreover, for a variety of reasons, some of which will become clear during the course of this investi¬ gation, Ricardo scholarship has been sometimes tarnished by special pleading designed to support a particular ideological viewpoint. Amongst historians of economics, who are of course profoundly con¬ cerned with the historical Ricardo, there is a lack of consensus regarding the distinguishing features of Ricardo’s theoretical structure. There is, for example, no agreement on the precise role of allocation via the price mechanism, the nature of the aggregate factor supply functions, or even Say’s Law. There is no consensus regarding the origins of Ricardian eco¬ nomics, its policy achievements, its relationship with the broader body of

1

This is a conspicuous feature of recent mathematical formulations. Cf., for exam¬ ple, Paul A. Samuelson, ‘A Modern Treatment of the Ricardian Economy, I,’ Quarterly Journal of Economics, LXXIII (Feb. 1959), 1: ‘To avoid arguments over what Ricardo himself “meant” or understood, I shall describe Ricardo-like models.’

4 THE ECONOMICS OF DAVID RICARDO

‘classical’ doctrine, and its longevity. Even where there is substantial accord as far as concerns the matter of ‘content’ there are profound divi¬ sions regarding ‘quality.’ ‘The judgments of economists on Ricardo,’ it has been observed, ‘suggest the opinions of the nine blind men who felt various parts of the elephant and then described the animal.’2 3 The riddle of Ricardo’s position in the history of economic thought has been desig¬ nated ‘the Ricardo problem,’3 which, according to one commentator, is by its very nature insoluble: ‘The overriding fact surely is that Ricardo came, with tragic discontinuity, to the end of his personal “long run,” in no state of even relatively stable or neutral intellectual equilibrium. Moreover, the “dynamic” process of development was crammed into so comparatively few years that no decisive trends in his thinking get much chance of emerging definitely.’4 5 To some extent the disaccord may be accounted for (and indeed justi¬ fied) by the fact that each generation rewrites its own history of econo¬ mics. From this perspective an evaluation often tells us more about the commentator than his subject. (A particularly significant division of opinion in this regard, and one with which we shall be much occupied, is reflected in the treatment of Ricardian economics by J.A. Schumpeter as an unfortunate ‘detour’ in the development of economic analysis, in total contrast to the reading of the evidence by Maurice Dobb which places Ricardo at the very head of the main branch of the ‘true’ classical tradition.) ’ There can be no absolute standards, but too little effort has been made to justify the use of the particular frame of reference within which the critic undertakes his interpretation. I hope to demonstrate that by attending to this issue, and by following certain principles of exegesis, it is possible if not to ‘solve’ the Ricardo Problem at least to reduce it to manageable proportions and narrow the range of acceptable readings of the record. A primary objective of this study is to define the characteristic features that distinguish Ricardo’s economics from the work of Adam Smith: to define the scope and nature of the ‘Ricardian revolution,’ and to specify the common classical tradition shared with Smith; a closely related goal is to define both the shared ground and the differences between Ricardian and later neo-classical procedures. My preoccupations extend, however, beyond the pure theory of value and distribution - the central analytical 2

F.W. Fetter, ‘The Rise and Decline of Ricardian Economics,’ History of Political Economy, I (Spring 1969), 67

3

H.M. Robertson, ‘The Ricardo Problem,’ South African journal of Economics, XXV (Sept. 1957), 171-86

4 T.W. Hutchison, ‘Ricardo’s Correspondence,’ Economica, XX (Aug. 1953), 265 5 J.A. Schumpeter, History of Economic Analysis (New York 1954); Maurice Dobb, Theories of Value and Distribution since Adam Smith (Cambridge 1973). Detailed references to the secondary literature will be given during the course of this work.

INTRODUCTION 5 core — to growth and monetary theory. Ricardo’s contribution to the theory of economic policy will also be considered; and possible relation¬ ships between his intellectual contributions and the nature of the contem¬ porary economy will be investigated. THE ANALYTICAL CORE: A SUMMARY STATEMENT

Four months before publication of his Principles of Political Economy in 1817 Ricardo received the following words of advice from his friend James Mill: ‘In preparing your book, the question for you to determine is - whether you will chuse to include in it a view of the whole science ... Or, whether you will content yourself with those parts of the science which you yourself have improved. In the first way, you would be most useful; but I rather think you will get most reputation in the last.’6 In reply Ricardo observed: ‘It will, I think, be easier to me, to publish only those parts of the science which have particularly engaged my attention, and if my efforts should be favourably received, it may afford me a future agreeable task to take a view of the whole science.’7 In his previous letter he had been quite specific about what ‘particularly engaged his atten¬ tion’: ‘In reading Adam Smith, again, I find many opinions to question, all I believe founded on his original error respecting value. He is particu¬ larly faulty in the chapter on bounties ...’ The ‘original error’ in question was alluded to explicitly in a letter to J.R. McCulloch written at the same time: ‘Your system proceeds upon the supposition that the price of corn regulates the price of all other things, and that where corn rises or falls, commodities also rise or fall, — but this I hold to be an erroneous system although you have great authorities in your favour, no less than Adam Smith, Mr. Malthus and Mr. Say.’8 We shall be particularly concerned in this work with what Ricardo himself regarded as his original contribution; it will already be clear that this falls within the domain of value and distribution. It may be helpful to set the stage by providing a summary statement of the analytical core 6 7

Letter of 16 Dec. 1816, The Works and Correspondence of David Ricardo, ed. P. Sraffa (Cambridge 1951-73), VII, 107 20 Dec., ibid., 112. Ricardo had actually made the point to Mill in an earlier letter of 17 Nov., ibid., 88. And a similar statement of the scope of his intentions appears in correspondence with Hutches Trower over a year earlier: ‘Mr. Malthus and I continue to differ in our views of the principles of Rent, Profit and Wages. These principles are so linked and connected with everything belonging to the science of Political Economy that I consider the just view of them as of the first importance. It is on this subject, where my opinions differ from the great author¬ ity of Adam Smith, Malthus, etc. that I should wish to concentrate all the talent I possess, not only for the purpose of establishing what I think correct principles but of drawing important deductions from them.’ 29 Oct. 1815, ibid., VI, 315-16

8

To Mill, 2 Dec. 1816, ibid., VII, 100; to McCulloch, 4 Dec., 105

6 THE ECONOMICS OF DAVID RICARDO

of Ricardian theory leaving the fuller justification for my formulation to the corpus of the book. In so far as concerns the theory of value the essential point to keep in mind is its function as a necessary preliminary for the analysis of distribu¬ tion, particularly the analysis of profit rate determination and the effect of wage rate changes upon the rate of profit. Ricardo was preoccupied with the problem of defining the minimum conditions required of a medium of exchange, at least in principle, to assure approximate con¬ stancy in the value of the output to be shared between the income recipi¬ ents in the face of changes in distribution: for ‘even though nothing has occurred to change the magnitude of the aggregate, there may be appa¬ rent changes due solely to changes in measurement, owing to the fact that measurement is in terms of value and relative values have been altered as a result of a change in the division between wages and profits.’9 Attention was thus focused upon changes in the price structure brought about by wage rate variations, rather than upon the price structure itself. In the event that conditions prevail which justify the use of a labour theory of exchange value - namely identical factor proportions between commodities - the problem that Ricardo faced is immediately solved, for exchange rates are then unaffected by wage rate variations. Ricardo appreciated the limitations of the labour theory created by differential factor proportions and struggled with the choice of the appropriate com¬ modity to use as medium. Nevertheless, he proceeded with the analysis of profits by presuming identical factor proportions and utilizing a labour theory, justifying the procedure not merely as a practical, if provisional, course of action but also on the grounds that the effects on relative values of wage rate changes are empirically constrained in comparison with the effects induced by alterations in labour input. Ricardo’s primary concern, for the analysis of which he sought to de¬ vise a suitable measure of value, was the rate of return on capital (the profit rate) rather than, as is sometimes believed, the aggregative income shares. But the profit rate was envisaged as a direct function of the share of profits and as an inverse function of the share of wages in the value of net output minus rentyNow in the Ricardian structure, an increase in the proportionate share of wages appears as an increase in wages expressed in terms of the ‘gold’ measure of value - a commodity produced with constant labour input and thus constituting a labour-embodied unit. While it may seem that the identification lacks generality since all de¬ pends upon a presumed constancy of aggregate value (in other words upon the assumption of a given total labour force), we may in fact quite accurately express the Ricardian theorems in terms of per capita rather than total wages and output: an increase in per capita ‘gold’ wages neces9

Editor’s introduction, ibid., I, xlviii

INTRODUCTION 7

sarily implies a rise in the labourer’s share in per capita output which is of constant ‘value’ whatever may happen to total value.1’ In summary, the entire Ricardian scheme is designed to relate the rate of return on capital to the ‘value’ of per capita wages (Ricardian ‘real’ wages) — which in effect amounts simply to the proportion of the work-day devoted to the production of wages — and variations in the rate of return to (inverse) variations in the ‘real’ wage rate. This relationship will be referred to as ‘the fundamental theorem on distribution.’ It follows from the basic analysis - assuming unchanged input coeffi¬ cients in the production of the monetary metal, or ruling out nominal changes in money values — that wage rate increases are non-inflationary and at most generate an alteration in relative prices within limited bounds; capitalists are unable to pass on increased wage costs in the form of generally higher prices. This fundamental conception was initially for¬ mulated as a direct challenge to received doctrine based upon Adam Smith’s analysis whereby wage rate increases are passed on by capitalists in the form of higher prices in manufacturing industries and lower rents in agriculture. It will be my contention that here lies the essence of the Ricardian contribution, and that the significance, indeed the primary objective, of Ricardo’s analytical work cannot be accurately evaluated unless placed in this historical context. At the same time it must be strongly emphasized that in formulating his challenge Ricardo utilized principles of resource allocation learned from the Wealth of Nations itself. In effect, he took his predecessor to task for a faulty application. The weakness of the Smithian position came to light in the course of Ricardo’s preoccupation with the great monetary issues of the early years of the nineteenth century - the famous ‘bullionist’ controversy. It should be remarked that, despite the attention paid to the problem of construct¬ ing a suitable measure of value, the conclusion that wage rate increases are non-inflationary was maintained quite generally and applied to the ‘real world’ where the conditions required of the theoretical measure are not fulfilled. This fact has profound implications for any evaluation of the intended scope of Ricardo’s model construction. I accordingly pay par¬ ticular attention to the inverse wage-profit relationship under alternative monetary regimes. In some standard interpretations it is maintained that the substance of Ricardian economics may be accurately expressed by a single-sector agricultural model of distribution and growth. This abstraction entails 10

Ricardo’s preoccupation in the analysis of value was therefore to assure constancy of the value of per capita output as the wage rate varies, for this assures an equivalent variation in the labourer’s share in the value of per capita output. But an increase in labour’s per capita share necessarily entails an increase of the total wage share in the aggregate output to be divided between labour and capital whether or not total population is given.

8 THE ECONOMICS OF DAVID RICARDO

treatment of the economy as a giant (agricultural) firm employing one variable factor, labour - in unlimited supply at the ‘subsistence’ wage and producing a single product (‘corn’) subject to diminishing returns. It is, however, possible to introduce a manufacturing sector while retaining the notion that the general profit rate is determined in agriculture alone (and its course over time governed within the agricultural sector). A number of attributions to Ricardo have these properties." I have in mind, first, the famous interpretation offered by Piero Sraffa of Ricardo’s Essay on the Influence of a Low Price of Corn on the Profits of

Stock (1815), particularly of the statement therein that it is ‘the profits of the farmer which regulate the profits of all other trades.’ This interpreta¬ tion is based upon the assumption that in the agricultural sector both output and input consist of a single homogeneous commodity (corn) so that the rate of profits may be determined in terms of physical product independently of valuation.12 Given the profit rate in agriculture as deter¬ mined by the margin of cultivation - the wage basket consisting of a fixed quantity of corn - a specific ratio of the price of manufactures to that of corn is implied, namely that which brings the profit rate in the manufacturing sector into line. Luigi Pasinetti’s algebraic formulation of Ricardo’s system (attributed to the ‘mature’ Ricardo of the Principles) is one which, in contrast to the corn-profit representation, formally adopts the labour theory of ex¬ change value." The system is represented by a two-commodity model involving a wage good (corn) and a luxury good, the latter identified with the standard of value (‘gold’). The monetary unit is taken to be the constant gold output of one worker for one year: ‘gold’ represents an

invariable measure of value. Corn is also produced in a one-year process. In both sectors wage-goods capital alone is required, and the capital stock at the beginning of the year is presumed to be a datum, as is the corn wage. Given the land area and the state of technology, the (fourteen) equations describing the system yield unique and economically meaningful solu¬ tions for the (fourteen) variables of the system including the rate of profit. What must be emphasized for our purposes here is the independence of the general profit rate from conditions in the luxury-good sector. The profit rate is dependent solely upon the marginal product of labour in agriculture and the given corn wage, which is precisely the result of the dual-sector ‘cornprofit model. ’" 11

12 13

For a detailed account of the literature, see Appendix B. Editor’s introduction, Works, I, xxxi Luigi L. Pasinetti, Growth and Income Distribution: Essays in Economic Theory (Cambridge 1974), 2

14 The profit rate (r) =

=-^ — 1 where x is the given corn wage and f (Nj the marginal product of labour in corn production.

INTRODUCTION 9 A labour theory is not, however, required to obtain the result that the general profit rate is determined in the wage-goods sector. I refer to the brilliant interpretation of Ricardo by V.K. Dmitriev (1904) whose recent rediscovery has excited much interest.1’ His analysis constitutes a defence of Ricardo against a criticism by Leon Walras - quite ruinous if justi¬ fied — to the effect that the Ricardian system is underdetermined, con¬ taining too few equations to determine the unknowns.16 According to Dmitriev’s defence there is one equation in Ricardo’s system of cost equa¬ tions which yields a solution for the profit rate independently of the others and this magnitude can then be used to solve for exchange values. The unique production-cost equation is that relating to the wage-goods sector. The profit rate depends, therefore, upon the (given) ‘conditions of produc¬ tion’ - the labour inputs, both direct and indirect, and their investment periods — in the wage-goods (corn) industry and the (given) corn wage. The three foregoing representations of the Ricardian system - the Sraffa ‘corn-profit’ model, the Pasinetti version of a dual-sector system based upon the labour theory, and Dmitriev’s equational system - have in common the dependence of the general profit rate solely upon the conditions of

production in the wage-goods sector and the (given) real wage, a result which 15

See the biographical note by D.M. Nuti in Dmitriev, Economic Essays on Value, Competition and Utility, ed. Nuti (Cambridge 1974), 29-32.

16

Cf. Walras, Elements of Pure Economics, ed. W. Jaffe, 4th definitive ed. (1926; London 1954), 424-5: ‘Let P be the aggregate price received for the products of an enterprise; let S, I and F be respectively the wages, interest charges and rent laid out by the entrepreneurs, in the course of production, to pay for the services of personal faculties, capital and land. Let us recall that, according to the English School, the selling price of products is determined by their cost of production, that is to say, it is equal to the cost of the productive services employed. Thus we have the equation P = S + / + F, and P is determined for us. It remains to determine S, I and F. Surely, if it is not the price of the products which determines the price of productive services, but the price of productive services that determines the price of the products, we must be told what determines the price of the services. This is precisely what the English economists try to do. To this end, they construct a theory of rent accord¬ ing to which rent is not included in the expenses of production, thus changing the above equation to P = S + I. Having done this, they determine S directly by the theory of wages. Then, finally, they tell us that “the amount of interest or profit is the excess of the aggregate price received for the products over the wages expended on their production,” in other words, that it is determined by the equation, / = P - S. It is clear now that the English economists are completely baffled by the problem of price determination; for it is impossible for / to determine P at the same time that P determines /. In the language of mathematics one equation cannot be used to determine two unknowns.’

10 THE ECONOMICS OF DAVID RICARDO

turns upon a rigid distinction between wage goods and luxury goods and which follows from the fact that wage goods enter into the production of every product in the system while luxury goods do not. This kind of theoretical structure has been represented as one wherein the profit rate is determined ‘independently of and prior to market-price or even of natural value.’1' The historiographical implications of such an approach are profound. What is implied is a very different conceptualiza¬ tion of the economic process from that of the general-equilibrium econo¬ mists for whom distribution and pricing are inextricably intertwined. It is from this perspective that a dual-development of nineteenth-century analysis has sometime been perceived, one line emanating from Smith, carried further by J.S. Mill and the so-called ‘dissenters,’ and culminat¬ ing with Walras and Alfred Marshall; and a second line that includes Ricardo and Marx. There is some ambiguity attached to the kind of representation of Ricardian theory just outlined for it is not always clear whether temporal priority or causal priority or both is intended by the ‘prior’ solution to distribution.18 But in any event it is my belief, which I shall justify in the course of this work, that this corpus of interpretation is unacceptable. There is little justification for the attribution to Ricardo of a solution to distribution independent of pricing; as in the Smithian and the neo¬ classical systems, distribution and pricing are interdependent. Above all, changes in the pattern of final demand can affect the wage rate, and changes in wages can affect the structure of prices.1'1 Demand-supply analysis for Ricardo - as for Smith and the neo-classicists - was the vehicle of determination in his general system. In much of this, it should be added, my perspective is that of Marshall who clearly recognized his Ricardian lineage. It is fortunately possible to isolate the source of what appears to be a faulty reading of Ricardo. The problem is created in part by the ambi-

17

Dobb, Theories of Value and Distribution, 119-20

18

In one important formulation temporal priority is explicitly attributed to Ricardo: see R.V. Eagly, The Structure of Classical Economic Theory (New York 1974), 45f. Activity is said to occur in discrete time intervals, each involving a ‘production period’ followed by an ‘exchange period,’ thus rendering product and factor mar¬ kets independent of each other.

19

If my case is well made, it follows that the Ricardian system has less in common with those models - the focus of much recent theoretical discussion turning on the ‘non-substitution’ theorems and Piero Sraffa’s masterpiece, The Production of Com¬ modities by Means of Commodities (Cambridge I960) - which allow the derivation of a determinate pattern of prices without reference to demand. See A. Bose, ‘Con¬ sumer’s Demand, Distributive Shares and Prices,’ Economic Journal, LXXV (Dec. 1965), 771-86; and K.J. Arrow and D.A. Starrett, ‘Cost- and Demand-Theoretical Approaches to the Theory of Price-Determination,’ in J.R. Hicks and W. Weber, eds., Carl Menger and the Austrian School of Economics (Oxford 1973), 129-48.

INTRODUCTION 11 guous methodological status of the ‘fundamental theorem on distribu¬ tion’ itself. It was Ricardo’s frequent practice in analysing the inverse profit-wage relationship to derive a new (lower) general profit rate in consequence of a change (rise) in wages by use of the standard measuring procedure and then to apply the new rate in the calculation of the price structure. But this does not constitute an account of process analysis entail¬ ing causal linkages; it is merely a device designed to yield appropriate

predictions regarding the new equilibrium values of key variables follow¬ ing a disturbance to the wage rate. Allocation of resources and thus price movements are in fact governed by profit rate differentials between in¬ dustries created by the initial disturbance to wages; and a new equili¬ brium general rate of profit is yielded together with the new equilibrium price structure as a consequence of the reallocation. Distribution is not in any causal sense ‘prior’ to pricing. A second general source of confusion is Ricardo’s practice of simplify¬ ing for analytical convenience. Thus, while a constant real wage is often assumed by Ricardo to simplify the argument the general treatment of the labour market runs along the lines laid out in the Wealth of Nations and Malthus’s Essay on Population. In short, variability of wages is the general case. The simplifying assumption of uniform factor ratios from industry to industry is a further crucial example. It is this assumption which allows a neglect of any feedback upon the wage rate deriving from changes in the pattern of demand for final goods. But a relaxation of the assumption — suggested by Ricardo himself in some contexts — makes clear the interdependency of distribution and pricing. Ricardo’s formal statements to the effect that changes in the production costs of commodities consumed by workers (or the taxation of such com¬ modities) affect the profit rate whilst changes in the production costs of those which do not enter the wage basket (or their taxation) have no such effect, represent, I believe, an example of his standard practice of formu¬ lating ‘strong cases’ better to expound a principle. Ricardo’s intention by such statements was merely to emphasize that the profit rate will only be affected by variations in wages - a principle which applies even in an econ¬ omy engaged in the production of commodities all of which are consumed both by workers and non-workers, that is to say, in an economy where there is no sharp distinction between wage goods and non-wage goods. The more formal statement in the Essay on Profits to the effect that the profits of the farmer regulate all other profits can be similarly inter¬ preted. The statement was made for the case where corn happened to be the only commodity in the wage basket, but the general analysis holds in all cases. Ricardo was, throughout, preoccupied by the link between the money price of corn, the money wage, and the money price of manufac¬ tures, and sought to demonstrate rigorously that an increase in the money-wage rate - assuming constancy in the ‘value’ of money - must

12 THE ECONOMICS OF DAVID RICARDO

entail a fall in the general profit rate. My reservations apply even more strongly to the single-sector interpretations, for Ricardo was preoccupied with a multi-commodity system where the problem of value is para¬ mount. An introductory word is in order regarding the common view that the

dominant aspect of^Ricardo’s system may be envisaged in terms of the joint operation of diminishing agricultural returns and the Malthusian population doctrine, which together imply a constant rate of commodity wages and a downward trend in the rate of profits to the minimum level characterizing the advent of the stationary stat^It will be a main theme of the present work that to single out the theorem relating to a declining rate of return on capital is to exaggerate the import of a particular appli¬ cation of the basic theory. I shall show that Ricardo paid more careful attention to the general principle of the inverse profit-wage relationship than to the particular issue of a falling profit rate. More important, the empirical relevance of the notion of a barrier to economic progress was not considered by Ricardo to be very serious. The treatment of economic growth requires, none the less, the closest attention, for there are important lessons to be drawn therefrom regard¬ ing Ricardian methodology and the theory of economic policy. Of par¬ ticular importance is the fact that the ‘prediction’ of a declining rate of profit - subject always to the assumption of constant technology - was supposed to hold good despite a downward secular trend in the realwage rate. The subsistence wage characterizes the stationary state alone and is nothing more than the precise counterpart of the minimum accept¬ able profit rate: both the wage and the profit rates exceed their respective

minima in a growing economy. Neither the commonly held view that the analysis of the effects of accumulation was undertaken on the assumption that all demographic responses are already achieved and the commodity wage is throughout already equal to the subsistence wage, nor the alter¬ native but in practice equivalent assumption that population responses occur almost instantaneously so that the economy can be conceived to advance with wages at the subsistence level, are accurate reflections of Ricardo’s procedures. Indeed, such attributions imply that Ricardo’s pri¬ mary concern was not the actual process of growth at all or the adjust¬ ment of the key variables to an ultimate state of stationarity, but rather with the equilibrium state itself, or, more specifically, with the technical conditions relating to the existence and stability of long-run equilibrium; and to this extent the attributions in question seem to constitute an his¬ torical anachronism. But if the wage rate is not taken to be a datum of the system, or at least exogenously determined, we are faced with the pro¬ blem of accounting for the movement of wages upon which depends the rate of profit. It will be my contention (as already noted) that Ricardo

INTRODUCTION 13

drew directly upon the Smithian analysis of wage rate determination in a growth context to overcome the dilemma. Ricardo’s theorem whereby a tax on wages or on wage goods brings about a compensatory rise in money wages is generally believed to de¬ pend upon a real-wage rate initially at subsistence. This too requires correction. I shall demonstrate that while Ricardo’s analysis frequently proceeds upon the assumption that the wage is given, it is not necessarily constant at the subsistence level such that population growth is zero. And even the supposition of constant wages is merely in the nature of a first approximation to be relaxed when appropriate. Here too Ricardo’s debt to Smith is conspicuous. In my account above of the essential Ricardian contribution, no men¬ tion has yet been made of the ‘law of markets.’ This principle, formulated embryonically by Smith, in fact played a key strategic role, permitting Ricardo to ward off" objections to his own approach towards profit rate determination, particularly those of Malthus. But it also played a central part in the analysis of adjustment to change (such as technological pro¬ gress that expels factors from particular sectors or legislative intervention that attracts factors into particular sectors) and is conspicuous in the structure of equations defining general equilibrium. Needless to say, the principle takes on an importance in its own right in the context of money and banking. The theory of employment capacity, incorporating Ricardo’s version of the ‘wages-fund’ theory, will be considered apart from the main core of value and distribution analysis. The theory is an important extension of the Smithian position rather than a breakaway. The comparative cost theory, a truly fundamental insight into resource allocation and a central part both of the case for free trade (above all the case against the corn laws) and of the analysis of the specie-flow mechanism upon which is based a justification for a fully operative gold standard, can also be treated apart from the main model. Nevertheless, there are points of con¬ tact and these will be carefully attended to. PLAN OF WORK

To appreciate the nature and significance of Ricardo’s contribution to the theory of value and distribution it is essential to familiarize ourselves with the state of the discipline in the early nineteenth century. Part I of this work is accordingly devoted to the Smithian legacy. Chapter 1 examines the theory of value and distribution developed in the Wealth of Nations, various applications thereof, and some reactions by economists during the period 1776-1816. It becomes clear that it was Smith who provided British economics with an archetype of the method of deductive

14 THE ECONOMICS OF DAVID RICARDO

theory; there was no methodological revolution in 1817 involving the intro¬ duction by Ricardo of a new ‘speculative’ or purely deductive approach. Indeed, late eighteenth- and early nineteenth-century economists were struck by Smithian ‘system-building,’ and in some cases took Smith to task for a too rapid transfer from theory to policy and a predilection for long trains of deductions, the very charges directed later by some inter¬ preters against Ricardo - the famous ‘Ricardian Vice.’ This fact must colour any interpretation of the ‘Ricardian revolution.’ Considerable time will be spent in establishing the historical record in this respect. It is further demonstrated that while Smith used historical and con¬ temporary data in a masterly fashion to develop the premises relating to behaviour, he forcibly rejected induction from statistical data as a valid means of deriving causal relationships. At the same time he had little confidence in testing procedures for the verification of the deductions drawn from economic models, in contrast to models in the natural sci¬ ences. In the last resort, the results derived would inevitably be ‘conjec¬ tural inferences.’ As for the principle of testing the theorems drawn by logical process from the assumptions, there appears to be little to distin¬ guish the positions of Ricardo and Smith; both were thoroughly aware of the horrendous problems in the way. Ricardo’s central theoretical concern was with matters relating to value and distribution and his point of departure from Smith involves the theory of profit rate determination. Nevertheless, the law of mar¬ kets, the key principle of classical macroeconomics, played a fundamen¬ tal if defensive role in Ricardo’s hands. In Chapter 2 the stage is set by consideration of the main lines flowing from the Smithian analysis of accumulation, particularly its conception of the savings process as one proceeding in ‘hitchless’ fashion. I shall attend in this context to the criticisms of Smithian doctrine by Lord Lauderdale and to the famous extensions to this doctrine by James Mill and J.B. Say. Part II is devoted to Ricardo’s economics. Chapter 3 attempts to spe¬ cify the origins and to recreate the course of development of the Ricar¬ dian system prior to the Essay on Profits (1815). Here I take up Ricardo’s early allusions to the theory of value and distribution during the course of the famous ‘bullionist’ debates. It is in fact possible to show that his initial dissatisfaction with the Smithian model - particularly with the view that ‘competition of capitals’ governs the profit rate and accord¬ ingly the price level - arose precisely from its implications regarding money supply conditions. On the other hand, the investigation here sug¬ gests that the part played by the corn law debate as stimulus to the new theory of profits should not be given the weight often accorded to it in the literature. In Chapter 4 I consider Ricardo’s Essay on Profits and subsequent correspondence in which Ricardo explains in detail his intentions

INTRODUCTION 15

therein. My primary concern will be with the corn-model interpretation of the pamphlet. The next two chapters are designed as a single unit. They deal with theoretical aspects of the Principles largely of a non-monetary order. Chaper 5 considers the pure theory of value and distribution and differ¬ ences between the first edition of 1817 and the third of 1821. I then proceed to take stock of the fundamental theorem on distribution, particularly the question of the dependency of the theorem upon the standard measure of value. In this context the inverse wage-profit rela¬ tionship and money supply conditions are considered as well as the notion sometimes attributed to Ricardo of profits as ‘exploitation’ in¬ come. The implicit and explicit use of allocation economics in the analysis of the inverse wage-profit relationship, and more generally, is examined in Chapter 6. It is in this chapter that we come to grips with the notion of a solution to distribution prior to pricing so often attributed to Ricardo. Chaper 7 is concerned with matters relating to employment and growth, including Ricardo’s version of the wages-fund theory, and his position on ‘machinery’; the precise form taken by the labour and capital supply functions; the secular behaviour of the profit and wage rates; and the question of the class shares in a growing economy. In Chapters 8 and 9 I turn to a formal discussion of money and trade — theory and policy - topics of profound interest in their own right and also because Ricardo’s original concern was with these matters and his major contributions to pure theory derived from his monetary pre¬ occupation. Here we seek the precise rationale for Ricardo’s recommen¬ dation of resumption of cash payments at par, and show that his position was far less extreme than is often portrayed, for he was deeply concerned with short-run frictions and the resultant dangers of sharp contractions in the money supply. The divergence between his position and, for example, that of Henry Thornton on matters of method, substantive theory, and policy seems to have been overdrawn in the literature. But a number of serious interpretive problems arise in the light of Ricardo’s denial of an excess demand for money as a characteristic feature of the post-war depression. The chapters that follow deal with matters of general policy. Chapter 10 gives an account of Ricardo’s ‘theory of economic policy,’ particularly his approach to ‘the ends’ of economic activity. We here discern a pre¬ occupation with issues of distribution - above all ‘the condition of the people.’ Attention is paid in this context to the poor law institution, and to population growth and earnings prospects. The related issue of the corn laws is taken up in Chapter 11, with particular reference to the question whether (and in what sense) Ricardo’s basic concern was with the construction of a ‘predictive’ engine designed to trace the conse-

16 THE ECONOMICS OF DAVID RICARDO

quences of agricultural protection for prospective growth. The analysis casts doubt on the common view that Ricardo tended to move from theory to policy recommendation in an irresponsible manner, a conclu¬ sion also suggested by the monetary analysis. The concluding chapter commences with a general discussion of pro¬ blems of interpretation which describes my approach towards appro¬ priate exegesis. I then draw some relationships between Ricardian and Smithian economics on the one hand and Ricardian and neo-classical economics on the other, and touch upon some implications of the analysis of this work for the interpretation of post-Ricardian trends in economic thought. In a final summing up it is argued that the distinctive features of Piero Sraffa’s famous system set it apart from the Ricardian tradition.

I ASPECTS OF THE SMITHIAN LEGACY

I

•

ONE

Value and distribution analysis, 1776-1816

If we are to understand and evaluate the innovations due to Ricardo it is essential to develop first a picture of the status of economic science at the time of his apprenticeship; we must try to ascertain what economists knew in terms of substantive theorems and how they proceeded in terms of method when Ricardo entered the lists. Central to this investigation is Adam Smith’s model relating the corn price, money wages, and general prices and also the nature of his deductive method. This chapter begins, then, with brief accounts of the theory of value and distribution deve¬ loped in the Wealth of Nations, and the uses of theory in that work, and then proceeds to consider some reactions to Smithian doctrine and method by contemporaries and near-contemporaries.1 2 THE SMITHIAN THEORY OF VALUE AND DISTRIBUTION

The theory of value and distribution formulated in the Wealth of Nations1 draws upon a surprisingly broad range of economic variables. It is best appreciated in the first instance as a model of an open economy. A key role is played in the main model by the money price of corn, which is not formally treated in terms of production costs as are the prices of other commodities.3 The process of corn price determination is 1

The reception of Smithian money and banking theory will be considered in

2

Chapter 8. In this section and the next I draw freely upon my Economics of Adam Smith

3

(Toronto 1973), especially Chapter 5. When Smith refers to labour productivity in the production of corn, it is to emphasize its long-run constancy: ‘in every different stage of improvement... the raising of equal quantities of corn in the same soil and climate, will, at an average, require nearly equal quantities of labour The Wealth of Nations, ed.

20 THE ECONOMICS OF DAVID RICARDO

developed most fully in the celebrated ‘Digression on Silver’ attached to the chapter dealing with rent. Here it is made clear that both changes in the productivity of the silver mines, governing the supply of silver, and changes in the domestic demand for silver will govern the corn-silver exchange rate.4 Assuming unchanged supply conditions of the monetary metal, it was Smith’s contention that from an initial state of general inter¬ national equilibrium (in terms of a common silver price of corn through¬ out the trading world) an increase in the aggregate level of activity in any country will generate a fall in the silver price of corn, as a necessary precondition for the inflow of the metal. The inflow itself, of course, raises the corn price (and, correspondingly, the outflow will lower it in metal¬ losing countries) until a new equilibrium is achieved where the metal price of corn is again everywhere equal. ’ The next step of the argument relates to the determination of money wages. The silver price of corn, determined by the principles of specie distribution, together with the ‘demand for labour,’ will jointly deter¬ mine the money-wage rate; or, given labour demand conditions, the money-wage rate will vary directly with the corn price.6 It is the purpose of the chapter ‘Of Wages’ to account for both the nominal and the corn price of labour. And the essence of the argument is that changes in the price of corn will influence the money-wage rate even though the real wage is above the subsistence level. The silver price of corn ‘regulates’ also the prices of other agricultural products; it is the prices of other products which, in the Smithian system,

E. Cannan, Modern Library ed. (New York 1937), 187 -and this despite refer¬ ences to land scarcity as a cause of the declining rate of profit (see below, p. 23). It should also be noted that variations in the supply of corn were envisaged as

4

generating equivalent variations in demand conditions by way of an initial effect on population, thereby ruling out relative corn price changes emanating from an altered supply-demand relationship [ibid., 146). Wealth of Nations, 188-9. The formulation appears at first sight to deal with the general purchasing power of silver. But the ‘Digression on Silver’ deals entirely with the silver price of corn representative of ‘that Sort of Produce which always affords Rent’ [ibid., 174-5). And, as we shall see, it is variations in the money price of corn which determine movements in the prices of manufactured goods and other agricultural products. For a preliminary observation regarding corn price determination, see ibid., 36: ‘The average or ordinary price of corn again is regulated ... by the value of silver, or by the richness or barrenness of the mines which supply the market with that metal, or by the quantity of labour which must be employed, and consequently of corn which must be consumed, in order to bring any particular quantity of silver from the mine to the market.’ It must be emphasized that it is not the relative

5

labour costs of corn and silver which are here said to determine the silver price of corn. Ibid., 216-17

6

See the passage from ibid., 85, given below, p. 28.

VALUE AND DISTRIBUTION ANALYSIS 21

must be accommodated to that of corn. The position is supported by reference to the quantitative significance of corn, and to the historical fact that the relative price of cattle to that of corn was only recently high enough to justify the transfer of land from corn production.7 8 The circle is closed when the money price of labour is utilized in the analysis of the determination of cost price in manufacturing. This rela¬ tionship holds good, it must be carefully noted, given the conditions of demand for labour, and is expressed most clearly in the following extract drawn from the chapter ‘Of Bounties,’ in Book IV, which also sum¬ marizes much of the preceding argument: [The] money price of corn regulates that of all other home-made commodities. It regulates the money price of labour, which must always be such as to enable the labourer to purchase a quantity of corn sufficient to maintain him and his family either in the liberal, moderate, or scanty manner in which the advancing, stationary or declining circumstances of the society oblige his employers to maintain him. It regulates the money price of all the other parts of the rude produce of land, which, in every period of improvement, must bear a certain proportion to that of corn, though this proportion is different in different periods. It regulates, for example, the money price of grass and hay, of butcher’s meat, of horses, and the maintenance of horses, of land carriage consequently, or the greater part of the inland commerce of the country. By regulating the money price of all the other parts of the rude produce of land, it regulates that of the materials of almost all manufactures. By regulating the money price of labour, it regulates that of manufacturing art and industry. And by regulating both, it regulates that of the complete manufacture. The money price of labour, and of every thing that is the produce either of land or labour, must necessarily either rise or fall in proportion to the money price of com.H A fundamentally significant result flowing from the model is the effect on prices and rents of an increase in the money-wage rate. In the manu¬ facturing sector the general level of prices will be raised, as we have just seen. In the agricultural sector prices remain unchanged in the face of an 7

See in particular the chapter ‘Of the Rent of Land’ for the notion that the rent of corn land governs that of other food-producing land: ‘In Europe corn is the principal produce of land which serves immediately for human food. Except in particular situations, therefore, the rent of corn land regulates in Europe that of all other cultivated land’ [ibid., 159). Cf. 149: ‘It is thus that in the progress of improvement the rent and profit of unimproved pasture come to be regulated in some measure by the rent and profit of what is improved, and these again by the rent and profit of corn’; and ibid., 228: ‘... the price of each particular produce must be sufficient, first, to pay the rent of good corn land, as it is that which regulates the rent of the greater part of other cultivated land ...’

8

Ibid.,

(my emphasis)

22 THE ECONOMICS OF DAVID RICARDO

increase in wages. The burden falls on rents. For the silver price of corn determined in the manner explained above, together with the known money-wage rate (and the profit rate, about which more below), yield the rent per acre of corn land as a kind of ‘residual’ (and thus at one and the same time the alternative cost that must be met by all other land-using products). An increase in the money wage reduces the ‘residual,’ and of course the alternative costs of land-use throughout agriculture. These relationships will be amplified further presently. In this outline of the basic Smithian model, a particular rate of growth of the capital stock and therefore a particular (long-run) real-wage rate has been taken for granted. The rate of profit is also taken as given. But it is a central proposition of the

Wealth of Nations that in the course of

economic expansion the profit rate will tend downwards, while because of the rising rate of capital accumulation the real-wage rate tends to rise. It must be borne in mind that the argument refers to variations in the real or corn rate of profit, and not merely to the nominal or silver rate. The ‘ordinary’ rate of profit, in Smith’s account, is ‘every where regu¬ lated by the quantity of stock to be employed in proportion to the quan¬ tity of the employment, or the business which must be done by it.’ Accordingly, the rate tends to fall with accumulation in consequence of ‘increased competition’ between capitalists in commodity markets: ‘The increase of stock, which raises wages, tends to lower profit. When the stocks of many rich merchants are turned into the same trade, their mutual competition naturally tends to lower its profit; and when there is a like increase of stock in all the different trades carried on in the same society, the same competition must produce the same effect in them all.’9 A fuller'account of the phenomenon appears in Book II: As the quantity of stock to be lent at interest increases, the interest, or the price which must be paid for the use of that stock, necessarily diminishes, not only from those general causes which make the market price of things commonly diminish as their quantity increases, but from other causes which are peculiar to this particular case. As capitals increase in any country, the profits which can be made by employing them necessarily diminish. It becomes gradually more and more difficult to find within the country a profitable method of employing any new capital. There arises in consequence a competition between different capi¬ tals, the owner of one endeavouring to get possession of that employment which is occupied by another. But upon most occasions he can hope to justle that other out of this employment, by no other means but by dealing upon more reasonable terms. He must not only sell what he deals in somewhat cheaper, but in order to get it to sell, he must sometimes too buy it dearer. The demand for productive labour, by the increase of the funds which are destined for maintaining it, grows 9

Ibid., 799, 87

VALUE AND DISTRIBUTION ANALYSIS 23 every day greater and greater. Labourers easily find employment, but the owners of capitals find it difficult to get labourers to employ. Their competition raises the wages of labour, and sinks the profits of stock. But when the profits which can be made by the use of a capital are in this manner diminished, as it were, at both ends, the price which can be paid for the use of it, that is, the rate of interest, must necessarily be diminished with them.10

Strictly speaking, the rise in wages should have been considered only as a concomitant of the process of expansion rather than as responsible, in part, for the declining return on capital; capitalists are in the central argument accorded the ability to escape the burden of rising wages.11 None the less, in the foregoing passage Smith envisaged pressures ‘at both ends’ — in labour as well as commodity markets.12 At one juncture Smith discussed the declining return on capital in rather different terms. In a passage regarding colonies he related the phenomenon to the necessity of having recourse to increasingly inferior land, namely to diminishing returns at the extensive margin:

High wages of labour and high profits of stock, however, are things, perhaps, which scarce ever go together, except in the peculiar circumstances of new colo¬ nies. A new colony must always for some time be more under-stocked in propor¬ tion to the extent of its territory, and more under-peopled in proportion to the extent of its stock, than the greater part of other countries. They have more land than they have stock to cultivate. What they have, therefore, is applied to the cultivation only of what is most fertile and most favourably situated, the land near the sea shore, and along the banks of navigable rivers. Such land too is frequently purchased at a price below the value even of its natural produce. Stock employed in the purchase and improvement of such lands must yield a very large profit ... Its rapid accumulation in so profitable an employment en¬ ables the planter to increase the number of his hands faster than he can find them in a new settlement. Those whom he can find, therefore, are very liberally re¬ warded. As the colony increases, the profits of stock gradually diminish. When the most fertile and best situated lands have been all occupied, less profit can be made by the cultivation of what is inferior both in soil and situation ... [But] the wages of labour do not sink with the profits of stock. The demand for labour increases with the increase of stock whatever be its profits; and after these are diminished, stock may not only continue to increase, but to increase much faster than before.13 10

Ibid., 336

11

As we have seen, a wage increase generates a rise in (manufacturing) prices and a fall in (agricultural) rents.

12 13

See also ibid., 94 Ibid., 92-3

24 THE ECONOMICS OF DAVID RICARDO

It should be emphasized that the preceding argument does not seem to have constituted Smith’s principal case; the argument in terms of increas¬ ing ‘competition of capitals’ is quite general and not made to depend solely upon an increasing paucity of investment priorities reflecting diminishing agricultural returns.14 Yet the phenomenon was recognized, and takes on a potential significance especially when supplemented by Smith’s description of a stationary state:

In a country which had acquired that full complement of riches which the nature of its soil and climate, and its situation with respect to other countries, allowed it to acquire; which could, therefore, advance no further, and which was not going backwards, both the wages of labour and the profits of stock would probably be very low. In a country fully peopled in proportion to what either its territory could maintain or its stock employ, the competition for employment would necessarily be so great as to reduce the wages of labour to what was barely sufficient to keep up the number of labourers, and, the country being already fully peopled, that number could never be augmented. In a country fully stocked in proportion to all the business it had to transact, as great a quantity of stock would be employed in every particular branch as the nature and extent of the trade would admit. The competition, therefore, would every-where be as great, and consequently the ordinary profit as low as possible.10

§ The basic distribution model served as foundation for a theory of tax incidence. That increased wage costs will, in the long run, be passed on by capitalists to the consumer in the form of higher industrial prices and to the landlord as lower rents appears conspicuously in the analysis of taxes imposed upon wages. The analysis also confirms the differential treatment accorded the determination of price in the manufacturing and agricultural sectors:

A direct tax upon the wages of labour ... though the labourer might perhaps pay it out of his hand, could not properly be said to be even advanced by him; at least if the demand for labour and the average price of provisions remained the same after the tax as before it. In all such cases, not only the tax, but something more than the tax, would in reality be advanced by the person who immediately employed him. The final payment would in different cases fall upon different persons. The rise which such a tax might occasion in the wages of manufactur¬ ing labour would be advanced by the master manufacturer, who would both be

14 James Anderson’s criticism that Smith failed to recognize the principle of dimin¬ ishing returns is discussed below (p. 4If.). Yet the role of land scarcity in the Wealth of Nations was clearly recognized in some accounts. 15 Ibid., 94-5

VALUE AND DISTRIBUTION ANALYSIS 25 entitled and obliged to charge it, with a profit, upon the price of his goods. The

final payment of this rise of wages, therefore, together with the additional profit of the master manufacturer, would fall upon the consumer. The rise which such a tax might occasion in the wages of country labour would be advanced by the farmer, who, in order to maintain the same number of labourers as before, would be obliged to employ a greater capital. In order to get back this greater capital, together with the ordinary profits of stock, it would be necessary that he should retain a larger portion, or what comes to the same thing, the price of a larger portion of the produce of the land, and consequently that he should pay less rent to the landlord. The final payment of this rise of wages, therefore, would in this case fall upon

the landlord, together with the additional profit of the farmer who had advanced it,16 More generally, any tax upon wage goods has a similar incidence, and is borne ultimately by the consumers of manufactured goods, and by land¬ lords: ‘Taxes upon necessaries, by raising the wages of labour, necessarily tend to raise the price of all manufactures, and consequently to diminish the extent of their sale and consumption ... Taxes upon necessaries, so far as they affect the labouring poor, are finally paid, partly by landlords in the diminished rent of their lands, and partly by rich consumers, whether landlords or others, in the advanced price of manufactured goods; and always with a considerable over-charge.’17 (it is not apparent why the secular rise in per capita wages reflecting an increasing rate of capital accumulation should be treated any differently. Yet, as we have seen, Smith - perhaps inadvertently - suggested that in this case the increase in wage costs puts pressure on the return on capital.) It should be added in conclusion that Smith had much to say on the effects of high profits on general prices: ‘In reality high profits tend much more to raise the price of work than high wages’ - with correspondingly more damaging effects on the competitiveness of the export sector. And a 16

Ibid., 816 (my emphasis)

17

Ibid., 824. Moreover, any such increase in the prices of manufactured wage goods implies a further rise in the money-wage rate with a further sequence of inflation¬ ary effects. In the second edition of 1778 Smith slightly altered the propositions, and allowed perhaps for some increase in agricultural prices: ‘A tax upon the wages of country labour does not raise the price of the rude produce of land in proportion to the tax\ for the same reason that a tax upon the farmer’s profit does not raise that price in that proportion' [ibid., 817; italicized phrases added in second edition). The sharp distinction between the effects of wage-cost increases upon the prices of manufactured goods and of agricultural products obviously flows from the dif¬ ferent accounts of price determination in the two sectors discussed above. But dur¬ ing an account of taxes upon the profits of particular products Smith was more explicit and referred to the actual process whereby prices of manufactured goods rise to cover increased costs, namely by a reduction in output and sales; by con¬ trast, in the case of the farmer, it was presumed that supply elasticity is zero [ibid., 807).

