RICARDO'S PRINCIPLES -- A MINI-TUTORIAL PART ONE

David Ricardo was born in 1772, four years before the publication of Adam Smith's Wealth of Nations, and died in 1823, six years after the publication of his great work, On the Principles of Political Economy and Taxation. For more information about Ricardo's life and work, you may read the important and very long Introduction by Piero Sraffa to his magisterial edition of the complete works of Ricardo, published by Cambridge University Press. You might also take a look at the 1958 book on Ricardian Economics by Mark Blaug, a noted economic historian. [Personal aside: In 1984, a brilliant student named Ricardo Blaug turned up in one of my courses at the University of Massachusetts. Sure enough, he was the son of Mark Blaug, who had named his son David Ricardo Blaug. Ricardo has since gone on to a distinguished career in the English academic world. We are still in touch from time to time.]

Ricardo was close friends with Jeremy Bentham, Thomas Malthus, and James Mill, and according to Sraffa, it was in fact the latter who persuaded Ricardo to expand an earlier essay into the book-length Principles. [Another personal aside of what might be called an "apostolic succession" nature. Bentham was the godfather of young John Stuart Mill, who in turn was the godfather of Bertrand Russell. In 1954, at the age of twenty, I had tea with Russell, who was then eighty-two. So I can claim to have taken tea with the godson of the godson of Jeremy Bentham!]

Continuing in this stroll down memory lane, I will report that I first encountered Ricardo's thought and writings in the Spring of 1978. After six and a half years at UMass, I had earned a sabbatical leave, which I chose to devote to the study of Economics, a subject about which I knew practically nothing. For reasons explained in my Autobiography, I spent the month of January teaching myself Linear Algebra, up through the theory of eigenvectors and eigenvalues and the Perron-Frobenius theorems. Then I exercised my privilege as a member of the faculty to sit in on, and work through the materials of, three graduate courses in the splendid UMass Economics Department, which even then had acquired a well-deserved reputation as the foremost radical Economics department in the country. My first course, with a fine neo-classical economist, Donald Katzner, was devoted to a mathematical treatment of Microeconomics, using a then standard text by Henderson and Quandt. [Boundary conditions and Bordered Hessians and all that stuff.] The second course, devoted to Macroeconomics, was taught by a new young member of the department, Robert Costrell. [I subsequently attended a boisterous and quite enjoyable Seder at his home.]

The third course was taught by a brilliant thirty-three year old economist from Cambridge, England named John Eatwell. The title of the course was "Theories of Value," which turned out to have nothing at all to do with what philosophers like me understood by that phrase. It was taught at a frighteningly high level of abstraction, and was attended by a number of members of the Economics Department as well as some very fortunate students. Needless to say, I was operating way above my pay grade, but I put on my game face and quizzed some of the friends I had made in the Econ Department when I got lost. On the very first day, Eatwell said that he was going to start with a discussion of theories of price. I raised my hand [no one ever accused me of being shy] and asked why it was important to have a theory that explained how much corn or linen or potatoes cost. He was so startled by the sheer naiveté of the question that he did not actually give me a coherent answer, but in time I worked out my own answer. As we shall see, the politically and ideologically most hotly contended issues in social theory turn on the answer to the simple question, "What determines the price at which commodities sell in the market?" [That brilliant and very charming young man is now, heaven help us, Baron Eatwell of Stratton St Margaret in the County of Wiltshire, a Labour member of the House of Lords. The English have an odd way of recognizing intellectual accomplishments.]

Before we turn to the first page of the Principles, it will be useful for me to say a few words about some background matters, historical and theoretical, to set the stage for Ricardo. When Smith published Wealth of Nations in 1776, England had an agricultural economy with a small but growing sector devoted to factory production. The reigning economic theory was Mercantilism, which taught that a nation's wealth consisted essentially in its store of gold and silver. [I am going to simplify all of this for the sake of brevity.] The more gold and silver a nation possessed, the wealthier it was thought to be. From this it followed that each nation must strive as hard as it could to sell more abroad than it bought, maintaining what was called a "favorable balance of trade," for each sale brought gold and silver to its shores as the buyer and seller settled up, whereas each purchase resulted in gold and silver leeching away to foreign owners. The result was a series of high tariffs imposed on foreign goods and a seemingly endless series of wars over markets in Africa and Asia.

Smith was convinced [correctly, by the way -- Ron Paul take note] that this theory was wrong -- hence the full title of his great work: "An Inquiry into the Nature and Causes of the Wealth of Nations." The success of Spain and Portugal in locating and stealing the gold and silver of the peoples of the Americas resulted for a time in their experiencing an enormous boom, as they used the pilfered metals to buy spices, luxurious cloths, and fancy horses, and to hire hordes of armed men to protect their piles of goods and conquer new colonies. But over time, this money flew north to the Low Countries, where industrious merchants flourished. By Smith's day, Spain and Portugal were no longer the envy of the European world. Smith argued that the wealth of a nation consisted in the productivity of its people. High tariffs simply impeded trade and resulted in a lowered level of productivity for the nation imposing them. Because the regime of tariffs was inevitably reciprocal, the entire undertaking was self-defeating.

Smith's most urgent concern was the conflict he perceived between the interests of the landed gentry, who owned or controlled the agricultural land on which England's productivity depended, and the interests of the new entrepreneurial class. [Keep in mind that in 1776, much of this entrepreneurial activity consisted of renting land owned by the gentry and putting it to use growing crops and grazing sheep. Relatively less of their investments were in the new industrial sector, important though it was.] Smith had nothing but contempt for the landed gentry, whom he described as parasitically maintaining a luxurious standard of living by hiring crowds of servants who engaged in "unproductive labour."

It followed immediately from Smith's analysis that the landed gentry and the entrepreneurs were engaged in an irresoluble conflict. Since the rents on which the landed gentry lived were paid out of the profits of the entrepreneurs, these two magnitudes -- rents and profits -- varied inversely. Smith's great fear, and that of Ricardo forty-one years later, was the advent of what was called "the stationary state." This was a condition of zero growth in which the rents demanded by the landowners would drain away so much of the profits earned by the productive activities of the entrepreneurs that virtually nothing would remain for the new investment required for expanded production.

The third great social and economic class -- the workers -- were not a focus of Smith's concern. Their meager food and shelter were understood by him to be one of the costs of production, on a par with seed corn and farm machinery -- what he called "stock." Thomas Malthus, whose Essay on the Principle