26 THE ECONOMICS OF DAVID RICARDO

tax imposed directly on profits can also be passed on, either to the con¬ sumer or to the landlord, or (in this case) to the rentier.18 THE USES OF ECONOMIC THEORY

Smith’s practice makes it clear that he regarded theory as providing an indispensable framework for the interpretation of the historical record and for the ‘prediction’ of the future course of events, including the con¬ sequences of policy proposals. An outstanding feature of his methodo¬ logical approach is the great weight placed upon mutual cause-effect relationships and multi-causality. It will be best to give some specific examples. The discussion is limited here to the central model of value and distribution. A most striking instance of the ‘explanatory’ function of theory is provided by the attempt to account for several centuries of corn price movements. Statistical data - and Smith went to great lengths indeed to establish the actual record - suggested a downward trend in corn prices from the middle of the fourteenth century until the beginning of the sixteenth century. There also occurred an increase in the money supply during the same period. Some authorities, Smith complained, had been misled by the growth of the money supply to believe that the value of silver must have fallen, refusing in some conspicuous cases to recognize the facts, indicated by their own series of prices, because of the strength of their conviction in a one-way positive relationship between the money supply and prices.19 Smith’s concern was the avoidance of simple-minded causal relationships of this kind. An equally significant relationship re¬ verses the order and links the level of corn prices as cause to the money supply as effect, such that a fall in the former enduces an expansion of the latter: The quantity of the precious metals may increase in any country from two differ¬ ent causes: either, first from the increased abundance of the mines which supply it; or secondly, from the increased wealth of the people, from the increased produce of their annual labour. The first of these causes is no doubt necessarily connected with the diminution of the value of the precious metals; but the sec¬ ond is not. When more abundant mines are discovered, a greater quantity of the precious metals is brought to market, and the quantity of the necessaries and con¬ veniences of life for which they must be exchanged being the same as before, equal quantities of the metals must be exchanged for smaller quantities of com¬ modities. So far, therefore, as the increase of the quantity of the precious metals

18 19

Ibid., 97-8 (cf. also 565-6), 799 Ibid., 185, 188

VALUE AND DISTRIBUTION ANALYSIS 27 in any country arises from the increased abundance of the mines, it is necessarily connected with some diminution of their value. When on the contrary, the wealth of any country increases, when the annual produce of its labour becomes gradually greater and greater, a greater quantity of coin becomes necessary in order to circulate a greater quantity of commo¬ dities ... The quantity of their coin will increase from necessity ... [But] gold and silver are not likely to be worse paid for ... gold and silver will naturally ex¬ change for a greater quantity of subsistence in a rich than in a poor country, in a country which abounds with subsistence, than in one which is but indifferently supplied with it.20 The specific justification for Smith’s hypothesis regarding the down¬ ward trend in corn prices (at least for part of the period in question) appears to have been his impression of general economic expansion, although the effects of exhaustion of the mines are also taken into account: In the end of the fifteenth and beginning of the sixteenth centuries, the greater part of Europe was approaching towards a more settled form of government than it had enjoyed for several ages before. The increase of security would natur¬ ally increase industry and improvement; and the demand for the precious metals, as well as for every other luxury and ornament, would naturally increase with the increase of riches. A greater annual produce would require a greater quantity of coin to circulate it; and a greater number of rich people would require a greater quantity of plate and other ornaments of silver. It is natural to suppose too, that the greater part of the mines which then supplied the Euro¬ pean market with silver, might be a good deal exhausted, and have become more expensive in the working. They had been wrought many of them from the time of the Romans.21 Induction as a means of discerning causal relationships is clearly ruled out. In the present context, for example, increases in the money supply might be correlated with both price increases and price reductions from observation unsupported by a theoretical model. What is remarkable about Smith’s procedure is the sophistication of the underlying theoreti-

20

Ibid., 188—9. The re-establishment of international equilibrium following a dis¬ turbance was also noted: ‘That the increase in the quantity of the precious metals, which arises in any country from the increase of wealth, has no tendency to diminish their value, I have endeavoured to show already. Gold and silver natur¬ ally resort to a rich country ... not because they are cheaper there than in poorer countries, but because they are dearer, or because a better price is given for them. It is the superiority of price which attracts them, and as soon as that superiority ceases they naturally cease to go thither' (ibid., 216-17, my emphasis).

21

Ibid., 181

28 THE ECONOMICS OF DAVID RICARDO

cal model used in the analysis of the historical data - the rejection of one-way causal relationships in favour of complex mutual cause-effect relationships. Yet at the same time it is also clear that to arrive at any conclusion regarding the appropriate hypothesis some reliance (some considerable reliance) had to be replaced upon qualitative impressions in the present case impressions regarding the actual growth pattern coup¬ led with knowledge of the state of the mines. Theory itself, although indispensable, could not alone suffice in the analysis of the historical record.22 A second outstanding example of the explanatory function of theory may be drawn from the discussion of money-wage movements. Here there is the problem of multi-causality to be overcome. Money-wage movements are related both to corn price movements and to the state of the demand for labour. Given the rate of growth of labour demand, an increase in the price of corn will be reflected in a higher money wage; or, given the corn price, an increase in the labour-demand rate of growth will also result in a higher money wage. But when both causal variables are at work at the same time a wide variety of wage-rate movements may result, including the possibility that a corn price increase will be accompanied by a fall in the money wage: Though the variations in the price of labour, not only do not always correspond with those in the price of provisions, but are frequently quite opposite, we must not, upon this account, imagine that the price of provisions has no influence upon that of labour. The money price of labour is necessarily regulated by two circum¬ stances; the demand for labour, and the price of the necessaries and conveniencies of life. The demand for labour, according as it happens to be increasing, stationary, or declining, or to require an increasing, stationary, or declining population, deter¬ mines the quantity of the necessaries and conveniencies of life which must be given to the labourer; and the money price of labour is determined by what is requisite for purchasing this quantity. Though the money price of labour, therefore, is sometimes high where the price of provisions is low, it would be still higher, the demand continuing the same, if the price of provisions was high.2'1 The problem of interpretation is considerably complicated by the fact that the wage-rate response to corn price variations is a long-term reaction so that seasonal or even annual fluctuations are possible while money wages remain unchanged: ‘the wages of labour do not in Great Britain fluctuate with the price of provisions. These vary every-where from year 22

This characteristic is evident also in the analysis of the upward trend in corn prices, 1570-1640, which is attributed to the discovery of new mines or an exoge¬

23

nous inflow of money outweighing the pressures exerted on prices of an increas¬ ing demand for silver due to advances in industry {ibid., 191). Ibid., 85

VALUE AND DISTRIBUTION ANALYSIS 29 to year, frequently from month to month. But in many places the money price of labour remains uniformly the same sometimes for half a century together.’ Similarly, ‘the money price of labour ... does not fluctuate from year to year with the money price of corn but seems to be every-where accommodated, not to the temporary or occasional, but to the average or ordinary price of that necessary of life.’24 Once again reliance on induc¬ tion from the historical record can lead nowhere for it may give the im¬ pression that money wages are totally unrelated to corn prices. It may be remarked, however, that some modern commentators fail to recognize the logic of Smithian procedure, and maintain that Smith’s various state¬ ments regarding the relationship between money wages and corn prices are contradictory. This is far from the truth; at all places where the ‘stan¬ dard’ relationship appears to be denied it is either because of variations in the demand for labour or because the discussion is limited to the short run whereas the money-wage response to variation is defined as a reac¬ tion to ‘permanent’ not seasonal corn price variation. (More will be said regarding this issue when we turn to applications of the model to policy.) Much the same consideration applies to the effects of wage taxation, where the problem of interpretation is compounded by the interdepen¬ dence of the various causal influences acting on the money-wage rate. According to the model such taxation generates a rise in the money-wage rate to prevent a reduction in the real wage. Yet it is conceded that workers may suffer a decline in real wages in the event that the demand for labour is adversely affected by taxation: ‘If direct taxes upon the wages of labour have not always occasioned a proportionable rise in those wages, it is because they have generally occasioned a considerable fall in the demand for labour ... In consequence of them, however, the price of labour must always be higher than it otherwise would have been in the actual state of the demand: and this enhancement of price, together with the profit of those who advance it, must always be finally paid by the landlords and consumers.’25 The foregoing instances illustrate the impotency of inductive proce¬ dures: Smith was attempting to find hypotheses - all of which were drawn from a basic model or ‘system’ — to fit his impressions of what the facts were or had been.2'1 At the same time the examples also give some

24 25 26

Ibid., 74, 36 Ibid., 817 (see also 475-6, 839) Smith worked hard to establish the record. This concern is evident throughout the Wealth of Nations but in my view is particularly striking in the brilliant discus¬ sions of the historical pattern of corn price movements, and of the contemporary state of real wages. Smith’s famous comment, ‘I have no great faith in political arithmetic’ [ibid., 501), is of great interest in the present context. By this he meant that he had little confidence in supposedly accurate statistics which were actually often achieved by

30 THE ECONOMICS OF DAVID RICARDO

notion of the problems in the way of theory ‘refutation.’ In many cases Smith, as it were, was seeking for the disturbing causes which impede the ‘expected’ sequence of events from being revealed in the historical re¬ cord. A very specific illustration of this characteristic is provided by the case of the corn-export bounty: ‘The average price of corn, it has been said, has fallen considerably since the establishment of the bounty. That the average price of corn began to fall somewhat towards the end of the last century, and has continued to do so during the course of the sixtyfour first years of the present, I have already endeavoured to show. But this event, supposing it to be as real as I believe it to be, must have happened in spite of the bounty, and cannot possibly have happened in consequence of it.’27 The bounty in itself, it may be shown from theory, ‘by occasioning an extraordinary exportation, necessarily keeps up the price of corn in the home market above what it would naturally fall to.’28 A special word is in order here regarding the celebrated ‘prediction’ of a declining profit rate. As we know, Smith maintained that ‘as capitals increase in any country, the profits which can be made by employing them necessarily diminish.’ Yet he devoted much attention to exogenous disturbances — in effect changes in ceteris paribus conditions - that check or even reverse the supposed trend. He had in mind, for example, the acquisition of ‘new branches of trade’ as well as ‘new territory’ (which in principle encompasses technological progress): The acquisition of new territory, or of new branches of trade, may sometimes raise the profits of stock, and with them the interest of money, even in a country which is fast advancing in the acquisition of riches. The stock of the country not being sufficient for the whole accession of business, which such acquisitions present to the different people among whom it is divided, is applied to those particular branches only which afford the greatest profit. Part of what had be¬ fore been employed in other trades, is necessarily withdrawn from them, and turned into some of the new and more profitable ones. In all those old trades, therefore, the competition comes to be less than before. The market comes to be less fully supplied with many different sorts of goods. Their price necessarily a process approaching guesswork. His own proof that real wages exceeded the ‘subsistence’ level relied to a large degree on ‘many plain symptoms’ - on quali¬ tative evidence — thus avoiding ‘any tedious or doubtful calculation of what may be the lowest sum’ upon which the labourer may ‘bring up a family’ [ibid 74). 27

Ibid., 473-4. Smith’s position in the early Lectures was very different. There the bounty was assumed to lower the corn price. See Lectures on Police, Justice, Revenue and Arms, ed. E. Cannan (1896; New York 1964), 181-2, 230.

28

Other examples are easily found. See Wealth of Nations, 230-1, where it is explained that (real) wool prices tend to rise during the course of development. For the observed historical decline Smith sought disturbing causes.

VALUE AND DISTRIBUTION ANALYSIS 31 rises more or less, and yields a greater profit to those who deal in them, who can, therefore, afford to borrow at a higher interest.29 The analysis is, incidentally, applied to explain an upward movement in interest rates after the peace of 1763. ‘New business’ was provided by the British ‘acquisitions’ in North America and the West Indies, and capital was diverted away from the Mediterranean and European branches of trade. ‘So great an accession of new business to be carried on by the old stock, must necessarily have diminished the quantity employed in a great number of particular branches, in which the competition being less, the profits must have been greater.’30 § The difficulties in the way of model testing in economics must be kept in mind when we consider Smith’s case against the corn-export bounty — the issue which, I believe, provides the key to any evaluation of the status of Smithian economics in the early 1800s. Surprising though it may seem in light of what was said above regarding interpretation of the past record, Smith’s procedure involved the direct and unqualified application of the model of value and distribution to a practical policy issue of vital social significance. While variations in the rate of wages leave the silver price of corn unaffected according to the basic analysis - in contrast to the prices of manufactured commodities — poor harvest conditions during the period 1764-76 and the contemporary corn-export bounty were said to have exerted a powerful influence on the domestic level of corn prices. But governmental intervention by export subsidies (or by import duties), as a means of raising agricultural profitability, Smith insisted, generated merely a nominal variation in corn price (in sharp contrast to the real effects which similar intervention would generate if applied to manufac¬ tured commodities) precisely because of the effects upon the money wage and therefore prices in general: ‘The real effect of the bounty is not so much to raise the real value of corn, as to degrade the real value of silver; or to make an equal quantity of it exchange for a smaller quantity, not only of corn, but of all other home-made commodities; for the money price of corn regulates that of all other home-made commodities.’31

29

30 31

Ibid.., 93. It must be emphasized that the argument does not relate to new opportunities which permit the profitable use of hitherto idle capital; but rather involves the possibility of diverting hitherto pilly utilized capital away from lowyielding branches of activity. Ibid., 93—4 (see also 562f.) Ibid., 476. Cf. 482: ‘[Our country gentlemen] did not perhaps attend to the great and essential difference which nature has established between corn and almost every other sort of goods ... The nature of things has stamped upon corn a real

32 THE ECONOMICS OF DAVID RICARDO

The effects of an increase in imports was attended to subsequently in the ‘Digression on the Corn Trade.’ Here a reverse sequence was defined whereby a fall in the corn price will, given labour-demand conditions, generate a reduced money wage and therefore reduced money prices generally: ‘It tends, indeed, to lower somewhat the average money price of corn, but not to diminish its real value, or the quantity of labour which it is capable of maintaining. If importation was at all times free, our farmers and country gentlemen would, probably, one year with another, get less money for their corn than they do at present... but the money which they got would be of more value, would buy more goods of all other kinds, and would employ more labour. Their real wealth, their real revenue, therefore, would be the same as at present, though it might be expressed by a smaller quantity of silver ...,J2 value which cannot be altered by merely altering its money price. No bounty upon exportation, no monopoly of the home market, can raise that value. The freest competition cannot lower it.’ The entire argument, it must be noted, is based upon the assumption of given labour-demand conditions. In the first two editions Smith wrote (ibid., 482) that ‘the nature of things has stamped upon corn a real value which no human institution can alter.’ (He failed to alter a similar statement on p. 476) The change - which does not effect the substance of the argument in so far as concerns the analysis of the bounty — was due to criticism by James Anderson. For Smith’s own account, see below, p. 41. Smith expanded his case against the bounty in his third edition (1784) taking issue with the view that, as a result, ‘our merchants and manufacturers ... will be enabled to sell their goods as cheap or cheaper than their rivals in the foreign market. A greater quantity, it is said, will thus be exported, and the balance of trade consequently turned more in favour of our own country’ (ibid., 472). Now it is agreed by those who championed the policy that given the ‘extent of tillage’ the bounty must withdraw output from the home market thus leading to a short-run price rise. But it is claimed that the extent of tillage would be expanded in consequence of the larger foreign market and in response to the higher price obtainable in the short run, so that in the long run the domestic price will in fact be reduced: ‘This double encouragement must, they imagine, in a long period of years, occasion such an increase in the production of corn, as may lower its price in the home market, much more than the bounty can raise it, in the actual state which tillage may, at the end of that period, happen to be in’ (ibid., 474). The argument is rejected by Smith. In the short run every additional bushel exported is drawn from the home market: its domestic sale would have served ‘to increase the consumption, and to lower the price of that commodity’ (ibid., 475). But in addition the policy brings about an actual fall in demand (and not merely a fall in the quantity demanded) - or perhaps rather a smaller increase than otherwise would occur because in the case at hand there is likely to result a check to the growth rate of population: ‘The extraordinary exportation of corn, therefore, occasioned by the bounty, not only, in every particular year, diminishes the home, just as much as it extends the foreign market and consumption, but, by restraining the population and industry of country, its final tendency is to stunt and restrain the gradual extension of

32

the home market; and thereby, in the long run, rather to diminish, than to augment, the whole market and consumption of corn’ (ibid., 476). Ibid., 502

VALUE AND DISTRIBUTION ANALYSIS 33 Smith himself condemned the ‘man of system’ and the ‘spirit of system’ - allusions not to abstract and rigorous theory as such but to the

abusive use of such method and particularly to the careless or unqualified application to concrete issues of deductions drawn from a necessarily incomprehensive model.11 But it is by no means clear that he himself was totally free from the vice. For frictions in the economic system are simply neglected despite Smith’s own insistence in a different context, as we have seen above, that the money wage ‘does not fluctuate from year to

year with the money price of corn.’ Now it is doubtless true that Smith had in mind ‘permanent’ changes in corn price and consequently in money wages because of the bounty, but no attention at all was paid to the wage lag in the application at hand. We shall see presently that this particular characteristic was hit upon by critics as the major weakness of Smith’s applied economics. SOME REACTIONS TO SMITHIAN ‘SYSTEM-BUILDING’

It is a conception of Smith’s method in terms of ‘system-building’ rather than an eclectic, comparative, sociological procedure which is sometimes said to be its characteristic feature — that appears to be upper¬ most in the minds of a number of late eighteenth- and early nineteenthcentury economists trained in Scottish universities: Dugald Stewart, James Mill, Francis Horner, and David Buchanan. We consider first the famous Memoir of 1793 by Stewart, who was in general favourably disposed towards Smithian method.34 Stewart com¬ pared Smith’s method with that of the ‘mathematical and physical sci¬ ences’ and evaluated it as more successful from a scientific point of view than that of the Physiocrats, although he recognized that Smith had much in common with the French economists regarding ‘the doctrine concerning the freedom of trade and industry’:

33

I refer to The Theory of Moral Sentiments, 6th ed. (1790; New York 1966), 341-3. On this issue, see Jacob Viner, Guide to John Rae’s Life of Adam Smith (New York 1965), 32—3; see also M.L. Myers, ‘Adam Smith as Critic of Ideas,’ Journal of the History of Ideas, XXXVI (April-May 1975), 281-96. Sir James Steuart had long before warned against ‘the habit of running into what the French called Systemes ... a chain of contingent consequences, drawn from a few fundamental maxims, adopted, perhaps, rashly,’ which the economist applies ‘far beyond the limits of the ideas present to his understanding, when he made his definition’ - a warning against what in our time has been referred to as the ‘Ricardian vice.’ Cf. An Inquiry into the Principles of Political Economy (l 76 7),

34

ed. A.S. Skinner (Chicago 1966), 8. Biographical Memoir of Adam Smith (1793), ed. Sir W. Hamilton (Edinburgh 1858; New York 1966). Stewart held the chair of moral philosophy at Edinburgh and his lectures on political economy were attended by James Mill, J.R. McCulloch, Thomas Chalmers, Lord Lauderdale, Henry Brougham, and Francis Horner.

34 THE ECONOMICS OF DAVID RICARDO

But is surely cannot be pretended by the warmest admirers of that system, that any one of its numerous expositors has approached to Mr. Smith in the preci¬ sion and perspicuity with which he has stated it, or in the scientific and luminous manner in which he has deduced it from elementary principles. The awkward¬ ness of their technical language, and the paradoxical form in which they have chosen to present some of their opinions, are acknowledged even by those who are most willing to do justice to their merits; whereas it may be doubted, with respect to Mr. Smith’s Inquiry, if there exists any book beyond the circle of the mathematical and physical sciences, which is at once so agreeable in its arrange¬ ment to the rules of a sound logic, and so accessible to the examination of ordinary readers. Abstracting entirely from the author’s peculiar and original speculations, I do not know that, upon any subject whatever, a work has been produced in our times, containing so methodical, so comprehensive, and so judi¬ cious a digest of all the most profound and enlightened philosophy of the age. ’ James Mill also had nothing but praise for the Smithian esprit de systeme. His evaluation is brought out clearly in a contrast drawn (in 1806) between Smith and Sir James Steuart: To Sir James’s eye the subject presented itself as a rude chaos; and he found himself unable to reduce it to light and order ... He explained some old errors, and established some new truths. But his opinions have no general bearing. The mind is bewildered in following Sir James’s speculations. The general principles of Political Economy seem to become more obscure in his hands than they were before ... there is no combination of principles in his volumes which can be called a system at all ... Dr. Smith reared the study to the dignity of a science. He explained the real sources of wealth, which till his time had been so grossly misunderstood; and conferred as great a benefit upon Political Economy, as was conferred on Astronomy by those philosophers who first confuted the perplexed doctrine of the cycles and epicycles, and established the simple principles of the Copernican system.36

35

Ibid., 65—6. See also ibid., 68-9, where the emphasis is again on the methodology rather than the novelty of the ‘principles’ in themselves: ‘After all, perhaps the merit of such a work as Mr. Smith’s is to be estimated less from the novelty of the principles it contains, than from the reasonings employed to support these princi¬ ples, and from the scientific manner in which they are unfolded in their proper order and connexion. General assertions with respect to the advantages of a free commerce may be collected from various writers of an early date. But in questions of so complicated a nature as occur in Political Economy, the credit of such opinions belongs of right to the author who first established their solidity, and followed them out to their remote consequences; not to him who, by a fortunate accident, first stumbled on the truth.’

36

‘Sir James Steuart’s Works,’ Literary Journal, I, 2nd series (March 1806), 231-2. It is probable that Steuart’s ‘mercantilist’ recommendations blinded Mill to his methodological qualities. Smith, for his part, totally neglected Steuart. See, on this, James Bonar, The Tables Turned (London 1931), 38-9, 41.

VALUE AND DISTRIBUTION ANALYSIS 35 Now Mill was much interested in the ideas of the Scottish Historical School, particularly as formulated by John Millar.37 It is significant, then, that the ‘system-building’ propensity of Smith in the Wealth of Nations is emphasized by Mill in 1806 rather than ‘genetic,’ ‘evolutionary,’ or ‘socio-historical’ themes. Both Dugald Stewart and Mill looked favourably on Smithian scien¬ tific methodology applied to economics. But in the opinion of some critics Smith went overboard in his attachment to ‘system.’ David Buchanan, Smith’s editor, remarked that while the Wealth of Nations ‘stands in de¬ cided contrast to all abstract theory,’ Smith none the less ‘erred occasion¬ ally from too great a fondness for system.’38 More significant is Francis Horner’s complaint of ‘premature’ system-building which closely resem¬ bles that of John Rae39 many years later: Bacon speaks of the evil effects of premature system upon the progress of sci¬ ence, and he insists upon the superior advantage of arranging our knowledge into detached aphorisms, which leave the passage always open to farther addi¬ tions and improvements. If this observation refers to the propriety of confining our theoretical arrangements within the precise limits of actual and legitimate induction, it appears to be so well founded, that no real progress can be made in any science without implicit obedience to the precept. In all my future studies and investigations with regard to the complicated relations of political economy, and the principles of general jurisprudence, I wish I could keep this rule steadily and habitually in view. Did not Adam Smith judge amiss, in his premature attempt to form a sort of system upon the wealth of nations, instead of presenting his valuable speculations to the world under the form of separate dissertations? As a system, his work is evidently imperfect; and yet it has so much the air of a system, and a reader becomes so fond of every analogy and arrangement, by which a specious appearance of system is made out, that we are apt to adopt erroneous opinions, because they figure in the same fabric with approved and important truths. That illustrious philosopher might therefore have contributed more powerfully to the progress of political science,

37

On this connection see A.L. Macfie, The Individual in Society (London 1967), 30-1, 145—6 and R.L. Meek, Economics and Ideology and Other Essays (London

38

1967), 49. Observations on the Subjects Treated of in Dr. Smith’s Inquiry into the Nature and Causes of the Wealth of Nations, 1st ed., 1814; 2nd ed. (Edinburgh 1817; New York 1965), IV, viii, xi. None the less, Buchanan saw his own task as the provision of a ‘complete system of political economy’ [ibid., xv). He also took his subject to task for a self-imposed limitation on the scope of political economy {ibid., x-xi). Thus Smith had examined the matter of defence solely from the perspective of ‘eco¬ nomy; considering, not what is the best, but what is the cheapest system of

defence.’ 39 John Rae, Statement of Some New Principles on the Subject of Political Economy (1834), in John Rae: Political Economist, ed. R. Warren James (Toronto 1965), II, 334-5.

36 THE ECONOMICS OF DAVID RICARDO had he developed his opinions in detached essays; nor would he have less con¬ sulted the real interests of his reputation, which indeed may have been more brilliant at first, by his appearance as the author of a comprehensive theory, but will ultimately be measured by what he shall be found to have actually contri¬ buted to the treasures of valuable knowledge.411

TWO EARLY CRITICS OF SMITH’S ‘APPLIED’ ECONOMICS

Governor Pownall and James Anderson were two very early critics of Smith’s applied economics, writing immediately after the appearance of the

Wealth of Nations. Both were noticed by Smith. In his Letter41 to

Smith, Pownall emphasized the systematic plan of Smith’s work: ‘you have, I find, by a truly philosophic and patient analysis, endeavoured to investigate analitically those principles, by which nature first moves and then conducts the operations of man in the individual, and in com¬ munity: And then, next, by application of these principles to fact, expe¬ rience, and the institutions of men, you have endeavoured to deduce

synthetically, by the most precise and measured steps of demonstration, those important doctrines of practice, which your very scientific and

40 Journal entry dated 1 Dec. 1800, Memoirs and Correspondence of Francis Homer, ed. Leonard Horner (London 1853), I, 126-7. (A later passage from Horner’s journal, dated 24 May 1801, ibid., 164, expresses the great difficulty in understanding the fifth chapter of the first book of the Wealth of Nations, involving ‘the doctrine of the real measure of value, and the distinction between nominal and real price.’) Horner was one of the founders of, and an early contributor to, the Edinburgh Review, which took a generally Smithian position on matters of analysis and policy (see below, p. 55). But in private correspondence of 15 August 1803 he noted: ‘We owe much at present to the superstitious worship of Smith’s name; and we must not impair that feeling, till the victory is complete. There are few practical errors in the Wealth of Nations, at least of any great consequence; and, until we can give a correct and precise theory of the nature and origin of wealth, his popular and plausible and loose hypothesis is as good for the vulgar as any other’ [ibid., I, 237-8). 41

A Letter from Governor Pownall to Adam Smith (London 1776; New York 1967). Smith replied to the pamphlet in a personal letter to Pownall (January 1777), expressing his intention to meet the author for discussion of some of the issues raised - see John Rae, Life of Adam Smith (London 1895), 318-19, and The Corre¬ spondence of Adam Smith, ed. E.C. Mossner and I.S. Ross (Oxford 1977), 224. From a letter of October 1780 to another correspondent it is clear that Smith felt at the time that he had convinced Pownall only to find himself mistaken: ‘I have not thought it proper to make any direct answer to any of my adversaries. In the second edition I flattered myself that I had obviated all the objections of Gover¬ nor Pownall. I find, however, he is by no means satisfied, and as Authors are not much disposed to alter the opinions they have once published, I am not much surprised at it.’ See W.R. Scott, Adam Smith as Student and Professor (1937; New York 1965), 282; also in Correspondence of Adam Smith, 250.

VALUE AND DISTRIBUTION ANALYSIS 37 learned book offers to the consideration of the world of business.’ But he took issue with a variety of matters that, on the whole, reflect largely the belief that Smith erred in the transition from analysis to ‘application.’ Here in fact lay the raison d’etre for the ‘letter’: ‘On the first reading the eight first chapters of your first book ... before I came to the use and application of your doctrines in the explication of practice and business, I began to apprehend, that some dangerous consequences in practice might be deduced from theory, instead of those sound and beneficial doctrines which derive through experience, by a true analysis of nature and her principles ... When I came to the doctrines applied to practice, and the businesses of the world, I found that my cautions had not been unnecessary, and that my apprehensions ... were grounded ...,42 One aspect of the general complaint was that Smithian ‘Theory, in the pride of rectitude,’43 failed to allow in practical applications for lagged relationships with very serious consequences, especially from the perspective of labour’s well-being: ‘That the prices of wages do continu¬ ally increase with the advancing prosperity of any community, and that they are the highest in those communities, who are advancing with the most rapid velocity, is a truth, a comfortable and an encouraging truth: yet as prices of wages follow but with slow and loaded steps, in propor¬ tion to the quick motions of the rise of the prices of all other things, if some care and attention is not given to aid the motion of the rise of wages, in some measure to keep it above the lowest scale, which it can subsist by; we may, in the triumph of prosperity, and in the pride of rectitude, see the poor labourer, of the lower classes, under a continued state of helpless oppression, amidst the prosperity of the community in general ...,44 The failure to take into account lagged relationships was the source of Smith’s position on the corn-export bounty with which Pownall took particular exception: ‘I cannot but hope, that the same wisdom which gave the bounty, will operate with the country gentlemen, to doubt every speculation of closet doctrine, and to oppose, on every occasion, even the most distant attempt to lower, or to confine within narrower limits this bounty.’ The complaint against the Smithian argument (attributed also to Jacques Necker) according to which a rise in the price of corn (due to 42

A Letter from Governor Pownall, 3-4, 6-7

43 44

Ibid., 6 Ibid., 15-16. Cf. also 6-7: ‘Although the demand for those who live by wages must necessarily increase with the increase of national wealth; and consequently the price of wages rise in proportion to the rise of every thing else; so as that the labourer will in the end partake of the general riches and happiness of the publick. Although the rise in the price of all produce is in the end no calamity, but the forerunner of every publick advantage: Yet as those prices do forerun, and must, during the progress of improvement always forerun; wages and rent must always continue at an under-value in the comparison.

38 THE ECONOMICS OF DAVID RICARDO

the bounty) will merely generate a (proportionate) rise in general prices41 is expressed in the following passage. Here, in effect, Pownall takes Smith to task for working within a ‘comparative statics’ framework, introducing a disturbance into a system initially in full equilibrium, a procedure which is of little practical relevance and indeed is positively misleading: If corn was the first article which started in price, so that all other commodities followed it, then indeed both your positions would be true; first, that so far as respects the home market, we should only raise the nominal price, for all rising proportionably, there would be no alteration in the ratios of the scale: this would therefore be of no use to the farmer on one hand, but by raising all the articles

of subsistance and supply, our manufactures must become too dear for the aver¬ age rates of the general market. But the contrary is the fact. Corn is the last of all the articles of the market which starts in its price, and rises always with the slowest motion. It is only in consequence of all other commodities having arisen, that a rise in this becomes necessary, and when it does begin to rise, it follows with such unequal motion, that some encouragement becomes neces¬ sary, as a spring to aid the velocity of its rise in proportion to other things. It is not the rise of the price of corn, but the general improved state of the country, raising the rates of all things, and the burthen of taxes successively accumu¬ lated, which raises the prices of our manufactures. On the contrary, encourag¬ ing the raising of corn by a good price in the direct instant, creates a plenty: a plenty, with a succession of surplusses, keeps down the price, taken in a gen¬ eral series of times; and in some measure it tends also to lower the price of manufactures, by the number of hands which plenty of subsistance, if I may so express myself, always creates.46 One further methodological objection will be mentioned here. Pownall charged that in formulating his case against the monopoly accorded Brit¬ ish capital in the American trades Smith failed to consider objectively the empirical evidence. More specifically, he maintained that Smith retained the basic model despite an inability to corroborate its validity from the evidence, and did so by means of resort to (what were to be called) ‘dis¬ turbing causes’:

45

Ibid., 36-7: ‘The next objection in which you and Mr. Necker join, is, that the doing any thing to raise the price of corn (as you express it, of subsistance, as Mr. Necker rather more logically) in the home-market, must of course raise the ex¬ pence of our manufactures, and give advantage to the rival manufactures of every part of Europe against us. This objection takes rise from a total mis-stating of the case.’ The reference to Necker is to Sur la Legislation et le Commerce des Graines (Paris 1775). Pownall asserted, in fact, that Smith seems ‘on this subject [of the

46

corn-export bounty] to have adopted the reasoning which Mr. Necker uses, and to have copied it closely ...’ [ibid., 31 see also 8). Ibid., 36

VALUE AND DISTRIBUTION ANALYSIS 39 Having gone through your argument of objection, you close with some corollary observations, as deriving from it. You think, that the unnatural spring applied to the colony-trade, has destroyed the natural balance which would otherwise have taken place amongst all the different branches of British industry, and that the direction of it is thus thrown too much into one channel. The idea then of a blood vessel, artificially swelled beyond its natural dimensions, strikes your imagination, and you are brought under an apprehension of some terrible dis¬ order. As this disorder did not seize Great Britain in the case you supposed, you then search out five unforeseen and unthought-of events ... which fortunately occurred to prevent it. As I am no malade imaginair in politicks, and have no fears of those ‘convulsions, apoplexy, or death,’ which have been so often pre¬ dicted, I know not how to go seriously, against fact, into reasoning upon them ... [The] whole state of our trade, as it stands in fact, and is found in effect, is to me a proof in point against your case in theory.47 § Another early critic was James Anderson. In a retrospective view of his initial reactions to the

Wealth of Nations on its appearance, Anderson

complained largely of Smith’s hypothetico-deductive theorizing or his rejection of the ‘inductive’ approach: Soon after Dr. Adam Smith’s excellent work on the wealth of nations was pub¬ lished, it fell into my hands. I read it with the attention that it deserved, and with no small degree of satisfaction and improvement in many respects; but the satis¬ faction was not without alloy. While I admired the liberality of his general turn of thinking, the ingenuity of his arguments, the perspicuity of arrangement, and the acute accuracy of discrimination, that are eminently conspicuous in that work, I could not help lamenting that in it, as in all others that I have seen on practical subjects, which have been written by speculative men, the conclusions were, on too many 47

Ibid., 44—5. Cf. also an earlier comment, 40: ‘It strikes me as material, and I am sure, therefore, you will excuse me making, in this place, one remark even on the manner of your argument, and how you stretch your reasoning nicely. You in words advance upon the ground of probable reasons for believing only, you prove by probable suppositions only; yet most people who read your book, will think you mean to set up an absolute proof, and your conclusion is drawn as though you had.’ Pownall also took exception to Smith’s proposition that ‘labour is the measure of value, and the real price of all commodities' - established initially as ‘an abstract notion' — when put to practical use: ‘What do we, but pervert our reasoning from distinct notions in practice, to “abstract notions,” and subtleties in theory ...’ [ibid., 12-13). For the implication, he complained, was that Smith played down metallic money, which ‘hath been hitherto esteemed a common known measure of the value of all other things,’ and thus opened the door for a conception of money as accounting medium only which could as well be served by an unbacked paper or indeed by ‘an account, without any deposit' [ibid., 8). ‘It is here,’ Pownall closed, ‘that I think your Analysis, subtilised by too high refinement, deviates from the path in which the nature of things would have led you.’ [ibid., 18).

40 THE ECONOMICS OF DAVID RICARDO

occasions, deduced from theoretical principles, rather than from a patient induction of actual facts. It is much to be lamented, that, when the mind is thus occupied with preconceived notions, many important facts are suffered to escape notice; and those only are deemed worthy of attention which serve to corroborate the favour¬ ite hypothesis. When a mind is under the influence of this disposition, acuteness of talents only tends to lead it the farther astray, by suggesting plausible combi¬ nations, that serve only to prevent the objects from appearing in their true light to the inquirer himself; and, of course, he will find no difficulty in representing them under false colours to others. Few writers, of eminence, in modern times have been more frequently under the influence of this fascinating power than the author of the Wealth of Nations.48 It will be recalled that Sir James Steuart (and Smith himself) had long before warned against the irresponsible use of abstract theory. It was precisely with the unqualified application of theory to concrete policy issues that Anderson charged Smith. He had in mind, in particular, Smith’s position on the corn laws: In no one particular, that I have had occasion to notice, has he been so grievously misled as with regard to the influence of the corn-laws; concerning which he had formed a favourite hypothesis, which he cherished with that kind of pertinacity that is in general attached to every kind of bigotry. But facts not being at all times easy to be reconciled to this hypothesis, the mind became, as it were, irritated, so as to catch at every appearance of an argument in its favour, wherever that occurred. Thus is the subject of the corn-laws recurred to again and again, in many parts of Dr. Smith’s work; and peevish assertions come at length to be mistaken for argu¬ ments respecting it. It is to this circumstance alone that I am inclined to ascribe the many inconsistent, and even contradictory, remarks that occur respecting the corn-laws in various parts of his ingenious work.49 Anderson illustrated Smith’s approach towards the evidence by an ex¬ ample to which we have already alluded: ‘when Dr. Smith found himself pressed by the obvious argument, that the price of corn had declined ever since the bounty was [established], while that of other commodities had been almost universally advancing, he attributes this circumstance solely to the general prosperity of the nation, which resulted from the revolution; and he peevishly asserts, “that the price of corn had not been lowered in consequence of the bounty, but in spite of it.” As if the same argument would not equally apply to the price of all other commodities.’ We have here a splendid instance of Smith’s quest for ‘disturbing causes.’

48 49

A Calm Investigation of the Circumstances that have led to the Present Scarcity of Grain in Britain (London 1801), 16-17 (my emphasis) Ibid., 17

VALUE AND DISTRIBUTION ANALYSIS 41 AN EARLY STATEMENT OF DIMINISHING RETURNS AND DIFFERENTIAL RENT

Anderson’s objections to Smithian doctrine constitute, from our perspec¬ tive, something more than an instance of ‘minor dissent,’ despite a failure to attract attention.50 In his Observations on National Industry, Anderson developed a case - precluded as we have seen by Smith - for government intervention to encourage domestic agriculture by means of an export bounty.’1 In the course of an attempt to fix upon the precise magnitude 50

51

For instances of ‘minor dissent’ during the quarter century after 1776, see J.H. Hollander, ‘The Founder of a School,’ in J.M. Clark et al., Adam Smith, 1776-1926 (Chicago 1928), 24; Hollander, David Ricardo: A Centenary Estimate (Baltimore 1910; New York 1968), 20; and Hollander, ‘The Development of the Theory of Money from Adam Smith to David Ricardo,’ Quarterly Journal of Economics, XXV (May 1911), 430. See also W. Cunningham, ‘The Progress of Economic Doctrine in England in the Eighteenth Century,’ Economic Journal, I (March 189l), 73-94. Observations on the Means of Exciting a Spirit of National Industry (1777; Dublin 1779), II. It was taken for granted that agricultural self-sufficiency is desirable: ‘as it is universally acknowledged, that the most essential riches of any country consist in the produce of the soil, any regulation that tended to diminish that produce, would be destructive; it ought, therefore to be the study of the legisla¬ ture, to encourage the cultivation of the fields, so as to make the produce, if possible, sustain all its inhabitants’ (208). In his later work, A Calm Investigation, 18-19, Anderson referred to the Observa¬ tions and complained of Smith’s failure to take it into account in making his case for a free corn trade: ‘Being aware of this at the time I read that work [the Wealth of Nations], I thought it my duty to counteract its influence, as much as it was in my power, by a careful consideration of each particular, accompanied with a refuta¬ tion of it. These remarks occur in a work that I was writing at the time, and which was published, in the year 1777, under the title of Observations on the Means of exciting a Spirit of national Industry, chiefly as applicable to Scotland. A juvenile performance, that has had very little sale, and attracted very little notice. The prin¬ ciples that are laid down in these observations, however, (see P S. to Letter XIl) on this subject at least, I think I may now take upon me to say, are established incontrovertibly; not only because no one has yet attempted to refute them, not even Dr. Smith himself, (to whom a copy of the work was sent as soon as it was published,) though he told our common friend Dr. Cullen, immediately after he read it, that he thought it required an answer, which he intended to give it; and he did, to my knowledge, take measures to ascertain some facts with that view; but, upon maturer considerations, it would seem, he relinquished the design. My conviction of the truth of these observations, however, now rests upon much stronger grounds than even the abandonment of his hypothesis by Dr. Smith could have afforded; viz. the undeniable and striking coincidence of succeeding facts with the reasoning there detailed.’ (The reference to Letter XII is an error; it should be Letter XIII.) An account by Smith himself of the episode is given in a letter to a correspon¬ dent in October 1780: ‘A very diligent, laborious, honest Man of the name of Anderson, has published a large quarto volume concerning improvements; in this volume he has done me the honour to employ a very long chapter in answering my objections to the bounty upon the exportation of Corn. In volume second

42 THE ECONOMICS OF DAVID RICARDO

of the subsidy required, Anderson utilized the principle of diminishing returns — from which he deduced the conception of rent as an intra¬ marginal surplus — on the grounds that it is the level of marginal costs which is relevant for the calculation. The exposition of the principle is striking.52 It is true that Anderson does not formally emphasize that his page 101 of the first edition [1937 ed., p. 482], I happened to say that the nature of things had stamped a real value upon Corn which no human institution can alter. The expression was certainly too strong, and had escaped me in the heat of Writing. I ought to have said that the nature of things had stamped upon corn a real value which could not be altered merely by altering its Money price. This was all that the argument required and all that I really meant. Mr Anderson takes advantage of this hasty expression, and triumphs very much by showing that in several other parts of my Work I had acknowledged that whatever lowered the real price of manufactur’d produce, rais’d the price of rude produce, and consequently of corn. In the second edition I have corrected this careless expression, which I apprehend takes away the foundation of the whole argument of Mr Anderson.’ Scott, Adam Smith as Student and Professor, 282; also in Correspon¬ dence of Adam Smith, 251. Smith seems to have missed the import of Anderson’s major contribution, which amounts to the recognition of changes in the relative 52

price of corn due to diminishing agricultural returns. Observations on National Industry, 207-9: ‘Corn cannot be reared without a certain expence of labour, nor can it be brought to market unless the cultivator receives a price sufficient to indemnify him for that expence. It is the wages of this labour necessary for producing grain that I call its intrinsic value. In a country that possesses a very fertile soil, it is evident, that the same quantity of grain may be reared, and brought to market, at a much smaller expence than in one that is more barren. The intrinsic value of the corn, there¬ fore, must be higher in the last country than in the first; and, by consequence, the average price of corn may, with safety, be much lower in proportion to other commodities in the fertile than in the barren country ... In every country there are various soils, which are endued with different de¬ grees of fertility; and hence it must happen, that the farmer who cultivates the most fertile of these, can afford to bring his corn to market at a much lower price than others who cultivate poorer fields. But if the corn that grows on these fertile spots is not sufficient fully to supply the market alone, the price will naturally be raised in that market to such a height, as to indemnify others for the expence of cultivating poorer soils. The farmer, however, who cultivates the rich spots, will be able to sell his corn at the same rate in the market with those who occupy poorer fields; he will, therefore, receive much more than the intrinsic value for the corn he rears. Many persons will, therefore, be desirous of obtaining possession of these fertile fields, and will be content to give a certain premium for an exclusive privilege to cultivate them; which will be greater or smaller according to the more or less fertility of the soil. It is this premium which constitutes what we now call rent-, a medium by means of which the expence of cultivating soils of very differ¬ ent degrees of fertility may be reduced to a perfect equality.’ These principles are applied to legal ‘price fixing’ in the domestic market (which apparently would be closed to foreign corn imports): ‘In countries, there¬ fore, of moderate fertility, it is prudent to fix the average price of grain at a rate high enough to enable the farmer to cultivate so much of those unfertile fields as will be sufficient to furnish grain to supply the whole inhabitants with food in the scarcity years, that thus they may never be in danger of wanting this essential necessary of life’ (209). It is further observed that ‘if they rear so much grain as

VALUE AND DISTRIBUTION ANALYSIS 43 rent conception differs from that of Smith and he obviously does not base a full-fledged ‘Ricardian’ system upon it; but the principle of diminishing returns from which the rent concept derives is used none the less to counter Smith’s position on the bounty. In effect, the entire body of Smithian theory according to which variations in the price of corn can only be nominal variations, in consequence of the general effect upon prices as a whole, is turned down.53 The same case was presented by Anderson in his An Enquiry into the Nature of the Corn-Laws. Here he observed that ‘it is not ... the rent of land that determines the price of its produce, but it is the price of that produce that determines the rent of the land ...,54 Accordingly, to fix a low corn price would mean not merely a fall of rent but a reduction in agricultural out¬ put despite the ‘popular objection ... that the price to the farmer is so high only on account of the high rents and avaricious extortions of proprietors. Lower (say they) your rents, and the farmer will be able to afford his grain cheaper to the consumer.’ The notion of no-rent land at the (extensive) margin of cultivation is expounded with most impressive clarity in an account that has much in common with that regarded as ‘revolutionary’ nearly forty years later.55 J.R. McCulloch had some very kind words for the exposition.56 will sustain the whole inhabitants in years of scarcity, there will be much more than enough for them in years of plenty. A market, therefore, must be provided for this surplus produce, to prevent the unreasonable degradation of price on these occa¬ sions’ (210). The object of the bounty is thus ‘to regulate the price of grain, and to keep it as moderate, and as steady, as the nature of things will admit of (206). The precise magnitude of the bounty would depend upon foreign cost conditions 53

54

and transportation costs (206-7, 210-11). Two earlier expositions of the principle of diminishing returns are those by A.R.J. Turgot (1767), in Oeuvres de Turgot, I (Paris 1844), 420-2, which relates to the ‘intensive margin,’ and by Sir James Steuart, Inquiry into the Principles of Political Economy, I, 116, regarding the ‘extensive margin.’ (Edinburgh 1777), 45n. David Hume too objected to the Smithian exposition of cost price in the chapter ‘Of the Natural and Market Price of Commodities’ wherein rent appears as a component part of price on a par with the returns to capital and labour: ‘I cannot think,’ he wrote to Smith in April 1776, ‘that the Rent of Farms makes any part of the Price of the Produce, but that the Price is determined altogether by the Quantity and the Demand.’ The Letters of David

55

Hume, ed. J.Y.T. Greig (Oxford 1932), II, 311 The account has much in common with that of Ricardo. For example, it is implied that the demand for corn is a function of population size alone and not of price {En¬ quiry, 46n). In the exposition a certain specific population size is postulated which implies a specific demand for corn. This quantity can be produced by use of plots A, B, C, and D and a price of 12/- per boll is assumed to be sufficient, that is to cover costs on the marginal plot. The intra-marginal farmers pay rent to assure an equal¬ ity of profits such that all are ‘equally willing to take the one [plot] as the other’ [ibid., 47n). The effects of an increase in population are then traced through. Further aspects of Anderson’s position are taken up in Appendix C.

56

See McCulloch, The Literature of Political Economy: A Classified Catalogue (London 1845), 68: ‘The publication of this tract marks an important oera in the history of

44 THE ECONOMICS OF DAVID RICARDO

THE RECEPTION OF SMITHIAN ECONOMICS, 1800-15

In this and the following sections we consider contributions to the early nineteenth-century literature with an eye upon the reception of Smithian economic doctrine. Of particular, but not exclusive, interest is the effect of the price of corn upon general prices. Two groups may be discerned: those who opposed Smithian trade policy, particularly his position on the corn-export bounty, and those who were in favour. The theoretical un¬ derpinnings of the specific policy position are by no means uniform within a particular group; on the contrary, in some cases the analytical similarities of writers with differing policy positions are very close. The main point to note is that the majority of writers, in both categories, accepted the fundamental Smithian proposition that a rising corn price will be reflected in a higher general level of prices. Among the numerous tracts of 1814-15 dealing with agricultural pro¬ tection is the Earl of Lauderdale’s well-known Letter on the Corn Laws. But his opposition to Smithian doctrine extends far beyond the matter of agricultural protection, and he must be counted amongst the serious crit¬ ics at the turn of the century. In his Inquiry of 1804 he took Smith to task for the position ‘that labour may be considered as an accurate measure of value,’ on the grounds that ‘the existence of a perfect measure of value must at once appear impossible.’5' He rejected the distinction between productive and unproductive labour which turned upon ‘the mere dur¬ ability of the services performed.’58 Of particular significance are Lauder¬ dale’s critical comments upon Smith’s conception of the nature of profits as a derivative income, and his case relating to the limits to profitable accumulation also made in criticism of Smith. Some of these matters will be taken up in the next chapter, keeping in mind at this stage that Lauderdale accepted without question the Hume-Smith position that increases in wages can be passed on to consumers in the form of higher

economic science, from its containing the earliest explanation that is anywhere to be met with of the real nature and origin of rent. And it is to be observed that the author did not stumble upon this great discovery as it were by chance, and without being aware of its value. On the contrary, nothing can be more complete and satisfactory than his analysis of the circumstances in which rent originates, and which occasion its increase and diminution; and he did not fail to recur again and again to the subject in subsequent publications.’ McCulloch observed that the work attracted little attention and that Malthus and West were regarded unjustly as originators of the principle of differential rent in their pamphlets of 1815. 57

‘[For] as nothing can be a real measure of length and quantity, which is subject to variations in its own dimensions, so nothing can be a real measure of the Value of

58

other commodities, which is constantly varying in its own value.’ An Inquiry into the Nature and Origin of Public Wealth, 1st ed. (Edinburgh 1804; New York 1962), 27. The second edition of 1819 is in substance the same as the first. Ibid., 151

VALUE AND DISTRIBUTION ANALYSIS 45 prices. He objected to the presumption that an increase in the wage rate necessarily implies an increase in unit wage costs in the light of technical change. Our main interest in Lauderdale here is his very sharp rejection of Smith’s position on the corn-export bounty expressed in the Letter on the Corn Laws, namely that ‘it is impolitic to protect the Home Trade in Grain by prohibitory Duties, or to encourage the growing of Grain by Bounties on Exportation, on the special ground that such regulations do not afford the same excitement to the Agriculturalist as to those con¬ cerned in the conduct of other branches of industry.’59 Lauderdale said nothing of the proposition relating the general price level to the price of corn, but the pamphlet emphatically turned down Smith’s conception of corn as a product unlike all others and emphasized, as in the Inquiry, the possibility of altering the relative profitability of agricultural investment by intervention.60 § We turn next to Malthus. In the second editionof the Essay on Population Malthus added a chapter ‘Of Bounties on the Exportation of Corn’ - a subject of the ‘highest importance’ — which took strong exception both to various aspects of Smith’s analytical treatment of the issue and to his pol-

59 60

A Letter on the Com Laws (Edinburgh 1814), 10 Formally, the case for corn laws was based on the argument that other sectors were enjoying protection; general free trade would be the ideal [ibid., 7f., 20—1). On this Ricardo observed to Malthus, letter of 13 Jan. 1815, The Works and Correspondence of David Ricardo, ed. P. Sraffa (Cambridge 1951—73), VI, 169: ‘I cannot help thinking that Lord Lauderdale was mistaken, (and I believe you hold the same opinion as him) in supposing the farmer to lie under any particular disadvantage from not having the monopoly of the home market, whilst so many other trades were enjoying that benefit.’ Ricardo had in mind ‘any particular disadvantage’ compared with other consumers or producers. Other arguments for protection prescribed by Lauderdale in the pamphlet include the notion that corn is a special commodity in so far as it is particularly difficult to foresee shortages (Letter on the Corn Laws, 19). In the ‘Advertisement’ Lauderdale complained of the dependency upon foreigners and high corn prices since 1773 under a regime of effective free trade in corn, and of the current propaganda against protection, on the grounds that it would involve ‘sacrificing the interest of the Poor to the avidity of the Landholder.’ It may be added that in his pamphlet Lauderdale had some very sharp words for what he considered to be Smith’s gross abuse of language particularly in the discussion of ‘real’ value: ‘The reasoning by which this extradordinary distinction is justified affords one of the numerous, perhaps indeed, one of the most remark¬ able instances of that laboured obscurity, produced by an almost studied inaccu¬ racy of phraseology, by which this Author has successfully deceived many a careless reader, whilst it must remain evident to any one who considers the means used to establish the proposition he attempts to maintain, that he has only be¬ wildered himself’ [ibid., 12-13). For a defence of Smith in the Edinburgh Review by Henry Brougham, see below, p. 72.

46 THE ECONOMICS OF DAVID RICARDO

icy conclusions. Malthus insisted, in the first place, that an export sub¬ sidy would in fact raise the agricultural profit rate and thus encourage expansion, denying the existence of any ‘great and essential difference’ between corn and other goods such as that emphasized by Smith: When Dr. Smith says that the nature of things has stamped upon corn a real value, which cannot be altered by merely altering the money price; and that no bounty upon exportation, no monopoly of the home market, can raise that value; nor the freest competition lower it; it is evident, that he changes the question from the profits of the growers of corn in any particular country, to the physical and absolute value of corn in itself... I certainly do not mean to say, that the bounty alters the physical value of corn, and makes a bushel of it sup¬ port a greater number of labourers for a day, than it did before: but I certainly do mean to say that the bounty to the British cultivator does, in the actual state of things, really increase his profits on this commodity; and by thus making the growth of corn answer to him, encourages him to sow more than he otherwise would do, and enables him in consequence to employ more bushels of corn in the maintenance of a greater number of labourers.51 Malthus in this context alluded to both the immediate or short-run and the long-term effects of the subsidy on the price of corn. As far as concerns the former the price increase will not (as Smith believed) fail to represent a ‘real’ increase — or a relative increase in terms of other goods - because while money wages and general prices are affected they do not rise in proportion to the corn price: The most plausible argument that Dr. Smith advances against the corn laws, is, that, as the money price of corn regulates that of all other home-made commodi¬ ties, the advantage to the proprietor from the increased money price is merely apparent, and not real; since what he gains in his sales he loses in his purchases. This position, however, is not true, without many limitations. The money price of corn, in a particular country, is undoubtedly by far the most powerful ingredient in regulating the price of labour, and of all other commodities; but it is not the sole ingredient. Many parts of the raw produce of land, though ef¬ fected by the price of corn, do not, by any means, rise and fall exactly in propor¬ tion to this price. When great improvements in manufacturing machinery have taken place in any country, the part of the expence arising from the wages of labour will bear a comparatively small proportion to the whole value of the wrought commodity, and consequently, the price of it, though effected by the price of corn, will not be effected proportionally.52 61 62

An Essay on the Principle of Population, 2nd ed. (London 1803), 461-2 Ibid., 458-9. (in support of the assertion that ‘the money price of corn ... is undoubtedly by far the most powerful ingredient in regulating the price of labour,’ Malthus referred to Du Pont de Nemours.)

VALUE AND DISTRIBUTION ANALYSIS 47 The corn price is thus likely to rise relatively to the prices of other goods in consequence of the bounty. Even assuming a proportionate rise in the money-wage rate, Malthus later observed, taxes and rents, which are assumed here to enter costs,will be roughly constant so that agricul¬ tural profitability is none the less raised/4 Similar reasoning was applied to the short-run effects of freer corn importation. Here the fall in the price of corn will have disastrous effects on profitability since, in consequence of relatively constant rental and tax charges, in addition to sticky money wages, costs will not fall proportionately: ‘When

great and numerous taxes on consumption

exist in any country, those who live by the wages of labour must always receive wherewithall to pay them, at least all those upon necessaries, such as soap, candles, leather, salt, &c. A fall in the price of corn, there¬ fore, though it would decrease that part of the wages of labour which resolves itself into food, evidently, would not decrease the whole in the same proportion. And besides these, and other limitations which might be

named, the experienced difficulty of lowering wages when once they have been raised, should be taken into consideration before the position can be practically applied.’“ As for the long-run consequences of the corn-export subsidy, ‘it will scarcely fail to follow,’ Malthus asserted, ‘that the greater plenty, occa¬ sioned by this encouragement, will ... lower the price.’ Malthus then turned the Smithian case upon itself; for since the effect of the bounty is to lower the corn price ‘all Dr. Smith’s just reasonings respecting the dis¬ advantage of the cheapness of silver in any particular country, or the dear¬ ness of all other commodities ... are applicable in favour of the corn laws, not against them.’hh 63 64

‘One of the principal ingredients in the price of British corn, is the high rent of land’ [ibid., 460). Ibid., 462

65

Ibid., 459 (my emphasis). In an earlier chapter ‘On Agricultural and Commercial Systems’ Malthus expressed the fear that easy corn importation would drive down the corn price but not the money wage: ‘Experience warrants us in saying, that, from political fears, or other causes, the fall in the price of labour would be uncertain; but the ruin of our agriculture would be certain’ (446).

66

Ibid., 462—3. In the chapter ‘On Agricultural and Commercial Systems’ Malthus observed [ibid., 444-5): ‘Dr. Smith says, that, in his time, merchants frequently complained of the high price of British labour as the cause of their manufactures being undersold in foreign markets. If such complaints were in any degree founded at that time, how will they be aggrevated twenty years hence!’ Nothing is said formally in the chapter dealing with the corn-export subsidy about the precise nature of the long-run agricultural supply function. In his criticism of Anderson, Malthus, as we shall see in Appendix C, made use of the conception of diminishing returns; yet in the present context he implied increasing returns, or perhaps the effects of innovation. Doubtless, however, the distinction was made between the long run and the short run; and in later

48 THE ECONOMICS OF DAVID RICARDO

The fundamental fact to observe in both the analysis of the short-run and the long-run effects of the subsidy is Malthus’s unquestioning accept¬ ance of the basic Smithian proposition that the price of corn governs the general level of prices by way of its effect upon the money-wage rate - ‘the money price of corn, in a particular country, is by far the most powerful ingredient in regulating the price of labour, and of all other commodities.’ It is with Smith’s extreme interpretation of the principle that he took issue/’7 In the Observations on the Effects of the Corn Laws (1814), which was formally designed as an impartial evaluation of the merits of protection and of free trade, the discussion turns once again on Smith’s analysis of the corn-export bounty and in particular the special treatment accorded corn pricing: ‘I have always thought, and still think, that this peculiar argument of Dr. Smith, is fundamentally erroneous.’68 The issue at stake, as in the Essay on Population, is Smith’s assertion that ‘corn is of so pecu¬ liar a nature, that its real price cannot be raised by an increase of its money-price; and that, as it is clearly an increase of real price alone, which can encourage its production, the rise of money-price, occasioned by the bounty, can have no such effect.’ Once more Malthus insisted that the money-wage rate does not rise proportionately with the corn price, and this because of the existence in the wage basket of home and im-

editions we read in fact: ‘As far as the bounty might tend to force the cultivation of poorer land, so far no doubt it would have a tendency to raise the price of corn; but we know from experience that the rise of price naturally occasioned in this way is continually counteracted by improvements in agriculture.’ An Essay on the Principle of Population, 5th ed. (London 1817), II, 47 In 67

Malthus also gave his reasons for wishing to see an expansion of the agricultural sector. His primary fear was that of excessive dependence on imports: ‘... is it politick, merely with a view to our national greatness, to render ourselves thus dependent upon others for our support ...’ What was called for was ‘some system, which will permanently raise the profits of agriculture, encourage cultivators to employ more labour in the growing of corn, and completely secure them from all apprehensions of overstocking the markets.’ Malthus conceded that, in principle, interference with resource allocation is unwise but maintained that ‘the objection which Dr. Smith brings against bounties in general ... does not apply to the present instance, on account of the preeminent qualities of the products of agricul¬ ture, and the dreadul consequences that attend the slightest failure of them’ {ibid., 2nd ed., 465-6). The case for agricultural protection was further justified on the grounds that other sectors of the British economy were artificially encouraged. The Corn Laws of 1688 and 1700 regulating imports and exports ‘did not do more than place them upon an equality’ [ibid., 450-2, 468~9n; on this last matter, see the criticisms by Buchanan, Observations, 156, and remarks by Ricardo in a letter to Malthus of 13 Jan. 1813, Works, VI, 170). Moreover, Malthus maintained that before 1773 -when agriculture was effectively protected - corn prices were both lower and steadier than thereafter [ibid., 452-3).

68

Observations on the Effects of the Com Laws, 2nd ed. (London 1814), in The Pamphlets of Thomas Robert Malthus (New York 1970), 96—7

VALUE AND DISTRIBUTION ANALYSIS 49 ported goods other than corn."1 Moreover, the reaction of money wages to an increase in the price of corn occurs in consequence of a slow re¬ sponse of labour supply so that ‘corn and labour rarely keep an even pace together; but must often be separated at a sufficient distance and for a sufficient time, to change the direction of capital.’ In brief, ‘the price of corn does not immediately and generally regulate the prices of labour and all other commodities; and ... the real price of corn is capable of varying for periods of sufficient length to give a decided stimulus or discouragement to agriculture ...,7° Malthus went out of his way to avoid any possibility of misinterpreta¬ tion. As in the Essay on Population, he stood by the proposition that general prices will vary with the corn price, but questioned Smith’s for¬ mulation of the relationship and some of the deductions based upon it: ‘although the price of corn affects but slowly the price of labour, and never regulates it wholly, yet it has unquestionably a powerful influence upon it.’71

69

Ibid., 98, 99. Malthus relied here on data given in Sir Frederick Eden, State of the Poor (London 1797). According to these estimates roughly 40 per cent of a labouring family’s budget was devoted to meal or bread; 40 per cent to houserent, fuel, soap, candles, tea, sugar, and clothing; and 20 per cent to meat, milk, butter, cheese, and potatoes.

70

Pamphlets, 100, 106. Cf. ibid., 101: ‘we may be assured, that, whatever influence the price of corn may have upon other commodities, it is neither so immediate nor so complete, as to make this kind of produce an exception to all others.’ Smith’s assertion that the corn price strictly governs the prices of all commodi¬ ties had led him, Malthus maintained, to establish com as ‘a standard measure of real value in exchange’ whereas no such standard measure existed for it waS^ untrue that a given quantity of corn could everywhere and at all times, even in the long run, purchase the same quantity of labour or commodities-in-general [ibid., 104). It should also be observed that Malthus recognized that the effects of the imposition of a (once-and-for-all) bounty would be to raise the agricultural profit rate temporarily for ‘it is impossible’ - ‘where the competition is free’ - ‘per¬ manently to raise the profits of farmers or particular manufacturers above the level of other profits’ [ibid., 106).

71

Ibid., 112. Reference was made to ‘a relative disadvantage in all foreign commer¬ cial transactions, occasioned by the high comparative prices of corn and labour, and the low value of silver, as far as they affect exportable commodities’ [ibid., 122-3). The same position was repeated in Malthus’s next pamphlet, Grounds of an Opinion on the Policy of Restricting the Importation of Foreign Com (London 1815), wherein he stated a positive preference for agricultural protection. While the free trade argument that ‘a fall in the price of our corn and labour, affords the only chance to our manufacturers of retaining possession of the foreign markets’ was conceded [ibid., 160), the case for protection remained on balance decisive for a variety of reasons amongst which are included the potentially damaging effects upon activity of a general fall in the price level [ibid., 161) and the great increase in the real burden of taxation which a general fall in prices would imply [ibid., 168). Referring to this latter consequence, Malthus concluded: ‘I own it appears

50 THE ECONOMICS OF DAVID RICARDO

It is highly significant that Malthus considered Smith’s theoretical position to fly in the face of the general theory of resource allocation: ‘it cannot be maintained without violating the great principles of supply and demand, and contradicting the general spirit and scope of the reasonings, which pervade the “Wealth of Nations.”’ The Smithian approach excluded corn from those normal supply responses which flowed from changes in the relative demands for commodities, and consti¬ tuted an unjustifiable exception to ‘the operation of that principle, so beautifully explained and illustrated by Dr. Smith, by which capital flows from one employment to another, according to the various and necessarily fluctuating wants of society.’72 Malthus’s position regarding Smithian theory as formulated in the famous Inquiry on the Nature and Progress of Rent of February 1815 also requires attention. Here Malthus set out the principle of differential rent, which he contrasted with the notion of rent envisaged as a ‘monopoly’ return (as envisaged, according to his interpretation, by Smith, Say, the Physiocrats, Sismondi, and Buchanan).73 But what is particularly striking from our present perspective is the interpretation and critical assessment of the Smithian theory of corn price determination: Adam Smith has very clearly explained in what manner the progress of wealth and improvement tends to raise the prices of cattle, poultry, the materials of clothing and lodging, the most useful minerals, &c. &c. compared with corn; but he has not entered into the explanation of the natural causes which tend to determine the price of corn. He has left the reader, indeed, to conclude that he considers the price of corn as determined only by the state of the mines which at the time supply the circulating medium of the commercial world. But this is a cause obviously inadequate to account for the actual differences in the price of grain, observable in countries at no great distance from each other, and at nearly the same distance from the mines.74 to me that the necessary effect of a change in the measure of value on the weight of a large national debt is alone sufficient to make the question fundamentally different from that of a simple question about a free or restricted trade ...’ J.R. McCulloch, in his Essay on the Question of Reducing the Interest on the National Debt (Edinburgh 1816), 198f., suggested an obvious means of overcoming this particu¬ lar objection. Malthus’s position of 1815 is not the same as that of 1803 in all respects. In the Essay he spoke of a general fall in prices in consequence of protection (at least in the long run). 72

Pamphlets, 97, 101

73

Malthus also took Smith to task for the view ‘that all land which yields food must necessarily yield rent’ but recognized that Smith sometimes ‘contemplates rent quite in its true light.’ Ibid., 180n

74

Ibid., 209. Precisely the same observation was repeated in Malthus’s Principles of Political Economy, 2nd ed. (London 1836; New York 1964), 184-5. Malthus here made reference to an early extract from the Wealth of Nations, 36 (cited above p. 2On), as evidence for his interpretation.

VALUE AND DISTRIBUTION ANALYSIS 51 For his own part Malthus accounted for a ‘high comparative money price of corn in terms of its ‘high comparative real price, or the greater quan¬ tity of capital and labour which must be employed to produce it.’75 Despite this fundamental divergence, the standard Smithian relation¬ ship between the corn price and general prices by way of the effect upon the money-wage rate is once again asserted,76 and the effect of money-wage variations upon general prices reiterated.77 None the less, as a practical matter

the potential damage of high corn prices was not to be exaggerated - an implicit criticism of Smith’s procedure — for ‘repeated experience has shewn us that such tendencies are continually counter balanced, and more than counter balanced by other circumstances. And we have witnessed, in our own country, a greater and more rapid extension of foreign commerce, than perhaps was ever known, under the apparent disadvantage of a very great increase in the price of corn and labour, compared with the prices of surrounding countries.’78 § We turn now to a little-known author but one to whom Ricardo refers. William Jacob in his pamphlet on agricultural protection of 1814 was sharply critical of Smith’s treatment of the issue: ‘The name and opinions of Adam Smith have deservedly too great weight in the public estimation to admit of any writer treating them with neglect or contempt; but ... on the subject of restraints on importation, and on bounties (Book 4th, Chap. 3 and 5) there is more obscurity, and more inaccurate phraseo¬ logy, than in any other part of his work.’79 Jacob also made the point that 75

Pamphlets, 210

76

Ibid.., 216: ‘I am well aware, and indeed have myself stated in another place, that the price of provisions often rises, without a proportionate rise of labour; but this cannot possibly happen for any length of time, if the demand for labour continues increasing at the same rate, and the habits of the labourer are not altered, either with regard to prudence, or to the quantity of work which he is disposed to perform.’ For ‘it is a still greater error, to suppose that the price of labour uncon¬ nected with the price of corn than to suppose that the price of corn immedi¬ ately and completely regulates it. Corn and labour rarely march quite abreast; but there is an obvious limit, beyond which they cannot be separated’ {ibid., 215n). Some of the witnesses at parliamentary investigations of the corn law issue during 1815 had suggested that there was little connection between the corn price and the money wage. Malthus’s rejection of this view was particularly praised by McCulloch in his Essay on the Question of Reducing the Interest on the National Debt, 133n, although McCulloch was a free trader.

77

Pamphlets, 216: ‘the peculiar evil to be apprehended is, that the high money price of labour may diminish the demand for it; and that it has this tendency will be readily allowed, particularly as it tends to increase the prices of exportable com¬ modities.’

78

Ibid., 216—17. Doubtless his allusion is to the effects of technological progress.

79

Considerations on the Protection Required by British Agriculture and on the Influences of the Price of Com on Exportable Production (London 1814), 11-12. Jacob observed that Lauderdale in his Letter on the Com Laws had drawn attention to several of the fallacies of Smith’s case, but the discussion had to be carried further in the light of the basic changes in industry structure since 1776.

52 THE ECONOMICS OF DAVID RICARDO

‘a writer without the affectation of ingenuity certainly might, from the concessions made by Adam Smith, show that restrictions on commerce, and even monopolies, can be defended by his authority.,HI1 In point of fact Jacob has little to offer of any analytical significance/1 One aspect of the work does, however, merit attention. The standard rela¬ tionship between the corn price and the money wage is reiterated,83 and the (Smithian) position whereby an increase in money wages is ultimately reflected in the higher price of commodities in general is also accepted. But Jacob set out to reject systematically the argument that any such general price increases would damage British competitiveness in foreign mar¬ kets.83 A variety of assertions are made during the course of the argument: on the basis of Sir Frederick Eden’s calculations according to which corn products constitute no more than one-half of the working class budget and taking into consideration the fact that ‘mechanisms’ accounted for a sig¬ nificant proportion of unit costs, it is estimated that some

12'/2 per cent

only of the final selling price of commodities would be affected by a corn price increase.84 Secondly, it is asserted that British exports were sold largely in markets where there was little competition so that ‘any small increase of price, arising from a higher rate of labour, will scarcely dimi¬ nish that consumption.’ And in any event the primary market for British manufacturers was the home market.85 80 81

Ibid., 13. Jacob had in mind here Smith’s concessions that if domestic taxes are imposed on a commodity a countervailing protective duty might be justified. His main argument for protection - a corn-export subsidy in years of good har¬ vest and low price and import prohibition in poor years {ibid., 47, 96f.) — is to assure ‘security’ of supply on the grounds that foreign sources could not be relied upon to feed a growing population, while a protected domestic industry could be relied upon to generate rising supplies at reduced cost and moreover, with re¬ duced price fluctuations. (At best corn imports would permit short run price reductions which would force serious cut-backs in home output and subsequent scarcities - ibid., 63, 60, 100, lOlf.) Jacob also justified protection in terms of the particularly heavy taxes born by British farmers compared with their foreign counterparts, and in terms of the protection enjoyed by various domestic manu¬ facturing industries [ibid., 61, 69).

82

‘It appears almost superfluous to assert, that the great mass of the inhabitants of this island, those who subsist by their daily labour, cannot be injured by such a state of things; for it is well known that, if the price of corn does not immediately, and in its full extent, regulate the price of labour, it has a certain and gradual influence upon it. Corn is supposed to constitute half the expenditure of a labourer’s family ...’ (l 26). Jacob is here presuming a higher price of corn in Britain than on the Continent.

83

‘It has, indeed, been stated that if corn be higher in England, than in other countries, labour will also be higher; that this will, by increasing the price, obstruct the sale of our exportable commodities; and that this evil may be ulti¬ mately so great, as to counterbalance the effects of our extraordinary skill, capital, and machinery’ (128).

84

Ibid., 137-8. It is also assumed that the prices of non-corn products in the wage

85

basket remain unchanged when the price of corn rises. Ibid., 131, 147f.

VALUE AND DISTRIBUTION ANALYSIS 53 A ‘sequel’ to the pamphlet published in the following year attracted Ricardo’s attention. (The sequel, according to the author, was written in response to Sir Edward West’s famous contribution of February 1815, about which more below.) It would appear from the new pamphlet that Jacob accepted the principle of diminishing returns. But he used the principle to support his own protectionist case by maintaining that free trade would imply a severe reduction in domestic output since ‘poorer lands’ constituted by far the greater proportion of the total, an assertion combined with the further assertion that the transfer of capital and labour from the agricultural sector (where it is conceded that foreign producers are relatively low-cost producers) to the manufacturing sec¬ tor - that is to say, a greater degree of international specialization — would entail an excess supply of manufactured goods. But in an appen¬ dix to the pamphlet on Ricardo’s Essay on Profits — with reference to an observation therein that free trade would simply entail the transfer of resources between sectors-Jacob maintains that capital could not in practice be withdrawn from agriculture but must be permanently lost.86 § David Buchanan, Smith’s editor, provides us with an illustration of an author who supported free trade in corn, but not on Smith’s grounds. In terms of our present categories he has more in common with the protec¬ tionists and for this reason his work is examined at this juncture. The principal objection to the Wealth of Nations relates to the effects of a rise in the corn price upon money wages. Buchanan objected to the opinion ‘adopted by Dr. Smith, and most other writers, that the money price of labour is regulated by the money price of provisions, and that when provisions rise in price, wages rise in proportion.’87 He also took exception to the notion that the prices of all agricultural goods are governed by the corn price. It followed that Smith’s position whereby the corn-export bounty could not raise the relative profitability of agricul¬ ture88 was invalid: ‘the price of corn does not regulate the money price of

86

A Letter to Samuel Whitbread, being a Sequel to Considerations on the Protection Required by British Agriculture (London 1815), 4-6, 7-8, 34-5. The appendix is unflattering: ‘I should deem it trifling with practical men if I were to enter with him into the truisms, mixed with vagaries, which, cloathed in the technical cant of political economy, are to be found in the 1st. 24 pages of his work.’ Jacob noted Ricardo’s statement that foreigners could not cut back their exports to

87

England without great loss so that the danger of reliance on imports was small, but observed that this phenomenon should be equally applied to England. Observations on the Subjects Treated of in Dr. Smith’s Inquiry into the Nature and Causes of the Wealth of Nations, (being vol. IV of Buchanan’s edition of the Wealth

88

of Nations), 59. This observation is inaccurate since Malthus for one rejected the idea that money wages rise in proportion to the corn price. ‘In arguing against this measure, Dr. Smith maintains, that the rise which the bounty occasions in the price of corn is no advantage to the farmer, because the price of corn regulates the money price both of labour and of commodities’ (ibid., 158).

54 THE ECONOMICS OF DAVID RICARDO

all the other parts of the rude produce of land. It regulates the price neither of metals nor of various other useful substances, such as coals, wood, stones, &c.; and as it does not regulate the price of labour, it does not regulate the price of manufactures; so that the bounty, in so far as it raises the price of corn, is undoubtedly a real benefit to the farmer.,8y His case against intervention is simply that there was no justification to drive up the corn price artificially despite the encouragement that would be given to domestic production.90 It is, however, implicit in Buchanan’s commentary on the Wealth of

Nations that in the event of an increase in the wage rate (for whatever reason) the general level of manufacturing prices would be affected.91 And while the Observations was intended ‘to rectify what is amiss with Dr. Smith,’ Buchanan none the less agreed that the corn price is ‘in no re¬ spect influenced by the expences of its production’ so that when such expenses vary ‘the consequence is not a higher or a lower price, but a higher or a lower rent.’92 Thus for all his criticisms Buchanan remained to a large extent within the Smithian fold on the fundamental issue of a special treatment for the price of corn. § It is clear from the discussion thus far that even those who opposed Smithian free-trade policies - Malthus, Lauderdale, Jacob - accepted the fundamental notion that higher corn prices will be reflected (although to a 89 90

The Wealth of Nations, ed. Buchanan (1st ed., 1814; 2nd ed., 1817), II, 276-7n Observations, 159. Buchanan was particularly critical of the assertion by protection¬ ists that since 1773 corn prices had tended to rise (and had undergone serious short-run fluctuations) compared with the earlier period in consequence of the aban¬ donment of protection. He himself accounted for the rise in corn prices since 1773 in terms of a fall in the value of money affecting all goods. The case for protection was in any event inconsistent in calling for the encouragement of agriculture by high prices and asserting at the same time that protection will result in low prices [ibid., 150-3). The corn price increase is also explained in terms of the relatively rapid growth of the manufacturing sector and rising population generating increased demand for agricultural products, rising prices, and consequently increased imports {ibid., 154-5). Buchanan also rejected Malthus’s view - and we have seen that Lauderdale too took this position - that agricultural protection was justified since the manufactur¬ ing sector enjoyed tariffs: ‘those who admit the impolicy of such expedients, surely act with singular inconsistency in endeavouring to establish a system in regard to agriculture which they condemn when applied to trade; and there is indeed an end of all sound legislation, if one abuse is thus to be made the ground of another’ (ibid., 157).

91

Wealth of Nations, ed. Buchanan, III, 336f. Buchanan objected to that part of the Smithian position of wage taxation relating to the effect of the tax upon the wage rate, but not to the supposed positive effect of a wage increase upon prices.

92

Observations, IV, 37. Accordingly all agricultural taxes fall upon the landlord, and all agricultural improvements ‘though they lessen the original cost, do not lessen ... market price,’ but raise rents (ibid., 38).

VALUE AND DISTRIBUTION ANALYSIS 55 limited extent) by way of the money-wage rate in the higher prices of manufactured goods. In Malthus’s case protection was justified on the grounds that the long-term prospect was one of falling corn prices, or — and here Malthus occupies all positions — on the grounds that any general fall of prices due to free trade would impose a damaging burden on debtors, or because the potential ill effects flowing from any increase of money wages upon general prices (more specifically upon the prices of exports) should not be exaggerated. In Lauderdale’s case particular em¬ phasis was placed upon prospects for the ‘substitution’ of capital for labour as a means of overcoming the disadvantages of high wage costs in foreign markets. Similarly, Jacob maintained that the adverse effects of any general rise in prices upon British competitiveness should not be exaggerated. Buchanan constitutes a case apart in so far as he rejected protection, but in principle he carried the objections to Smith even fur¬ ther by denying that the money-wage rate is at all dependent upon the corn price. A rise in wages, however, for any other reason could, he implied, be passed on to consumers. THE EDINBURGH REVIEW

The Edinburgh Review, founded in 1802, has been described as the ‘closest approach that Great Britain had to an economic journal,’ even after the appearance of the other major reviews, with an influence on thought and policy during the Napoleonic period and the years following ‘far greater

than

economists

have

recognized.’91 The

general

doctrinal

approach of the journal in the early years, particularly on the matter of free trade, was that of Adam Smith. (Several of the major contributors had been students of Dugald Stewart, including both Henry Brougham and Francis Horner.94) Brougham’s defence of the

Wealth of Nations

against various charges by Lauderdale will be left to the next chapter; this

section

will

be

devoted

to

Horner’s

criticisms,

on

Smithian

grounds, of the 1804 legislation relating to the corn-export bounty. Horner’s review article of 1804 dealing with the commercial legisla¬ tion of that year is of considerable importance both for its intrinsic merit and because of its subsequent description by Ricardo, in his chapter dealing with ‘Bounties on Exportation,’ as representative of the ‘common error which has misled Dr. Smith, and, I believe, most other 93

Frank W. Fetter, ‘The Authorship of Economic Articles in the Edinburgh Re¬ view, 1802—47,’ Journal of Political Economy, LXI (June 1953), 232, 234; see also John Clive, Scotch Reviewers: The ‘Edinburgh Review’ 1802-1815 (London 1957),

94

124f. It should be noted, however, that Lauderdale had also been a student of Stewart. And, as we have seen, neither Stewart himself nor, for example, Homer were uncritical disciples of Smith.

56 THE ECONOMICS OF DAVID RICARDO

writers on this subject,’ namely that ‘because the price of corn ultimately regulates wages ... it will regulate the price of all other commodities.’9’ Horner took issue with some of the details of Smithian analysis — and his criticism of Smith’s method will be recalled — but he accepted it in the broad and also the deductions drawn therefrom for commercial policy:

... [critics] have quite misunderstood Smith’s important doctrine, that the varia¬ tions of the money-price of corn are communicated ultimately to that of labour and other commodities. He has not perhaps stated this general truth, nor de¬ duced the reasoning by which we are led to it, in a form perfectly unexception¬ able; but his application of it to the operations of the bounty is quite legitimate. They have insisted, some of them at great length, that the price of commodities and labour is liable to be affected by many other circumstances, besides the price of corn. This is unquestionably true; but is surely not incompatible with Dr. Smith’s proposition, which, so far as it enters into his reasonings about the bounty, goes no farther than to assert, that every change it may occasion in the money-price of corn will communicate itself, first to the money-wages of labour, and, through them, to the money-price of all other articles; and that thus the real

price of corn will be maintained the same, notwithstanding a nominal variation. Without a just apprehension of this fundamental truth, it is impossible to reason with accuracy upon the subject,96

Horner was not, however, uncritical. His objections relate to Smith’s failure to consider ‘that interval which elapses ... between the enhance¬ ment of the money-price of corn, and its communication to the money price of labour and other commodities.’97 To this extent his position is very similar to that of Malthus. But unlike Malthus he did not believe that the lagged response of general prices was sufficient reason to justify the bounty. (There were a variety of disadvantages of a high general level of prices to consider, amongst which are included ‘the depreciation of fixed pecuniary returns’ and ‘the injury to domestical manufactures in their competition against foreign industry.’98) Horner consistently supported free trade in corn. Some ten years later he objected to Malthus’s publications in February 1815 (his Grounds of an

95

Works, I, 302

96

‘Observations on the Bounty upon Exported Corn,’ Edinburgh Review, V (Oct. 1804), in The Economic Writings of Francis Homer in the Edin burgh Review 1802-6, ed. F.W. Fetter (New York 1957), 106 (my emphasis).

97

Ibid., 105. Accordingly, ‘in the interval that must ... elapse before wages are equal¬ ized with each ... rise in the price of corn, there will be a certain degree of new

98

encouragement held out to husbandry, and some diminution in the wealth and comfortable subsistence of the labouring consumers ... ’ (104). Ibid., 109

VALUE AND DISTRIBUTION ANALYSIS 57

Opinion and Inquiry on Rent), for failing to draw the obvious policy con¬ clusion from the principle of diminishing returns." He also objected to Malthus’s emphasis upon ‘the advantages the labourer may derive from a high money price of corn, and consequently high wages to himself. Do not you assume,’ he asked, ‘that, though corn should fall and bring down wages, yet there will be no fall in the prices of any other articles of his consumption?’100 Horner thus retained the Smithian position that a fall in the corn price will, via the wage rate, affect prices generally. JAMES MILL AND J.R. McCULLOCH

Two uncritical authors of our period are James Mill and J.R. McCulloch. The potency of Ricardo’s subsequent challenge to received doctrine is particularly striking in their cases. James Mill’s pamphlet of 1804 on the ‘impolicy’ of a corn-export bounty was based squarely on Smithian principles: ‘No proposition is established more thoroughly to the conviction of those who have studied the scientific principles of political economy than this; that the money price of corn, regulates the money price of every thing else.’101 For the money wage is ‘entirely regulated by the money price of corn’ and - in strict Smithian fashion — the prices of all other agricultural products bear a regular relation to that of corn so that the cost items relevant for manu¬ factured commodities and accordingly manufacturing prices tend to rise proportionately: ‘Nothing then can be more incontrovertible than the proposition of Smith, that “the real effect of the bounty is not so much to raise the real value of corn, as to degrade the real value of silver; or to make an equal quantity of it exchange for a smaller quantity not only of corn, but of all other commodities.’” Mill also concluded, in the same manner as Horner, that the inflationary pressure exerted by a cornexport subsidy would have damaging effects upon British competi¬ tiveness in foreign markets: ‘We supposed that it was a proposition completely agreed upon by those who had studied the principles of national wealth, and a proposition which no one, bearing the name of a politician, was ignorant of, that one of the most favourable and advan99 Letter dated 12 Feb. 1815, in Memoirs ajid Correspondence (note 40 above), II, 222: ‘If the consequence of “high farming” and curious cultivation be a progressive rise of the price of produce, an importation of partial supplies from countries, which by a ruder agriculture can furnish it cheaper, seems the provision laid by nature for checking too exclusive an employment of capital upon the land least fit for culture.’ 100 Ibid., 226 101 An Essay on the Impolicy of a Bounty on the Exportation of Corn (London 1804), 36. Mill’s essay and the review by Horner have much in common regarding organ¬ ization: both take up the analysis of a simple subsidy first, and then extend the discussion to the case of a subsidy on exports alone.

58 THE ECONOMICS OF DAVID RICARDO

tageous of all circumstances to a manufacturing country, was the cheap¬ ness of provisions.’102 One observation made by Mill during the course of the foregoing argument is worth special note as an indication of the state of the science. I refer to a specific comment on the profits of stock in manufacturing, which makes it clear that the general profit rate is seen to be unchanged in the face of changing wages. The price of manufactured goods ‘may be resolved into three parts; 1st, The price of the raw material; 2d, The wages of labour; 3d, The profit of stock.’ The first two items are raised by the subsidy ‘in exact proportion to the price of corn,’ so that ‘more circu¬ lating capital ... is wanted in that proportion to carry on every manufac¬ ture, and the reasonable profit upon this additional capital must be added to the price of the manufactured commodity.’ Profits per unit of output rise but the general rate of profit is constant, despite the rise of 103 money wages. Mill was by no means consistent in making his case. For he also attempted to argue against the bounty on the quite different grounds that any attraction of capital to agriculture to take advantage of relatively high profits would simply imply a lessening of ‘the competition of capi¬ tals’ in other sectors, thus raising the general profit rate until equality with that in agriculture is achieved.104 This argument, however, concedes an expansion of the agricultural sector which the main case positively does not. It must be borne in mind, none the less, that here too Mill based himself on the Smithian proposition relating the profit rate to the ‘competition of capitals.’105 § McCulloch in his early writings also maintained a variety of fundamen¬ tal Smithian propositions. His position is clarified in a pamphlet of 1816 relating to the national debt. Here we find the notion of a constant (longrun) real price of corn supported on the Smithian grounds that ‘the expence of raising equal quantities of corn in different stages of improve¬ ment is nearly balanced.’100 Accordingly, corn becomes (in Smith’s terms) 102 Ibid., 37-8, 40 103 Ibid., 37-8 104 Ibid., 32 105 See also ‘Lord Sheffield on the Colonial System,’ Literary Journal, II, 2nd series (July 1806), 58, for a further fundamental Smithian proposition: ‘It is a fixed maxim in political economy that every thing which tends to lower the general price of commodities by reducing the profits of stock is an advantage to the country ...’ 106 Essay on the Question of Reducing the Interest on the National Debt, 81. McCulloch also refers to J.B. Say for support regarding the proposition that a variation in the supply of corn implies an equivalent variation in demand (because of the effect on population) so that there occur no disturbances emanating from agricul¬ ture to disturb the relative prices of corn and other commodities (see note 111 below).

VALUE AND DISTRIBUTION ANALYSIS 59

a ‘ more accurate measure of value’ than other commodities and ‘it is by the rise and fall of its nominal price, that we can best judge of the rise and fall in the value of money.’107 Smith’s denial of the possibility of altering, by legislative means, the ‘real’ price of corn is expressed in the following terms: ‘A forced rise in the price of corn being attended with a corresponding rise in the price of labour, must equally augment the price of almost every article the farmers purchase. Their situation, after a short interval, becomes the same; they receive more money with the one hand, but they are forced to pay away more with the other. The corn laws, therefore, cannot be of any really permanent utility to our agriculturalists; and whatever ill effects they may have on our commerce, seem not to be compensated by any corre¬ sponding advantages.’108 The relationship between the corn price and the general level of prices (by way of the effect on money wages) implied, McCulloch observed, that the corn law legislation of 1815 was positively dangerous: The supporters of this part of our fictious system argue, that the price of labour has no connection with the price of food, and that the former being regulated solely by the state of the supply and demand, the enhancing the price of corn in the home market does not necessarily cause any increase in the wages of labour, and consequently is not injurious to our foreign trade. In a manufacturing coun¬ try, for short intervals, and to a limited extent, this statement is consistent with fact ... If, however, this rise in the price of corn is of a permanent nature, and if manufacturers cannot allow a corresponding rise in the price of labour, the prin¬ ciple of population will begin to operate, and by lessening the supply of workmen, will ultimately reduce the price of corn, and raise wages to their proper level.100

107 Oddly enough, in a subsequent section [ibid., 122f.), McCulloch in effect denies this position by criticizing writers who looked at the rise in the bullion price of corn since 1760 as evidence of ‘a fall in the value of gold and silver,’ on the grounds that they failed to realize that population increase combined with restric¬ tions upon importation had been responsible for the rising price. 108 Ibid., 138. The Smithian conception of a relationship between the prices of agri¬ cultural products other than corn and corn itself also makes an appearance [ibid., 133): ‘When more money can be made by grazing than cropping, land is immediately taken from the latter species of industry to be employed in the former, and an equilibrium of profit is attained. On the same principle when the price of corn is raised by violent means, pasture land is ploughed up, and the price of cattle is soon made to correspond with that of corn.’ 109 Ibid., 131—2. Cf. also 155: ‘The wages of our workmen cannot be raised much higher than in surrounding states, without fundamentally endangering our com¬ mercial prosperity.’ McCulloch referred to the Eden data indicating that not more than one-third to two-fifths of the working class budget was devoted to corn, and asked whether a rise in the price of corn might not be accommodated, without a compensatory money-wage increase, by reductions in other expendi¬ tures. In reply McCulloch noted that even in the event of unchanged corn consumption reduced expenditures on other items will also generate a fall in

60 THE ECONOMICS OF DAVID RICARDO

McCulloch paid special tribute to the argument by David Hume (in his essay ‘Of Money’) regarding a general law of growth and decay based on the view that rising money wages and prices must ruin the initial cost advantages of advanced economies as manufactures are allured to less developed countries ‘by the cheapness of provisions and labour there¬ in’110: ‘It is impossible to doubt the accuracy of this reasoning; its justness has been admitted by almost every political economist, and may be de¬ monstrated by the history of almost every commercial country in the world. What, therefore, should be thought of a policy that, in a nation supported to such an extent as Britain by commerce and manufactures, should labour to place them under great relative disadvantages? That, instead of attempting to counteract the ordinary causes of their decline, and to perpetuate the national power and welfare, should endeavour to accelerate their ruin?’111 TWO CONTRIBUTIONS TO THE CORN LAW DEBATE OF 1815: WEST AND TORRENS

Sir Edward West’s pamphlet of February 1815 is famous for its formula¬ tion of the principle of diminishing returns (allowing for both the exten-

labour supply and increased money wages. A policy of deliberately reducing real wages is termed ‘most detestable’ [ibid., 132) and support is drawn for this position from Smith and Say [ibid., 134). 110 McCulloch apparently did not realize that Hume changed his mind on this matter. See my Economics of Adam Smith, 77-8. 111 Essay, 158-9. J.B. Say, Traite d'economic politique, 3rd ed. (Paris 1817), I, 249, took for granted, with little discussion, that a higher corn price raises general prices by way of the money-wage rate: ‘Son prix influe sur celui de tous les autres produits. Un chef d’entreprise, fermier, manufacturier ou negociant, emploie un certain nombre d’ouvriers, qui tous ont besoin de consommer une certaine quantite de ble. Si le prix du ble augmente, il est oblige d’augmenter dans la meme proportion le prix de ses produits.’ See too ibid., 1 210: ‘Les impots mis dans l’interieur sur les objects de premiere necessite font hausser les prix

,

non-seulement des choses imposees, mais ... de presque tous les autres produits.’ See ibid., I, 261—2, regarding the corn law debate and a reference to general price increases, in consequence of protection, damaging to British export indus¬ tries. The effect of corn price increases is also discussed: ibid., II, 344-5. As already noted Say also accepted Smith’s position that the corn price is steady over time in so far as concerns the effects of increased or diminished supply [ibid., II, 346-7n): ‘Les produits de l’industrie agricole ont meme cela de particulier, qu’ils ne deviennent pas plus chers en devenant plus rares, parce que la population decroft toujours en meme temps que les produits alimentaires ; et que par consequent, la quantite de ces produits qui est demandee, diminue en meme temps que la quantite offerte.’ For illustration Say reverted to a compari¬ son between contemporary conditions and those during the Middle Ages remark¬ ing on the long-term stability of corn prices.

VALUE AND DISTRIBUTION ANALYSIS 61

sive and intensive margins) and for the use of the principle in the analysis of the declining secular return on capital. What concerns us most here is West’s rejection of the Smithian position, which runs in terms of increas¬ ing ‘competition of capitals,’ on grounds of fallacy of composition: Smith therefore attributes this decline in the rate of profit to increased competi¬ tion. But the slightest consideration will detect the fallacy of this opinion. If the capital employed in one branch of trade alone be increased, doubtless the in¬ creased competition of the dealers in that branch will lower the price of their articles, and consequently the profits of those dealers. But why is the price lowered except because that article is now more abundant than others, and could not be sold without such diminution of price. But if the capital in all the different branches of trade, and consequently the quantity of all the articles of those respective trades be increased in the same degree, the same ratio between each and all the rest remains, and each article must sell for the same real price as it fetched before. If the competition be increased in any one article, it for the same reason is increased in all; and as it exists in the same degree in each, it cannot alter the real price of any one. It is only the relative alteration of the demand and supply which can increase the price, and here there is no such alteration.112

West’s implicit distinction in the foregoing passage between relative and absolute prices is of the first importance. It is conceded that there would be a temporary decline in general money prices in the case at hand which would, however, be corrected by a monetary inflow: ‘The money price of all articles would no doubt be diminished, and therefore the money-profits of stock; but this would not lower the real price of those articles, nor the real profits; even the money price would soon be raised to a level with the real price, by a favourable balance of trade and the consequent introduction of bullion.’113 In all this West’s argument bears a close resemblance to that of Ricardo, for, as we shall see, Ricardo also was to insist that a disturbance affecting all commodities can have no real consequence (although his specific objections to the notion of increased ‘competition of capitals’ itself ran in terms of the law of markets) while a change in the general level of prices (in any single country) will be temporary only in the light of money flows. Unfortunately, West was a little careless in some of his 112 Essay on the Application of Capital to Land (1815; Baltimore 1903), 21. For a recent account of West’s work, see William D. Grampp, ‘Edward West Reconsidered,’ History of Political Economy, II (Fall 1970), 316-43. 113 Ibid. That aspect of ‘increased competition’ which involves the consequences of rising wages West rejected on the grounds that the pressure on the rate of profit exerted by an upward tendency of wages itself slows down the growth rate, of labour demand [ibid., 23).

62 THE ECONOMICS OF DAVID RICARDO

subsequent (and more general) observations. Thus he appears to give formal assent to Smith’s proposition whereby a rise in the price of corn will, by way of the effect upon wages, generate a general rise in all prices: ‘That this rise too in the price of rude produce is followed by a rise in the wages of labour, and communicates itself, more or less to all manufactures, chiefly of course to those in which rude produce pre¬ dominates most, and in a less degree to those manufactures of a finer kind in which rude produce bears but a small proportion to the skill of the artist, is also evident.’"4 Had West carried through his earlier obser¬ vations implying the impossibility of a general (permanent) change in the price level (without additional means of circulation) he would have been led immediately to question the relationship between corn prices and general prices, and to the formulation of the fundamental ‘Ricar¬ dian’ case against Smith.115 (Even so, ‘priority’ would not have been his as will become clear in Chapter 3.) § Our concern next is with the extent of adherence to Smithian theory by Robert Torrens in his contribution of February 1815 to the corn law debate. His Essay on the External Corn Trade is of course celebrated for its development of a variety of conceptions central to the classical theory of value and distribution, particularly the principles of diminishing agricul¬ tural returns and of natural wages dependent on custom.116 Yet there remains a very fundamental Smithian residue on the main issues that interest us which distinguish the work from Ricardo’s Essay on Profits. In the first place Torrens retains the notion that with secular expan¬ sion the profit rate declines in consequence of increased ‘competition of capitals.’ This standard notion was, however, now combined with the principle of diminishing returns: For the increase of wealth, the accumulation of capital, and the competition amongst capitalists, lower the interest of money, and reduce the rate of manufac-

114 Ibid., 31 115 It must be said immediately that West did hint at this position because he alluded back to the kind of argument made in the critique of the notion of increased competition of capitals: ‘Great question has been made of the truth of the fact, which is noticed by Dr. Smith, that any rise in the price of corn com¬ municates itself to every other commodity. It is immaterial here to enter into the question whether Dr. Smith meant real or nominal price. The rise in the real price of any thing which immediately and fully communicates itself to every other article seems, indeed, a contradiction in terms; because the real price of any article is its value in exchange for every other: but if the rise in price of any one be immediately and fully communicated to every other, the rise is merely nomi¬ nal, as that article can now purchase no more of any other article than before’ [ibid., 34). 116 For a full analysis of this essay and Torrens’s contribution in general, see Lionel Robbins, Robert Torrens and the Evolution of Classical Economics (London 1958).

VALUE AND DISTRIBUTION ANALYSIS 63 turing and commercial profit, until it no longer exceeds, what can be obtained by reclaiming inferior lands. Capitalists, therefore, cease to be induced, by the prospect of greater gains, to leave such lands neglected; nay, if the customary rate of manufacturing and commercial profit should be reduced to nine per cent, the lands lately left untilled, because they could bring a return of only ten per cent, would be eagerly sought after, and capital would flow from manufactures and commerce, and vest itself in agriculture. In the progress of wealth, the pro¬ fits of stock, and the interest of money, are gradually lowered, while land acquires a higher relative value, and tracts, which can afford a return of nine, of eight, or even of seven per cent, are brought into tillage.117

There are indeed suggestions that pressures will be exerted by diminish¬ ing returns upon the general profit rate itself,118 but these are not con¬ sidered in conjunction with the principle of competition of capitals, which plays so central a role in the analysis, and their mutual consistency is not investigated. Secondly, when he turned from ‘real’ to ‘monetary’ matters Torrens retained the linkage between the price of corn and general prices work¬ ing via the money wage so characteristic of Smithian theory: And now we are to consider the manner, in which a rise in the money price of labour raises the money price of all commodities. When, in consequence of a rise in corn, an advance has been effected in the wages of labour, the capitalist who gives it employment, and who pays the advance upon it, must either suffer a diminution in the rate of his profits, or else indemnify himself by charging an advanced price upon his goods. Now when corn has risen, he will be enabled to advance his goods; for the farmer and landowner, receiving a greater sum for the produce of their ground, will have a greater sum to give for other articles. The money demand for commodities being thus increased, the capitalist will be in¬ demnified, by increased money prices, for the increased rate of wages which the rise in corn obliged him to advance.119

117 An Essay on the External Corn Trade (London 1815), 51 118 Thus ibid., 71: ‘In raising the corn, and, through the corn, in preparing the cloth, a greater quantity of the produce of labour will be consumed by the labourer while at work; and, consequently, the net produce of manufactural industry, remaining in the hands of the master clothier, will be diminished, and, with the same quantity of capital, he will furnish a less supply of cloth, than before the natural price of corn, and through it, of cloth, had been increased.’ And ibid., 73-4: ‘Every restriction on the import trade in corn, which forces into cultivation, land of inferior quality, not only deprives the particular portions of labour and capital thus turned upon the soil, of their most beneficial employ¬ ment, but, by increasing the natural price of corn, lowers, universally, the pro¬ ductive powers of labour and capital, and gives a general check to the prosperity of the country.’ 119 Ibid., 81-2. Torrens explained further that the price spiral set in motion by the increased corn price will be a damped one, tending to an equilibrium, his argu-

64 THE ECONOMICS OF DAVID RICARDO

It is strongly implied in this preceding passage that there will occur no fall in the profit rate in consequence of the rise in wages, an implication which may be found elsewhere too.120 This is a conclusion which does not sit easily beside the contrary implications of the earlier discussion which alludes to the depressing effects flowing from reduced agricultural pro¬ ductivity. Torrens himself appears uncomfortable with his own position in the light of questions raised regarding the value of money: ‘One other impor¬ tant consideration belongs to this branch of our subject. A rise in the price of corn raises the price of labour, and the rise in labour is communi¬ cated to all commodities, both those which it immediately produces, and those to which these are employed as the equivalents. But bullion is a commodity. It is immediately produced from the mines by domestic labour; or, if not, purchased by equivalents, which are. Does it then rise and fall in price with the labour that procures it, when it is a native commodity, and with the produce of labour which purchases it, when it is a foreign one?’ But he unfortunately declined to enter further into the issue.121 We may only speculate whether, had he done so, he would have been led in the same direction as Ricardo and abandoned the Smithian argument. It is also significant that, despite his formal adherence to the Smithian relationship between corn prices and general prices, Torrens did not fol¬ low Smith all the way and reject the corn bounty as totally ineffective as a ment making allowance for the proportion com constitutes in the workers’ basket and the proportion wage costs constitutes in total costs: ‘Hence, every rise in the money price of corn, raises the price of labour; and, through labour, the price of the other necessaries of life. The advance upon these, again, raises wages, and the rise in wages, again advances them; and so on, until the increased money price of goods, equals the increased money demand for them, which the rise in corn threw into the hands of the landed interest. Here the ascending scale of prices terminates. Beyond the money demand for goods, it is impossible that money prices should increase. The necessaries of life no longer rising, the labourer will no longer require increasing wages to enable him to purchase subsistence; and the employer of labour, not being under the necessity of advancing increased sums to procure it, will no longer seek, for so doing, an indemnity by charging higher prices upon his goods. Thus labour, capital, and goods, will adjust them¬ selves to the proper level.’ 120 For example, ibid., 87 121

Ibid., 88—9: ‘These questions would lead us far. They involve considerations on the value of bullion and of currency, upon which, though they are highly impor¬ tant in themselves, and intimately connected with the external trade in corn, I must, in this place, refrain from enlarging.’ Cf. also ibid., 93: ‘A rise in wages, other things remaining as before, is, as we have seen, communicated to all the articles of life. But a rise in all the articles of life is the same thing as a fall in the value of money. Here, then, every question respecting the price of corn, ulti¬ mately resolves itself into a question of currency. Into the discussion of this very important branch of the subject, however, I shall not, at present, enter ...’

VALUE AND DISTRIBUTION ANALYSIS 65

stimulant to agriculture activity (although, of course, he was opposed to such intervention on other grounds): ‘Bounties upon export, and restric¬ tions upon import, might, indeed, give an increased relative value to land, and raise the price of its produce, until the cultivation of very infe¬ rior lands afforded, for a time, at least, a profit sufficiently high to draw labour and capital from other occupations. But this forced and artificial encouragement, afforded to agriculture, would be dearly, much too dearly purchased.’122 Once again it is unfortunate that Torrens did not spell out the argument, for he might then have been led to question the logic of the dependency of general prices upon the price of corn. One further matter is of interest to us here. Despite the use made of the principle of diminishing returns Torrens is never crystal clear about the make-up of the ‘natural price of goods.’ At one stage rent is included within natural price.’123 Yet the notion of differential rent is also recog¬ nized124 and the consequences of trade policy for rent, thus conceived, is developed. SUMMARY

Our discussion in this chapter has illustrated the great weight placed on Smithian ‘system-building’ by late eighteenth- and early nineteenthcentury economists, and even the view that Smith on occasion - despite his own warnings against the unqualified application to concrete issues of deductions drawn from necessarily incomprehensive models - acted too much as a ‘man of system.’ In particular we have encountered the quite widespread complaint that Smith tended to neglect frictions in the eco¬ nomic system in his applications to trade policy, reasoning in terms of the immediate relevance of the long run. These are precisely the characteris¬ tics commonly attributed to Ricardo - they constitute the so-called ‘Ricardo Vice’ - whose method is so often contrasted with Smithian ‘in¬ duction.’ Opposition to the Smithian theory of value and distribution should by no means be minimized; something more than ‘minor dissent’ is in¬ volved. Apart from the specific objections by Anderson at a very early stage, and Malthus and West subsequently, which emphasized Smith’s neglect of the principles of diminishing returns and differential rent, we have encountered those by Pownall, Malthus, and others relating to Smith’s treatment of corn as a unique commodity whose profitability is not susceptible to alteration by means of intervention. Even Horner, writing for the Edinburgh Review in opposition to the corn-export bounty

122 Ibid., 52 123 Ibid., 57, 62. Even in this context, rent has something of a residual character [ibid., 60). 124 Ibid., 177

66 THE ECONOMICS OF DAVID RICARDO

of 1804, took Smith to task for the extreme formulation of the relation¬ ship between the corn price and general prices, and, although a free trader, adopted an analytical position similar to that of Malthus. Nevertheless, even those who favoured the interventions of 1804 and 1815 accepted the positive relationship expounded in the Wealth of Nations between the price of corn and general prices. (Various argu¬ ments were drawn upon to demonstrate that export industries would in practice be little damaged.) And by no stretch of the imagination can it be said that any of Smith’s critics supplied an alternative ‘system.’ Sir Edward West’s pamphlet of 1815 constitutes something of an ex¬ ception in so far as his argument implies a rejection of the effect upon general prices of a change in the price of corn. But the case is made too briefly and too casually to be effective. And Torrens subscribed, in his contribution to the corn law debate, to basic Smithian principles — the relationship between the corn price and general prices and the ‘competi¬ tion of capitals’ - without considering how well they fitted in with his own ‘novel’ principles which included the consequences of diminishing returns for profits. (We shall find that both West and Torrens were approaching the same path that Ricardo had laid out at least two years earlier.) For the evaluation of the nature of the ‘Ricardian revolution’ we must also emphasize the fact which has emerged that the most loyal followers of Smith in analysis and policy at this early stage were James Mill and J.R. McCulloch. The latter, in particular, merely repeated the master word for word on the relationship between the corn price and general prices and the appropriate deductions for agricultural trade policy.125 Finally, a fundamental characteristic of the literature thus far ex¬ amined is the failure, prior to the contributions of 1815, to analyse the effect of rising money wages upon the rate of profits. The issue is simply neglected and it is thus implied that apart from possible effects of wage increases upon competitiveness in foreign markets there were no further matters to consider.

125 For an example of the early influence of Smith amongst non-economists, see C.R. Fay, The World of Adam Smith (Cambridge I960), 40, regarding the early years of the Glasgow Chamber of Commerce: ‘It has, in our humble opinion, been demonstrated that no benefit worth counting on has been derived from the Bounty, even to the Corn countries; as the chief effect of it must have been to enhance the price to the consumer, and of course to raise that of every species of manufacture and other articles of consumption ...’ (Report of 1790).

TWO

The law of markets

The early nineteenth-century formulators of the ‘law of markets’ started off from the Smithian doctrine of savings.1 This doctrine involved a eulogy to the advantages of capital accumulation, a corresponding nega¬ tive attitude towards luxury consumption, and an insistence that the actual process of savings entails no leakages from the income stream: Whatever a person saves from his revenue he adds to his capital, and either employs it himself in maintaining an additional number of productive hands, or enables some other person to do so, by lending it to him for an interest, that is, for a share of the profits ... What is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too; but it is consumed by a different set of people. That portion of his revenue which a rich man annually spends, is in most cases consumed by idle guests, and menial servants, who leave nothing behind them in return for their consumption. That portion which he annually saves, as for the sake of the profit it is immediately employed as a capital, is consumed in the same manner, and nearly in the same time too, but by a different set of people, by labourers, manufacturers, and artificers, who re-produce with a profit the value of their annual consumption.2

1

Cf. J.J. Spengler, ‘The Physiocrats and Say’s Law of Markets,’ Journal of Political Economy, LIII (Sept., Dec. 1945), in Spengler and W.R. Allen, eds., Essays in Economic Thought: Aristotle to Marshall (Chicago I960), 184: ‘Smith’s discussion of parsimony, while not formulated precisely in the same terms as Say’s law, is permeated by its spirit; for he looked upon money as essentially a facilitator of exchange and upon exchange as essentially barter.’ See also my Economics of Adam Smith (Toronto 1973), 314—15, and Thomas Sowell, Say’s Law (Princeton 1972),

2

15-17. Wealth of Nations, ed. E. Cannan, Modern Library ed. (New York 1937), 321 (my emphasis)

68 THE ECONOMICS OF DAVID RICARDO

The theorem on savings as formulated by Smith implies that no attempt is made to add to money balances from sales proceeds. And Smith himself gave some explanation for such implied behaviour: ‘In all countries where there is tolerable security, every man of common understanding will endeavour to employ whatever stock he can command in procuring either present enjoyment or future profit ... A man must be perfectly crazy who, where there is tolerable security, does not employ all the stock which he commands, whether it be his own or borrowed of other people, in some one or other of those ... ways.’3 The qualification regarding ‘tolerable security’ is of potential signifi¬ cance, but the range of possible exceptions to the general rule was not amplified, and nothing was said of ‘short-run’ excess demand for money in conditions of uncertainty. It can, however, be argued that a niche had been created for the phenomenon which J.B. Say was to fill. Further¬ more, Smith did not explicitly formulate the proposition that there can be no general excess supply of commodities, and it is precisely the explicit formulation and its precise rationalization which concern us.4 Before turning to these matters it is appropriate to consider first Lord Lauderdale’s critique of Smith on accumulation. LORD LAUDERDALE’S CRITIQUE

A major assault on the Smithian position was launched by Lord Lauder¬ dale in 1804. In the first place he objected to what he read to be a concep¬ tion of profits as transfer payment: By what means Capital or Stock contributes towards wealth is not so apparent. What is the nature of the profit of stock? and how does it originate? are ques¬ tions the answers of which do not immediately suggest themselves. They are, indeed, questions that have seldom been discussed by those who have treated on political oeconomy; and, important as they are, they seem nowhere to have re¬ ceived a satisfactory solution. The Author of the Wealth of Nations appears to consider the profit of stock, as paid out of, and therefore derived from, the value added by the workman to the raw material

...’5

3

Ibid., 268

4

See below, p. 474, for the technical distinction between the law of markets as ‘identity’ and as ‘equality’ which proves helpful in approaching the early litera¬ ture.

5

An Inquiry into the Nature and Origin of Public Wealth (Edinburgh 1804; New York 1962), 155. Cf. 158: Smith - and before him Locke - implied ‘that the profit of stock must be a derivative, and not an original source of revenue,’ in which case profits were nothing more than ‘a transfer from the pocket of the labourer into that of the proprietor of stock. Lauderdale referred to various passages in the

THE LAW OF MARKETS 69

Far from profit representing a derivative income, as Smith appeared to believe, ‘in every instance where capital is so employed as to produce a profit,’ Lauderdale insisted, ‘it uniformly arises, either - from its supplant¬ ing a portion of labour, which would otherwise be performed by the hand of man; or - from its performing a portion of labour, which is beyond the reach of the personal exertion of man to accomplish .’6 A similar criticism of the ‘comple¬ mentary relationship envisaged by Smith between capital and labour led Lauderdale to his primary conclusion, that there are definable limits to profitable accumulation.7 Smith’s unqualified eulogy of parsimony, Lauderdale observed fur¬ ther, was an instance of a serious fallacy of composition which identified private riches and public wealth and which ‘has pointed out parsimony or fourth edition of Wealth of Nations (see, in particular, p. 48 of the Modern Library

6

edition of 1937), and to Locke’s Some Consideration of the Consequence of Lowering Interest, and Raising the Value of Money (London 1691), 53. Inquiry, 161 (emphasis in original). Lauderdale included all categories of capital — circulating as well as fixed - in his proposition that the function of capital is that of ‘supplanting’ labour (cf. ibid., 195). The practice is not always felicitous; for example, the servant maintained by circulating capital ‘supplants the labour’ of his master. See the comments by R.L. Meek, Economics and Ideology and Other Essays (London 1967), 43, regarding the anticipation of the ‘productivity theory of profit’ in the work of John Millar.

7

Inquiry, 204-5: ‘The idea, that capital puts labour into motion, that it adds to the productive powers of labour, gives rise to the opinion that labour (which it will afterwards be shewn is the great means of increasing wealth) is every where proportioned to the quantity of existing capital; that the general industry of a country is always proportioned to the capital that employs it; and therefore authorises the inference, that the increase of capital is the sovereign and un¬ bounded means of augmenting wealth. Whereas the opinion, that capital can alone be employed with utility and advantage in supplanting or performing labour, naturally suggests the inference, that a country cannot be benefited by the possession of a greater portion of capital than can be employed in performing and supplanting labour, in the production and formation of those things for which there exists a demand.’ The distinction between capital ‘putting labour into motion or ... adding to the productive powers of labour’ and capital ‘supplanting the necessity of a portion of labour ...’ Lauderdale insisted, did not reflect ‘a mere criticism on words.’ Lauderdale’s criticism extended also to Smith’s emphasis upon the division of labour as a major means of augmenting wealth; machinery is the primary consid¬ eration [ibid., 286-7). That the introduction of machinery is ultimately ‘due to’ the division of labour is also denied (29If.). Lauderdale conceded on occasion {ibid., 169-70n) that ‘there are passages [in the Wealth of Nations\ that strongly tend to confirm the opinion here maintained.’ But this was not helpful: Smith ‘seems to have had no fixed ideas in relation to it. Indeed, there is no opinion that has been any where maintained on the subject of the sources of national wealth, which does not appear to have been adopted in dif¬ ferent parts of the Inquiry into the Wealth of Nations’ (l 16). Lauderdale was equally critical of the Physiocrats as far as concerns ‘the sources of wealth’ (115).

70 THE ECONOMICS OF DAVID RICARDO

accumulation by a man’s depriving himself of the objects of desire, to which his fortune entitles him, (the usual means of increasing private fortune), as the most active means of increasing public wealth.’8 It was precisely this view of savings that ‘had given birth to an erroneous system of legislation’ - an allusion to Pitt’s recommendations regarding the Sinking Fund.9 (it is important to note that Pitt had explicitly supported his proposals of 1792 in terms of the Smithian analysis of the effects of capital accumulation.10) Throughout the critique Lauderdale had his eye largely upon accumu¬ lation that entailed an actual ‘abridgement’ of consumption as distinct from accumulation accomplished by way of increased ‘exertions of indus¬ try.’ ‘The public must, therefore, suffer,’ he warned, ‘by this love of accu¬ mulation, if pushed beyond its due bounds; - 1. By the creation of a quantity of capital more than is requisite; - and, 2. By abstracting a por¬ tion of encouragement to future reproduction.’11 The ‘due bounds’ of profitable accumulation would, apparently, not be superseded in a freely operating system,12 although this view is belied by references elsewhere to the dangerous consequences of an unequal distribution (quite apart from legislative interference).13 The precise 8

Ibid., 208-9. Earlier in the work (41) Lauderdale insisted also that ‘public wealth’ ought not to be considered as merely representing the sum of ‘private riches,’ and complained that because of this erroneous identification ‘there appears no means of increasing the fortune of an individual ... that is not regarded as productive of national opulence.’ The point here is that individual wealth depends on ‘scarcity’ while national wealth depends on high quantity. See also on this issue Lauder¬ dale’s denial that national wealth is ‘constituted by exchangeable value ...’ [ibid., 141; cf. 146).

9

10

Ibid., 210. ‘If persisted in,’ Lauderdale warned, Pitt’s recommendation ‘must infal¬ libly ruin the country.’ In this context Lauderdale rejected Smith’s notion that ‘parsimony, and not industry, increases capital, (meaning wealth).’ See Lauderdale’s citations [ibid., 236-8). On the details of the Sinking Fund see William Smart, Economic Annals of the Nineteenth Century (London 1910), I, 34-5. See also Ricardo, Funding System (1820) in The Works and Correspondence of David Ricardo, ed. P. Sraffa (Cambridge 1951—73), IV, 143f., which contains accounts of the relevant legislation given in Robert Hamilton, An Inquiry Concerning the Rise

11

and Progress, the Redemption, and Present State of the National Debt of Great Britain, 3rd ed. (Edinburgh 1818). Inquiry, 214, 220

12

Without the kind of artificial encouragement to accumulation such as the Sinking Fund, there would be little to worry about as ‘the mischief done by the parsimony and disposition to accumulation of one individual is almost uniformly counter¬ acted by the prodigality of some other’ [ibid., 228-9)

13

‘In general, however, it may be observed, that great inequality of fortune, by impoverishing the lower orders, has every where been the principal impediment to the increase of public wealth’ [ibid., 345). Similarly: ‘a proper distribution of wealth insures the increase of opulence, by sustaining a regular progressive

THE LAW OF MARKETS 71

limits at any time will depend (in part) upon the state of technology.14 Furthermore, while there are no formal references to the principle of diminishing returns, there is a hint that land scarcity is accorded a role, for beyond a point further accumulation is ‘useless to mankind’ unless new technology is available or ‘unless there is ... an acquisition of ter¬ ritory. 1 On the other hand, upward pressure on real wages due to rapid capital accumulation relative to population growth plays no part. But here we observe an odd circumstance. Lauderdale took David Hume to task for suggesting - in the famous ‘Discourse on Money’ (1752) — that ‘the progress of human industry, in any country, was bounded and con¬ fined by the check it must receive from the augmentation of wages,’ on the grounds that this pessimistic forecast neglected the role of technologi¬ cal change.16 (it is essential to recall that Lauderdale accepted without question the Hume-Smith position that increases in wages can be passed on to consumers in the form of higher prices; he objected to the presump¬ tion that an increase in the wage rate necessarily implies an increase in unit wage costs.) What is surprising is the failure to emphasize this propo¬ sition in making his own case relating to the limits to profitable accumu¬ lation.

demand in the home market, and still more effectually, by affording to those whose habits are likely to create a desire of supplanting labour, the power of executing it’ (ibid., 349-50). 14

Ibid., 226-8: ‘But this description of property [capital] has its limits, beyond which it cannot, with advantage, be increased. In every state of society, a certain quantity of capital, proportioned to the existing state of the knowledge of man¬ kind, may be usefully and profitably employed in supplanting and performing labour in the course of rearing, giving form to, and circulating the raw materials produced. Man’s invention, in the means of supplanting labour, may give scope, in the progress of society, for the employment of an increased quantity; but there must be, at all times, a point determined by the existing state of knowledge in the art of supplanting and performing labour with capital, beyond which capital can¬ not profitably be increased, and beyond which it will not naturally increase;

15 16

because the quantity, when it exceeds that point, must increase in proportion to the demand for it, and its value must of consequence diminish in such a manner, as effectually to check its augmentation.’ Ibid., 216 Ibid., 298—9. Hume was dealing with the damaging effect on competitiveness in foreign markets due to higher export prices generated by wage increases. In Lauderdale’s view, any wage increase will be ‘a trifling drawback on the great advantages a country derives, not only from the ingenuity of man in supplanting labour by machinery, but from capital laid out in roads, canals, bridges, inclo¬ sures, shipping; and employed in the conduct of home and foreign trade, all of which is alike engaged in supplanting the necessity of paying the wages of labour.’ It is possible that the notion of capital-labour substitution in response to a relative wage increase is here intended rather than, or in addition to, innovation in the strict sense.

72 THE ECONOMICS OF DAVID RICARDO

§ Henry Brougham evaluated Lauderdale’s Inquiry for the Edinburgh Review. Regarding the measure of value, Brougham denied that Smith had intended ‘to predicate the absolute immutability of any standard’; he sought merely an ‘approximation.’1' He denied that Lauderdale’s distinc¬ tion between ‘public wealth’ and ‘private riches’ - the former a function of plenty and the latter a function of scarcity - was helpful or indeed valid. On Lauderdale’s charge that Smith was confused on the matter of the ‘sources of wealth’ (allowing for labour, or land, or land and labour, or capital and labour, or land, capital, and labour), Brougham insisted that ‘the inconsistency lay in the ... language only of Dr. Smith’s state¬ ments.’ He had some kind words for Lauderdale’s analysis of the ‘use of capital’ in supplanting labour or performing functions unattainable by labour, but insisted, justifiably I believe, that Smith had appreciated the phenomenon: Smith’s notion of capital ‘raising the productive power of labour’ was precisely ‘the supplanting of labour’ to which Lauderdale referred. He further insisted, again correctly, that the development of machinery was, as Smith explained, dependent upon the division of labour.18 The impression that Lauderdale rejected ‘accumulation’ as a means of assuring an increase of national wealth was noted by Brougham, who pointed out, however, that the concern is, in effect, only with ‘excess’ accumulation.19 He observed that Lauderdale accused Hume of failing to allow for ‘the powers of human invention’ in the analysis of the effects of wage increase, but did not realize that the same charge might be applied equally to Lauderdale’s own position: ‘It is because new capital, i.e. stock 17

‘Lord Lauderdale’s Inquiry into the Nature and Origin of Public Wealth,’ Edin¬ burgh Review, IV, no 8 (July 1804), 349: ‘Upon the whole, we are disposed to think that our author avails himself of certain obscurities, and even inconsistencies in Dr. Smith’s language, for the purpose of fastening upon him a much more contradictory and erroneous theory than he ever maintained. That a person of Dr. Smith’s metaphysical and mathematical powers (n. See Professor Stewart’s Life of Smith.) should have meant to predicate the absolute immutability of any stan¬ dard, we cannot for a moment imagine ... We apprehend that he only sought for an approximation, and thought he had found it in that one commodity which,

18 19

being by much the most frequently exchanged against all other commodities, and of course the most constantly brought into comparison with every object of barter, might be assumed as the best attainable measure of their relative value.’ Ibid., 350f., 365, 368-9, 372 Ibid., 372: ‘At first, we are led to suppose that he means roundly to deny the reality of the difference which accumulation makes upon the sum-total of wealth; and indeed all his general assertions, especially his invectives against those who prefer the conduct of the thrifty to that of the prodigal, warrant the idea of accumulation being, in our author’s opinion, injurious to society. Afterwards, however, when he comes to argue the matter more methodically, we find that his reasons apply merely to the excess of accumulation; and that the only inference to which they lead is, that capital may be heaped up, by parsimony, so as to exceed the amount which can be profitably employed.’

THE LAW OF MARKETS 73

not consumed but saved, gives employment to new men, and sustenance to increased numbers of inhabitants, and because it exercises the inven¬ tive powers of its possessors, that its accumulation may fairly be said to have no defineable bounds.’20 Now in point of fact Brougham, basing himself upon Smith, believed that there did exist limits to accumulation. Holland represented a state ‘thoroughly peopled and cultivated’; the country was so small ‘as to leave no room for great agricultural or manufacturing improvements’ and ‘foreign commerce had attained the greatest height which the parsimony of its inhabitants enable it to attain by a diminution of profits.’ Further accumulation of stock by parsimony ‘must then be unnecessary, as no new channels of employment can be opened. Holland has long nearly reached this point; and England seems tending towards it, if she does not, as will be the necessary effect of her farther progress in accumulation of capital, attend more to her domestic agriculture, and the improvement of her noble colonies.’21 On balance, it would therefore appear that Brougham, who envisaged himself as working within a Smithian frame of reference, recognized limits to profitable accumulation due to the paucity of technological progress and population growth, both of which phenomena seem, in the last analysis, to be related to land scarcity. He simply objected to the assertion that Lauderdale was original in his arguments regarding the limits to accumulation.22 JAMES MILL AND THE LAW OF MARKETS

We turn next to consider the early position of James Mill. In his review of Lauderdale’s Inquiry we find many of the themes which played a part in the later debate regarding the law of markets.23 In the first place there is a categorical denial of the relevance of hoarding in a modern economy: ‘If [a merchant] cannot employ what he saves with any advantage, he will not save it. No one thinks of accumulating dead stock. We have heard in times of ignorance and insecurity of men who accumulated money, which they neither lent nor employed. We have no such misers, however, now-a-days. And no man saves any part of his income which he has not a prospect of employing with advantage.’ Drawing upon Smith’s dictum 20 21

Ibid., 373. The reference also to increased labour supplies will be noted. Ibid.

22

On some points Brougham himself took issue with Smith. For example, he denied that ‘in agriculture nature works, with man, and that the rent is the wages of her labour; but that, in manufactures, man does every thing’ [ibid., 359); and he rejected the distinction between ‘productive’ and ‘unproductive’ labour or labour hired as an act of investment as distinct from labour hired as an act of consump¬ tion, on the grounds that the final objective, even in the case of the former category, is consumption [ibid., 354f.).

23

‘Lord Lauderdale on Public Wealth,’ Literary Journal, IV (July 1804), 3-18

74 THE ECONOMICS OF DAVID RICARDO

‘what is annually saved is as regularly consumed as what is annually spent, and nearly in the same time too,’ Mill refuted Lauderdale’s fears of the depressing effects on demand of a transfer from consumption expen¬ diture to savings. Mill sang the praises of accumulation — defined in terms of ‘instruments or the materials of labour and manufacture’ (as distinct from wage goods, that is, ‘articles of consumption’) — the func¬ tion of which was to increase ‘the productive powers’ of land and labour: ‘It is the increase of these powers which is the sole motive to this parsi¬ mony; and the more of it therefore which can be produced, the more the wealth of the country is promoted.’ The justice of Lauderdale’s reference to the tendency to accumulate as a ‘baneful passion’ is questioned, as also are his fears, as Mill phrased it, that ‘parsimony’ might ‘accumulate faster than employment can be procured for active stock’: ‘We believe that a country must be placed in very peculiar circumstances to admit of this accident ever happening ...,24 In the light of this general approach Mill’s positive reaction in the same journal to the first edition of Say’s Traite is only to be expected. No reference at all is made to the famous chapter ‘Des Debouches’ (dis¬ cussed below) but a translation is given of those paragraphs of Book IV, Chapter V, which in the later editions were absorbed into the central discussion. Mill simply remarked: ‘The manner in which our author corrects prevailing errors may be exemplified by what he advances re¬ specting an important case, the relation between consumption and pro¬ duction.’ Similarly he reproduced Say’s criticism of the Physiocrats’ emphasis upon the desirability of high consumption. In all of this Mill saw Say as directly in the Smithian tradition: ‘... he understands the doc¬ trines of Smith better than almost any other author. He has a very clear discernment of the bearings, tendency, and application of those doc¬ trines; in several instances he has very happily extended those applica¬ tions, and in many others has rectified popular mistakes, and removed misapprehensions.’25 In Commerce Defended of 1808 James Mill developed his own formula¬ tion in opposition to William Spence’s doctrine relating to the social de¬ sirability of landlords’ luxury expenditure. Spence’s position, originally formulated as a criticism of Adam Smith’s argument ‘that the practice of parsimony is the most effectual way of accumulating national riches,’ was that ‘expenditure, not parsimony, is the province of the class of land proprietors; and that it is upon the due performance of this duty by the class in question, that the production of national wealth depends.’26 Mill’s

24

Ibid., 13-14

25

'Say’s Traite,' ibid., V (April 1805), 419-21. Mill also takes Lauderdale to task for his position regarding excess supply.

26

Cited by James Mill, Commerce Defended (London 1808), 66

THE LAW OF MARKETS 75

response was initially formulated in terms of a model involving an annual production period; output in any given year depends upon that portion of the previous year s output now devoted (‘destined’) to ‘reproduction’ as distinct from unproductive consumption.,2/ Within the framework of this model Mill asserted that the process of savings entails (productive) consumption - the Smithian ‘savings are consumed’ theorem - and that self-interest assures against the presence of unsold stocks, as working capital will be devoted either to consumption or accumulation: Let [Spence] rest in perfect assurance, that the whole annual produce of the country will be always very completely consumed, whether his landholders choose to spend or to accumulate. No portion of it will be left unappropriated to the one species of consumption, or to the other. No man, if he can help it, will let any part of his property lie useless and run to waste. Nothing is more clear, than that the self-interest of men, ever has impelled and ever will impel them, with some very trifling exceptions, to use every particle of property which accrues to them, either for the purpose of immediate gratification, or of future profit. That part, however, which is destined for future profit, is just as completely con¬ sumed, as that which is destined for immediate gratification.28

As in Smith’s formulation the emphasis is not upon the net addition to the stock of capital goods created by savings, but rather upon the process of savings.2' (it may be added that increased savings was seen by Mill as entailing the absorption of labour from the unproductive sector to the productive sector presumably at an unchanged real wage.) Now it must be emphasized that ‘hoarding’ had been ruled out by Spence himself.30 Spence’s fear was of inadequate consumption to absorb the increased flow 27

Ibid., 70: ‘The whole annual produce of every country is distributed into two great parts; that which is destined to be employed for the purpose of reproduc¬ tion, and that which is destined to be consumed. That part which is destined to serve for reproduction, naturally appears again next year, with its profit. This reproduction, with the profit, is naturally the whole produce of the country for that year. It is evident, therefore, that the greater the quantity of the produce of the preceding year, which is destined to administer to reproduction in the next, the greater will naturally be the produce of the country for that year.’ Cf. Mill’s statement in his Elements of Political Economy, 1st ed. (London 1821), 185: ‘A year

28 29

is assumed in political economy as the period which includes a revolving circle of production and consumption.’ Commerce Defended, 71 In Smith’s case it seems clear that the result of the savings process in additions to the real stock of capital was fully appreciated. See my Economics of Adam Smith, 188f. Mill had little to say on fixed capital in Commerce Defended, but see ibid., 78.

30

See Mill’s paraphrase, ibid., 75: ‘Let it not be urged, says he, that what they might save would not be hoarded (for misers now-a-days are wiser than to keep their money in strong boxes at home) but would be lent on interest; it would still be employed in circulation and would still give employment to manufacturers.’

76 THE ECONOMICS OF DAVID RICARDO

of output due to the investment program.31 His emphasis, therefore, was upon the outcome of the process of saving - the consequence of higher capacity - rather than the process itself. Yet is is upon the latter that James Mill met him in the debate repeating simply that saving entails consumption.32 Mill, However, did introduce a supplementary argument and it is one which, at least at this stage of the proceedings, is formally treated apart from the principle that saving entails consumption.33 I refer to the theo¬ rem that ‘ the production of commodities creates, and is the one and universal cause which creates a market for the commodities produced,’34 This principle - one version of the law of markets - was designed to refute the notion that capital might ‘increase too fast’ or that ‘the production of commodi¬ ties should be too rapid’ since there is ‘a market for a given quantity of commodities, and if you increase the supply beyond that quantity you will be unable to dispose of the surplus.’ This law of markets is phrased in the following terms: No proposition however in political economy seems to be more certain than this which I am going to announce, how paradoxical soever it may at first sight appear; and if it be true, none undoubtedly can be deemed of more importance. The production of commodities creates, and is the one and universal cause which creates a market for the commodities produced ... It is obviously ... the collective means of payment which exist in the whole nation that constitute the entire market of the nation. But wherein consist the collective means of payment of the whole nation? Do they not consist in its annual produce, in the revenue of the general mass of its inhabitants? But if a nation’s power of purchasing is exactly measured by its annual produce ... the more by that very act you extend

31

‘It should be considered, that money borrowed on interest is destined not for expenditure, but to be employed as capital; that the very circumstances of lessen¬ ing expenditure decreases the means of the profitable employment of capital, and consequently that the employment of the sum alluded to as capital, would in no degree diminish the hardships of those, who had been deprived of the revenue derived from its expenditure’ (cited by Mill, ibid., 75). Spence’s argument was directed specifically against Smith: ‘There is a singular vagueness and confusion in the whole of Dr. Smith’s reasoning, relative to the different effects of prodigality and parsimony upon national wealth. His argu¬ ments seem to be intended to maintain, that fresh capital may be profitably employed, in manufacturing goods which nobody will buy; for, certainly no pur¬ chasers would be found for the goods brought into existence by the employment

32

of new capital, if all members of the society were to convert the greater part of their revenue into capital’ (cited in ibid., 78-9n). Ibid., 75-8

33

Cf. Donald Winch, Classical Political Economy and Colonies (London 1965), 84:

34

‘Say’s Law may have developed from Smith’s “saving is spending” theorem, but Smith himself did not take this step.’ Commerce Defended, 81

THE LAW OF MARKETS 77 the national market, the power of purchasing and the actual purchases of the nation. Whatever be the additional quantity of goods therefore which is at any time created in any country, an additional power of purchasing, exactly equiva¬ lent, is at the same instant created; so that a nation can never be naturally overstocked either with capital or with commodities; as the very operation of capital makes a vent for its produce

...35

In the foregoing formulation it is stated that demand cannot exist without production since production generates the income with which commodities are purchased — a Keynesian-type proposition — and, fur¬ ther, that not only is the ‘'power of purchasing’ expanded by production but also the ‘actual purchases of the nation.’ The ‘demand of a nation,’ Mill concluded, ‘is always equal to the produce of a nation.’ This latter assertion appears to flow from a conception of the economy in terms of barter, for ‘the idea of money frequently tends to perplex’: When money is laid out of the question, is it not in reality the different commodities of the country, that is to say, the different articles of the annual produce, which are annually exchanged against one another? Whether these commodities are in great quantities or in small, that is to say, whether the country is rich or poor, will not one half of them always balance the other? and is it not the barter of one half of them with the other which actually constitutes the annual purchases and sales of the country? Is it not the one half of the goods of a country which universally forms the market for the other half, and vice versa? And is this a market that can ever be overstocked? Or can it produce the least disorder in this market whether the goods are in great or in small quantity?3fi

Mill’s position that increased incomes are ‘always’ spent might at first sight appear to be merely an empirical observation which allows for the (exceptional) possibility in practice of hoarding - an excess demand for money to hold. But his recommendation to envisage the economy in barter terms suggests a much stronger version of the law of markets, that version according to which the excess demand for money is zero under all circumstances. In brief, money per se, it is implied, has no utility. The proposition regarding the impossibility of a general excess supply of commodities is carefully contrasted with the possibility of a partial excess. But, Mill insisted, such distortions are rapidly corrected by a movement of resources between industries:

35 36

Ibid.,

80, 81-2 Ibid., 83, 82. Mill’s recommendation to conceive of the economy in barter terms is in fact based on a suggestion by Spence himself, who Mill calls upon to ‘follow his own advice on this occasion.’

78 THE ECONOMICS OF DAVID RICARDO

It may be necessary, however, to remark, that a nation may easily have more than enough of any one commodity, though she can never have more than enough of commodities in general. The quantity of any one commodity may easily be carried beyond its due proportion; but by that very circumstance is implied that some other commodity is not provided in sufficient proportion. What indeed is meant by a commodity’s exceeding the market? Is it not that there is a portion of it for which there is nothing that can be had in exchange. But of those other things then the proportion is too small. A part of the means of production which had been applied to the preparation of this superabundant commodity, should have been applied to the preparation of those other com¬ modities till the balance between them had been established. Whenever this balance is properly preserved, there can be no superfluity of commodities, none for which a market will not be ready. This balance too the natural order of things has so powerful a tendency to produce, that it will always be very exactly preserved where the injudicious tampering of government does not prevent, or those disorders in the intercourse of the world, produced by the wars into which the inoffending part of mankind are plunged, by the folly much more frequently than by the wisdom of their rulers.37

Mill’s law of markets, introduced to refute the notion that sales outlets may prove inadequate as the ‘dimensions’ of an economy are expanded, was formally treated apart from the issue of the nature of savings. Thus Mill concluded his case: ‘What is the difference when the goods are in great quantity and when they are in small? Only this, that in the one case the people are liberally supplied with goods, in the other that they are scantily; in the one case that the country is rich, in the other that it is poor: but in the one case, as well as in the other, the whole of the goods will be exchanged, the one half against the other; and the market will always be equal to the supply.’ Mill sought to justify the main result further and in this context the issue of the nature of savings makes a reappearance: Thus it appears that the demand of a nation is always equal to the produce of a nation. This indeed must be so; for what is the demand of a nation? The demand of a nation is exactly its power of purchasing. But what is its power of purchas¬ ing? The extent undoubtedly of its annual produce. The extent of its demand therefore and the extent of its supply are always exactly commensurate. Every particle of the annual produce of a country falls as revenue to somebody. But every individual in the nation uniformly makes purchases or does what is

37

Ibid., 84-5; cf. 82-3: ‘All that here can ever be requisite is that the goods should be adapted to one another; that is to say, that every man who has goods to dispose of should always find all those different sorts of goods with which he wishes to supply himself in return.’

THE LAW OF MARKETS 79 equivalent to making purchases, with every farthing’s worth which accrues to him. All that part which is destined for mere consumption is evidently employed in purchases. That too which is employed as capital is not less so. It is either paid as wages to labourers, who immediately buy with it food and other necessaries, or it is employed in the purchase of raw materials. The whole annual produce of the country, therefore, is employed in making purchases. But as it is the whole annual produce too which is offered to sale, it is visible that the one part of it is employed in purchasing the other; that how great soever that annual produce may be it always creates a market to itself; and that how great soever that portion of the annual produce which is destined to administer to reproduction, that is, how great soever the portion employed as capital, its effects always are to render the country richer, and its inhabitants more opulent, but never to confuse or to overload the national market.38

The full statement of the law of markets introduces a potentially seri¬ ous complexity. The savings process as initially formulated by Mill39 in¬ volves a particular production model wherein produce available from the previous period is utilized in the current period either for final consump¬ tion or for reproductive consumption: an advances model is involved.40 By contrast, the formulation of the law of markets itself, involving as it does an emphasis upon income which generates the wherewithal for expendi¬ ture, implies a vision of ‘synchronized’ activity and does not sit easily beside the advances conception; it is income currently generated that is currently utilized either for consumption or investment. J.B. SAY AND THE LAW OF MARKETS

The first edition of Say’s Traite d’economie politique, that of 1803, con¬ tained a very brief chapter entitled ‘Des Debouches.’ The argument commenced with the observation that it is the excess outputs of com¬ modities over their producers’ own requirements which generate mutual outlets or debouches for each other. In this context, Say implied that no attempt is made to add to money balances from sales proceeds, money serving merely as the medium of exchange: 38 39

Ibid., 83-4 See above, pp. 74-5.

40

In the advances model the produce of year (t — l) to be distributed between unproductive consumption and productive consumption or ‘investment’ is already in specific form at the commencement of period t; unless it is assumed that consumption and investment entail the same kind of commodities the decision regarding the allocation is predetermined during the preceding period. Mill’s emphasis upon a multi-commodity exchange system — to which is grafted the ‘savings are consumed’ theorem - does not imply the conceptions entailed in an advances model.

80 THE ECONOMICS OF DAVID RICARDO

La monnaie sert dans cette operation a-peu-pres de la meme maniere que les affiches et les feuilles d’avis qui, dans une grande ville, operent le rap¬ prochement des gens qui sont dans le cas de faire des affaires ensemble. Au bout de l’annee chaque producteur a manie une tres-grande quantite d’argent, mais sauf quelques soldes de peu de consequence, il ne lui reste ordinairement pas entre les mains plus d’argent comptant a la fin de 1’annee qu’il n’en avait au commencement. L’essentiel est ce qu’il achete avec cet argent, c’est-a-dire les produits des autres qu’il a echanges avec les siens, et dont il a consomme une partie et conserve l’autre, selon ses besoins, son economie et l’etat de sa fortune. Ceci montre, j’espere, que ce n’est point tant l’abondance de l’argent qui rend les debouches faciles, que l’abondance des autres produits en general. C’est une des verites les plus importantes de l’Economie politique.

Sales opportunities thus depend upon the ability to purchase, which in turn is governed by production or real output. In the exchange process Targent ne remplit qu’un office passager ... Les echanges termines, il se trouve qu’on a paye des produits avec des produits.’41 Whether it was Say’s deliberate intention to rule out short-run excess commodity supply - temporary excess demand for money - is a problem we shall keep in mind. The fact is that the possibility of excess commo¬ dity supply was explicitly recognized, although there is nothing to suggest that (at least in the present context) it was envisaged as the conse¬ quence of an excess demand for money. The solution in any event is to produce more of a second commodity: ‘quand une nation a trop de pro¬ duits dans un genre, le moyen de les ecouler est d’en creer d’un autre genre.’42 To the extent that the ‘solution’ is unrelated to the dissipation of an excess demand for money it might be said that the issue was more relevant to underdevelopment than ‘Keynesian’ unemployment. Indeed Say’s major concern appears to have been with long-run or secular growth and the relevance for this issue of the proposition that it is real production, not money supply expansion, that generates the requisite purchasing power.43 (The general unimportance of the ‘mercantilist’ con¬ cern with the adequacy of the money supply is subsequently made on Hume-like grounds.44) 41

Traite d 'economie politique, 1st ed. (Paris 1803), Book I, chap. 22, 152-3, 154

42

Ibid.,

154. Foreign trade is said to come into its own when this possibility is ruled

out, presumably because full capacity has been reached: ‘C’est quand on ne peut 43

plus produire aucun objet d’echange, que l’exportation devient avantageuse.’ Say refers specifically to the invalidity of characteristic mercantilist notions. Sir James Steuart is taken to task for maintaining that foreign trade is the sine qua non of expansion, and Forbonnais for conceiving of foreign sales as national gains and foreign purchases as national losses {ibid., 155n).

44

‘La nation est interessee a produire beaucoup, a vendre beaucoup de produc¬ tions au-dehors, a fin de recevoir une grande quantite de productions en

THE LAW OF MARKETS 81

Say had much to say of relevance to the general theme elsewhere in the Traite. Materials that were in subsequent editions gathered within a single extended chapter on ‘Des Debouches were, in 1803, contained in two chapters devoted to the questions: ‘Suivant quelles proportions la valeur des produits se distribue entre les trois sources de production’ and ‘Si un etat s’enrichit par ses Consommations.’45 These formulations are significant since they caught the eye of James Mill in 1805, as we have seen. In the first of these chapters it is observed that the level of expenditure depends upon the level of general activity. Even more strongly it is affirmed that ‘la demande des produits en general est done toujours egale a la somme des produits.’ Those doctrines that relate the level of activity to (unproductive) consumption outlays are firmly rejected: L’etendue de la demande des moyens de production en general, ne depend pas, ainsi que trop de personnes font imagine, de Vetendue de la consommation. La consommation n’est point une cause : elle est un effect. Pour consommer il faut acheter ; or on n’achete qu’avec ce qu’on a produit. La quantite de produits demandes est-elle done determinee par la quantite de produits crees ? Sans aucun doute. Chacun peut a son gre consommer ce qu’il a produit ; ou bien avec son produit en acheter un autre. La demande des produits en general est done toujours egale a la somme des produits. Une nation qui ne produirait par an qu’une valeur de deux milliards, ne pourrait pas acheter ou consommer, pen¬ dant le meme espace de terns [$tc], pour trois milliards de valeurs, a moins de prendre chaque annee le milliard excedant, sur ses capitaux. On voit que le meilleur moyen d’ouvrir des debouches aux produits est de les multiplier et non de les detruire. Si ce resultat est evident, comme je le crois, que penser des systemes ou Ton encourage les consommations pour favoriser la pro¬ duction.46 echange des siennes ; du reste peu lui importe qu’on la paye en argent ou en marchandise. Si l’argent vient a manquer chez elle il en entrera naturellement parce que l’argent s’elevera a un prix tel, qu’il sera plus lucratif d’y envoyer 45 46

cette denree-la qu’une autre’ [ibid., 179-80). Book IV, chap. 5; Book V, chap. 3 Ibid., II 175-6. Say adds a note to the effect that ‘un produit consomme par son auteur est un produit qui a ete offert et demande par la meme personne. Il fait partie du total des produits offerts, et du total des produits demandes.’ Subsequently Say charged the Physiocrats with confusing the order of causality and recommending high consumption as a means of encouraging production. Ibid., 358—9: ‘Beaucoup de gens voyant, en gros, que la production egale tou¬ jours la consommation (car il faut bien que ce qui se consomme ait ete produit) se sont imagine qu’encourager la consommation, e’etait favoriser la production. Les Economistes se sont empares de cette idee et en ont fait un des principes fondamentaux de leur doctrine ... on en a conclu qu’un etat s’enrichissait par ses consommations, que l’epargne etait directement contraire a la prosperite publique, et que le plus utile citoyen, etait celui qui depensait le plus.’

82 THE ECONOMICS OF DAVID RICARDO

It was further emphasized that the process of accumulation creates no special problems since accumulation implies expenditure as much as does (unproductive) consumption: ‘Le debouche n’est-il pas trouve par cette accumulation aussi bien que si la meme valeur avait ete consommee ?’ To this proposition there is appended the reminder that ‘la partie epargnee sur les revenus et ajoutee aux capitaux, est egalement consommee chaque annee, mais d’une autre fa^on ; j’entends d’une fapon reproductive.’ The limits to output are those imposed by capacity: ‘Elies sont dans les moyens de produire.’47 In fact, since accumu¬ lation results in expanded capacity the consequence thereof is a concomi¬ tant expansion of the market.48 None the less, following Smith, Say also subscribed to the notion of a falling return on capital with accumulation due to ‘increasing competition.’49 Ricardo was to complain of a serious inconsistency on the part of Smith and Say in this regard. As in the chapter ‘Des Debouches’ Say raised the issue of excess supply, but he now considered the solution not in terms of the produc¬ tion of counter-commodities50 but rather in terms of the transfer of re¬ sources from the production of the commodity initially in excess:

Mais, dit-on, s’il y a de la marchandises qui ne trouve pas Vecoulement, il y a necessairement plus de moyens de produire employes, qu’il n’y a de facultes pour consommer leur produits. Nullement ; l’engorgement n’a lieu que lorsqu’il y a trop de moyens de

production appliques a un genre de production et pas assez a un autre. En effet qu’est-ce que le defaut d’ecoulement ? C’est la difficulte d’avoir une autre marchandise (denree ou argent) en echange de celle qu’on offre. Les moyens de production manquent done a la premiere autant qu’ils sont surabondans pour la seconde. Un canton de l’interieur des terres ne trouve pas d’ecoulement pour ses bles ; mais s’il s’y etablit une manufacture, et qu’une partie des fonds et de l’industrie qui se dirigeaient vers la culture de la terre, se dirige vers un autre genre de production, les produits de l’une et de l’autre

47

Ibid., 176-7. By the term ‘consumption’ when used alone, Say intends ‘la consommation improductive, et nullement de celle qu’on fait d’un capital pour le retablir avec profits.’

48

Ibid., 361-2: ‘Quant a la nation qui ne depense pas tout son revenu et augmente chaque annee ses capitaux, c’est elle, et elle seule, qui offre chaque annee a ses produits de plus grands debouches. En effet elle voit grandir chaque annee les profits de ses capitaux et le pouvoir de son industrie, ses revenus par consequent ; e’est-a-dire ses moyens de consommer soit directement, soit par echange ; en un mot ses debouches. Le public n’est done point interesse a la consommation qui se fait ; mais il est interesse et prodigieusement interesse aux epargnes.’

49

Ibid., 189: ‘... car les profits des capitaux ne peuvent baisser sans qu’il y ait une plus

50

grande quantite de capitaux jetee dans la circulation ...’ (cf. also ibid., 183). Above, p. 80

THE LAW OF MARKETS 83

espece s ecouleront sans peine, quoique les produits aient plutot augmente que diminue. Le defaut d ecoulement vient done non de la surabondance, mais d’un emploi defectueux des moyens de production. The corrective transfer of resources between sectors in the case of partial excess supply, it is further maintained, would be made rapidly and the concession did not disturb the principal theme which applied at the aggregate level: ‘Je confois que la circulation peut etre obstruee par de certains produits trop abondans ; e’est un mal qui ne peut jamais etre que passager, car on cesse bientot de se livrer a une production, dont les produits excedent les besoins et tombent dans l'avilisement, pour s’occuper de la production des denrees recherchees ; mais je ne confois pas que les produits de l’industrie d’une nation en general, puissent jamais etre trop abondans, car l’un donne les moyens d’acheter 1 autre. La masse des produits compose la masse des richesses d’une nation; et les richesses sont une chose dont les nations ne sont pas plus embarrassees que les particulars.’51 Say’s Smith-like panegyric for accumulation suggests a preoccupa¬ tion with growth, not with the ‘Keynesian’ short run, an impression en¬ hanced by an illustration drawn from the secular record to corroborate the argument that there always exists adequate purchasing power to absorb any volume of output: ‘Ce point bien eclairci, nous fournit une reponse a la question qui nous occupe et que je reproduis : A quoi tient la demande des moyens de productions en general ? Elle tient a l’etendue de la production. Et comme Petendue de la production depend de Petendue des moyens de production, la demande des moyens de production s’etend dans la meme proportion que les moyens de pro¬ ductions eux-memes ; e’est-a-dire en resultat qu’une nation a toujours les moyens d’acheter tout ce qu’elle produit. Autrement comment ferait-on pour acheter en France deux ou trois fois plus de choses, au moins, qu’on n’en achetait sous le regne miserable et infortune de Charles VI ?’52 But what of Say’s references to money solely as medium of exchange, or to general expenditure always being at its limit?53 We must attempt to discover whether Say intended to preclude short-run excess demand for money, that is, short-run attempts to add to money balances from sales proceeds. The impression such statements undoubtedly leave is belied by two considerations: in the first place, Say considered, as we have noted,54 the problem of increasing the effective quantity of money where an in-

51 52 53 54

Ibid., 177-8, 179 Ibid., 179-80 (Charles Above, p. 81 Above, note 44

VI, 1368-1422)

84 THE ECONOMICS OF DAVID RICARDO

crease in real income called for it; secondly, Say allowed explicitly for hoarding, a matter to which we now turn.1’ Under normal circumstances, it is true, hoarding was certainly ruled out. For it implied irrational behaviour in the light of the loss of interest in¬ volved - nothing is said of ‘precautionary’ or other advantages of holding money stocks. But under circumstances of exceptional political insta¬ bility, and of exceptional uncertainty regarding future prices (specifically expectations of general price reductions), the phenomenon took on great importance and was the source of, or at least was accompanied by, general depression: Le meilleur des encouragemens pour la circulation, est le desir que chacun a, surtout les producteurs, de ne perdre que le moins possible l’interet des fonds engages dans l’exercise de leur industrie. La circulation se ralentit bien plutot par les contrarietes qu’elle eprouve

que

par le

defaut d’encouragemens

qu’elle regoit. Ce sont les guerres, les embargos, les droits penibles a acquitter, le danger ou la difficulte des communications, qui l’entravent. Elle est lente encore dans les momens de craintes et d’incertitudes ; quand l’ordre public est menace et que toute espece d’entreprise est hasardeuse. Elle est lente quand on se croit expose aux contributions arbitraires et que chacun s’efforce de cacher ses facultes. Elle est lente dans un terns d’agiotage ou les variations subites occasionnees par le jeu sur les marchandises, fait esperer a quelques personnes un benefice fonde sur une simple variation dans les prix. Alors la marchandise attend a l’affut d’une hausse; l’argent a l’affut d’une baisse : des deux parts, capitaux oisifs, inutiles a la production.56

In this context Say briefly considered the reverse circumstances where inflationary price expectations rule. Here the rapid disbursement of money funds reflects the effort to avoid a loss of purchasing power: ‘c’est en partie ce motif qui fut cause de la prodigieuse circulation qui eut lieu pendant que le discredit des assignats allait en croissant. Tout le monde etait ingenieux a trouver un emploi pour un papier-monnaie dont la valeur s’evaporait d’heure en heure. On ne le recevait que pour le placer. II semblait qu’il brulat quiconque le touchait.’57 It must be em¬ phasized, however, that under ‘normal’ conditions the case against the likelihood of hoarding was not the ‘perishability’ of the value of money but the avoidance of a loss of interest. § We turn now to the second edition of 1814. Are there any significant additions or alterations in the new edition? The main theme - ‘que c’est 55

Cf. J.A. Schumpeter, History of Economic Analysis (New York 1954), 619, regard¬

56

ing the former characteristic of Say’s work. Schumpeter denied that Say con¬ sidered the problem of hoarding. Traite, 136-7

57

Ibid., 137. Say gives a brilliant account of the construction of industrial plant, house repairs, and the like undertaken during the assignat episode in question.

THE LAW OF MARKETS 85

la production qui ouvre des debouches aux produits’58 — reappears in a much expanded chapter ‘Des Debouches.’ And again allusion is made to secular experience to demonstrate the proposition.59 Scarcity of money never constitutes a problem, although it may so appear on a surface view.60 Money acts simply as a medium of exchange - i’argent ne remplit qu’un office passager dans ce double echange; et les echanges termines, il se trouve toujours qu’on a paye des produits avec des produits,’ a formulation identical to that of 1803. But now a potentially important, and much reproduced, paragraph is added: II est bon de remarquer qu’un produit cree offre, des cet instant, un debouche a d’autres produits pour tout le montant de sa valeur ; car tout produit n’est cree que pour etre consomme, soit reproductivement, soit improductivement, et meme pour etre consomme le plutot possible, puisque toute valeur qui attend, fait perdre a celui qui en est actuellement le possesseur, l’interet de cette attente ; le marchand a soin de ne pas avoir des marchandises qui doivent rester en magasin, et le consommateur a soin de ne pas en acheter tres-long-temps avant le moment d’en faire usage. Un produit est done toujours, autant que chacun peut, destine a la plus prompte consommation. Du moment qu’il existe, il cherche done un autre produit avec lequel il puisse s’echanger. Je n’en accepte pas l’or et l’argent ; car a peine le marchand a-t-il vendu, qu’il cherche l’emploi du produit de sa vente. On voit done que le fait seul de la formation d’un produit, ouvre des l’instant meme, un debouche a d’autres produits.61

What import has the foregoing qualification ‘des cet instant’? Should it be taken to imply that Say ruled out the possibility of excess commo¬ dity supply in the short run? This deduction would appear to be unjusti¬ fied. As in 1803, Say recognized general depression - ‘cette prodigieuse difficulte qu’on eprouve, surtout quand la situation des affaires generales est peu prospere, pour l’ecoulement des produits de l’industrie, d’ou il resulte qu’on en tire alors un parti peu avantageux.’62 The 58 59

Traite d’economie politique, 2nd ed. (Paris 1814), I, 144 Ibid., 145n.: ‘Autrement comment ferait-on pour acheter maintenant en France, dans une annee, six ou huit fois plus de choses qu’on en achetait sous le regne miserable et infortune de Charles VI ? Il est evident que e’est parce qu’on y produit annuellement six ou huit fois plus de valeurs, et qu’on y achete ces

60

valeurs les unes avec les autres.’ Regarding scarcity of money Say observed: ‘La marchandise intermediaire qui facilite tous les echanges (la monnaie) se remplace dans ces cas-la avec la plus grande facilite par des moyens connus des negocians, et bientot la monnaie afflue, par la raison que toute espece de marchandise se rend aux lieux ou l’on en a besoin’ [ibid., 146).

61 62

Ibid., 147-8 Ibid., 148. Cf. 158: ‘dans tout etat ou la production marche peniblement et ne remplace jamais la quantite des valeurs consommees, les demandes allant en declinant, il y a toujours plus de marchandise offerte que de marchandise ven¬ due ; les profits, les salaires diminuent, l’emploi des capitaux devient hasardeux ...’

86 THE ECONOMICS OF DAVID RICARDO

explanation for the phenomenon runs in terms of an inadequate output of counter-commodities, now formally identified with inadequate income and accordingly purchasing power: Je me bornerai a faire remarquer ici qu’un defaut d’ecoulement d’un produit, ou meme d’un grand nombre de produits, n’est que le resultat d’un engorgement dans un ou plusieurs des canaux de l’industrie ; qu’il se trouve alors dans ces canaux une plus grande quantite de ces produits que n’en reclament les besoins generaux, et que c’est toujours parce que d’autres canaux, loin d’etre engorges, sont au contraire depourvus de plusieurs pro¬ duits qui, en raison de leur rarete, sont aussi recherches que les premiers le sont peu. C’est parce que la production des produits manquans a souffert, que les produits surabondans ne trouvent point de debit, et que leur valeur s’est alteree. En termes plus vulgaires, beaucoup de gens ont moins achete, parce qu’ils ont moins gagne ; et ils ont moins gagne, parce qu’ils ont trouve des difficultes dans l’emploi de leurs moyens de production, ou bien parce que ces moyens leur ont manque.63

It will be noted that the inadequacy of purchasing power has its source in low earnings which in turn is related not only to ‘des difficultes dans l’emploi de leurs moyens de production’ but also to inadequate supplies of capital. In effect, Say is here allowing for secular as well as short-run constraints on activity. It must, however, again be emphasized that constraints on the produc¬ tion of counter-commodities were envisaged as the consequence of artifi¬ cial impediments to the normal working of the system rather than inherent therein:64 Aussi Ton peut remarquer que les temps ou certaines denrees ne se vendent pas bien, sont precisement ceux ou d’autres denrees montent a des prix excessifs ; et, comme ces prix eleves seraient des motifs pour en favoriser la production, il faut que des causes majeures ou des moyens violens, comme des desastres naturels ou politiques, l’avidite ou l’imperitie des gouvernemens, maintienne forcement cette penurie d’un cote, qui cause un engorgement de l’autre. Cette cause de maladie politique vient-elle a cesser, les moyens de production se portent vers les canaux vacans, et le produit de ceux-ci absorbe le trop-plein des autres ; l’equilibre se retablit, et cesserait rarement d’exister, si les moyens de production etaient toujours laisses a leur entiere liberte.65 63

Ibid., 148-9

64

G.J. Stigler, Essays in the History of Economics (Chicago 1965), 317, observes that

65

Say ‘does not introduce any conditions (such as rigid prices) which would bring such a disequilibrium about.’ Traite (1814), I, 149-50

THE LAW OF MARKETS 87

It is thus asserted (as in 1803) that under normal conditions, in the absence of des causes majeures ou des moyens violens,’ there is no pro¬ blem of inadequate expenditure.66 At the close of the chapter following upon that devoted to ‘Des Debouches Say pays particular attention to the rationale for the rapid expenditure of sales proceeds and reproduces word for word that key passage in the earlier edition which refers, first, to the eagerness to avoid any loss of interest - ‘le desir que chacun a, surtout les producteurs, de ne perdre que le moins possible l’interet des fonds engages dans l’exercise de leur industrie’ - and, secondly, to the failure of the smooth flow of expenditures in the event of uncertainty.67 There were, then, no substantive changes in Say’s position between 1803 and 1814. § Let us move forward to the third edition of the Traite, that of 1817. The chapter ‘Des Debouches’ contains one possibly significant altera¬ tion. Whereas the potential loss of interest had served to explain the sup¬ posed rapid disbursement of money receipts (under normal conditions), Say now - without warning the reader - altered the passage and aban¬ doned this argument, referring instead to the potential loss of purchasing power: ‘II est bon de remarquer qu’un produit cree offre, des cet instant, un debouche a d’autres produits pour tout le montant de sa valeur. En effet, lorsque le dernier producteur a termine un produit, son plus grand desir est de le vendre, pour que la valeur de ce produit ne chome pas entre ses mains. Mais il n’est pas moins empresse de se defaire de l’argent que lui procure sa vente, pour que la valeur de l’argent ne

66

Ibid., 156-7: ‘il s’agit bien moins de donner l’envie de consommer que d’en procurer les moyens ; et nous avons vu que la production, qui donne les moyens de consommer, suffit pour que la consommation ait lieu, soit reproductivement soit improductivement, puisque le fruit de cette production serait perdu s’il n’etait employe, et que le retard meme de son emploi est une perte. Aussi ce sont les mauvaises administrations qui excitent a consommer : les bonnes excitent a produire.’ Say illustrated the phenomenon of general depression, it may be added, by reference to French experience in 1813: ‘La France a pu se former une idee de cette situation penible en 1813. L’industrie y etait dans un tel etat de souffrance, toute espece d’entreprise industrielle y etait tellement dangereuse, ou si peu lucrative, que les capitaux n’y trouvaient point d’emploi avec une surete tolerable ; chaque fois qu’ils rencontraient cette surete, ils se pretaient moyennant un tres-faible interet ; et le bas interet des capitaux, qui est ordinairement une marque de prosperite, y etait un signe de detresse’ [ibid., 159n). He further suggested the possibility of permanent stagnation and even de¬ cline: ‘... si cet etat dure, le depopulation, le besoin et la barbarie prennent la place de l’abondance et du bonheur, auquel toute nation peut atteindre quand

67

elle veut.’ Ibid., 164. And the discussion of the potential loss of purchasing power as motive for rapid money flows, given inflationary expectations, is also repeated [ibid., 165).

88 THE ECONOMICS OF DAVID RICARDO

chome pas non plus. Or, on ne peut se defaire de son argent qu’en demandant a acheter un produit quelconque. On voit done que le fait seul de la formation d’un produit ouvre, des l’instant meme, un debouche a d’autres produits.’68 Nevertheless, Say left the final pas¬ sages of the next chapter unaltered, and retained without change the references to avoidance of loss of interest as rationale for speedy dis¬ bursement of proceeds under normal conditions, and to the effects of uncertainty on spending decisions.69 The (abnormal) inflationary expe¬ rience - the panic flight from money - is again described as in all the early editions.70

68

Traite d’economie politique, 3rd ed. (Paris 1817), I, 145. In addition Say added an analytical dictionary of terms. Under ‘Debouches’ Say made the following entry which summarizes the main principles (il, 440-1): ‘Debouches. Ce sont les moyens d’ecoulement, les moyens d’echange, les moyens de vente pour un produit. L’abondance de For et de l’argent monnaye n’est pas ce qui facilite les debouches. La monnaie n’est qu’un intermediate dans les echanges ; celui qui la donne n’a pu se la procurer qu’en echange des fruits de sa production. Les pro¬ duits ne sont done en definitive a.chetes qu’avec des produits, et l’etendue des debouches est proportionnee a l’etendue de la production. Toute valeur nouvellement produite, a moins qu’elle ne soit immediatement detruite par la consommation, ouvre des ce moment un debouche a une autre valeur produite ; elle appelle en echange un autre produit. Ainsi, quand la vente d’un objet languit, e’est parce qu’il n’y a pas assez d’autres objets produits ; et l’avilissement dans le prix de certaines choses est toujours accompagne d’un rencherissement dans certaines autres choses ; les epoques ou la vente de certaines marchandises ne va pas, sont des epoques de cherte pour d’autres mar¬ chandises.’ To this is attached the following note: ‘Les moyens de production se porteraient toujours vers la production des marchandises les plus cheres, et par consequent ouvriraient des debouches aux marchandises avilies, si 1’industrie etait toujours fibre dans ses mouvements. C’est la cause principale qui fait que les guerres, les

69

mauvaises lois (telles que la prohibition des produits etrangers, les entraves interieures, etc.), nuisent aux debouches, le plus souvent sans que les parties interessees s’en doutent.’ Ibid., 161-2

70

In a recent article Walter Eltis has suggested that Say may have been led to develop the law of markets - in the form that money constitutes merely a medium for transactions but has no other utility — in consequence of his experience of the inflationary war period. Cf. ‘The Failure of the Keynesian Conventional Wisdom,’ Lloyds Bank Review, no. 122 (Oct. 1976), 12—13. The argument rests on the following passage (which appears first in the third edition of 1817, not in the fourth as stated): ‘When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should vanish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. Thus, the mere circumstance of the creation of one product immediately opens a vent for other products.’ Treatise on Political Economy, 4th ed. (1819), English translation by C.R. Prinsep (London 1821), I, 167.

THE LAW OF MARKETS 89

§ In the fourth edition (1819)71 there is one change of emphasis that at first sight appears significant but on examination turns out to have little purpose. As in the earlier editions Say raised the question of general gluts. But he now offered a twofold explanation: ‘But it may be asked, if this be so, how does it happen, that there is at times so great a glut of commodities in the market, and so much difficulty in finding a vent for them? Why cannot one of these superabundant commodities be ex¬ changed for another? I answer, that the glut of a particular commodity arises from its having outrun the total demand for it in one of two ways; either because it has been produced in excessive abundance, or because the produce of other commodities has fallen short.’72 It is the failure of counter-commodities - as in the earlier editions - that Say takes up thereafter, and again the problem is not inherent in the system but reflects ‘some violent means, or some extraordinary cause.’ But the altera¬ tion has the merit of distinguishing formally between the problem of par¬ tial excess supply, reflecting faulty allocation between sectors which might be corrected by redistribution of factors, and that of excess supply which calls for general expansion of incomes and earnings.

§ Say’s celebrated ‘Letters to Malthus’ of 1820 is pertinent to the issue, for this work was specifically designed to account for the contemporary phenomena of excess capacity and widespread unemployment.74 The sig-

The following observations are in order. In dealing specifically with the assignats Say indeed utilized the concept of a loss of value as motive for the flight from money. Nevertheless, the retention in this context of the notion of loss of interest as rationale for rapid expenditure of sales proceeds under normal conditions must also be kept in mind. Secondly, Say’s allowances for hoarding in periods of deflation¬ ary expectations are also relevant to the issue; the experience of the assignats did not colour his entire outlook, (indeed there is an additional note appended to the chapter ‘Des Debouches’ in 1819, ibid., 164n, dealing with hoarding: ‘Even

72

when money is obtained with a view to hoard or bury it, the ultimate object is always to employ it in a purchase of some kind. The heir or the lucky finder uses it in that way, if the misers do not; for money, as money, has no other use than to buy with.’) Although we are largely concerned in this section with the pre-Ricardian litera¬ ture it is convenient to complete the story as far as concerns Say. Ibid. (1821), 168

73

‘It is because the production of some commodities has declined, that other com¬

71

modities are superabundant. To use a more hackneyed phrase, people have bought less, because they have made less profit; and they have made less profit for one of two causes; either they have found difficulties in the employment of their pro¬ ductive means, or these means have themselves been deficient.’ The problem is attributed to ‘some violent means, or some extraordinary cause, a political or nat¬ ural convulsion, or the avarice or ignorance of authority’ [ibid., 169). 74

Letters to Mr. Malthus on Several Subjects of Political Economy (1820; London 1821), 2: ‘What is the cause of the general glut of all the markets in the world, to which merchandize is incessantly carried to be sold at a loss? What is the reason that in

90 THE ECONOMICS OF DAVID RICARDO

nificance of the work lies also in its formulation of the law of markets within a production context. (As we have seen, Say tended to discuss the issue within an exchange context in the Traite, although without any doubt he always recognized its extended applicability.) Say first laid out the notion - attributed to Adam Smith — that it is the income generated by production which provides the wherewithal to make purchases, while money serves only as medium of exchange:

Since the time of Adam Smith, political economists have agreed that we do not in reality buy the objects we consume, with the money or circulating coin which we pay for them. We must in the first place have bought this money itself by the sale of productions of our own ... [Money] is only the price of the productions which they have themselves created by means of their lands, capital or industry. In selling these, they exchange first their productions for money; and they after¬ wards exchange this money for objects of consumption. It is then in strict reality with their productions that they make their purchases; it is impossible for them to buy any articles whatever to a greater amount than that which they have produced either by themselves, or by means of their capitals and lands.7’

Despite his indebtedness to Smith there can be no doubt that Say consid¬ erably sharpened the conception of circular flow in an enterprise eco¬ nomy, an extended outline of which is given in order to discover ‘whether we have not the means of consuming what we have the means of producing.’76 Secondly, the ‘savings is spending’ theorem is formulated in the follow¬ ing terms: ‘[What] the capitalists would have saved would nevertheless have been equally expended. In expending it unproductively, the expen¬ diture has not been increased in amount. As to riches accumulated, with¬ out being reproductively consumed, such as the sums amassed in the miser’s coffers, neither Smith nor I, nor any one, undertakes their defence; but they cause very little alarm; first, because they are always

the interior of every state, notwithstanding a desire of action adapted to all the developments of industry, there exists universally a difficulty of finding lucra¬ tive employments?’ 75

Ibid., 2. Cf. Say’s observation, p. 4: ‘the only true consumers are those who on their side produce, because they alone can buy the produce of others ... unproductive consumers can buy nothing, unless by means of the value created by those who produce.’ Say is squarely in the ‘classical’ tradition.

76

Ibid., 10. Say cites Malthus’s well-known objection to Say, James Mill, and Ri¬ cardo, who, he complained, ‘have fallen into some fundamental errors on this subject. In the first place they have considered commodities as if they were so many mathematical figures, or arithmetical characters, the relations of which were to be compared, instead of articles of consumption, which must of course be referred to the numbers and wants of the consumers.’

THE LAW OF MARKETS 91

very inconsiderable, compared with the productive capital of a nation; and secondly, because their consumption is only suspended.’77 Say complained to Malthus that ‘you assume implicitly as fact, that a production saved is abstracted from every species of consumption; although in all these discussions, in all the writings you attack, in those of Adam Smith, of Mr. Ricardo, in mine, and even in your own, it is laid down that a production saved is so much subtracted from unproductive consumption to be added to capital, that is to say, to the value that is consumed reproductively.’78 It will be noted that subscription to ‘the Smith-Turgot theorem’ as in Say’s case does not necessarily entail the adoption of an ‘advances’ model as is sometimes implied.79 In Say’s case the theorem is used within the context of a circular-flow model in order to show that the flow is not, so to speak, ‘broken’ at any point when ‘savings’ are made. In the same context we read also of the rejection of the wages fund or advances conception. The treatment of capital and land is on a par with that of labour; interest and rent are simply the incomes paid by the entrepreneur for the services of capital goods and land, the suppliers of which devote their earnings to the purchase of the commodities produced.80 Amongst the principal ‘deductions’ drawn by Say from his conceptual¬ ization of the economic process is the standard notion, reminiscent of the Traite, ‘that productions can only be purchased with productions ... it is production which opens a market to production,’81 ‘that ... we purchase commodities with productive services, and ... the more productive ser¬ vices we carry to market, the more we can buy in return,’82 or, at a more

77

Ibid., 37-8

78

Ibid., 39; cf. ibid., 39n: ‘accumulation is not non-consumption-, it is the substitution of reproductive consumption for that which is unproductive.’ See B.A. Corry, Money, Saving and Investment in English Economics, 1800-1850

79

(London 1962), 18f., especially 21, and R.V. Eagly, The Structure of Classical Economic Theory (New York 1974), 90f., especially 91. 80

Letters to Malthus, 18, 19. But Say treated the service sector in the standard ‘classical fashion’ [ibid., 18—19n).

81

Ibid., 24, cf. 3: ‘From these premises I had drawn a conclusion which appeared to me evident, but which seems to have startled you. I had said “As each of us can only purchase the productions of others with his own productions - as the value we can buy is equal to the value we can produce, the more men can produce, the more they will purchase.”’

82

Ibid., 16, cf. 30: ‘Experience, as well as reasoning, demonstrates that a produc¬ tion, an article necessary or agreeable to man, is only rejected when people have not the means of paying for it. These means of purchasing are precisely those which establish the demand for a production, and give it a price. Not to want an useful thing is not to be able to pay for it. And what occasions this inability to pay for it? The being deprived of that which constitutes wealth: the being deprived of industry, land, or capital.’

92 THE ECONOMICS OF DAVID RICARDO

general level, that ‘all the producers possess collectively the means of acquiring the whole of the productions.,Ht And, as in the Traite, empirical evidence for the conclusion that ‘production opens a market to produce’ is drawn from the experience of secular progress, for it is asserted that the huge increase in the volume of (internal) British sales since Elizabeth’s time can only be appreciated in terms of corresponding output expansion.”4 Secondly, we also find the further ‘deduction’ (which does not in fact seem to follow logically from the circular-flow conceptualization) ‘that if certain goods remain unsold it is because other goods are not pro¬ duced.’85 It must, however, be added immediately that, as in the Traite, the source of excess supply is traced by Say to government interference which renders unprofitable the production of the necessary ‘counter¬ commodities’: ‘We have hitherto founded our discussions upon the sup¬ position of an indefinite liberty, allowing a nation to carry to the utmost extent production of every description; and it appears to me that I have proved that if this hypothesis could be realized, a nation so circum¬ stanced would be able to purchase all that it could produce.’ In the event of intervention, it is conceded, the smooth operation of the mechanism might break down. And in response to Sismondi’s and Malthus’s objec¬ tions to his conception of the law of markets in the light of the fact of excess capacity and supply, Say observed: ‘To buy the superabundant produce, it would be requisite to create other produce: but if the pro¬ ducers were placed in too disadvantageous a situation ... [the] benefit which he might derive from his production would not indemnify him for its expenses.’ Alternatively expressed, ‘the utility of productions is no longer worth the productive services, at the rate at which we are com¬ pelled to pay for them.’8'1 In this context Say observed that in contempo-

83

Ibid., 27. In this context Say denied that landowners could be categorized within the category of unproductive consumers: ‘Whom do you designate by this numer¬ ous body of unproductive consumers, so necessary, according to you, to the producers? Is it the proprietors of lands and capitals? Undoubtedly they do not directly produce, but their instruments (their property) does it for them. They consume the value to the creation of which their lands and capitals have contri¬

84

buted. They assist in production and can only make purchases in consequence of this assistance’ {ibid., 32). Ibid., 4f.

85

Ibid., 3. Cf. also ibid., 5: ‘I have advanced that whenever there is a glut, a super¬ abundance, of several sorts of merchandize, it is because other articles are not pro¬ duced in sufficient quantities to be exchanged for the former; and if those who produce the latter could provide more of them, or of other goods, the former would then find the vent which they required: in short, that the superabundance of goods of one description arises from the deficiency of goods of another descrip¬ tion. You on the contrary, assert that there may be a superabundance of goods of all sorts at once ... M. Sismondi had already opposed my doctrine ...’

86

Ibid., 43, 48, 51. Say had in mind largely the burden of taxation: ‘taxes do not augment the profits [incomes] of the producer, although they increase the price of

THE LAW OF MARKETS 93

rary conditions of excessive taxation ‘many savings are not invested’ and capitals are quietly sleeping in the coffers of their proprietors.’ While hoarding is thus only symptomatic of the contemporary depression, rather than the causal feature, it is clear enough that the community’s excess demand to hold cash is not zero under all circumstances. The various references we have encountered in Say’s writings to the effect that money is viewed as a medium of exchange only (that sellers want money only to acquire goods) are apparently intended only for an economy not subject to ‘taxes and other charges.’87 It should be added that in making his concessions Say seems to have in mind much more than short-run depression; he appears to maintain that features characteristic of secular stagnation were actually manifest. For Say appealed to Malthus’s own insistence upon a propensity towards ‘indolence’ which reflects precisely this perspective: ‘You observe, in sev¬ eral places [alluding to Malthus’s Principles of 1820] “that man is natur¬ ally indolent, and that it betrays great ignorance of his nature to suppose that he will always consume all he can produce'''’ ... You are right, indeed; but I maintain no other doctrine when I say that the utility of productions is no longer worth the productive services, at the rate at which we are compelled to pay for them.’88 Say also accepted that the return on capital will tend to decline with accumulation — in the Traite the case was made on Smithian grounds. But he failed to appreciate Malthus’s fears: ‘To the disciples of Adam Smith, who think that saving is beneficial, you oppose the inconveniences of an excessive saving; but here the excess carries its remedy along with it. Wherever capital becomes too abundant, the interest which capitalists derive from it becomes too small to balance the privations which they im¬ pose upon themselves by their economy. It becomes more and more diffi¬ cult to find good securities for investing money, which is then placed in foreign securities. The simple course of nature stops many accumu¬ lations.’89 It remains to point out subsequent qualifications in later editions of the Traite itself. These are formally alluded to in a posthumously published letter to Malthus of February 1827 relating to the latter’s Definitions in Political Economy. every production: the incomes of the producers become insufficient to purchase the produce, the moment its price is raised by the circumstances which I have just described’ [ibid., 46). To the objection that tax revenues are ultimately spent by public functionaries, soldiers, etc., Say asserted that such expenditures are ‘en¬ tirely at the expense of the producers’ [ibid., 48). The argument therefore does not hinge upon an inadequacy of purchasing power in consequence of taxation. 87

Ibid., 49-50n (see below, p. 520, for a full extract and Say’s criticism of Ricardo). At the same time Say also maintained in the previous letter that ‘sums amassed in the miser’s coffers ... cause very little alarm’ (above, p. 90).

88

Ibid., 50-1

89

Ibid., 40-1

94 THE ECONOMICS OF DAVID RICARDO

... je confesserai que ma doctrine des debouches que vous avez combattue dans vos autres ouvrages, et dans celui-ci (page 65), est en effet sujette a quelques restric¬ tions. Je l’ai tellement senti que, dans la cinquieme edition de mon Traite (tome Ier, page 194 et suivantes), qui a ete publiee en trois volumes, a la fin de l’annee derniere [1826], j’ai expose cette restriction, quoique MM. Ri¬ cardo, Mill et Macculloch aient adopte ma doctrine a cet egard, et que le ministere actuel de la Grande-Bretagne en ait fait la base de son nouveau systeme commercial ; il vaut mieux s’attacher a l’investigation des faits et de leur enchamement qu’a des syllogismes. Dans cette cinquieme edition, j’ai en meme temps combattu vivement les abstractions sur lesquelles on batit une economie politique ideale.9"

Much has been made in the literature of this so-called ‘recantation.’ It has been read as a rejection of the law of markets interpreted as a denial of short-term limits to production.91 It is, however, clear that Say had in mind secular growth capacity rather than the short-term issues. (This is implied by the reference to infinite progression as characteristic of theoreti¬ cal models alone.) In so far as concerns limits to growth Say had (perhaps inadvertently) already conceded much by his subscription to Smith’s the¬ ory of the declining profit rate in terms of competition of capitals. What he had in mind now, however, were constraints reflecting a secular in¬ crease in demand for leisure at the expense of commodities, with rising incomes - a quite general phenomenon apparently unrelated to govern¬ ment intervention and taxation.92 As for aggregate activity in the short

90

Melange et correspondance d’economie politique, published with Cours complet d'economie politique pratique (Brussels 1845), 645. Say’s reference to ‘abstract quantities’ alludes to the following passage: ‘On voudra savoir peut-etre quel serait le terme d’une production croissante et ou des produits, chaque jour plus considerables, s’echangeraient constamment les uns contre les autres ; car enfin ce n’est que dans les quantites abstraites qu’il y a des progressions infinies, et dans la pra¬ tique la nature des choses met des bornes a tous les exces. Or, c’est l’economie politique pratique que nous etudions ici.’ Horace Say, ed., Traite d'economie politique, 6th ed. (Paris 1841), 147.

91

Paul Lambert, ‘The Law of Markets Prior to J.B. Say and the Say-Malthus Debate,’ International Economic Papers, no 6 (1956), 20; Thomas Sowell, Classical Economics Reconsidered (Princeton 1974), 47f.

92

Traite (l841), 147-8. The same secular preoccupation is clear also in Cours complet d’economie politique pratique (1828-9), particularly the chapter ‘Des bornes de la production,’ 163f. In Say’s formulations the notion of a secular constraint imposed by the desire for leisure rather than additional commodities appears as a failure on the part of the producers of (marginal) output to cover costs - in which event such expan¬ sions are foregone. In the now famous (posthumously published) letter to Malthus of July 1827 Say protested: ‘Notre discussion sur les debouches commence a n’etre plus qu’une dispute de mots. Vous voulez que j’accorde le nom de pro¬ duits a des marchandises qui peuvent satisfaire un certain nombre de besoins et

THE LAW OF MARKETS 95

run, the fact is that Say had never maintained the strong (identity) ver¬ sion of the law of markets as the allowance for hoarding in conditions of deflationary price expectations makes clear. SUMMARY: THE MATTER OF ‘PRIORITY’

In his Commerce Defended James Mill referred to a comment in Say’s Traite on the folly of the Physiocratic emphasis on the necessity for consump¬ tion — ‘J’ai connu ... un jeune homme qui fesait voler par la fenetre les flacons de cristal a mesure qu’il les vidoit ; il faut, disait-il, encourager les manufactures.’93 But Mill’s sole formal attribution was to Smith regarding the ‘savings is spending’ theorem, while he made none regarding the ‘law of markets’ strictly defined. The law, we have seen, is in fact described as ‘paradoxical’ and difficult to understand, leaving readers with the impres¬ sion (perhaps unintentionally) that a truly original statement was at stake. Yet it must again be emphasized that the first edition of the Traite con¬ tains much of relevance for the law of markets quite apart from the mate¬ rials in the very brief chapter ‘Des Debouches,’ and that Mill in his 1805 review specifically quoted from the relevant chapters of Volume II. Tem¬ poral priority for the law of markets appears to be Say’s.94 Let us consider whether there are any substantive differences between the formulations. qui ont une certaine valeur, quoique cette valeur soit insuffisante pour rembourser la totalite de leurs frais de production. Mais le fond de ma doctrine sur la pro¬ duction etablit clairement qu’il n’y a de production complete qu’autant que tous les services necessaires pour cette oeuvre sont payes par la valeur du produit. Lorsqu’on depense six francs en travaux et en argent, et qu’on ne produit qu’une valeur de cinq francs, il est evident qu’il n’y a reellement eu de produit qu’une utilite valant cinq francs ; si elle a coute davantage a produire, il y a eu un deficit d’utilite et de valeur, et c’est a ce deficit que je refuse le nom de produit. Je crois done etre autorise a dire que tout ce qui est veritablement produit trouve a se placer ; que tout ce qui ne se place pas a ete une depense faite inconsiderement sans rien produire ; et ma doctrine des debouches demeure entiere’ (Melange et Correspondance, 649). This apparent defence of the law of markets has been the source of much merriment at the expense of Say who is understood as attempting to ward off challenge by a terminological sleight-of-hand. But this is clearly an invalid criti¬ cism. Say refers to secular constraints on expansion reflecting a desire for leisure.

93 94

Commodities whose costs are therefore not covered will simply not be produced and the law of markets remains intact. Commerce Defended, 76n Cf. Lambert, ‘The Law of Markets,’ 13; Schumpeter, History of Economic Analysis, 491n; Spengler, ‘The Physiocrats and Say’s Law of Markets,’ 191; and James Mill: Selected Economic Writings, ed. Donald Winch (Edinburgh and London 1966), 34. But see Jacob Hollander, in Hollander and T.E. Gregory, eds., Notes on Malthus' ‘Principles of Political Economy’ by David Ricardo (Baltimore 1928), lxxixf. Hollander represented Mill as the true ‘originator’ of the law on the (mistaken) grounds that there is very little on the law of markets in the first edition of the Traite.

96 THE ECONOMICS OF DAVID RICARDO

Mill, it has been said, introduced the condition that the composition of output must be adapted to the tastes of consumers and investors and in this vital respect his statement stands far and away above that of SayT Now we have in fact seen that as early as 1803 Say referred to the need for reallocation of resources to reflect the pattern of demand and the likeli¬ hood of rapid correction of any maldistribution in normal conditions.16 There is no substantive difference here, although it is true that Mill tended to give the condition a particularly strong emphasis. There is, however, a related issue wherein a very sharp distinction between the two formulations may indeed be discerned. For Mill ‘the production of commodities creates ... a market for the commodities pro¬ duced,’ while for Say ‘a product once created affords ... a market for other products ...’ The latter formulation allows for excess capacity which will be corrected only if and when other products are brought into existence: ‘beaucoup de gens ont moins achete, parce qu’ils ont moins gagne ; et ils ont moins gagne, parce qu’ils ont trouve des difficultes dans Vemploi de leurs moyens de production ...,97 On balance it appears correct to say, with Chipman, that ‘for the sharp and excessively doctrinaire version of the principle, priority must certainly go to Mill - doubtless a dubious dis¬ tinction.’ Secondly, Say sought to rationalize the prompt expenditure of sales receipts in terms of the avoidance of any loss of interest. In later editions there are allusions to the ‘perishability’ of the value of money. And of great importance, Say was prepared to specify exceptions to the rule - excep¬ tions which Adam Smith invited by his early formulations. These char¬ acteristics also lend support to the view that Say’s version was less doctrinaire and rigid than Mill’s. In Mill’s case we find only a brief reference to the proposition that ‘no man, if he can help it, will let any part of his property lie useless and run to waste,’ a formal recommenda95

Stigler, Essays in the History of Economics, 313. It is suggested further (317) that Mill had in mind a sophisticated version of the law of markets according to which an economy can operate with all commodities selling at remunerative prices no matter how much capital is accumulated, in contrast to Say’s ‘tautology’ that an offer of one commodity is always an implicit demand for another. To my mind the attribution to Mill is unjustified. (For a much weaker attribution, see Stigler, ‘The Scientific Uses of Scientific Biography,’ in J.M. Robson and M. Laine, eds., James and John Stuart Mill: Papers of the Centenary Conference (Toronto 1976), 64: ‘In Commerce Defended [Mill] proposed the proposition: total output, if properly composed of various goods, could always be sold. If he had added “at prices

96

equal to costs” this would have been an equilibrium proposition.’) As for Say, the various allowances for a breakage in the circular-flow process renders unjustified the designation ‘tautological’ for his position. Above, pp. 82-3

97

Above, p. 86 (my emphasis). The distinction in question is emphasized by John S. Chipman, ‘A Survey of the Theory of International Trade: Part 2, The NeoClassical Theory,’ Econometrica, XXXIII (Oct. 1965), 709n.

THE LAW OF MARKETS 97

tion to conceive of the system in barter terms which implies that money holdings per se yield no utility. I conclude by reiterating that Say’s primary concern during the course of his discussion ‘Des Debouches’ was with secular expansion.98 But at the same time he subscribed to Smith’s notion of a declining rate of return in consequence of ‘increasing competition of capitals’ without apparently recognizing that this phenomenon does not sit easily beside the notion that a paucity of expenditure imposes no secular constraints. With the passage of time he came to recognize further limits to expansion due to causes interpreted as manifestations of the propensity for ‘indo¬ lence.’

98

For much the same conclusion, see William J. Baumol, ‘Say’s (at least) Eight Laws, or What Say and James Mill May Really Have Meant,’ Economica, XL (May 1977), 145-61.

II / THE ECONOMICS OF DAVID RICARDO

THREE

The new theory of profits

A number of authoritative attempts have been made to recreate the pre¬ cise course of development of the Ricardian system. In the account by Jacob Hollander three broad stages are identified.1 The first extends from Ricardo’s ‘discovery’ of the Wealth of Nations in 17992 3 until the rent controversy of 1814-15, during which period Ricardo expounded Smith¬ ian theory. The second is characterized by a great concern with problems of distribution, centring upon the rate of profit and the inverse profitwage relationship. This middle phase commenced in 1814 and includes the appearance of the Essay on the Profits of Stock — which ‘marks the passing of Ricardo from an expositor of Adam Smith to the author of an independent system of economic relations” - and the Principles itself. 1

Jacob H. Hollander, David Ricardo: A Centenary Estimate (1910; New York 1968),

2

64f. Regarding the episode in question, see the ‘Memoir of Ricardo’ (probably by his brother Moses) in The Works and Correspondence of David Ricardo, ed. P. SrafTa (Cambridge 1951-73), X, 7: ‘It was not till Mr. Ricardo was somewhat advanced in life that he turned his attention to the subject of political economy. While on a visit to Bath ... he took up, and read, the work of Adam Smith. It pleased him; and it is probable that the subject from that time occupied, with the other objects of his curiosity, a share of his thoughts, though it was not till some years after that he appeared to fix upon it much of his attention.’ The precise date of the visit is given by J.R. McCulloch, ‘A Notice of the Life and Writings of the Author,’ The Works of David Ricardo, Esq.,M.P. 2nd ed. (London 1852), xvii. Of the early years Ricardo reminisced later to Hutches Trower (26 Jan. 1818) Works, VII, 246: ‘I remember well the pleasure I felt, when I first discovered that you, as well as myself, was a great admirer of the works of Adam Smith, and of the early

articles on Political Economy which had appeared in the Edinburgh Review. Meeting as we did every day, these afforded us often an agreeable subject for half an hour’s chat when business did not engage us.’ 3

Hollander, David Ricardo, 77

102 THE ECONOMICS OF DAVID RICARDO

The object of the first chapter of the Principles, it is emphasized, with much justice, was less to provide a statement of value theory for its own sake than to establish a firm foundation for a demonstration of the in¬ verse profit-wage relationship: ‘it was impossible to prove that a rise in wages was the exclusive cause of a fall in profits if it were true that a rise in wages necessarily occasioned a rise in prices ... Thus the validity of Ricardo’s theory of profits became, in a large measure, dependent upon his ability to prove that prices do not necessarily increase as wages rose.’ According to Jacob Hollander, the extent to which Ricardo had by 1816 already reached the conclusion that a rise in the price of corn, by way of its effect on the rate of wages, was not necessarily accompanied by a rise in general prices, ‘cannot be determined.’4 But even in the Principles we may discern remnants of the early Smithian phase in the chapter ‘On Value’ and elsewhere.5 The third, or post-Principles, phase entailed spirited controversy over the characteristic Ricardian doctrines. The story in the famous account by Piero Sraffa6 is much the same in its broad outlines. However, particular weight is placed upon a signifi¬ cant break discernible between the Essay on Profits and the Principles. According to this interpretation of the record, a fundamental principle of the Essay - indeed of the correspondence of 1814 as well - is the deter¬ mining role of profits in agriculture (the notion that ‘the profits of the farmer ... regulate the profits of all other trades’) based on the ‘rational foundation’ that in agriculture both input and output consist of a com¬ mon product. This assumption permitted the determination of the profit rate in a single sector independently of value relations, while the prin¬ ciple of a uniform rate of profit throughout the system is assured by adjustments in the exchange values of the products of other sectors rela¬ tive to corn. The principle in question ‘is not to be found in the Principles' where a general theory of value permitted Ricardo ‘to demonstrate the determination of the rate of profit in society as a whole instead of through the microcosm of one special branch of production.’ A parallel and intimately related development involves the link be¬ tween the corn price and general prices by way of the money wage. As in the Hollander account, it is observed that the received doctrine accord¬ ing to which a wage increase generates higher prices obscures the profitwage relationship, a fact which became clear to Ricardo as he progressed towards a more general theory of profits. Ricardo’s preoccupation in the Principles with the effects on value of a change in wages must be under4

Ibid., 83, 84

5

Ibid., 66n, 71-2. See also J.H. Hollander, ‘The Development of Ricardo’s Theory of Value,’ Quarterly Journal of Economics, XVIII (Aug. 1904), 455-91, where we

6

read of a ‘retreat’ under criticism from aspects of ‘Smithian’ theory of value presented in the first edition. Works, I, xxxi—iii

THE NEW THEORY OF PROFITS 103

stood in these terms: ‘if a rise or fall of wages by itself brought about a change in the magnitude of the social product, it would be hard to deter¬ mine accurately the effect on profits.’7 And while there are passages in the Essay ‘which foreshadow his full theory of value and already link it with the theory of profits,’ these should not be exaggerated; the ‘turning point’ in the transition between the two works was reached only at the end of 1815 when Ricardo set about a systematic investigation of the problem of value for the first time.8 We are concerned in this chapter with the period prior to publication of the Essay on Profits and more specifically 1809 to 1813. (The story is taken further in the next chapter.) The evidence relating to Ricardo’s early position will be reviewed in an attempt to isolate as precisely as possible the nature and timing of his transition from the Smithian theory of value and distribution. It is possible to show in fact that the first clear indications of a theory of profit along what were to become standard Ricardian lines are discernible early in 1813 with roots extending back to 1811. The importance of these dates is that they fall before the famous debates on agricultural protection preceding the legislation of 1815, a most relevant fact in any attempt to discern and evaluate the intellectual forces governing the breakaway.

ON ‘VALUE’ AND ‘PRICE’

Ricardo’s original interests lay within the domain of money and banking and only subsequently did problems of value and distribution take prece¬ dence. Nevertheless, the latter issues did arise at an early stage and it is clear that Ricardo adhered closely to Smithian principles. Before turning to this feature of the literature, a terminological complexity must be dealt with. The terms ‘value’ and ‘price’ appear in Ricardo’s earliest publications and extant letters. At this early stage, Ricardo understood by the value of a commodity nothing more than its rate of exchange with any other commodity: ‘You have no where defined the word value. It has a very different meaning from the word price and yet I think you have often used these words as synonymous ... when we speak of the value of bullion we mean ... to measure it by some other commodity, - corn, coffee, hard-

7 8

Ibid., xlviii Ibid., xxxiii-iv. Sraffa takes strong issue only with that part of the Hollander account which envisages a ‘retreat’ from the value theory presented in the first edition of the Principles [ibid., xxxvii). No essential changes, it is demonstrated, were made in the successive editions of 1819 and 1821 regarding the theory of value as such, although there were important developments as far as concerns the measure of value [ibid., xlf.).

104 THE ECONOMICS OF DAVID RICARDO

ware or any amongst thousands of commodities.’9 The price of a com¬ modity referred to its value in terms of money. Variations in the money price of a good might occur that entail no changes in its value in terms of other goods, as is clear from the following passage relating to bullion: ‘When the circulation consists wholly of paper, any increase in its quantity will raise the money price of bullion without lowering its value, in the same manner, and in the same propor¬ tion, as it will raise the prices of other commodities, and for the same reason will lower the foreign exchanges; but this will be only a nominal, not a real fall, and will not occasion the exportation of bullion, because the real value of bullion will not be diminished, as there will be no in¬ crease in the quantity in the market.’10 Conversely, a commodity might undergo no alteration in its money price yet its value could change.11 It is quite clear that Ricardo was from the very outset keenly aware of the notion of the relativity of value. It is also clear that as far as concerns the value of money itself changes might be expressed in terms of any commodity, and therefore in terms of all commodities, at least in so far as concerns disturbances emanating from changes in money supply condi¬ tions that affect commodities proportionately.12 The value of money itself, although formally defined in terms of commodities considered individually, can at least in principle be considered for many purposes in terms of general purchasing power. Ricardo himself obviously thought in these terms and expressed the desirability of possessing a money whose ‘value’ - in the sense of general purchasing power - is tolerably stable over time; on these grounds he justified the historical choice of the metals as monetary medium: ‘Strictly speaking, there can be no permanent measure of value. A measure of value should itself be invariable; but this is not the case with either gold or silver, they being subject to fluctuations as well as other commodities. Experience indeed taught us, that though the varia¬ tions in the value of gold or silver may be considerable, on a comparison of distant periods, yet for short spaces of time their value is tolerably fixed. It is this property, among their other excellencies, which fits them better than any other commodity for the uses of money.’13 When Ricardo turned seriously to matters of distribution the precise conditions required of a stable measure of value were found to be quite 9

Letter to James Mill, 26 Sept. 1811, Works, VI, 54-5, commenting on a Mill manuscript.

10

The High Price of Bullion (1810), ibid., Ill, 64n

11

Cf. ibid., 60, where Ricardo takes Henry Thornton to task for ‘not distinguishing between an increase in the value of gold, and an increase in its money price.’ See also letter to Horner, 5 Feb. 1810, ibid., VI, 5f.

12

At least as a first approximation. The ‘quantity theory’ will be examined in detail in Chapter 9.

13

Ibid., Ill, 65n. The statement is very close to that appearing in the Principles itself, ibid., l, 149.

THE NEW THEORY OF PROFITS 105

complex. Yet even at the early stage which now concerns us one of the conditions was clearly recognized, namely stability in the conditions of supply of the monetary medium. At the outset of The High Price of Bul¬ lion Ricardo clouded the issue by a broad assertion that ‘gold and silver, like other commodities, have an intrinsic value, which is not arbitrary, but is dependent on their scarcity, the quantity of labour bestowed in procuring them, and the value of the capital employed in the mines which produce them.”4 But immediately thereafter Smith is cited to the effect that ‘the most abundant mines of the precious metals would add little to the wealth of the world. A produce of which the value is princi¬ pally derived from its scarcity is necessarily degraded by its abundance.’ It is largely in terms of ‘short-run’ supply conditions rather than ‘longrun’ cost conditions that the argument runs. Moreover, Ricardo was con¬ scious of the difficulties created when relative prices are disturbed yet some conception of the general value of money is required.15 RICARDO AS SMITHIAN ECONOMIST: EARLY ALLUSIONS TO VALUE AND DISTRIBUTION

We turn now to substantive matters arising during the bullion debate which touch upon aspects of the theory of value and distribution. Ricardo appears as a full-fledged Smithian.16 In his second contribution in print, a letter to the Morning Chronicle of September 1809, Ricardo firmly denied any causal relationship between money supply and the interest rate (such as that alluded to by some champions of increased note issues), basing himself upon Smithian doc¬ trine: ‘It has been shewn incontrovertibly by that able Writer, Dr. Adam Smith, that the rate of interest for money is regulated by the rate of profits on that part of capital only which does not consist of circulating medium, and that those profits are not regulated but are wholly indepen¬ dent of the greater or lesser quantity of money which may be employed for the purposes of circulation; that the increase of circulating medium will increase the prices of all commodities, but will not lower the rate of interest.’1' The rate of interest, he observed a year later in a further letter 14 15 16

17

Ibid., ill, 52 For example, draft letter to Malthus, 17 July 1811, ibid., VI, 36n In his criticisms of Bank of England policy during the same period Ricardo believed himself to be following Smith’s monetary line of thought, with the sole exception of the so-called ‘real bills’ doctrine. This matter will be taken up in Chapter 8. 20 Sept. 1809, ibid..

Ill,

25-6. The reference is to the Wealth of Nations, Book

II,

chap. 4. (Ricardo’s first publication was a letter of Aug. 1809 to the Morning Chro¬ nicle.) Ricardo was rebutting observations contained in an earlier letter of the same month signed ‘A Friend to Bank-notes but no Bank Director.’ The writer was Hutches Trower (see Sraffa, ibid..

Ill,

22n).

106 THE ECONOMICS OF DAVID RICARDO

to the same newspaper, is ‘regulated solely by the competition of capital, not consisting of money’ as Smith had ‘undeniably demonstrated.’18 In informal notes on the Bullion Committee Report Ricardo maintained the same position,19 as also in the Reply to Bosanguet where he referred to ‘the able exposition of Dr. Smith ... that the rate of interest is governed wholly by the relation of the amount of capital with the means of employ¬ ing it.’20 But the best indication of Ricardo’s almost total adherence to the Wealth of Nations is The High Price of Bullion. In the following passage, for example, we find not only a denial of any relation between the money supply and the rate of interest but also we find the Smithian theory of profit rate determination in terms of ‘competition of capitals’ and the Smithian notion that a change in the profit rate can affect the general level of prices: To suppose that any increased issues of the Bank can have the effect of perma¬ nently lowering the rate of interest, and satisfying the demands of all borrowers, so that there will be none to apply for new loans, or that a productive gold or silver mine can have such an effect, is to attribute a power to the circulating medium which it can never possess. Banks would, if this were possible, become powerful engines indeed. By creating paper money, and lending it at three or two per cent, under the present market rate of interest, the Bank would reduce the profits on trade in the same proportion; and if they were sufficiently patriotic to lend their notes at an interest no higher than necessary to pay the expences of their establishment, profits would be still further reduced; no nation, but by similar means, could enter into competition with us, we should engross the trade of the world. To what absurdities would not such a theory lead us! Profits can only be lowered by a competition of capitals not consisting of circulating medium. As the increase of Bank-notes does not add to this species of capital, as it neither increases our exportable commodities, our machinery, or our raw ma¬ terials, it cannot add to our profits nor lower interest.21 18

18 Sept. 1810, ibid., 143. Ricardo was rebutting Sir John Sinclair, Observations on the Report of the Bullion Committee (London 1810). See also the following comment in a letter of 24 Sept., Works, III, 150, constitut¬ ing a reply to the report of a speech delivered at the General Court of the Bank of England: ‘in the 4th chapter of the 2d book of the Wealth of Nations, to which I, in my last letter referred, it is demonstrated that the rate of interest depends on the rate of profits, which again is totally independent of the nominal amount of the circulating medium.’

19

Works, III, 374-5. One Bank director had given as his test of ‘super abundance,’ ‘money being more plentiful in the market.’ On this Ricardo commented: ‘This opinion is built upon the idea that the interest of money rises or falls according to the abundance of money - If the Bank Directors could be convinced that this is an

20 21

erroneous principle we might expect to see them adopt a very different system.’ Ibid., 194n Ibid., 92. (The qualification ‘permanently’ in the opening sentence does not appear in the first two editions of the pamphlet.) A further instance of the same position is also found in Ricardo’s informal ‘Notes on the Bullion Report’ [ibid., 375).

THE NEW THEORY OF PROFITS 107

A further crucially significant indication of Ricardo’s almost total acceptance of Smithian principles appears in the informal notes on a Bentham manuscript (‘Sur les prix’).22 Here we find a statement to the effect that, in principle, a wage increase due to the taxation of wage goods will be reflected in a generally higher level of prices: ‘Commodities may rise from taxation tho’ they are not subject to any direct taxation them¬ selves. If a tax were laid on bread every commodity would rise, as there is no commodity to the production of which the labour of man is not necessary. The question arises immediately whether it was also envisaged that an increase in the effective money supply would be required to maintain the higher level of prices. This is the main issue in what follows. Ricardo’s famous Reply to Bosanquet, written at about the same time, is revealing from this perspective. It had been a central theme of Bosanquet in his defence of the Bank of England against the strictures of the Bul¬ lion Committee that increased taxation sufficed to account for higher general prices since 1793. This hypothesis Ricardo firmly rejected: ‘is it a self-evident proposition - is it, as Mr. Bosanquet lays it down, an axiom in political economy, that the effect of taxation is to raise the prices of commodities in the full amount of the taxes levied?’ The income tax and various other taxes not imposed directly on commodities had no obvious effect at all on prices. Only commodity taxes (which, it is implied, were relatively insignificant) would generate price increases - ‘to the full amount of the tax.’ Ricardo therefore concluded: ‘If this view of the effect of taxation be correct, it will follow that Mr. Bosanquet’s estimate, that 48 millions has been actually added to the prices of commodities in consequence of taxation since the year 1793, and that such addition will sufficiently account for the rise in the prices of commodities, without having recourse to the depreciation of the circulating medium as the cause, is a false theory, neither supported by reason nor probability.’24 And while Ricardo conceded that ‘in consequence of some of our taxes the prices of commodities will be increased,’ he denied that ‘more money 22

A translation by Etienne Dumont of ‘The True Alarm,’ a manuscript prepared by Bentham in 1801. See SrafFa, Works, III, 26If., and for a more complete English version, Jeremy Bentham’s Economic Writings, ed. W. Stark (London 1954), III,

23

24

61-216. Works, III, 270. Ricardo was commenting on Bentham’s rejection of the hypothe¬ sis that contemporary high prices might be the result of taxation even in the case of goods not themselves subject to taxes. Ibid., 240, 241, 242. Bosanquet had maintained, in Ricardo’s paraphrase, that ‘as the value of commodities has been raised 48 millions since 1793, and the circula¬ tion only increased 3 millions, such increase cannot be called excessive’ [ibid., 242). Ricardo here attached a note to the effect that the actual money supply in¬ crease exceeded £3 million. Country Bank circulation had to be added to Bank of England issues and allowance made for ‘the economy in the use of circulating medium’ — increased velocity.

108 THE ECONOMICS OF DAVID RICARDO

will be requisite to circulate them.’2

(The contemporary increase in

money supply, we are left to understand, cannot be justified as a mere concomitant, so to speak, of commodity taxation.) The foregoing position is maintained more generally and applied with respect to the effects on prices of a rise in money wages due to a tax imposed on corn. In this case too, it is asserted, an increase in the money supply would be unnecessary to maintain a higher price level: If the tax were laid upon bread, and, in consequence, the wages of labour were raised, the tax would eventually fall on all those who consumed the produce of the labour of man. It would make no real difference to these consumers if they had at once paid the amount of such tax into the exchequer, or if it had gone through the circuitous channels which it would then take. Nor would any additional sum be required. Government would be in the daily receipt of a portion of the taxes, whether it was paid to the exciseman or to the tax-gatherer, and their expences in the one case would be precisely the same as in the other. Whatever the government expended would cause a diminished expen¬ diture in the people to the same amount: the same amount of commodities would be circulated, and the same money would be adequate to their circulation/' The implication of this argument is that if a higher general price level is to result from an increase in wages - the latter increase itself due to some cause other than taxation — a higher volume of currency would be required; without an expansion of the money supply the higher level of prices could not be maintained. Did Ricardo formally spell out these implications at this early stage? It was a further theme of Bosanquet that general prices had also been influenced by the increased price of grain acting upon money wages — a direct application to contemporary events of the basic Smithian relation¬ ship linking grain prices, money wages, and general prices.27 Ricardo in 25

Ibid., 242-3. The argument is that government receipts from taxation are ‘taken from a fund which would otherwise have been expended on consumable commodities. In proportion as the taxes are great, must the expences of the people diminish.’

26

Ibid., 243. Ricardo made one important qualification to this positon. If taxes are paid from ‘capital’ there would follow a reduction in the real national income and, given in the first instance the money supply, a rise in general prices and (in a metallic system) an outflow of the precious metals. Thus circumstances might be envisaged where taxation calls for an actual fall in the money supply under incon¬ vertible conditions.

27

In consequence of the poor harvests of 1800 and 1801 ‘it became necessary to advance the wages of all descriptions of labour, and these, as well as the pay of the army and navy, were raised to the standard of the current price.’ The higher wage rate (which remained at the new level despite subsequent fluctuations of the corn price) ‘operated as a cause instead of being the effect of high [general] prices.’ Charles Bosanquet, Practical Observations on the Report of the Bullion Committee (London 1810), 93-4

THE NEW THEORY OF PROFITS 109 his Reply conceded that ‘the scarcity of corn and the expences which have attended its importation, must have produced some rise in the price of commodities.’28 It is probable that he had in mind the process whereby the corn price acts on general prices by way of money wages — Bosanquet certainly did — but it is not made clear whether a higher volume of cur¬ rency is required to maintain the higher price level in the case at hand.29 For further elucidation we must return to the informal notes on Bentham. The episode is of particular importance in the sequence of events culminating in Ricardo’s intellectual transition from basic Smithian prin¬ ciples. An introductory word is therefore in order regarding Bentham who was, to my knowledge, the first to criticize Smith for failing to take into

account the requirement for an increased volume of currency to maintain a higher general price level. In manuscript notes of 1801 Bentham took Smith to task for failing to deal with two questions relating to the monetary mechanism: ‘In which way and by what causes does cash receive an encrease?’ and ‘Why is the Bank of England the only channel, or almost the only channel, through which gold in bars passes to the Mint and enters into circulation.’30 In a subsequent passage, apparently part of the same manuscript (sometimes referred to as ‘Of the Balance of Trade’), the first criticism is applied to Smith’s analysis of contemporary price movements, according to which — at least on Bentham’s reading - increased general prices, over an extended period of time, were accounted for by a series of poor harvests, without allowance for the necessary increase in money supply. Speaking of his own time, [Smith] denies the facts of an encrease of prices in so far as it depends on an encrease of money. He does admit an encrease of prices, and even for the period of the ten or twelve years ending in 1775; but he attri¬ butes it to the bad seasons, and not to money. He prefers the assumption of ten or twelve bad seasons to any other: not considering that, though the dearth of corn may encrease the relative price of this commodity for a time, yet it cannot encrease the aggregate of prices for any considerable length of time; because the encrease in the aggregate of prices implies by definition an encrease in the aggregate of money, both quantity and [velocity of] circulation being taken into account.31

28 29

Works, III, 240 There is one passage which is relevant but not very helpful: ‘When we talk of a scarcity of corn, and a consequent increase of price, it is naturally concluded, because its value is doubled, that double the value of money will be necessary to circulate it, but this is by no means obvious or necessary’ {ibid., 244). But Ricardo here said nothing of the effect of the corn price increase upon general prices to which Bosanquet had alluded, and which Ricardo had conceded, so that the import of the passage for our question is unclear.

30

Bentham’s Economic Writings, III, 131n

31

Ibid., 22,7

110 THE ECONOMICS OF DAVID RICARDO

Bentham does not, however, attribute to Smith, in the present context, a process whereby an increase in the price of corn acts upon general prices by way of the money-wage rate, and Smith himself had no such sequence in mind in the relevant sections of the Wealth of Nations.'1 It is not certain that Ricardo saw the specific criticism of Smith.31 But Bentham frequently restated his position, without necessarily referring to the Wealth of Nations, that an increased volume of money (or higher velocity) is essential to maintain a higher price level, except in the case of short-term grain shortages and war - (‘des circonstances extraordinaires et temporaires'): ‘Ces deux cas exceptes, les prix ne peuvent s’elever qu’en raison d’une augmentation pecuniaire dans la masse du revenu national, c’est a dire, dans le total des revenus individuels: et cette augmentation ne peut avoir lieu que par Faddition d’une nouvelle quantite d’argent, ou par une plus grande rapidite dans la circu¬ lation.’14 We are now in a position to return to Ricardo. Ricardo went further than Bentham and objected to any allowance regarding general price increase (given the money supply) in cases of grain shortage: ‘If any rise in the price of commodities is caused in the way here supposed it must be by diminishing the amount of commodities, which will make the money which circulates them more relatively abundant. If the commodities re¬ mained the same and their price was increased, more money would be absolutely necessary to circulate them. But if it is the mass of prices of which the author speaks, he is mistaken because what [sic] one commo¬ dity rose in price another would fall.’35 The passage is somewhat unsatis¬ factory.3'’ However, the following note suggests that Ricardo was insisting upon an unchanged price level in final equilibrium alone, but conceded a general price increase as part of the adjustment mechanism in an open economy: ‘[Bentham’s] arguments are all founded on the supposition of the country to which they are applied being insulated from all others. If

32

In fact, Bentham’s entire reading is questionable since Smith was concerned to dispute the contention that there had occurred a general fall in the value of silver-a general price increase. (Cf. Wealth of Nations, 198, 216-17, 240, 309, regarding the period 1763—75.) Elsewhere in the section ‘Of the Balance of Trade’ (Economic Writings, 222) Bentham maintained that ‘in proportion as capital is more abundant, the rate of profit is less,’ arguing in terms of the Smithian notion of ‘competition of capitals.’ There is thus no concerted breakaway on his part.

33

The section ‘Of the Balance of Trade,’ although probably part of ‘The True Alarm,’ may not have been seen by Ricardo (see Stark, ibid., 27).

34

Works, III, 300. Cf. also ibid., 309-10, regarding temporary increases in general

35

prices due to bad seasons which are possible without monetary increase. Ibid., 300

36

For it would seem logical to suppose that in the case of a poor harvest the volume of transactions does decline.

THE NEW THEORY OF PROFITS 111

not it is evident that the rapidity of the circulation would cause an expor¬ tation of money, and would not therefore raise prices at home.’37 An increase in the money supply is thus essential for a (permanent) rise of general prices, except, Ricardo again asserted, where taxation is respon¬ sible for higher prices.38 Now, at least in the ‘sound state’ of the currency, an increase in the money supply occurs only in response to an initially reduced price level; no other means of raising the money supply is conceded.39 Indeed Ricardo rejected Bentham’s allusions to real output effects of monetary expansion in terms making this very clear: ‘money cannot call forth goods,’ he insisted, ‘but goods can call forth money.’40 Ricardo’s insistence upon an increase in the money supply to assure a perma¬ nently higher level of prices is inconsistent with subscription to the Smithian proposition that a money-wage increase or an increase in profits will be passed on to consumers. But there is little to suggest that at this stage Ricardo re¬ cognized these implications.41 To carry the story further we turn to a work of 1810 by Coutts Trotter which came to Ricardo’s attention.42 Ricardo’s reaction is most revealing. Trotter had denied43 the existence of a contemporary excess paper issue: ‘the currency of the country is in no degree depreciated by the use 37

Ibid., 300. See also Ricardo’s response, ibid., 311: ‘Is not the mass of prices the same after [corn] scarcity as before. May we not as before put the mass of commodi¬ ties of all sorts on one side of the line - and the amount of money multiplied by the rapidity of its circulation on the other. Is not this in all cases the regulator of prices?’ This too is presumably a statement relating to long-run equilibrium states allowing therefore for a temporary increase in the general level of prices.

38 39

Cf. ibid., 307, 328, 341 Ibid., 325: ‘no bank can add to the amount of the circulation!;] they can only force the metallic circulation out of the country and replace it by paper.’ Needless to say, an increase in the money supply by way of inflows induced by external disturbances must be considered. (Thus: ‘Money or the metal from which money is made could not be imported unless from the increased production of the mines, the value of that metal had generally fallen in the world which would force an increased use for it.’ Letter to James Mill dated 1 Jan. 1811, ibid., VI, 17; see also letter to Malthus, 18 June, ibid., 26.) But Ricardo is now dealing with internal sources of monetary expansion and consequential effects on the internal level of prices. It is also clear once again that Ricardo is concerned with long-run equilibrium states, for in the short-run net additions to the money supply via exogenous note issues are possible — it is of course precisely by way of the effect on general prices that metallic currency is forced out.

40 41

Ibid., 301 Although he appears to have been on the verge of so doing in the Reply to Bosan-

42

quet (above, p. 108). The Principles of Currency and Exchanges applied to the Report from the Select Committee of the House of Commons Appointed to Inquire into the High Price of Gold Bullion, 1st ed. (London 1810). There is a helpful biographical note on Trotter by the editor of David Ricardo, Minor Papers on the Currency Question (Baltimore 1932), 90. (Ricardo’s comments were written in December 1810, or thereabouts.)

43

Works, III, 388

112 THE ECONOMICS OF DAVID RICARDO

of paper.’ That the currency had lost some part of its value was con¬ ceded but the fact was ascribed to gold itself (throughout Europe) falling in value relative to commodities; to the burden of taxation; and to the increase in population. It is the last that interests us here. For Trotter gave a clear statement of diminishing returns, and attempted to relate the phenomenon to the level of general prices by way of the price of corn and the wage rate: In a country insulated as ours now is, by political as well as natural circumstances, every increase of population must make an increase in the demand for all the articles which land and industry produce. To raise the former, worse soils and more unfavourable situations must be taken into cultivation; and the produce therefore will be obtained, and must be sold, at an increased expense. To create the latter, men must be paid at a higher rate of wages, because in every state of society, and especially in one progressive, as that of England is, men must receive some¬ what above what is necessary for their support; and the expense of that support will be regulated principally by the cheapness or dearness of food.44

Trotter thus linked the Smithian relationship between the corn price and general prices to the principle of diminishing returns. Ricardo’s response is of the very first importance. It is that ‘every increase of population must arise from an increase of capital, and has a tendency to lower the prices of commodities and therefore the wages of labour, not to raise them.’45 The notion of diminishing returns, and the rising real costs of food production, would appear from this observation to have been totally foreign to Ricardo - despite an allusion to the phe¬ nomenon in the Notes on BenthamN Ricardo had his eye solely upon the depressing effects upon prices of Smith’s ‘increased competition’ between capitalists: ‘An increase of Capital never raises the prices of commo¬ dities ... Can there be an increase of population without an increase of Capital having preceded it?, yet ... we are told that an increase of popula¬ tion will occasion a rise in the price of commodities, and in the wages of labour ... A competition of Capitalists keeps down prices.’47 44

Ibid., 388-9

45

Ibid.

46

Cf. ibid., 287: ‘It appears to me that the possession of new land would add to our own sum of riches without additional labour, because the same labour employed on double the quantity of equally good land now in cultivation in England would produce a greater return. This opinion is founded on the decreasing power of the land to produce in proportion to the labour and capital employed on it.’

47

Ibid., 389-90. As far as concerns Trotter’s observations regarding the effects of taxation on general prices, Ricardo conceded that ‘taxation has some effect no doubt, but will not account for the rise in the price of gold.’ He agreed with Trotter that throughout Europe gold command over commodities had declined.

j

)

i [

THE NEW THEORY OF PROFITS 113

It is evident, then, that at least until the early months of 1811 Ricardo fell squarely in the Smithian camp. His attachment to the principles of the Wealth of Nations extends to the effect on the price level of changes in the price of corn by way of wage rate variation; the ‘adding-up’ cost theory of price; and the explanation of profit rate determination in terms of the ‘competition of capitals.’ At the same time, the building-blocks for a reconstruction were already at hand in Trotter’s explicit formulation of the prin¬ ciple of diminishing returns applied to explain rising corn prices and money wages, coupled with Bentham’s principle - which Ricardo accepted and applied more stringently - that any general price increase cannot be sustained without an increased volume of money. Ricardo’s unawareness of this potent mixture is clear not only from the fact that he rejected Trotter’s case based upon diminishing returns, but that he did so on the grounds of inconsistency between this argument and the Smithian notion of ‘competition of capi¬ tals,’ whereby capital accumulation was supposed to lower general prices, rather than on the ‘monetary’ grounds of the non-sustainability of higher general prices.

THE NEW THEORY OF PROFITS

A preoccupation with currency and the exchanges characterizes the ex¬ tant Ricardo correspondence until March 1813. The first indications of a specific concern with the theory of profits, and one which implies a breakaway from Smith (partial only at this stage) are contained in two letters to Malthus dated 10 and 17 August 1813. In the first of the two letters in question Ricardo objected to Malthus’s contention (made in correspondence and perhaps also in conversation) that contemporary extensions of foreign trade could be taken as evidence of a rising rate of profit: ‘On further reflection I am confirmed in the opinion which I gave with regard to the effect of opening new markets or extending the old. I most readily allow that since the war, not only the nominal but the real value of our exports and imports has increased, — but I do not see how this admission will favour the view which you take of this subject ... [Extension of trade] does not prove a general increase of profits nor any material growth of prosperity.’48 In the second letter Ricardo explicitly stated the position that attention should be directed at agricultural productivity to understand trends in the rate of profit: 48

Ibid., VI, 93. Malthus’s letter to which Ricardo’s of 10 August is a reply, and Malthus’s answer are both wanting; indeed we do not have any Malthus letters from March 1812 until June 1814. The two met frequently, however, during 1813 and the issue of profit rate determination was doubtless discussed. Letters by other correspondents to Ricardo between January 1812 and November 1813 are missing.

114 THE ECONOMICS OF DAVID RICARDO That we have experienced a great increase of wealth and prosperity since the commencement of the war, I am amongst the foremost to believe; but it is not certain that such increase must have been attended by increased profits, or rather an increased rate of profits, for that is the question between us. I have little doubt however that for a long period, during the interval you mention [1793-1813], there has been an increased rate of profits, but it has been accompa¬ nied with such decided improvements of agriculture both here and abroad, - for the French revolution was exceedingly favorable to the increased production of food, that it is perfectly reconcileable to my theory. My conclusion is that there has been a rapid increase of Capital which has been prevented from shewing itself in a low rate of interest by new facilities in the production of food.

Quite clearly, Ricardo presumed that but for improved agricultural tech¬ nology during the Revolutionary and Napoleonic periods the profit rate would have declined with accumulation. In this section we shall attempt to isolate the influences governing Ricardo’s abandonment of profit rate analysis in terms of ‘competition of capitals’ — to which Malthus evidently subscribed. The task is substan¬ tially eased by the fact that the extant letters from Ricardo to Malthus up until 24 March 1813 make no mention of profit rate determination. As it is most unlikely that what Ricardo called ‘my theory’ in August would have been under consideration without appearing in the correspondence, the transition from the Smithian conception, it seems safe to conclude, probably occurred at some time during the four-month period from April to July 1813.50 Each of the extracts given above is followed by a statement insisting that an increase in general prices occurs only in consequence of a rising money supply (or velocity), while only a falling level of prices can induce a monetary inflow. Thus immediately after the passage from the letter of 10 August Ricardo formalized the proposition in the following terms: ‘I am of opinion that the increased value of commodities is always the effect of an increase either in the quantity of the circulating medium or in its power, by the improvements in economy in its use, — and is never the cause. It is the diminished value, I mean nominal value, of commodities which is the great cause of the increased production of the mines, - but the increased nominal value of commodities can never call money into circulation. It is certainly an effect and not a cause.’ Similarly, immedi¬ ately following the passage from the second letter Ricardo asserted of commodities in general that it is ‘their cheapness which is the immediate cause of the introduction of additional money.’51

49 Ibid., 94-5 (my emphasis) 50 There is a total absence of letters between those of 24 March and 10 August. 51 Ibid., 93-4, 95

THE NEW THEORY OF PROFITS 115

Now although we cannot be positive about the matter it is most likely that the statements alluding to the profit rate and those relating to the monetary mechanism are connected rather than independent. If this is so, Ricardo appears to be objecting to a formulation by Malthus very similar to that which was to appear later in the latter’s Principles of 1820 namely that an increase in the value of aggregate output from given resources may be ‘occasioned by commerce’ and will be associated with a rise in profits of those engaged in the new or expanded trade which extends to the general rate of return.52 During the course of his later analysis, which is used in the interpreta¬ tion of the war period 1793—1814,53 Malthus addressed himself to the 52

This interpretation was first suggested in G.S.L. Tucker, ‘The Origin of Ricardo’s Theory of Profits.’ Economica, XXI (Nov. 1954), 323-4. For Malthus’s analysis, see the section in his Principles entitled ‘Of the Distribu¬ tion occasioned by Commerce, internal and external, considered as the Means of increasing the exchangeable Value of Produce’ (Works, II, 388f.). On the general increase in value Malthus observed: while ‘the quantity of productive industry maintained in a country is nearly proportioned to the quantity of capital em¬ ployed ... the value of the revenue will be greater or less, according to the market prices of the commodities produced. These market prices must obviously depend upon the interchange of goods; and consequently the value of the revenue, and the power and will to increase it, must depend upon that distribution of commodi¬ ties which best adapts them to the wants and tastes of the society’ (ibid., 393-4). An explicit statement regarding the effect on profits - implied by the foregoing appears a little later in the section: ‘what I wish specifically to state is, that the natural tendency of foreign trade, as of all sorts of exchanges by which a distribu¬ tion is effected better suited to the wants of society, is immediately to increase \he value of that part of the national revenue which consists of profits, without any proportionate diminution elsewhere ...’ (ibid., 418). Indeed Malthus asserted that ‘no country with a very confined market, internal as well as external, has ever been able to accumulate'a large capital, because such a market prevents the formation of those wants and tastes, and that desire to con¬ sume, which are absolutely necessary to keep up the market prices of commodities and prevent the fall of profits.’ Principles of Political Economy, 2nd ed. (1836; New York 1964), 388. The falling profit rate referred to would be the consequence of occasional failures of aggregate demand quite apart from the secular effects of dimi¬ nishing agricultural returns. This latter passage is not given in Ricardo’s Works which reproduces the first edition; but the first edition does, however, contain the passage, with ‘and to occasion an increasing demand for them, and for the capital which is to produce them’ in place of the last five words. Principles of Political Economy (London 1820), 448.

53

Works,

II,

416-17: ‘It can as little be doubted that in this country, from 1793 to

1814, the whole exchangeable value of the produce, estimated either in domestic and foreign labour, or in bullion, was gready augmented every year. In this in¬ crease of value, as well as riches, the extension of our foreign commerce has been considered, almost without a dissentient opinion, as a most powerful agent ...’ In an earlier chapter dealing specifically with the profit rate, where the experience of the war period is compared with that of 1727-57, we find no explicit reference to the effects of foreign commerce (ibid., 275f.) Doubtless this is an omission.

116 THE ECONOMICS OF DAVID RICARDO

problem that any general increase in the value of the national product required suitably increased means of finance. He was confident that monetary expansion would be forthcoming, even in the absence of ‘fresh importations of the precious metals,’ although there would in fact occur a monetary inflow in consequence of the increase in the value of the national product.54 It would appear to be precisely this body of doctrine, which attributes the rising value of national product since 1793 to the opening of new markets for British goods, with which Ricardo took issue in 1813, appa¬ rently on the grounds that the expansion of the means of finance required to assure a higher level of prices and profits, of which Malthus was so confident, would not in fact be forthcoming. It remains an open possibility that Malthus’s position actually derived from the great bul¬ lion controversy of 1810-11 itself.” Although in 1811 Malthus firmly rejected the defence by the Bank of England authorities based upon the ‘real bills’ doctrine,56 he nevertheless did recognize conditions wherein an increase in the money supply might occur which is itself not responsible for price increases and a deteriorating exchange rate; indeed there might be periods of improving exchange rate despite increased note issues and rising prices in contrast to Ricardo’s more extreme position.5 The ques-

54

Ibid., 405—6. The circumstances envisaged of an ‘extension of foreign trade’ were such that ‘a greater velocity is given to the circulation of the money actually in use,’ and ‘fresh paper may be issued without a fall in the rate of foreign ex¬ changes, or a rise in the price of bullion and of goods.’ But ‘in fact, a successful extension of foreign trade is exactly that state of things which most directly leads to the importation of bullion.’

55

Cf. Tucker, ‘The Origin of Ricardo’s Theory of Profits,’ 325-8

56

See his Edinburgh Review articles, ‘Depreciation of Paper Currency’ (Feb. 1811)

57

and ‘Pamphlets on the Bullion Question’ (Aug. 1811), both in Occasional Papers of T.R. Malthus, ed. Bernard Semmel (New York 1963), 90-1, 100-1, 114. See, for example, ‘Depreciation of Paper Currency,’ ibid., 91-2: ‘We do not think that these facts [raised by Bosanquet] are at all satisfactorily explicable upon the principles of Mr. Ricardo alone, who, in his Reply [to Bosanquet], still perseveres in the confined view which he had before taken of the causes that operate upon exchange, and in considering redundancy or deficiency of currency as the main¬ spring of all commercial movements. According to this view of the subject, it is certainly not easy to explain an improving exchange under an obviously increas¬ ing issue of notes; an event that not infrequently happens ... Nothing, however, is more easy of explanation, if we take into our consideration the effects produced upon the real exchange by the payments necessary to be made, for the supply of past or present wants; which effects, in such instances, will always be found oper¬ ating in a direction exactly opposite to the effects of redundancy of currency. If the Bank were paying in specie, the precise period when it could keep the greatest quantity of its notes in circulation, would be that in which the state of mercantile transactions was occasioning a current of payments in bullion into the country ...’

THE NEW THEORY OF PROFITS 117

tion of the general profit rate itself, however, is scarcely raised by the disputants in 1811.58 Ricardo s rejection of Malthus’s position implies the rejection of the standard Smithian view according to which ‘the acquisition of new territory, or new branches of trade, may sometimes raise the profits of stock ... even in a country ... fast advancing in the acquisition of riches,’ by way of the reduction in the pressure exerted by ‘competition of capi¬ tals.’59 Now we have seen that in early 1811 Ricardo was maintaining the Smithian position that the price level will vary with the general profit rate, although at the same time he also insisted (in a different context) that a monetary expansion was essential to assure a rise in general prices.b0 He was bound sooner or later formally to take issue with the Wealth of Nations. Malthus’s analysis of the period 1793-1813 in terms of Smithian principles may have merely served as catalyst in this intellectual process.61 It has also been surmised by G.S.L. Tucker that Vansittart’s ‘New Plan of Finance’ introduced in the Commons on 3 March 1813 may have played some part in the story, at least in stimulating Ricardo’s interest in the theory of profits and perhaps more specifically in one which did not conflict with the ‘law of markets.’ Vansittart’s argument presumed that the rapid redemption of the national debt would generate a glut of capi¬ tal seeking investment and a fall of profits and interest,62 a position which Ricardo formally rejected in his Funding System (1820) as conflicting with the law of markets. Ricardo refers to the plan, albeit very casually, in his letters to Malthus of 22 and 24 March 1813, and the debate did ulti¬ mately at least by June 1814 come round to the question of aggregate demand and supply. We are now in a position to attempt a reconstruction. It will be re¬ called that the principle of diminishing returns was known to Ricardo at least as early as 1810, although its relevance to profit rate determination 58

However, in ibid., 95f., Malthus developed the notion of forced savings according to which increased money supplies may generate an expansion of the real capital stock with consequential effects on the rate of return. He concluded his case (77): ‘we are bound to acknowledge that an increased issue of notes tends to increase that national capital, and by an almost though not strictly necessary consequence, to lower the rate of interest.’ But the doctrine is strictly qualified - at least as far as it relates to contemporary circumstances — in his second review article,

59

‘Pamphlets on the Bullion Question.’ ibid., 119-20. Above, p. 30. It may be pertinent that Ricardo promised to ‘look at the passage

60

you refer n_: to in Adam Smith,’ an obvious indication that Malthus had drawn upon the Wealth of Nations for support (Works, VI, 95). Above, pp. 106, 111

61 62

Tucker, ‘The Origin of Ricardo’s Theory of Profits,’ 328 Parliamentary Debates, XXIV, 1083-1104

118 THE ECONOMICS OF DAVID RICARDO

was not realized - indeed Ricardo was then largely unconcerned with the profit rate. It will also be remembered that in the same year Ricardo firmly rejected Trotter’s position that accumulation implies rising food prices (as ‘worse soils and more unfavourable situations must be taken into cultivation’) and accordingly rising money wages and general prices. Now a very attractive reconstruction of the intellectual process suggests itself on the basis of the evidence thus far outlined. Ricardo’s objection to Trotter at the time turned upon the Smithian principle of‘competition of capitals.’ But by 1813, when he himself had abandoned the principle on monetary grounds, the objection to Trotter had fallen away and Ricardo would have been left with the basic relationship linking diminishing re¬ turns to the money-wage rate (as Trotter had it) but with general prices held constant (on quantity theory grounds), the burden of the wage in¬ crease falling on profits. Trotter himself had not apparently concerned himself with profits but Ricardo may have observed the relevance once he came to deal with the matter and found Smithian theory unaccept¬ able. It can indeed be confidently asserted that the constituent elements enter¬ ing into Ricardo’s position were available from a very early date (from 1811) and could logically have been brought together in 1813 to form a new (though incompletely formulated) theory of profit in the manner just outlined. But that this simple picture represents the actual intellectual process at work is uncertain. In the first place, of course, we cannot be sure that Ricardo had Trotter’s formulation in mind more than two years after he origi¬ nally formulated his comments. Much more serious is the fact (which will emerge in the next chapter) that even in 1814 Ricardo still maintained a positive (if qualified) relationship between the corn price and general prices. In short, the relevance for his own approach to profits of the monetary argument used in 1813 to counter the principle of ‘competiton of capitals’ was apparently not self-evident. The extant correspondence is too scanty for us to say much more. Smithian principles had indeed been challenged on quantity theory grounds and agricultural productivity in¬ troduced as the key to the new theory of profit, but the full logic of the new case remained to be worked out.63 THE CORN LAW DEBATE

What, however, of the corn law debate as a stimulus for Ricardo’s new position? The Essay on Profits without doubt constitutes an ‘essay in per¬ suasion,’ an appeal for a substantial degree of freedom for the corn trade; Ricardo, along with Malthus, Torrens, and West, was swept up by the 63

See p. 123 below. Appendix F on the Ricardo Papers (Cambridge) has a further discussion of the relevant issues.

THE NEW THEORY OF PROFITS 119

great debate early in 1815. But our question now relates to the first half of 1813.64 The report of the Select Committee on the Corn Trade of the United Kingdom, which was ordered to be printed in May 1813, made a case against free trade turning upon the asserted facts of low and steady corn prices during periods of protection and high and unstable prices during periods of effectively free importation, the latter including the war years.6’ Despite the emphasis on recent heavy importation, the report nonetheless recognized, as far as concerns Great Britain, that ‘there had been a great increase of tillage during the last ten years,’ maintaining at the same time ‘that the land now in tillage is capable of being made much more productive by the extension of the improved system of cultivation, and that much land now in grass is fit to be converted into tillage.’66 (However, much of the evidence dealt with Ireland and at one point the report asserted that an increase in Irish production would lower the corn price in the United Kingdom and contribute to the conversion of English soils from corn to dairy and meat products, thereby implying that the whole object of the proposed protective legislation was not to raise corn supplies in Britain.67) Some of the foregoing themes were elaborated by Sir Henry Parnell in his presentation of the report to the House of Commons on 15 June 1813 (although less attention is paid to Ireland). The major motive behind the 64

It is unlikely that Ricardo’s own experiences were of much significance in the development of his ideas relating to diminishing returns. Ricardo moved into his Gloucestershire country home in 1814 while our concern is with the first half of 1813. (Ricardo, however, considered the move during 1813 before drawing up the deed of covenant in June 1814. He also considered various alternative properties.) Moreover, the letter of 17 August implies that Ricardo had his eye upon ‘decided improvements of agriculture’ and ‘new facilities in the production of food’ rather than rising real costs in discussing recent experience. These facts suggest that this line of investigation is not a fruitful one. In any event it is the conceptual link between food prices and the profit rate which is most conspicuous rather than empirical movements of food prices.

65

Cf. Parliamentary Papers, 1812—13 (184), III, 479: ‘This review of the Corn Laws shews, that so long as the system of restraining importation, and encouraging ex¬ portation, was persevered in, Great Britain not only supplied herself, but exported a considerable quantity of corn; and also that the prices were steady and moderate. That since that system was abandoned, and during the whole period of the con¬ tinuance of the system that was substituted in its place, of encouraging importa¬ tion and restraining exportation, that is, from 1765 to the present time, Great Britain has not only not supplied herself, but has imported vast quantities from foreign countries; and also that the price has been progressively advancing from an average of 33s.3d. the quarter of wheat for 68 years, under the old system, to an average of 88s.lid. for the last 9 years under the new one.’ (7)

66 67

Ibid., 3 Ibid., 4. For a discussion of the inception of the committee, see William Smart, Economic Annals of the Nineteenth Century (London 1910), I, 372-3.

120 THE ECONOMICS OF DAVID RICARDO

recommendations, he contended, was to avoid ‘the danger of continuing to depend upon our enemies for a sufficient supply of food’ and ‘the im¬ policy of sending our money to improve other countries, when we have so much of our own lands that stand in need of the same kind of improve¬ ment.’68 He emphatically denied that they were designed ‘to increase the profits of any particular set of dealers either of farmers or of landlords.’69 Recent corn price increases were blamed in ‘very considerable part’ on the depreciation of money but also, in ‘no small part,’ on corn imports: ‘no greater error can be fallen into, than that of supposing the prices of corn are kept down by foreign importation.’ The long-run effect was to ‘diminish the profit of the British farmer’ by reducing his capital and to reduce his willingness to invest.70 Although the argument — which em¬ phasizes the machinations of corn import merchants, price variability in an open system, and the dangers of foreign dependence — suggests that Parnell may have had before him Anderson’s Calm Investigation ... in pre¬ paring the speech, it is upon Smith’s authority, surprising as it may at first sight appear, that he rests his case.71 68

Parliamentary Debates, XXVI, 645

69

The landed interests were, he observed, very prosperous and ‘the Committee, so far from adopting those views, which have usually influenced the leading advo¬ cates of the landed interest, of high prices for agricultural produce, have proposed to abolish the system of giving bounties on exportation of corn, which has at all times been considered by them as of essential importance to farming profits’ (644). Horner [ibid., 669) observed that this proposal was a political move to gain support for increased protection.

70

Ibid., 645-7. It was conceded that in the short run the prices of corn are kept down by foreign importation but with a cut-back in domestic agricultural invest¬ ment merchant-importers let the home deficiency run up prices very high; only in the face of increased competition by new dealers will they permit a trickle to reach the market fearing large price reductions. Parnell’s speech was not always consistent, or fully in accord with the report. For at one stage he emphasized the effect of the Continental System during the period 1809-13 in reducing imports but observed at the same time that ‘to these restraints are to be attributed the high and steady prices which corn has brought’ [ibid., 652). The report itself emphasized recent heavy imports, and, as we have seen, Parnell maintained that it was easy importation that kept prices high.

71

Ibid., 649-51. Parnell insisted that Smith’s case for free trade was conditional upon universal freedom: ‘From this reasoning, and this is the only reasoning he makes use of on the subject, it is plain that his opinion is a conditional opinion, and founded on the assumption that the policy of Europe ought to be altogether different from what it really is. The fair inference therefore to be drawn from his argument is, that he would not have advised a free trade as the best suited to the actual state of things.’ Secondly, Parnell maintained that Smith’s case for free trade on grounds of allocative efficiency was not intended to apply to corn since agricultural investments are accorded particular merit. Reference was also made to Smith’s statement that ‘the nature of things has stamped on corn a peculiar value,’ from which it was deduced that corn is absolutely necessary to a state which must not be placed at the mercy of others. Parnell also alluded to the great

THE NEW THEORY OF PROFITS 121

Parnell placed considerable emphasis on the prospects for low corn prices under a protected regime in consequence of increasing returns,72 and rejected the argument by free traders that the corn laws, by raising the corn price and money wage, would ‘deprive this country of its manu¬ facturing superiority.’ He also observed that price fluctuations would be reduced by substantial reliance on home supplies, thus avoiding sudden reductions in real wages resulting hitherto from the fact that ‘in those years in which [the corn price] is very high, the wages of labour do not rise proportionally „.’73 It is now known that Malthus considered the report in June 1813 and discussed some of the issues with Horner.74 In contrast to Horner, who as we know maintained the (Smithian) position that a rise in the price of corn entails a general price increase leaving the relative price of corn unaffected, Malthus accepted the view that import restrictions would encourage the expansion of agricultural output.75 He opposed the pro¬ posals, however, on efficiency grounds in a dynamic context which entailed the principle of diminishing returns: If there were no corn laws whatever I am decidedly of opinion that our general wealth would increase more rapidly, but I think that we should not so nearly grow our own consumption as at present. If Europe were like one large nation with regard to importation and exportation, its cultivation would proceed like the cultivation of a large nation; and it could never answer to bring indifferent land under tillage in one district, till the good lands in other districts, from which there was an easy communication, were first cultivated. England in reference to Europe may be considered as a large manufacturing district, with the natural tendency of such a district to import a considerable part

variety of contemporary regulations diverting investment from agriculture imply¬ ing the need for countervailing intervention in favour of agriculture. Parnell again appealed to Smith’s authority during the resumed debate of 5 May

72

1814 (Parliamentary Debates, XXVII, 71 Of.). Here Parnell referred to Smith’s praise of the Navigation Acts to demonstrate his allowance of exceptions to the free trade rule where national security is involved; his case for an equivalent protective duty where a commodity is subject to internal taxation; and his recognition of the dan¬ ger of the sudden introduction of free imports after a lengthy period of protection. ‘If they succeed in this they will secure a greater production of grain, at the same time with diminished expences in producing it, and at reduced prices to the con¬ sumer. For if the agricultural capital is considerably increased, its effects on the quantity produced, and the expence of production, and also in lowering prices, will be just the same as when employed in manufactures’ [ibid., XXVI, 645).

73 74

Ibid., 657, 658 Cf. letter of Malthus to Horner dated 16 June 1813, in Tucker, ‘The Origin of

75

Ricardo’s Theory of Profits,’ 331—3. Ibid., 332: ‘I cannot, without violating what appear to me to be some of the most fundamental principles of Political Economy, believe, that an increase in the rela¬ tive demand for home corn will not produce an increase in the relative price.’

122 THE ECONOMICS OF DAVID RICARDO

of its com, though with a power of growing it, if forced. In using this force there is reason to believe that we shall check our manufactures more than we shall increase our agriculture, and this it appears to me forms the true argument against the system; an argument surely of great weight although we allow that an independent supply is practical by such means.76

Although we cannot be sure that Ricardo was familiar with the report or with Parnell’s presentation, it is by no means unlikely; and the issues considered, including the nature of the agricultural production function and the relationship between corn prices and wages, may well have been debated with Malthus. Nevertheless, neither the parliamentary materials nor the discussions between Malthus and Horner touch upon the question of the effect upon the general rate of profits of variations in agricultural productivity, and it is precisely this relationship which requires explanation. Any stimulus provided by the corn law debate for Ricardo’s new theory is not a self-evident one.1'

76

Ibid. Furthermore, prices were likely to be unstable in a closed economy —‘a little excess of supply not being relieved by exportations, on account of the general high prices of corn at home, I doubt if prices would be steady.’ The same position regarding the greater steadiness of price under free trade appeared also in the Grounds of an Opinion ... in the following year (see Pamphlets of T.R. Malthus, 144) but Malthus there insisted that trade must be genuinely free and not subject to interference by foreign legislation. In his parliamentary intervention during the debate (l5 June 1813) on the report (Parliamentary Debates, XXVI, 668), Horner insisted that the evidence of the report itself demonstrated that freedom of trade - which existed in effect in recent years (reference is made to large imports into Great Britain despite the Continen¬ tal System and the formal existence on the books of corn laws) — had resulted in steady prices and a great extension of tillage. In his Memoirs and Correspondence of Francis Homer, ed. Leonard Horner (London 1853), II, 233 Horner referred to steadier prices under free trade but conceded that the issue was still a matter of ‘theory’ with not clear-cut picture emerging from the evidence.

77

For a similar view see Charles F. Peake, ‘Henry Thornton and the Development of Ricardo’s Economic Thought,’ History of Political Economy, X (Summer 1978),

193-212. New committees reported on the corn trade in July 1814. Sir Edward West in his Application of Capital to Land (1815), 25, refers to witnesses who ‘are unani¬ mous in their opinion that where lands are in a high state of cultivation the rent bears a less ratio to the gross produce than where they are less expensively tilled.’ (His citations are from both the Commons and the Lords Reports of July 1814.) Ricardo refers in correspondence to the Lords Report but in general terms only, and rather unenthusiastically (cf. letter to Malthus, 30 Aug. 1814, Works, VI, 130): ‘Have you read the report of the Lords Committee on the corn question? It dis¬ closes some important facts, but how ignorant the persons giving evidence appear to be of the subject as a matter of science.’ Malthus replied {ibid., 132): ‘I have been reading the Lord’s Report on the Corn Laws. It contains as you observe some very curious information. The evidence is a little suspicious, although it is a good deal such as I expected from Theory.’

FOUR

The Essay on Profits and Ricardo’s defence

The general theme outlined at the beginning of Chapter 3 regarding the Essay on the Profits of Stock (1815) will be continued here. I shall be mainly concerned with the view that Ricardo in his Essay accorded agri¬ cultural profits the determining role on the basis of the assumption that only in agriculture does the same commodity constitute both input and output, and with the further notion that the Essay and the Principles constitute two substantially different systems.' The first task, however, will be to consider the correspondence of 1814 when Ricardo was engaged in composing the Essay. This correspon¬ dence has more to say on value theory in relation to the problem of profit rate determination than is implied by the standard accounts, a fact that colours the interpretation of the Essay itself. The further development of the theory of profits during 1814 took into account the effect of corn price increases upon the wage rate, manufacturing prices tending to rise in consequence of higher wages but in lesser proportion. Thus Ricardo had by no means fully formulated his rejection of the Smithian relation¬ ship between the corn price and general prices. This fact is somewhat surprising, in so far as he might have relied on the principle that some explanation must be given for the monetary increase required to main¬ tain a higher overall level of prices - a principle already used in his ob¬ jections to Malthus of August 1813 and formulated much earlier by Bentham against Smith himself. But Ricardo’s attention was now upon the need for a real cost theory of money value, and accordingly reliance upon a form of quantity theory may not have been as attractive or as self-evident an expedient in 1814 as it had been a year or so earlier.

1

In this chapter I draw heavily upon my ‘Ricardo’s Analysis of the Profit Rate, 1813-15,’ Economica, XL (Aug. 1973), 260-82; and ‘Ricardo and the Corn Profit Model: Reply to Eatwell,’ ibid., XLII (May 1975), 188-202.

124 THE ECONOMICS OF DAVID RICARDO

THE THEORY OF PROFITS, 1814

It would appear that early in the new year Ricardo was engaged upon a preliminary draft of the Essay on Profits.2 In correspondence, he defined with particular care the conflict between himself and Malthus on the determination of the profit rate. All influences apart from the producti¬ vity of agricultural resources were again excluded, and the key role of the principle of diminishing returns in conditions of constant agricultural technology was carefully defined. What must be noted above all is the formal proposition, which has attracted so much attention, that ‘it is the profits of the farmer which regulate the profits of all other trades’: I contend that the arena for the employment of new Capital cannot increase in any country in the same or greater proportion than the Capital itself, - unless Capital be withdrawn from the land — unless there be improvements in hus¬ bandry, - or new facilities be offered for the introduction of food from foreign countries; - that in short it is the profits of the farmer which regulate the profits of all other trades, - and as the profits of the fanner must necessarily decrease with every aug¬ mentation of Capital employed on the land, provided no improvements be at the same time made in husbandry, all other profits must diminish and therefore the rate of interest must fall,3

Malthus’s position, implying a mutual relationship between sectors, is then given by contrast: To this proposition Mr. Malthus does not agree. He thinks that the arena for the employment of Capital may increase, and consequently profits and interest may rise, altho’ there should be no new facilities either by importation, or improved tillage, for the production of food; - that the profits of the farmer no more regulate the profits of other trades, than the profits of other trades regulate the profits of the farmer, and consequently if new markets are discovered, in which we can obtain a greater quantity of foreign commodities in exchange for our commodities, than before the discovery of such markets, profits will increase and interest will rise ... Nothing, I say, can increase the profits permanently on trade, with the same or an increased Capital, but a really cheaper mode of obtaining food. A cheaper mode of obtaining food will undoubtedly increase profits says Mr. Malthus but there are many other circumstances which may also increase profits with an increase of Capital. The discovery of a new market where there will be a great demand for our manufactures is one.4 2

See letter from Hutches Trower to Ricardo, 2 March 1814, The Works and Conespondence of David Ricardo, ed. P. Sraffa (Cambridge 1951-73), VI, 102, referring to ‘your very interesting papers on the profits of Capital.’

3

Letter to Trower, 8 March 1814, ibid., 103-4 (my emphasis)

4

Ibid., 104-5 (my emphasis). The reference to the ‘same or an increased Capital’ doubtless should be understood as referring to agricultural investment.

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 125

In a letter to Malthus himself in June 1814 Ricardo wrote that ‘the rate of profits and of interest must depend on the proportion of produc¬ tion to the consumption necessary to such production.’5 6 It is this particu¬ lar statement which, according to Piero Sraffa, implies a model yielding the determining role of agricultural profits, by assuming that agricultural capital and output both consist of the same physical commodity so that total profits and the rate of profit on capital can be determined in physi¬ cal terms without reference to valuation. Since all other sectors utilize corn as input only, it is the exchangeable value of their products which must be adjusted to yield the same profit rate as in agriculture.5 Ricardo, however, himself stated in this letter what he had in mind, and his explanation does not entail the preceding argument. Whatever the surface manifestation, the ultimate determinant of the general rate of profit was, in his view, the level of money wages, governed in turn by food prices, so that the secular behaviour of the profit rate could be explained by inverse movements of money wages. The ‘proportion of production to the consumption’ referred to above, he continued, ‘essen¬ tially depends upon the cheapness of provisions, which is after all, whatever intervals we may be willing to allow, the great regulator of the wages of labour. ’7 (Logically, the effect of import restrictions upon the profit rate would depend upon whether or not the commodities involved entered into the wage basket.) It must be carefully noted that the argument is stated in objection to Malthus’s view that the effects of trade restriction would be a reduction in aggregate capital and a consequent increase in the rate of profits.8 9 This is not the occasion to enter into a detailed account of the Malthusian theory of capital accumulation and of ‘effectual demand’ which envi¬ saged a potential divergence between aggregate demand and supply, but Ricardo’s treatment of the rate of profit cannot be fully appreciated un¬ less the position of his opponent regarding these issues is kept in mind. Thus Ricardo insisted in his letter of 26 June upon the identity of aggre¬ gate demand and supply: ‘Demand has no other limits but the want of power of paying for the commodities demanded. Every thing which tends to diminish production tends to diminish this power.’ And several weeks later Ricardo came to the defence of James Mill’s ‘law of markets’ against Malthus’s strictures.'1 Ricardo clearly believed that the success of his own theory of profits implied the corresponding failure of the entire 5 6

Letter dated 26 June 1814, ibid., 108 Ibid., I, xxxi

7 8

Ibid., VI, 108 (my emphasis) The relevant letter of Malthus, to which Ricardo’s of 26 June was written in

9

reply, is wanting. But Malthus subsequently restated his position regarding the reduction in capital and the elevating effect on the rate of profits in letters dated 6 July, ibid., VI, 110-11, and 5 Aug., ibid., 116-17. Ibid., 108; 16 Sept. 1814, ibid., 133-5

126 THE ECONOMICS OF DAVID RICARDO

Malthusian theory of effective demand, wherein the profit rate would be influenced by capital accumulation by way of a relative variation in aggregate demand. While Malthus presumed that restriction of corn imports would have the effect of reducing aggregate capital, Ricardo saw no such necessary connection; on the contrary, the effect of restriction would be much the same as that of capital accumulation since extensions to increasingly infe¬ rior land would be required in both cases."1 But Ricardo was willing to concede at this stage of the correspondence a decline in the level of acti¬ vity due to restriction - although not in aggregate capital - both supply and demand falling proportionately. The reason offered is worth considera¬ tion since he was to alter his position subsequently in a fundamental sense. The rise in the price of corn upon restriction of importation would tend to reduce the demand for manufactured goods in the sense both of a shift of the demand curve and a movement along the curve: ‘The rise of the price or rather the value of corn ... must necessarily diminish the demand for other things even if the prices of those commodities did not rise with the price of corn, which they would (tho’ slowly) certainly do. With the same Capital there would be less production, and less de¬ mand.’" In his next letter to Malthus, on 25 July, Ricardo put even greater emphasis upon reduced demand for manufactured goods due to the rise in their cost prices reflecting (in an unspecified way) the higher price of corn: ‘You say that “the proportion of production to the con¬ sumption necessary to such production, seems to be determined by the quantity of accumulated capital compared with the demand for the pro¬ ducts of capital, and not by the mere difficulty and expence of procuring corn.” It appears to me that the difficulty and expence of procuring corn will necessarily regulate the demand for the products of capital, for the demand must essentially depend on the price at which they can be afforded, and the prices of all commodities must increase if the price of corn be increased.’12 There is a possibility that Ricardo is here referring not to the increased prices of manufactured goods due to higher money wages - in turn re¬ sulting from higher corn prices - but rather to the use of raw materials produced at higher cost. The specific references to the price of corn sug¬ gest, however, that he in fact had in mind the effect of rising money wages on general prices. Let us take stock of Ricardo’s argument. The primary proposition is that the general profit rate tends to fall with restriction of corn imports 10

25 July 1814, ibid., 113

11

26 June 1814, ibid., 108. By ‘value’ of corn Ricardo may mean either its real difficulty of production or its relative exchange rate against all other commodities, or both.

12

25 July 1814, ibid., 114 (my emphasis)

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 127

because of the effect of high corn prices upon money wages. At the same time Ricardo s attempt to deal with Malthus’s contentions led him to adopt the view that the prices of manufactured products would also rise, although, as we shall see shortly, in lesser proportion than the wage increase.1 At this stage, Ricardo had not yet fully formulated his objec¬ tion to Smith s analysis of the relationship between wages and prices. § There is a second item of evidence offered in support of the ‘corn model’ as the fundamental theoretical construct utilized by Ricardo. In a further letter to Ricardo, Malthus objected: ‘In no case of production, is the produce exactly of the same nature as the capital advanced. Conse¬ quently we can never properly refer to a material rate of produce, inde¬ pendent of demand, and of the abundance or scarcity of capital.’14 This formulation, it is said, suggests that Ricardo must have stated the con¬ trary argument either in certain ‘lost “papers on the profits of Capital’” or in conversation since we find nothing in any of his extant letters and papers.15 But Ricardo’s argument is perhaps extant; it may well be contained in the letter of 25 July, which we have already considered, upon which Malthus was actually commenting.16 For after explaining the expected 13 14

That the prices of manufactures rise in lesser proportion than wages is made explicit in a letter of 11 August (see below, p. 129). 5 Aug. 1814, ibid., 117—18. Malthus concluded: ‘The more I reflect on the sub¬ ject, the more firmly I feel convinced, that it is the state of capital, or the general profits of stock and interest of money, which determines the particular profit upon the land; and that it is not the particular profits or rate of produce upon the land which determines the general profits of stock and the interest of money.’ See also the letter dated 9 Oct. 1814 (ibid., 140-1) wherein Malthus conceded that the cost of food affects the profit rate in a limiting sense only, and attributed to Ricardo an analysis which emphasizes physical corn output relative to ‘expences’: ‘It appears to me that... in the interval between the two extremes [of high and low profits due to good and poor land resources] considerable variations may take place; and that practically no country was ever in such a state as not to admit of increase of profits on the land, for a period of some duration, from the advanced price of raw produce. The Profits of stock, or the means of employing capital advantageously may be said to be accurately equal to the price of produce, minus the expence of production. And consequently whenever the price of pro¬ duce keeps ahead of the price of production the profits of stock must rise ... It is not the quantity of produce compared with the expence of production that deter¬ mines profits, (which I think is your proposition) but the exchangeable value or

15

money price of that produce, compared with the money expence of production ...’ Sraffa, Works, I, xxxi—ii

16

It is also possible that Malthus had in mind Ricardo’s letter of 26 June (men¬ tioned above) which referred to ‘the proportion of production to the consumption necessary to such production.’ This is, however, less likely since Malthus had already commented on the phrase in his reply of 6 July; Malthus did not there object to the phrase as such, although he took issue with Ricardo’s position re¬ garding the determination of ‘the proportion of production to consumption ...’

128 THE ECONOMICS OF DAVID RICARDO

reduced demand for manufactures as a consequence of rising corn prices, Ricardo restated his own position on the determination of the profit rate in terms of a corn surplus relative to a corn capital: The capitalists ‘who may find it necessary to employ a hundred days labour instead of fifty in order to produce a certain quantity of corn’ cannot retain the same share for himself unless the labourers who are employed for a hundred days will be satisfied with the same quantity of corn for their subsistence that the labourers employed for fifty had before. If you suppose that the price of corn doubled, the capital to be employed estimated in money will probably be also nearly doubled, - or at any rate will be greatly augmented and if his monied income is to arise from the sale of the corn which remains to him after defraying the charges of production how is it possible to conceive that the rate of his profits will not be diminished?17

The passage requires close consideration. It is of the very first impor¬ tance to notice the implication that while money wages per capita rise with the doubled price of corn they do not rise proportionately so that the per capita corn wage declines. Now Malthus, in his letter to which Ricardo was responding, had emphasized a reduction in the corn-wage rate in an attempt to demonstrate that there would not necessarily result a decline in profits upon resort to inferior land.18 The point upon which Ricardo insisted in his reply is that although the average corn wage will decline the rate of return on capital must none the less also fall. We may add at this stage that the same proposition is reiterated at the end of the year so that it cannot be maintained that we are dealing with a casual remark which Ricardo would not have cared to stand by: ‘A diminution of the proportion of produce, in consequence of the accumulation of capi¬ tal, does not fall wholly on the owner of stock, but is shared with him by the labourers. The whole amount of the wages paid will be greater, but the portion paid to each man, will in all probability, be somewhat diminished.’19 (We shall see later in this chapter that the same conception reappears in Ricardo’s defence of the corn calculation in the Essay on Profits.) The notion of a fixed com wage per head was not part of the Ricardian scheme as the ‘corn profit’ interpretation has it; a reduction in the ratio of corn profits to corn capital was the predicted pattern despite a fall in average corn wages.'20

17

Works, VI, 114-15 (my emphasis). The quotation at the outset is from Malthus’s letter of 6 July, ibid.. 111.

18

‘The effects of a great difficulty in procuring corn would in my opinion be, a dimi¬ nution of capital, a diminution of produce, and a diminution in the real wages of

19

labour, or their price in corn; but not a diminution of profits’ (6 July, ibid., 111). 18 Dec. 1814, ibid., 162-3

20

Ricardo was willing to make the concession, however, that his difference with Malthus regarding corn restriction was fundamentally ‘about the permanence of

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 129

We turn now to the matter of the general profit rate. We have already seen that in Ricardo s earlier letter to Malthus of 26 June the decline of the general profit rate was attributed to upward pressure on money wages due to the rising costs of wage goods. Attention can now be drawn to a further letter to Malthus in August, wherein Ricardo clarified signifi¬ cantly the operation of this mechanism. The manufacturer must pay increased money wages, while the price of his product does not rise pro¬ portionately, in contrast to the money value of the capital stock: ‘It is true that the Woollen or Cotton manufacturer will not be able to work up the same quantity of goods with the same capital if he is obliged to pay more for the labour which he employs, but his profits will depend on the price at which goods when manufactured will sell. [But]... the rise of his goods will not be in the same proportion as the rise of labour, and consequently his percentage of profit will be diminished if he values his capital, which he must do, in money at the increased value to which all goods would rise in consequence of the rise of the wages of labour.’21 In the light of a consis¬ tent emphasis upon the role of the money-wage rate in determining the general rate of profit — both immediately before and immediately after the letter containing the corn calculation — it appears unjustified to interpret Ricardo’s intentions regarding the relationship between the agricultural sector and the general profit rate along the lines suggested by Sraffa. In any event, the corn calculation itself implies a declining average corn wage casting further doubt upon the validity of the corn-profit interpretation. § A further letter of October 1814 brings together several strands of Ricardo’s argument in terms very similar to those used in the Principles the effects’ (letter of 30 Aug., ibid., 128). For his emphasis upon agricultural pro¬ ductivity implied operation of the population mechanism, while during an initial period average real wages might decline to such an extent that profits rise: ‘Profits are sometimes high when corn is scarce and dear, but this arises from the stimu¬ lus which the high price gives to industry. If the population could immediately accommodate itself to the scanty supply no such effects would follow; and in fact they only continue till time has gradually equalized them’ {ibid., 129). Cf. refer¬ ences to real (commodity) wage variation as a cause of variations in profits (23 Oct., ibid., 147). We must keep this in mind in interpreting the subsequent com¬ ment of Ricardo that ‘the state of the cultivation of the land is almost the only great permanent cause ... The state of production from the land compared with the means necessary to make it produce operates on all [trades], and is alone last¬ ing in its effects’ (16 Sept., ibid., 133). See also letter dated 23 Oct., ibid., 145-6, in which Ricardo insisted that Malthus had falsely ascribed to him the view that the state of agricultural productivity was the only determinant of the general pro¬ fit rate. Temporary variations were possible for other reasons, but ‘even during these temporary variations, the great cause namely the accumulation of capital may be paving the way for permanently diminished profits.’ 21

11 Aug., ibid., 119—20 (my emphasis). For Malthus’s position, according to which a rise in money costs could actually be accompanied by an increased profit rate, see ibid., 110-11.

130 THE ECONOMICS OF DAVID RICARDO

itself; it also defines Ricardo’s implicit assumptions and isolates the re¬ maining difficulties, particularly those relating to ‘value.’ In the letter in question Ricardo analysed the effects on the profit rate of four possible causes of rising agricultural prices, namely capital accumulation, bad seasons, general price inflation, and import restrictions, allowing at the same time that ‘there may be other causes of high price which do not at present occur to me. In the main case — the effects of capital accumulation - we note two features of the argument: first, the increase in corn price reflects the reduction in agricultural productivity in the long run only, after popula¬ tion expansion has been allowed for; secondly, the increase in corn price is not itself induced, or even reinforced, by higher money wages: ‘A rise in the price of raw produce may be occasioned by a gradual accumulation of capital which by creating new demands for labour may give a stimulus to population and consequently promote the cultivation or improvement of inferior lands, - but this will not cause profits to rise but to fall, be¬ cause not only will the rate of wages rise, but more labourers will be employed without affording a proportional return of raw produce. The whole value of the wages paid will be greater compared with the whole value of the raw produce obtained.’23 Thus far the argument applies to agriculture only. But it is extended in a passage which rejects Malthus’s view that accumulation entails a reduced price level: • 99

instead of anticipating a fall in the price of [manufactured] commodities we should expect a rise, because the fall of profits which generally follows accumulation is in con¬ sequence of the increase in the price of production [costs], compared with the price of produce [revenue]; although they would both undoubtedly rise. You appear to think, - indeed you say ‘that you know no other cause for the fall of profits which generally takes place from accumulation than that the price of produce falls compared with the expence of production, or in other words that the effective demand is diminished,’ and by what follows you seem to infer that 22

23 Oct. 1814, ibid., 146-7. (Cf. Principles, Works, I, 161, where Ricardo listed bad harvests, capital accumulation, general price inflation, and taxation of wage goods as causes of increase in corn prices.) ‘Bad seasons’ would raise the profit rate as a consequence of high demand inelasticity for corn: the ‘price of produce would rise considerably more than in the proportion of the deficient quantity, and would therefore be much ahead of the price of production’; a ‘fall in the value of the currency’ would raise profits because of a lag in money wages behind prices. But these are temporary phenomena only. Corn restriction too will raise the profits in the first instance ‘but they will ultimately fall below their former level’ {ibid., VI, 146). Presumably he had in mind, in the latter case, the proposition that the

23

decline in the profit rate following restriction requires the full operation of the population mechanism. Ibid., 146

THE 'ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 131 commodities will not only be relatively lower but really lower, and this is in fact the foundation of our difference with regard to the theory of Mr. Mill.24

The crucial step in Ricardo’s argument, apart from the use made of Say s Law (or rather ‘the theory of Mr. Mill’) and the Malthusian popu¬ lation mechanism, is the assertion that the prices of manufactured goods rise although not in proportion to money wages, (in the case of agricultural pro¬ duce Ricardo did not allow for any price increase due to higher money wages although quite possibly this was an oversight.) Considered from the perspective of the Principles the Ricardian theory of a declining profit rate due to rising corn prices still required a formal demonstration that higher money wages are not entirely passed on in the form of higher prices. Ricardo himself, in a context relating to the process of accumula¬ tion, put his finger on this issue: ‘It appears to me that the consideration of money value may be the foundation of our difference on this point.’’'15 The problem of ‘value’ reappears in a different context. To a claim by Malthus that the general profit rate would rise with new lines of foreign trade, Ricardo objected in terms similar to those subsequently developed in the chapter ‘On Foreign Trade’ in the Principles. Trade as such in¬ creases the quantity of commodities available and community well-being, but ‘there will not be a greater value of commodities to be exchanged for the raw produce, or for money,’ and, accordingly, he concluded, ‘no increased profits will any where be made.’ By this he had in mind the notion that if certain commodities are increased in supply it will be their exchange values only that would decline relatively to those whose supply remained unchanged, but the exchange value of these latter, or of goodsin-general, relative to either corn or money, is not altered: I cannot agree with you when you say that ‘without supposing capital to be taken from the land the throwing of new objects of desire into the market will increase the value of the whole mass of commodities in the country, estimated either in money, or in corn and labour,’ - and it is because I think that there will not be a greater value of commodities to be exchanged for the raw produce, or for money that I conclude no increased profits will any where be made. If the mass of commodities be increased we diminish their exchangeable value as com¬ pared with those things whose quantity is not augmented ... It is here I think, that our difference rests ...2f> 24 25 26

Ibid., 148—9 (my emphasis; ‘effective’ in original). The reference is to Malthus’s letter of 9 Oct., ibid., 142. 18 Dec. 1814, ibid., 164 (my emphasis) 18 Dec. 1814, ibid., 163. It is important to note that Ricardo defined his terms carefully to imply a long-run cost theory: ‘If we double the quantity, or rather double the facility of making stockings, we diminish their value one half, as com¬ pared with all other commodities.’ The argument is developed in a subsequent

132 THE ECONOMICS OF DAVID RICARDO

§ According to my understanding of Ricardo’s position in the correspon¬ dence of 1814, the profit rate in agriculture does not strictly determine the profit rate elsewhere. Rather the general profit rate varies inversely with the movements in money wages. In this case all depends upon the contents of the wage basket. If it contains solely agricultural produce (corn) then productivity in agriculture alone will govern the money wage. But, in principle, if it contains manufactured goods, then changes in manufac¬ turing productivity might affect the money wage and accordingly the general rate of profits.27 That Ricardo himself made this extension will now be demonstrated. It is true that Ricardo had expressed himself in terms of the strong proposition: ‘it is the profits of the farmer which regulate the profits of all other trades.’28 And late in 1814 Malthus defined the issue between him¬ self and Ricardo in terms of whether the agricultural rate does or does not ‘take the lead’: ‘It is of course by no means enough to say that from the state of production from the land, compared with the means necesary to make it produce, you can infer with certainty the state of general profits; as this is merely saying what every body knows, that all profits must caeteris paribus be on a level. But the question is whether agriculture always takes the lead in the determination? and I should certainly say that it did not.’29 To illustrate the argument Malthus referred to the open¬ ing of ‘a new foreign commerce’ — providing for the home market new and highly desirable products - whereby the profit rate on commercial letter, dated 13 Jan. 1815, ibid.., 170-1 (although problems exist regarding the precise mechanism by which exchange value reflects costs since a price reduction without quantity increase is allowed for): ‘If with the same labour we could obtain double the quantity of tin from the mines in Cornwall, after prices have found their level, would the value of the whole mass of commodities be increased in England? Should we obtain the same quantity of deals from Norway in exchange for a given quantity of tin as we now do? Although the mass of commodities both in the markets of Norway and in those of England would increase by the greater abundance of tin, or of some other commodity, if the labour employed in procur¬ ing tin were diverted to other objects, yet the estimated value of all their com¬ modities, in corn, money, or any article but tin, would, it appears to me, continue unaltered. It is sufficient that deals can be purchased cheaper in Norway than elsewhere to determine a portion of foreign trade to that quarter, although it should yield no more profits than those of other trades.’ 27

The complex nature of the wage basket is alluded to in the Appendix to The High Price of Bullion (1811): ‘If [the capitalist farmer’s] revenue be corn, he will be disposed to exchange it for fuel, meat, butter, cheese and other commodities in which the wages of labour are usually expended, or, which is the same thing, he will sell his corn for money, pay the wages of his labourers in money, and thereby

28

create a demand for those commodities which may be obtained from other coun¬ tries in exchange for the superfluous corn’ (ibid., Ill, 107: the context involves a case where corn supplies exceed home demand). Above, p. 124

29

23 Nov. 1814, ibid., VI, 152-3

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 133 capital would be raised. You allow,’ he wrote, ‘that in this case capital may be taken from the land. But to allow this is at once to allow that the profits of foreign commerce determine in this case the profits on the land and that whichever is the highest will take the lead of the other.’30 Ricardo, however, categorically denied Malthus’s attribution: ‘I do not recollect ever having allowed that an extension of foreign commerce will take capital from the land, unless we were an exporting country as far as regards corn, in which case my proposition would be true, namely that the rate of profits can never permanently rise unless capital be with¬ drawn from the land.’11 But particularly revealing is Ricardo’s concession that the general profit rate might be affected by events outside agricul¬ ture. He thereby widely extended the significance of his propositions:

I have been endeavoring to get you to admit that the profits on stock employed in Manufactures and commerce are seldom permanently lowered or raised by any other cause than by the cheapness or dearness of necessaries, or of those objects on which the wages of labour are expended. Accumulation of capital has a tendency to lower profits. Why? because every accumulation is attended with increased difficulty in obtaining food, unless it is accompanied with improve¬ ments in agriculture; in which case it has no tendency to diminish profits. If there were no increased difficulty, profits would never fall, because there are no other limits to the profitable production of manufactures but the rise of wages. If with every accumulation of capital we could tack a piece of fresh fertile land to our Island, profits would never fall. I admit at the same time that commerce, or

machinery, may produce an abundance and cheapness of commodities, and if they affect the prices of those commodities on which the wages of labour are expended they will so far raise profits: - but then it will be true that less capital will be employed on the land, for the wages paid for labour form a part of that capital.32

30

It may be noted that this argument was designed to ‘trap’ Ricardo. Malthus him¬ self believed that even if capital is not withdrawn from agriculture the effect of ‘throwing new objects of desire into the market’ would be to increase ‘the value of the whole mass of commodities in the country, estimated either in money, or in corn and labour, and there will in consequence be a greater value of commodities to be exchanged for the raw produce. This increase in the value of the raw pro¬

31

duce must raise the profits of farming for a period of some duration ...’ {ibid.). 18 Dec. 1814, ibid., 163 (for the ‘proposition’ referred to, see, for example, above, p. 124).

32

Ibid., 162 (my emphasis). Malthus’s comment (29 Dec. 1814, ibid., 168-9) on the effects of ‘a piece of fresh fertile land’ is revealing, for it suggests that he appreciated the role of money wages in Ricardo’s argument: ‘I quite agree with you that a piece of fertile land added to the country upon every increase of capital would prevent the fall of profits, but more in my opinion from its increasing the demand for manufactures by increasing the number of people than by its preventing the rise of wages, an effect which it would probably not have.’

134 THE ECONOMICS OF DAVID RICARDO

Now Ricardo must have been referring to manufactured wage goods in this passage. If his reference had been to corn he would never have for¬ mulated the final clause of the passage as he in fact did. Less capital would be employed on the land simply because labour is withdrawn from marginal plots. What he says, in fact, is merely that the money value of the capital on the land is reduced - a reflection of the lower prices of manufactured wage goods - the margin itself remaining unchanged.33 Ricardo has thus clarified his position. He was not claiming that the agricultural profit rate determines the general rate, but rather that agri¬ cultural productivity, which determines the price of corn, playing upon the money-wage rate, influences profits generally. Should the wage bas¬ ket contain manufactured products, then changes in productivity in manufacturing will have similar consequences. But Ricardo without doubt felt his position to be threatened for he closed his argument by insisting that ‘less capital will be employed on the land’ following an alteration in the cost of manufactured wage goods. This conclusion allowed him to claim formally that a reduction in agricultural capital accompanies the increase in the general profit rate; but the relationship is not a causal one, for it is not the reduction in capital which generates the increase in the general profit rate, but rather the converse.34

THE ANALYTICAL CORE OL THE EYYTT ON PROFITS

During the first week of February 1815, Ricardo read Malthus’s newly published Inquiry into the Nature and Progress of Rent. The theory of differ¬ ential rent developed therein met with his approval, fitting perfectly as it did into a general structure which was already prepared:35 ‘It is no praise to say that all the leading principles in it meet with my perfect assent.’ Yet while Ricardo accepted the broad principles he pointed out certain applications of the theory which Malthus had deliberately or unwittingly failed to make, or about which Malthus had expressed uncertainty. The

33

Moreover the term ‘commodities’ - as distinct from ‘produce’ - is usually used to refer to manufactured goods.

34

Subsequently Malthus (letter dated 29 Dec. 1814, ibid., 168) challenged Ricardo’s position from another direction. He asked Ricardo to presume, for the sake of argument, an increase in the foreign demand for home corn: ‘would not the profits of capital employed in agriculture be increased, although certainly more rather than less capital would be employed upon the land [?] The instruments of produc¬ tion compared with the price of produce would be cheaper, but it could not with any propriety be said that capital was withdrawn from the land.’ But Ricardo answered quite shortly: ‘there can be no question that more capital would be employed on the land, and I think profits would fall’ [ibid., 171).

35

See the pertinent comments to this effect in Simon N. Patten, ‘The Interpretation of Ricardo,’ Quarterly Journal of Economics, VII (April 1893), 329.

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 135

rapidity with which Ricardo absorbed the implications of the theory and incorporated it into his own vision of the economic process is striking. For example: since rents are always withdrawn from the profits of stock’ the importation of cheap foreign corn results in a social advantage meas¬ ured by the price differential alone, there being no need to correct for the loss of rents; the taxation of necessaries cannot fall on the landlord since the last portion of land cultivated, yields nothing more than the profits of stock’; land improvements (which raise output for a given outlay or reduce the outlay for a given output) will benefit the landlord only in so far as the farmer brings poorer land into cultivation, but in themselves are advantageous only to the farmer.36 The Essay on Profits itself1 represents Ricardo’s contribution to the monograph literature of February 1815 dealing with the potential effects of the proposed restrictions upon corn importation. Ricardo publicly re¬ cognized a debt to Malthus for the theory of differential rent,38 although he differed sharply on the deductions to be drawn therefrom. In particu¬ lar, he insisted that Malthus did not utilize logically and consistently the property of rent as a transfer payment;3’ and failed to make proper use of the conception of rent-free marginal land.40 However, the main variable under investigation in the Essay was the general rate of profits, and the fundamental determinant thereof was as it had been in the correspon¬ dence of 1813 and 1814 when the theory of differential rent was still unknown, namely the cost of production of food: 36

Letter dated 6 Feb. 1815, ibid., VI, 172-4. On the matter of the effects of taxes on necessaries Malthus had stated in the Inquiry that the burden fell on the landlord not the consumer. He conceded to Ricardo, in his reply (12 Feb. 1815, ibid., 176) that in this respect he was in error. He continued to maintain strenuously that agricultural improvements will raise rents despite the fact that they are ‘undoubt¬ edly a part of the wealth already created’ [ibid., 174).

37

An Essay on the Influence of a Low Price of Com on the Profits of Stock, Works, IV, 9-41; published 24 Feb. 1815 (cf. Sraffa, ibid., 5, for this date and those in the next note).

38

Ibid., 9, 15n, regarding the Inquiry into the Nature and Progress of Rent, and Grounds of an Opinion on the Policy of Restricting the Importation of Foreign Com, published 3 Feb. and 10 Feb. 1815 respectively. (Other contributors to the literature were Edward West, Essay on the Application of Capital to Land, 13 Feb., and Robert Torrens, Essay on the External Corn Trade, 24 Feb.) Sraffa has suggested that the first half of Ricardo’s Essay is a revised version of a text prepared before the appearance of Malthus’s two contributions, while the second half constitutes in effect a direct reply to them (cf. ibid., 4n).

39

‘It is never a new creation of revenue, but always part of a revenue already created’ [ibid., 18).

40

This is implied in Ricardo’s objections to the (supposed) view of both Adam Smith and Malthus on the taxation of ‘necessaries’: ‘Adam Smith thought that such taxes fell exclusively on the landholder; Mr. Malthus thinks they are divided between the landholder and consumer. It appears to me that they are paid wholly by the consumer’ (ibid., 34n).

136 THE ECONOMICS OF DAVID RICARDO

Profits of stock fall because land equally fertile cannot be obtained, and through the whole progress of society, profits are regulated by the difficulty or facility of procuring food. This is a principle of great importance, and has been almost over¬ looked in the writings of Political Economists. They appear to think that profits of stock can be raised by commercial causes, independently of the supply of food.41 Profits then depend on the price, or rather on the value of food. Every thing which gives facility to the production of food, however scarce, or however abun¬ dant commodities may become [by contractions or extensions of foreign trade, or the use of ‘machinery’], will raise the rate of profits, whilst on the contrary, every thing which shall augment the cost of production without augmenting the quantity of food, will, under every circumstance, lower the general rate of profits.42

The theory of differential rent was incorporated effortlessly into an already prepared general structure. At the outset Ricardo stated his assumptions, namely that real wage per man are constant and that agricultural technology is unchanged: ‘We will, however, suppose that no improvements take place in agricul¬ ture, and that capital and population advance in the proper proportion, so that the real wages of labour, continue uniformly the same; — that we may know what peculiar effects are to be ascribed to the growth of capi¬ tal, the increase of population, and the extension of cultivation, to the more remote, and less fertile land.’43 On this basis he constructed a wellknown model, relating to the agricultural sector, which yields a declining profit rate as capital and population expand and are applied to increas¬ ingly disadvantageous plots of land. In the model the plots of land are equally fertile but at increasing distances from the market so that addi¬ tional capital is required to yield the same results. Specifically, it is assumed that the capital of an (initial) farmer consists of the ‘value of two hundred quarters of wheat’ (of which 100 represents fixed capital and 100 circulating capital), and that ‘the value of the remaining produce,’ after maintenance of capital, amounts to ‘one hundred quarters of wheat, or [is] of equal value with one hundred quarters’ so that the rate of profit equals 100/200 or 50 per cent. A further addition of 300 quarters requires a capital of 210 quarters, or rather the ‘value’ of 210 quarters, so that the profit rate declines to 90/210 or 43 per cent. And since the common rate is ‘regulated by the profits made on the least profitable employment of capital on agriculture,’ 14 quarters of the original farmer’s profits are

41

Ibid., 13n (my emphasis)

42

Ibid., 26. Value evidently means ‘difficulty of production.’

43

Ibid., 12. With regard to the constancy of real wages per head, see also 13, 18n, 23.

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 137

transferred by the competitive process to the landlord as rent such that the profit rate on intra-marginal capital falls to 43 per cent.44 The use of corn as numeraire should be carefully noted: capital is ‘estimated in quarters of wheat, but does not consist entirely of wheat, as we shall see. Ricardo emphasized in particular the following results yielded by the model: that the net aggregate agricultural output (rent and profits only) rises with capital accumulation; that aggregate profits rise initially, but subsequently fall — ‘a view of the effects of accumulation which is exceedingly curious, and has, I believe, never before been noticed’; that the profit rate (‘relative profits’) declines from the outset; and that the pro¬ portion of rent to agricultural capital (the ‘share of the landlord’) rises.46 The fact that Ricardo did not emphasize the behaviour of the rental and profit shares in net or gross produce, but rather chose to examine the ratio of rent and profits to capital, both fixed and circulating, suggests that his primary concern was not with the aggregative shares. Ricardo was careful to observe that the data ‘are assumed, and are probably very far from the truth.’ In particular, ‘in proportion as the capital employed on the land, consisted more of fixed capital, and less of circulating capital, would rent advance, and [profits] fall less rapidly.’47 Doubtless he had in mind that a given increase in aggregate capital, if the fixed-capital constituent is relatively high, would entail a relatively smaller circulating-capital (wages) increment, and support accordingly a lesser increase in population, at the given wage, than if the fixed-capital constituent were lower.48 Ricardo here touched, for the first time, upon the thorny question of the relationships between different categories of capital, and between capital and labour. And it is clear that these rela¬ tionships are presumed to be technological data. 44

Ibid., 10, 13. Ricardo briefly referred also to an intensive margin, ibid., 14. He was on unsafe ground when he criticized Malthus (6 Feb., ibid., VI, 172) for not considering separately in his Inquiry ‘the relations of rent with the profits of Stock, and the wages of labour.’ His stricture that ‘by treating of the joint effect of the two latter on rent’ Malthus had ‘not made the subject so clear as it might have been can equally well be directed at the Essay where wages are rather casually included within capital.

45 46 47

Cf. the ‘Table shewing the Progress of Rent and Profit’ [ibid., IV, 17) where reference is also made to ‘capital estimated in quarters of wheat.’ Ibid., 16f. Ibid., 15—16n

48

The argument is probably based on ibid., 13: ‘if capital and population increased, more food would be required, and it could only be procured from land not so advantageously situated ... [The] necessity of employing more labourers, horses, &c ... although no alteration were to take place in the wages of labour, would make it necessary that more capital should be permanently employed to obtain the same produce.’ The extent of population increase - with wages per head constant - will depend upon the fraction of any given capital devoted to circulat¬ ing capital relative to fixed capital.

138 THE ECONOMICS OF DAVID RICARDO

It seems to have been Ricardo’s intention to apply the model specifi¬ cally to the agricultural sector;4' but, as we shall see, he was well aware that the fundamental result - the decline in the rate of profit with capital accumulation - was irrelevant unless some explanation for the behaviour of the rate of profit outside the agricultural sector could be provided. Only if it is satisfactorily demonstrated that the external rate moves pari passu with the internal rate can the model be said to reflect the economy as a whole. Any such demonstration, we may note, is independent of, and must be evaluated apart from, the model itself. Even in the event that an adequate relationship is defined beween the agricultural and general rates of profit the model would be unsuitable for the treatment of the income shares, and in fact Ricardo nowhere stated the belief that there is a parallel movement between the aggregate income shares and the shares in agricultural output as yielded by the model. THE GENERAL RATE OF PROFIT

We must recall at this stage of the argument a distinction between the ‘strong’ proposition - that the agricultural profit rate determines the pro¬ fit rate elsewhere, or a more sophisticated variation thereof that the state of agricultural productivity on the margin of cultivation is the unique determinant of the general profit rate, in so far as corn is the sole wage good; and the ‘weaker’ proposition - that the state of agricultural pro¬ ductivity exerts an influence on the general profit rate although not to the exclusion of other forces. It has already been demonstrated that Ricardo’s position in the correspondence of 1814 implies the ‘weak’ for¬ mulation. We must now consider the position adopted in the Essay. A preparatory statement by Ricardo is relevant for an evaluation of the ‘weights’ attached to these propositions in the Essay: ‘I am only desi¬ rous of proving that the profits on agricultural capital cannot materially vary, without occasioning a similar variation in the profits on capital, employed on manufactures and commerce.’50 This remark, which does not imply that the general rate is literally governed by the agricultural rate, is attached to the ‘proof’ itself: In this state of society, when the profits on agricultural stock, by the supposition, are fifty per cent, the profits on all other capital, employed either in the rude manufactures ... or in foreign commerce ... will be also, fifty per cent. 49

For example, at the outset Ricardo referred to ‘the usual and ordinary rate of the profits of agricultural stock’ [ibid., 10) and also the precise formulation of the results by the model would suggest this.

50

Ibid., 12n. Cf. the assertion [ibid., 14) that as the profit rate in agriculture declines from 50 to 43 per cent, so ‘the profits on all capital employed in trade would fall to forty-three per cent.’

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 139 If the profits on capital employed in trade were more than fifty per cent, capital would be withdrawn from the land to be employed in trade. If they were less, capital would be taken from trade to agriculture.51

As the so-called proof stands, it is in fact nothing more than an assertion that the profit rate cannot, in the long run (assuming competition), differ between sectors. It would be quite inadequate if intended as justification for the proposition that the general rate is governed by the agricultural rate since it does not preclude the possibility of variations induced by changes emanating outside the agricultural sector. Subsequently in the Essay Ricardo reconsidered the relationship be¬ tween the agricultural and general rates of profit in a more sophisticated manner, reminiscent in certain important respects of the correspondence with Malthus of 1814. According to the argument the manufacturing rate falls secularly, as a result of rising money wages (in turn due to the rising corn price) in the face of constant commodity prices; it is also taken for granted that the exchange value of a commodity reflects the ‘diffi¬ culty of production, which accounts for the rising price of corn, and the stable price of manufactured goods. To this extent we have already the position of the Principles: If the money price of corn, and the [money] wages of labour, did not vary in price in the least degree, during the progress of the country in wealth [capital] and population, still profits would fall and rents would rise; because more labour¬ ers would be employed on the more distant or less fertile land, in order to obtain the same supply of raw produce; and therefore the cost of production would have increased, whilst the value of the produce continued the same ... [But] the exchangeable value of all commodities, rises as the difficulties of their production increase. If then new difficulties occur in the production of corn, from more labour being necessary, whilst no more labour is required to produce gold, silver, cloth, linen, &c. the exchangeable value of corn will neces¬ sarily rise, as compared with those things ... Wherever competition can have its full effect ... the difficulty or facility of their production will ultimately regulate their exchangeable value. 7he sole effect then of the progress of wealth on prices ... appears to be to raise the price of raw produce and of labour, leaving all other commodities at their original prices, and to lower general profits in consequence of the general rise of wagesf2

51

Ibid., 12. Ricardo had in mind a ‘state of society’ where agricultural improve¬ ments are ruled out and real wages are constant, capital and population advanc¬ ing ‘in the proper proportion.’

52

Ibid., 18-20 (my emphasis). In a note attached to the passage Ricardo remarked that commodity prices are ‘ultimately regulated by’ and ‘always tending to, the cost of their production, including the general profits of stock.’ In brief, the ‘diffi¬ culty of production’ includes not only labour but capital costs too. But in so far as

140 THE ECONOMICS OF DAVID RICARDO

Now in some respects the foregoing extract dealing with economic progress leaves something to desired. Formally, Ricardo appears to iso¬ late two (separable) causal influences on profits - the decline in agricul¬ tural productivity in the agricultural sector itself, and the rise in money wages (reflecting the higher corn price) in manufacturing.13 According to the ‘mature’ view of the Principles, on the other hand, it is the latter force which is responsible for a decline in profits throughout all sectors of the economy, the rise in the corn price itself assuring that farmers are ‘compensated’ for reduced labour productivity in their sector. While for a truly accurate perspective it must be recognized that the precise for¬ mulation of the Principles remained to be accomplished, at the same time it can be noted that the opening proposition of the extract is merely presented as an aside so that its import should not be exagger¬ ated; nothing is said about the causal influence at work on manufactur¬ ing profits in the event that money wages remain unchanged, and the proposition is immediately followed by an insistence that money wages do in fact increase and reduce profits in manufacturing. Ricardo, we may say, left vague the precise function of the corn price in its ‘compen¬ sation’ capacity in agriculture and the fact that the inverse wage-profit relation in agriculture is precisely the same as in manufactures. There is, however, no necessary conflict with the Principles, (indeed, a further statement in fact appears to relate the reduction of profits in agriculture solely to the (inverse) movement in money wages: ‘If by foreign com¬ merce, or the discovery of machinery, the commodities consumed by

Ricardo was attempting to explain the general rate of profits it cannot be taken for granted as a datum; he is, therefore, entrapped in circular reasoning. A similar argument is developed later in the Essay. Technological improvement in agriculture or a relaxation of corn import restrictions would lead to a fall in the price of corn only - and therefore of money wages - but not of manufactures, and accordingly the general profit rate would rise: ‘A fall in the price of corn, in consequence of improvements in agriculture or of importation, will lower the ex¬ changeable value of corn only, - the price of no other commodity will be affected. If, then, the price of labour falls, which it must do when the price of corn is lowered, the real profits of all descriptions must rise; and no person will be so mate¬ rially benefited as the manufacturing and commercial part of society’ [ibid., 35-6). The margin of cultivation would in the latter case be pushed back; capital and labour released from agriculture would be available for use in the manufacturing sector. Cf. ibid., 32: ‘If we were left to ourselves, unfettered by legislative enact¬ ments, we should gradually withdraw our capital from the cultivation of such [in¬ ferior] lands, and import the produce which is at present raised upon them. The capital withdrawn would be employed in the manufacture of such commodities as would be exported in return for the corn.’ Opposition to easier corn imports, Ricardo argued, on grounds that agricultural capital would be withdrawn is no more reasonable than opposition to improved machinery (cf. also ibid., 35). 53

Cf. the formulation in letter dated 23 Oct. 1814, ibid., VI, 146, cited above, p. 130.

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 141

the labourer should become much cheaper, wages would fall; and this, as we have before observed, would raise the profits of the farmer, and there¬ fore, all other profits.’)54 § In the passage under discussion, Ricardo has once again moved from the strong proposition that the agricultural profit rate determines the general rate (which we have seen was never adequately justified) to the weaker formulation, since, in principle, any force generating a change in money wages would affect the profit rate whether or not it has its origin in the agricultural sector. Furthermore, in one vital respect the argument has progressed compared with that in the correspondence. For Ricardo now presumes the manufacturing price level to be unchanged during the process of capital accumulation.ss The increase in the money-wage rate itself in no way disturbs either the price structure, in particular the relative prices of agricultural and manufactured products, or the price level. It remained to be

shown precisely why, or under which conditions, this will be the case. A preliminary attempt was made to deal with the issue in a brief criti¬ cism of a proposition by Adam Smith to the effect that an increase in the price of corn, regarded as the ultimate regulator of wages, will lead to a general price increase. Ricardo objected, distinguishing between a vari¬ ety of causal influences: ‘It has been thought that the price of corn regu¬ lates the price of all other things. This appears to me to be a mistake. If the price of corn is affected by the rise or fall of the value of the precious metals themselves, then indeed will the price of commodities be also affected, but they vary, because the value of money varies, not because the value of corn is altered. Commodities, I think, cannot materially rise or fall, whilst money and commodities continue in the same propor¬ tions, or rather whilst the cost of production of both estimated in corn continues the same.”*’ Clearly Ricardo has, to all intents and purposes, 54

Ibid., IV, 26n

55

See above, p. 129, regarding Ricardo’s position in the correspondence of 1814. Prices of manufactured goods were said to rise - although not in proportion with the rise in money wages - despite the fact that there was no change in the ‘diffi¬ culty of production’ or ‘value’ as capital accumulation occurred. As we shall see, Ricardo subsequently allowed for some change in manufacturing prices but only to the extent that the prices of raw materials increased; this did not alter the main proposition that rising wages left prices unaffected.

56

Ibid., 21n. (Cf. also Ricardo’s criticisms of Smith, and Malthus, with regard to the effects of the taxation of necessaries: ‘They do not,’ he insisted, ‘subject us to any of the disadvantages of which Adam Smith speaks in foreign trade ...’ ibid., 33-4n). ‘Value’ once more refers to ‘difficulty of production.’ The calculation, it will be noted, is in terms of corn, but a parallel calculation in terms of resources used up might have been used since the productivity of labour (or labour-andcapital) is unchanged in money and manufactured goods.

142 THE ECONOMICS OF DAVID RICARDO

recognized the need for a ‘measure’ of the ‘value’ or the ‘difficulty of production’ of commodities in dealing with the issue of the effect of wage rate changes on prices. We may refer to two applications of the general argument in order to illustrate the significance thereof for Ricardo. The analysis is applied to the general theory of foreign trade in the manner of the Principles. A relaxation of restrictions upon the importation of corn would not alter the aggregate amount of trade, but profits on capital throughout the economy (not merely in the trading sector as Malthus believed) would be increased. This is because a low price of corn allows reductions in manu¬ facturing costs while selling prices remain unchanged: ‘A fall in the price of corn, in consequence of improvements in agriculture or of importa¬ tion, will lower the exchangeable value of corn only, - the price of no other commodity will be affected. If, then, the price of labour falls, which it must do when the price of corn is lowered, the real profits of all descrip¬ tions must rise; and no person will be so materially benefited as the manufacturing and commercial part of society.’57 A second application is made to Malthus’s argument, based on David Hume, that a low price of corn would have depressing effects on the economy. Ricardo objected on the grounds that there will be no general decline in prices, but rather a general increase in profits: A recurrence to a better monetary system, it is said, though highly desirable, tends to give a temporary discouragement to accumulation and industry, by depressing the commercial part of the community, and is the effect of a fall of prices: Mr. Malthus supposes that such an effect will be produced by the fall of the price of corn. If the observation made by Hume were well founded, still it would not apply to the present instance: - for every thing that the manufacturer would have to sell, would be as dear as ever: it is only what he would buy that4 would be cheap, namely, corn and labour by which his gains would be in¬ creased. I must again observe, that a rise in the value of money lowers all things; whereas a fall in the price of corn, only lowers the wages of labour, and therefore raises profits.™

§ One further issue relating to the general rate of profit requires com¬ ment. Ricardo had insisted during 1814 that the general profit rate could not rise ‘unless capital be withdrawn from the land,’59 but in the Essay he formulated this condition more rigorously. On the assumption that (domestic) demand for corn is a function of population size only, and 57

Ibid., 35-6

58

Ibid., 37 (my emphasis). See also ibid., 19n, where Ricardo distinguished a variation in the real cost of producing corn from ‘an alteration in the value of the

59

precious metals, proceeding from their abundance or scarcity.’ See above, pp. 124, 133.

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 143

therefore completely inelastic with respect to price, the margin of cultiva¬ tion is inexorably determined given population, and so, accordingly, is the agricultural profit rate.'0 Since in the long run there can be only one profit rate, the general rate must come into line following a disturbance in commerce or manufacturing: It is contended, that they [the rates of profit in various branches of activity] alternately take the lead; and, if the profits of commerce rise, which it is said they do, when new markets are discovered, the profits of agriculture will also rise; for it is admitted, that if they did not do so, capital would be withdrawn from the land to be employed in the more profitable trade. But if the principles respecting the progress of rent be correct, it is evident, that with the same popu¬ lation and capital, whilst none of the agricultural capital is withdrawn from the cultivation of the land, agricultural profits cannot rise, nor can rent fall: either then it must be contended, which is at variance with all the principles of political economy, that the profits on commercial capital will rise considerably, whilst the profits on agricultural capital suffer no alteration, or, that under such circum¬ stances, the profits on commerce will not rise.61

According to this argument, which takes for granted that once the mar¬ gin of cultivation is given the agricultural profit rate is immediately de¬ termined, the commercial rate must come into line, following an initial increase thereof, perhaps by new capital investment in commerce (pre¬ sumably financed by higher retained earnings) rather than by transfers from agriculture: ‘there will be such a fall in the price of the foreign commodity in the importing country, in consequence of its increased 60

In the correspondence of 1814, the notion of zero demand elasticity was not given a formal role in Ricardo s argument. In fact, when the demand curve for corn was considered Ricardo presumed it to be relatively, but not completely, inelastic. See, for example, letters to Malthus, ibid.., VI, 129: ‘I sometimes suspect that we do not attach the same meaning to the word demand. If com rises in price, you perhaps attribute it to a greater demand, — I should call it a greater competition.

61

The demand cannot I think be said to increase if the quantity consumed be dimi¬ nished, altho much more money may be required to purchase the smaller than the larger quantity’; and ibid., 146: in the case of a poor harvest ‘the price of produce would rise considerably more than in the proportion of the deficient quantity.’ Ibid., IV, 23-4. To this passage Ricardo attached the following note which con¬ firms the role of zero demand elasticity for corn: ‘Mr. Malthus has supplied me with a happy illustration - he has correctly compared “the soil to a great number of machines, all susceptible of continued improvement by the application of capi¬ tal to them, but yet of very different original qualities and powers.” How, I would ask, can profits rise whilst we are obliged to make use of that machine which has the worst original qualities and powers? We cannot abandon the use of it; for it is the condition on which we obtain the food necessary for our population, and the demand for food is by the supposition not diminished - but who would consent to use it if he could make greater profits elsewhere?’

144 THE ECONOMICS OF DAVID RICARDO

abundance, and the greater facility with which it is procured, that its sale will afford only the common rate of profits - that so far from the high profits obtained by the few who first engaged in the new trade elevating the general rate of profits - those profits will themselves sink to the ordi¬ nary level.’62 But it may be asked why equality between the two rates cannot be achieved simply as a consequence of an attempt to transfer capital from agriculture to trade, in the face of zero demand elasticity; such an attempt would force up the price of corn relative to that of other goods and tend to bring the rates into equality.63 If the gap is to be closed, the presumption that the agricultural rate is given once the mar¬ gin is determined must be justified. According to the suggestion by Sraffa, it will be recalled, Ricardo had in mind in the Essay a model wherein both agricultural inputs and out¬ puts consist of the same physical commodity (corn) so that total profits and the rate of profit on capital (a corn wages-fund) can be determined in physical terms without reference to valuation. Since all other sectors uti¬ lize corn as input only, it is the exchangeable value of their products relative to their (corn) capitals which must be adjusted to yield the same profit rate as in agriculture. If this is a justified attribution, then even though an attempt is made to transfer capital from agriculture and the price of corn consequently rises, the agricultural profit rate cannot alter. But our study of the pertinent letters of 1814, the Essay itself, and, as we shall see, the subsequent correspondence, suggests that it is unjustified to regard the argument as implying an analysis in terms of the corn model. The basis for Ricardo’s position seems rather to consist of the assumption that the exchangeable value of corn (as of any commodity) depends upon 62

Ibid., 24—5. A version of the same argument is also applied to the case of a tech¬ nological improvement introduced by one or a few firms in a particular manufac¬ turing industry. In the first instance profits will rise for these firms as their costs fall. But with increased output permitted by the increasing adoption of the inven¬ tion price will decline ‘to the actual cost of production, leaving only the usual and ordinary profits’ {ibid., 25). In this case too there ought to occur no flow of capi¬ tal between sectors if Ricardo is to be consistent. Yet he inserted a paragraph immediately which does suggest a process of transfer: ‘During the period of capital moving from one employment to another, the profits on that to which capital is flowing will be relatively high, but will continue so no longer than till the requisite capital is obtained.’ The difficulty, once again, is that any such mechanism implies that the new general rate will be somewhat higher than the original level which is

63

precisely the result which Ricardo was attempting to avoid, and indeed to disprove. Cf. G.J. Stigler, Essays in the History of Economics (Chicago 1965), 186. The modern economist might be inclined to analyse the problem in terms of an up¬ ward shift in the (positively sloping) supply curve of corn — reflecting the higher alternative rate of return — in the face of a given, inelastic, demand curve. Assum¬ ing a given aggregate capital, since there will be no actual transfer of capital from agriculture, there can be no increase in manufacturing output either and the pro¬ fit rate in agriculture rises to equality with the rate in commerce.

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 145

real costs — the difficulty of production.’ If the agricultural margin is fixed, the productivity of labour (and capital) on land is unchanged and so accordingly is the price of corn. If, then, the money-wage rate is depen¬ dent upon the corn price alone, it too is constant, so that the agricultural profit rate remains unchanged. In this case the only way equality across the board can be achieved is if the profit rate elsewhere comes into line as a result of expansion of commerce and manufacturing.64 The analysis left much to be desired and was to be considerably improved in the Prin¬ ciples.65 THE NATURE OF THE WAGE BASKET

In the course of the above analysis the existence of formal statements of the principle of the determining role of agricultural profits is obviously at no time questioned. But my investigation leads me to conclude, first, that Ricardo did not intend by his formal statements to maintain that the profit rate in agriculture literally determines the rate elsewhere, but rather that agricultural productivity alone influences profits generally in the event that corn alone enters the wage basket; and, secondly, that it does so by way of the effect of the price of corn upon money wages. According to this view, in the event that the wage basket contains manu¬ factured goods, an alteration in the prices of manufactures also may alter the general profit rate by way of precisely the same mechanism. The argument depended upon the supposition that changes in the moneywage rate do not generate changes in final price, a supposition which, in Ricardo’s case, hinged upon a labour theory of exchange value. In principle, all thus depends upon the contents of the wage basket. Now while in the correspondence Ricardo allowed explicitly for varia¬ tions in money wages due to productivity increases in manufacturing,66 he did not formally do so in the Essay, but continually formulated varia¬ tions on the theme that profits ‘depend on the price, or rather on the value of food’; that ‘general profits on capital, can only be raised by a fall in the exchangeable value of food’; or that ‘in every society advancing in wealth [capital] and population, independently of the effect produced by liberal or scanty wages, general profits must fall, unless there be improve64

The analysis of the effects of technological change in manufacturing (see note 62) should be contrasted with that of technical change in agriculture, where the price of corn falls and where, accordingly, the money-wage rate and the general profit rate are affected. (See above, note 52, regarding the Essay, Works, IV, 35-6). Unfor¬ tunately, Ricardo never explained exactly how the price of corn - in conditions of zero demand elasticity given population - comes to reflect long-run costs with

65

agricultural improvement. (A similar weakness appears in the correspondence of 1814; see above, note 26). See Chapter 6, p. 297f.

66

See above, pp. 133-4.

146 THE ECONOMICS OF DAVID RICARDO

ments in agriculture, or corn can be imported at a cheaper price.’ Ricardo was in fact quite explicit that expanded trade or technical pro¬ gress which affects manufactures will have no influence upon the profit rate - although national welfare would be improved - ‘because they do not augment the produce compared with the cost of production on the land, and it is impossible that all other profits should rise whilst the profits on land are either stationary, or retrograde.,h' But in the light of the evidence presented thus far, and also of evidence deriving from corre¬ spondence immediately after publication of the Essay (to be discussed presently), it does not seem likely that Ricardo intended by these observa¬ tions to ascribe a ‘determining’ role to the agricultural sector in his analy¬ sis of the general rate of return, on the basis of the logic ascribed to him by Sraffa. Nevertheless, there can be no doubt that Ricardo clouded the issue for his readers by his assumption in the Essay that corn alone enters the wage basket. For he failed to consider formally the implications of freer imports or technical change in the case of manufactured wage goods, and was led to assert, without qualification, that once the margin of cultivation is given the profit rate is automatically determined. In point of fact, a fall in the prices of manufactured wage goods, by reducing money wages, will influence the rate of return across the board even in the event that the margin of cultivation is given, and it will be recalled that this was allowed for by Ricardo in his letter of 18 December 1814.68 I would suggest, as a tentative hypothesis, that Ricardo’s emphasis upon corn in the wage basket has its source in two factors. The first is the policy orientation of the pamphlet which may have led Ricardo to work with strong cases to get the message across regarding the effects of corn import restriction. The second is the very strong objection Ricardo took to Malthus’s view that the profit rate is affected by events which do not work their way through changes in the cost of producing wage goods at all but rather operate at the level of aggregate demand and supply. For this purpose Ricardo may not have felt obliged to complicate his argu¬ ment.

THE MALTHUSIAN CHALLENGE

Among the results of Ricardo’s tabular formulation are first, an increase in the total corn surplus (rent and profits) in consequence of capital accu¬ mulation on land; second, an increase in total corn costs; and, third, a reduction in the ratio of the corn surplus to corn costs and in the agri¬ cultural profit rate, or the ratio of corn profits (considered apart from

67 68

Ibid., 26, 22, 23, 25-6 See above, pp. 133—4.

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 147

rent) to corn costs. An extensive correspondence between Malthus and Ricardo in the months immediately following publication of the Essay turned largely on the validity of these results. It was Malthus s position that rising corn prices, by reducing total costs in terms of corn, will raise the total corn surplus relative to costs, and generate at least the wherewithal for an increase in the rate of profit. He suggested accordingly that the secular decline in the profit rate (which is taken for granted as a well-established empirical phenomenon) could not be accounted for in the Ricardian manner. Ricardo, for his part, throughout maintained his original position, clarifying during the course of the exchange some of the implicit assumptions thereof. While the de¬ bate is extremely difficult to follow chronologically, it is possible to pro¬ vide an outline of the conflicting positions bearing in mind that unless we take into account to some extent the temporal sequence of the exchange we run the risk of imposing an artificial consistency upon the respective ‘models.’ The nature of Malthus’s objection to Ricardo’s results is clarified in part in a letter to Francis Horner. The source of Ricardo’s ‘error,’ according to Malthus, lay in the calculation of agricultural advances in corn terms instead of in the actual materials of which the capital consists, or in money which is the best representative of a variety of commodities.’ Ricardo failed to recognize that since capital in fact consisted of nonagricultural items as well as raw produce, a rise in the price of corn relative to the prices of manufactured or imported goods - a ‘supposition which is generally allowed ... in a rich and progressive country’ — will reduce the cost in terms of corn of producing a given corn output, since the manufactured or imported items could now be obtained at a lower corn expense. Of the increased net corn output ‘the farmer will either receive proportionably increased profits, or will divide them with the landlord and thus a rise in the price of corn appears to increase the productiveness of all the capital previously employed on the land.'69 This general argument is evidently what Malthus had in mind by a reference, in his first letter to Ricardo about the Essay, to a calculation 69

Letter to Horner, 14 March 1815, ibid., VI, 187 (my emphasis). In the calculation it is presumed that the value of the corn produce per acre equals £8, the value of the corn rent equals £2, the costs of manufactured or imported items of capital (including manufactured or imported wage goods) equals £2, so that corn valued at £4 — 50 per cent of the corn output — remains available for payment to labour and for profits. If the price of com doubles while the prices of imported or manu¬ factured goods rise only 25 per cent, the given corn output will be valued at £16; corn rent at £4; and the non-agricultural items of capital (including wage goods) at £2.5; so that corn valued at £9.5 - or 60 per cent of the corn output - remains available for payment to labour and for profits, an increase of 20 per cent. Since real wages consumed in the form of corn are assumed to be unchanged the corn ‘residual’ available to the farmer must have increased.

148 THE ECONOMICS OF DAVID RICARDO

made earlier in conversation which purported to demonstrate that a rela¬ tive increase in the price of corn might cause the agricultural profit rate to rise. Malthus also took the opportunity to allude to his own explana¬ tion of the presumed secular decline in the general profit rate: I confess I think that the kind of calculation which I mentioned to you in Town, shews in what manner profits on land may rise decidedly, from the altera¬ tion in the relative value of corn, and therefore shews that general profits may be determined by the general supply of stock compared with the means of employing it, and not merely by the stock employed on the land. Nor can I yet satisfy myself either from theory or experience that profits depend solely on the price of corn. I am struck by your persever¬ ing conviction, but I cannot see the subject in the same light; and it appears to me that experience is clearly against it.’7u It will be noted that Malthus’s suggestions regarding the effects on the agricultural profit rate are here made very tentatively; it is the effects on the total corn surplus and the rate of total surplus that are discussed with greater confidence. 70

10 March 1815, ibid., 182-3 (my emphasis). See also Malthus’s letter of 12 March, ibid., 185: ‘Pray think once more of the effect of a rise in the relative price of corn, upon the whole surplus derived from land already in cultivation. It appears to me I confess, as clear as possible that it must be increased. The expences esti¬ mated in Corn will be less, owing to the power of purchasing with a less quantity of corn, the same quantity of fixed capital, and of the circulating capital of tea sugar cloaths &c: for the labourers; and consequently more clear surplus will remain in the shape of rent and profits together {no matter which) for home demand.' Cf. also the letter to Horner of 14 March, ibid., 187. An important assumption of the analysis is the constancy of the wage basket in composition and in total; the corn price increase involves a lower wage in terms of corn, implying a failure of the money wage to rise proportionally to the price of com. Precisely the same assumption recurs in correspondence with Ricardo prior to the Essay. As we have seen above, the letter of 6 July 1814 refers to a decline in the corn wage per capita due to a lag in the rise of money wages relative to the price of corn (above, p. 128). The same assumption is also made in the Inquiry into the Nature and Progress of Rent (London 1815), reprinted in The Pamphlets of Thomas Robert Malthus (New York 1970), 197. On similar grounds, Malthus denied in correspondence after publication of the Essay (letter of 5 May, Works, VI, 223-4) that a reduction in the corn price, due for example to easier imports, could raise the rate of profit, since in this case corn expenses tend to rise relatively to corn output; again the money wage does not vary in proportion to the corn price: ‘When it is considered that a fall in the price of corn would not occasion an equal fall in labour, and still less of an equal fall in the other advances of the farmer, such as timber bricks leather, &c: &c: I own it appears to me quite impossible that the profits of capital employed on the land should not diminish, notwithstanding a very great reduction of the cultivation ...’ But for an alternative assumption made by Malthus in various contexts - that the corn wage remains constant, money wages varying in proportion to the corn price-see William D. Grampp, ‘Malthus on Money Wages and Welfare,’ American Economic Review, LXVI (Dec. 1956), 924^36.

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 149

It is significant that Malthus limited his contention that the total corn surplus will rise in consequence of reduced corn costs specifically to ‘the capital previously employed on the land,’ and did not formally take into account the effects of agricultural extensions to increasingly less produc¬ tive land. Moreover, the precise process of expansion which he envisaged required clarification at this stage of the exchange. In a subsequent let¬ ter, following objections by Ricardo to his calculations, Malthus insisted that consideration of the surplus and costs on the new extensions did not overturn his results as Ricardo believed.71 It will be noted again that here too Malthus had little to say regarding the effects of rising corn prices on the rate of profits as such; it is the effects upon the rate of total surplus that he emphasized. Nevertheless Malthus did discuss the issue, as we shall now see.

§ The precise causal sequence involved in agricultural expansion must first be clarified. Malthus drew a distinction between two very different stimuli: first, extensions to marginal land that result from a preceding decline in the profit rate; and, secondly, extensions that follow a rise in the demand for and price of raw produce. Extensions of the first kind, which he himself regarded as pertinent to the case involved in Ricardo s table of the Essay, would not ‘necessarily’ be accompanied by an absolutely increased price of corn, ‘although there will be a rise of rents.’ What Malthus had in mind was a decline in the general rate of return, caused by events external to the agricultural sector, mak¬ ing profitable extensions to hitherto sub-marginal land; lower profits, conceived of as a reduction in a regular factor return, might entirely counter-balance the fall in productivity at the margin and thus prevent 71

In the following extract we find a reiteration of the concept of increased average productivity (in corn terms) of agricultural capital despite a decline at the margin of cultivation: ‘You seem to forget... that it is only the last 500000 quarters of corn that have been added to the mass, which require for their production a greater quantity of capital. You distinctly allow that if no more labour and capital be employed, the productive power of that labour and capital, or the surplus of rents and profits, will increase, owing to an increase in the relative price of corn. Consequently when a rise in the price of corn takes place from an increasing population, or restrictions upon importation, all the capital previously employed upon the land will become more productive, and it is only the new capital that will be less so\ that is you will have the capital which produces the previous ten millions of quarters of wheat, yield a greater material surplus, while it is only the last addi¬ tions to the mass which require more labour ... Under these circumstances it is quite clear to me that a rise in the relative value of corn, will occasion the whole mass of corn to be raised at a less corn expenditure; and consequently will leave a larger surplus for the maintenance and encouragement of the mercantile and manufacturing classes’ (letter dated 15 March 1815, Works, VI, 190-1; my emphasis).

150 THE ECONOMICS OF DAVID RICARDO

an actual rise in the price of corn.’1 In this particular sequence of events, there will however occur an absolute fall in manufacturing prices, reflect¬ ing the lower general rate of profits, so that the corn price rises relatively, thus generating the main result outlined above, namely an increase in the corn surplus relative to costs. But in this case the higher rate of surplus is reflected only in higher rents, and not of course in higher profits. ' The second sequence proposed (and one which Malthus believed to have been in operation ‘during the last 20 years’ 4) involved extensions which have been induced by an (absolute) rise of corn prices, reflecting natural population growth and reduced corn importation. This is, in

72 73

Ibid.., 191. See also letter of 1 Oct., ibid., 291, where Malthus again insisted that ‘low profits will often counter-balance in price, difficulty of production.’ This is the substance of the following observation to Ricardo regarding his table: ‘I think your theory simple just and consistent as far as it goes; but I think you wrong in the application of it, that is, you expect similar results when the pre¬ mises are essentially different. The source of this error, as it appears to me, is, that because a relative rise in the price of corn (or rather perhaps fall in the price of manufactures) always accompanies an accumulation of stock and fall of profits, you assume such rise in the price of corn as the cause, when in fact the whole operation of this rise as far as relates to the land, goes the other way, and tends to raise rather than to lower profits, although of course when the rise is absolutely occasioned by the fall of profits, such fall must overcome the tendency, and all the advantage derived from it will go, as you justly observe to the Landlord ... In your table ... I should say that the regular progress would be a fall in the price of manufactures from lower profits, and a stationary price of corn, rather than a ris¬ ing price of corn, and a stationary one of manufactures. And this I think accords best with experience; but it is of no great consequence which, except perhaps, as it might serve to distinguish a rise occasioned by demand from a rise [occasioned] by a fall of profits’ (18 April 1815, ibid., 216-18). The ‘rise occasioned by the fall of profits’ refers to a relative corn price increase due to a reduction in manufacturing prices. The lower general profit rate appears as a lower factor price in agriculture and ‘cancels’ the effect on the corn price of diminishing agricultural productivity. Subsequently, Malthus played down even the absolute reduction in the price of manufactures pointing to an upward pressure on manufacturing costs emanating from the raw material component: ‘By the by surely we have been both wrong in thinking that in the progressive cultivation of poor land, the price of corn compared with manufactures would very greatly rise. I must question whether the natural and necessary rise of the raw material will not in general be nearly in proportion to the additional labour employed on the land. In wool, leather, and flax, I have little doubt that this is the case’ (letter of 1 Oct., ibid., 291). The logical implication of

74

the argument appears to be that with expansion there are scarcely any pressures tending to raise rents by way of a rising relative price of corn to manufactures. Ibid., VI, 191. See in greater detail the extract given above, note 71.

75

‘But there are other causes of a relative rise in the price of corn besides the fall of profits, such as a foreign demand for it, a greater home demand occasioned by restrictions on importation, and a prosperous foreign trade, by which we can at once import a great abundance and a great value of foreign commodities. These are causes (particularly the two former) of a rise in the relative price of corn in no respect necessarily connected with a fall of profits, and under the influence of

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 151

fact, the case which Malthus had in mind when he initiated the entire debate: I think further, he wrote, ‘that the increased price of corn is in the order of things rather a cause than a consequence of more men being employed. The price first rises from increased demand, and this rise, by increasing the value of produce compared with the instruments of pro¬ duction [including labour] determines what poor lands can be cultivated. No greater number of men can be employed at the same [money] wages till the price rises. The same process is outlined in even greater detail in the following passage according to which the average surplus per agricul¬ tural worker is said to increase not merely in the short run because of the rise in the market price of corn but also following expansion of cultiva¬ tion. It is, however, preceded by the explicit assumption, introduced be¬ cause of criticism by Ricardo, that there occurs only a small expansion of output compared with the original volume.77 Malthus failed to clarify adequately his view of the precise behaviour of the rate of agricultural profits during his account of expansion in¬ duced by increased demand; it is the rate of total surplus, not the rate of profit, which is unambiguously said to increase. Moreover, the nature of

76

these causes fresh land may be taken into cultivation ... With regard to manufac¬ tures in this case if they did not rise immediately from increased demand, some of the capital vested in them would go to the land till the level was restored’ (18 April 1815, ibid., 217; see also letter of 5 May, ibid., 225; and 16 July, ibid., 236, where Malthus listed a variety of possible causes of rising corn prices unrelated to increased difficulty of production). Malthus ascribed the extensions of cultivation since 1795 to the stimulus provided by initially high corn prices. That the whole agricultural capital was more ‘productive’ was, he wrote, ‘confirmed by the cir¬ cumstance of a much smaller proportion of the population being employed on the land than formerly’ (l9l). 24 March 1815, ibid., 200-1

77

‘I maintain that if half a million more quarters of corn were wanting either from the natural increase of population, or from restrictions upon importation, that the effect would be first a rise of price, which rise of price would increase the produc¬ tiveness of all the capital previously employed, and awarding only 14 bushels in¬ stead of two quarters to the precisely the same number of men would leave a greater portion of the ten millions of quarters for the maintenance and encourage¬ ment of the manufacturing classes. In the mean time this increased cheapness in the instruments of production would occasion more poor land to be brought under cultivation, and more men to be employed upon the land; but still so as to leave a larger surplus for the manufacturing and mercantile classes, as it is impos¬ sible to suppose that the increased corn expences upon the new land should equal the diminished corn expences upon the old land’ (19 March 1815, ibid., 195). Malthus also discussed the obverse case of the introduction of free trade in corn. In this event, he forecast a decrease in the rate of (agricultural) profits as well as in rents. His argument now turns on the rise in wages and other cost items in terms of corn (5 May 1815, ibid., 223-4, cited above, note 70). The asser¬ tion that follows ‘that a fall in rent profits and wages at the same time would be compatible is difficult to appreciate since corn wages were just said to rise', Malthus may have had in mind a decline in the actual commodity basket.

152 THE ECONOMICS OF DAVID RICARDO

the relationship envisaged between the agricultural and the general rates of return is unclear. However, as far as the determination of the general rate is concerned, the emphasis appears to be upon events in the manu¬ facturing sector, while the agricultural rate of return must somehow come into line. Thus we read in the case of a rise in corn prices ‘occa¬ sioned by demand’: ‘What additional quantity of labour will be em¬ ployed on new land will depend entirely upon circumstances — upon the causes which determine the general rate of profits.’78 The implication thus may be that there occurs a temporary rise in the agricultural profit rate in consequence of higher corn prices, followed by extensions which bring the rate down to the level obtaining in manufacturing.79 The predominant role of the manufacturing sector in determining the general rate of return is also apparent in criticism of Ricardo’s interpreta¬ tion of his own table according to which the high profits prior to exten¬ sive capital accumulation reflect the low price of corn - and here Malthus reverts to his first sequence: ‘Now the error you appear to me to fall into is, that, of applying your neat simple and ingenious table to a state of things not contemplated in it, and to which it does not apply. The high profits of stock which appear in the early periods of your table are owing, not to the low relative price of corn (which in fact has a contrary tendency) but to the small quantity of capital in the country compared with the means of employing it, and particularly to the small quantity of capital employed in manufactures, which unless furnished very sparingly, could never bring such high pro¬ fits as could be obtained from the land.’80 A return to a higher profit rate could not, according to Malthus’s view of the matter, be assured by ‘a low price of corn’ - unless it represented a low relative price reflecting an absolute increase in the prices of manufactures ‘occasioned by scantiness of capital and high profits’ - for a low corn price has the opposite effect on agricultural profits. Malthus referred to the test-case of an added ‘large tract of rich land’ to illustrate. While there would indeed occur an in¬ crease in the rate of return the sequence of events would be very different from that envisaged by Ricardo in his Essay f again the emphasis is 78

Letter dated 18 April 1815, ibid., 216

79

An analysis of this kind will also be found in the Inquiry, 195f. Formally Malthus traced movements in rent to variations in the difference between ‘expences of cul¬ tivation’ (including profits) and revenue. An increase in this differential, which occurs during regular expansion was said to occur also in consequence of exoge¬ nous disturbances, namely agricultural improvements, on the one hand, and increases in the corn price due to foreign demand, on the other, (it is in this con¬ text that Malthus emphasized his belief that money wages rise in less proportion to the price of corn — see above, p. 148). It was conceded that the consequence will initially be higher profits rather than higher rents but following agricultural extensions rents will rise.

80

Works, VI, 217 (my emphasis). Cf. also his remarks ibid., 182, cited above, p. 148.

81

Cf. ibid., IV, 18. In Ricardo’s scheme profits rise in consequence of reduced money wages reflecting a fall in the price of corn.

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 153

upon the manufacturing sector: ‘Before any fall of [corn] price had taken place, capital would be removing fast both from the old land and from manufactures. There would be a real want of stock compared with the means of profitably employing it; manufactures would rise considerably in price, from higher profits, and corn not rising, on account of the abun¬ dance of rich land, the relative price of corn would become low; but as a consequence (remark) not as a cause of high profits.’82 In this context also the distinction is drawn between a relative fall in the corn price, reflecting an absolute rise in manufacturing prices ‘occasioned by high pro¬ fits’- profits entering supply price - and an absolute fall in the corn price, due to reduced foreign demand or to freer importation. In the latter case of increased imports, in contrast to that of an added tract, capital would ... be expelled from the land slowly by low profits, instead of removing with alacrity for high profits. Manufactures would be over¬ loaded with capital instead of being very scantily furnished with it; and nothing ... could under such circumstances so increase the prices of manufactures as to occasion generally high profits.’ While it was upon the manufacturing sector that Malthus focused in his analysis of the general rate of return in terms of the relationship between capital and ‘the means of employing it,’ we must also take into account his references to a change in the demand for manufactures ema¬ nating from the agricultural sector. The rise in the corn surplus due to higher corn prices is said, on various occasions, to be responsible for an increase in the demand for manufactures. His original assertion had been that ‘a greater quantity of raw produce would be set free from the old land for the use and encouragement of the manufacturing and mercantile classes.’83 But during the course of the exchange he was obliged to con¬ cede that ‘while the same number of men are employed on the old land and living as well this cannot be the case.’ He therefore altered the con¬ tention, taking into account both the increased corn output due to agri¬ cultural extensions and the higher corn price.84 The argument is rather casual and not well thought through; as Mal¬ thus himself pointed out, ‘the subject is very curious,’ and as yet not ‘properly matured.’ An indication of the provisional nature of the case may be seen in the fact that the effect on general profits emanating from

82

Ibid., VI, 218

83

Letter of 24 March, ibid., 201, paraphrasing the position expressed in letter of 15 March (see above, note 7l).

84

‘But then the greatly increased money value of the corn in the country arising both from its increased quantity and increased price cannot fail to occasion such an increased demand for manufactured and foreign products as to encourage the growth of them and to render improvements in machinery particularly advanta¬ geous. Under such circumstances general profits may rise with rising prices of corn, and fall with falling prices, as we find from experience, though such periods are not likely to be of long continuence’ [ibid., 201).

154 THE ECONOMICS OF DAVID RICARDO

the agricultural sector by way of demand is said, in the foregoing refer¬ ence, to be of short-run relevance only, while, by contrast, in a letter shortly thereafter, Malthus insisted that the increased agricultural pur¬ chasing power ‘must prevent the profits upon them [manufactures] from falling for any length of time.’ The argument, he wrote to Ricardo, ‘affects your theory essentially.’85 THE DEFENCE: REJECTION OF THE CORN MODEL

Ricardo’s position on problems relating to value and distribution be¬ tween the Essay on Profits and the Principles cannot be fully appreciated apart from the Malthusian challenge. Ricardo was opposed to the entire scheme of things outlined by Malthus in correspondence, which he re¬ garded as confused and over-complex in contrast to his own analysis. After weeks of debate he complained of ‘a labyrinth of difficulties; one is no sooner got over than another presents itself. Let me intreat you to give my simple doctrine fair consideration, and you must allow that it accounts for all the phenomena in an easy, natural manner.,8h We now take up Ricardo’s defence of his position. In the account of the Essay itself, I have argued that while Ricardo outlined a model of the agricultural sector in his tabular formulation in which the numeraire is corn, he did not, when he turned to the question of the determination of the general rate of return on capital, rely on a ‘corn model’ in the strict sense; that is to say, he did not maintain the view that the rate of profits in agriculture determines the general rate. His defence of the table should therefore be evaluated apart from the broader question of the general rate of profits, and this is the pattern adopted in what follows. Malthus’s principal objection to the table was the failure of Ricardo, as he saw it, to recognize that a relative increase in the price of corn to those of manufactures will reduce total production costs in terms of corn, be¬ cause of the presence of manufactured items in capital, including the 85 ‘[it] shews that there is ample room for an increase of profits upon the land; and if this increase of profit be prevented from taking place, it can only be owing to the diminished profits in manufactures, and consequently it would appear that manufacturing profits determined the profits upon the land, and not the profits upon the land, manufacturing profits. I cannot however help thinking that the increasing demand for manufactured commodities must prevent the profits upon them from falling for any length of time. If five coats be now necessary to pur¬ chase the same quantity of corn as could be purchased formerly by four, will it not to a certainty follow, that the whole quantity of corn in the country will exchange for a greater number of coats than before; and consequently that there will be both the power and will to purchase with the raw produce of the country, a greater quantity of manufactured and foreign commodities. This is a most important and vital question as it appears to me ...’ (letter dated 2 April, ibid., 207-8). 86

Letter dated 17 April 1815, ibid., 214

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 155

wages component thereof. In brief, Malthus insisted that corn is not the only basic in the system, with ruinous consequences for the Ricardian argument. Now Sraffa emphasized the Malthusian objection to Ricardo,8' but he neglected to consider Ricardo’s reply early in 1815. The point to note is that Ricardo positively did not rest his defence upon the assumption that corn was the only basic good; and he agreed readily that the per capita corn wage would fall as the price of corn increased, a result later emphasized in the Principles. Ricardo conceded at the outset of the debate that the consequence of a rise in the price of corn would indeed be that insisted upon by Malthus, reduced total costs in corn terms and consequently an increase in the corn surplus and in the rate of surplus — but only in the case that agricul¬ tural extensions are ruled out: T cannot hesitate in agreeing with you,’ he wrote, that if from a rise in the relative value of corn less is paid [in terms of corn] for fixed capital and wages, — more of the produce must remain for the landlord and farmer together, — this is indeed self evident, but is really not the matter of dispute between us.’88 Beyond this he refused to go, for his attention was entirely on the long-run cost determination of prices.8’ Accordingly, he rejected Malthus’s contentions on the grounds that any rise in the price of corn reflected resort to inferior land and necessarily implied an increase in total labour and fixed capital costs, in terms of corn, relative to the increase in the surplus. At the same time - and this is quite crucial for an accurate appreciation of Ricardo he agreed readily that the per capita corn wage will indeed decline during secular advance: A rise of the price of corn and a fall in the corn price of labour is in my opinion incompatible, unless it be owing to something in the currency and it is not necessary to enquire here into what effects that would produce. Observe that I do not question that each individual labourer might receive a less com price of labour because I believe that would be the case, but I question whether the whole amount of wages

&c. paid for the cultivation of the land can be diminished with an increase of the 87 88

Ibid., I, xxxiin 14 March 1815, ibid., VI, 189

89

Cf. ibid.: ‘Corn can only permanently rise in its exchangeable value when the real expences of its production increase.’ See also a comment of 21 April 1815: ‘It appears to me that my table is applicable to all cases in which the relative price of corn rises from more labour being required to produce it’ [ibid., 220), and another of 27 June 1815 [ibid., 233) which isolates only ‘two causes which may cause a rise of prices, - one depreciation of money, the other the difficulty of pro¬ ducing,’ which should be read together with a remark made a month later (30 July, ibid., 24l) emphasizing Ricardo’s concern with a ‘real’ rather than a nomi¬ nal increase in the price of corn: ‘A really high price of corn is always an evil; in this opinion I think you would concur because it is always occasioned by diffi¬ culty of production. I know of no other cause ...’

156 THE ECONOMICS OF DAVID RICARDO

exchangeable value of corn. If no more labourers were employed and the price of corn rose your proposition could not be disputed, but the cause of the rise of the price of corn is solely on account of the increased expence of production.

This position is consistent with the tabular formulation of the Essay according to which - despite an increase in the corn surplus or ‘total produce in quarters of wheat, after paying the cost of production’ - the ratio of the corn surplus to corn costs declines steadily.11 But Ricardo’s defence on the grounds that a rise in the corn price necessarily implies a reduced ratio can scarcely be regarded as a rigorous one. We turn now to consider this issue in some detail, for the various arithmetical illustrations devised by Ricardo in defence of his position provide us with a splendid opportunity to pin down the precise assumptions of the analysis and thus arrive at an accurate evaluation of the ‘status’ of the table in the Essay, and of the contrasts between the Essay and the Principles. In the first place, a very brief example was given to support the state¬ ment already referred to, ‘that corn can only permanently rise in its ex¬ changeable value when the real expences of its production increase.’ In the event that 5000 quarters require an input consisting of ‘wages &cT amounting to 2500 quarters, while 10,000 quarters require 5500 quarters, the price of corn will increase by 10 percent.92 This conclusion is based upon a principle of average-cost rather than marginal-cost pricing; and the proposition that an increase in the (average) cost of corn production (in corn terms) leads to a proportionate increase in the money price of corn, implies that money prices are determined by relative (average) corn costs of production and that the corn cost of producing a unit of money is unchanged.93 Now Malthus commented upon Ricardo’s failure to emphasize margi¬ nal costs in his calculations: ‘You seem to forget ... that it is only the last 90

Ibid.., 189 (my emphasis)

91

A final comment in the same letter [ibid., 190) is, however, more difficult to reconcile with the table: ‘You will see by what I have said,’ Ricardo closed, ‘that a rise in the price of corn is always in my opinion accompanied by a less material surplus produce, but it may be of equal value as compared with other things. Of this produce the landlord gets so large a share that in spite of the rise of produce the situation of the farmer is constantly getting worse.’ The fact is, however, that in the Essay the surplus produce rises, and indeed a week later, as we shall see below, p. 164, he actually emphasized this feature: ‘If you meant only that the surplus produce would increase with every accumulation of capital on the land, though in a diminishing ratio to the capital employed on the land, that is not only advanced, but strenuously maintained as the groundwork of my theory, and is the basis also on which my table is formed.’ Accordingly, the earlier comment can only refer to the ratio of the total surplus to costs; moreover, in the table it is indeed the case that the ‘rent per cent on the whole capital’ rises while the ‘profit per cent on the whole capital’ declines.

92

Ibid., 189

93

This latter assumption is not satisfactory since Ricardo’s allowance for a decline in the per capita corn wage implies a decline in corn costs of producing money, even

THE ‘ESSAY ON PROFITS’ AND RICARDO’S DEFENCE 157

500000 quarters of corn that have been added to the mass, which require for their production a greater quantity of capital.’94 To this criticism Ricardo replied: I think you err in supposing it possible that the propor¬ tion of the whole corn expenditure, to the produce obtained, can fall, with an increase in the price of corn. The two are incompatible, — either the whole corn expences of production will be increased or not. If they be the price of corn will rise, — but if they be not I can see no reason for a rise in the price of corn. I admit that it is only the last portion of capital employed on the land which will be attended with an increased corn expence, but unless it renders the whole produce together at an in¬ creased expence the price of produce will not rise.’95 The emphasis thus remained upon average-cost pricing but Ricardo relied upon the proposi¬ tion that in light of diminishing returns at the ‘margin’ average costs must increase. An illustration devised to explain the case more fully (see Table i) explicitly assumes the wage basket to be composed of a fixed-proportions mix of corn and (manufactured) necessaries, the commodity wage to be constant, and per capita corn wages to fall in the course of development as the relative price of food rises. Pricing is still on an average-producti¬ vity basis, but in the present case Ricardo utilized, at least provisionally, a labour-quantity rather than a labour-cost theory of price. Ricardo’s objective in devising the illustration was to demonstrate that an increase in the corn price necessarily implies a rise in the average corn costs of corn production, or a rise in ‘the proportion of the whole corn expendi¬ ture to the [corn] produce obtained.’ Since he utilized a labour-quantity theory of pricing, the price of corn rises by 20 per cent while average [corn] costs rise by only 5 per cent. But this latter consequence simply follows from the particular assumption made regarding the labourer’s expenditure pattern; it is quite possible for average corn costs in corn terms to decline in the event that the corn component in the basket is accorded a somewhat greater weight so that the per capita decline in corn wages takes on greater significance. In brief, Ricardo completely failed to make his case on the basis of a labour-quantity theory of value.96 though no changes occur in labour input per unit of the monetary commodity. In brief, Ricardo’s implicit use of a labour-cost, as distinct from a labour-quantity, theory involves difficulties which he did not consider. It might be argued, how¬ ever, that since the fall in per capita corn wages affects labour in ail commodities

94 95 96

equally this variation can be ignored as a cause of relative price variations so that any changes in money prices reflect an altered labour input only. 15 March, ibid., 190-1 17 March, ibid., 192-3 For example, with the consumption patterns defined in columns 4 and 5, average corn costs decline:

I II

1 £4 £4.16.0

2 2.5 4.5

3 10 15

4 1.5 1.5

5 £2 £2

6 2 1.5

7 5m 6.75m

8 5m 4.75m

9 .5 .475

hJ CQ

1

i

1UU| 1

ill y ii .».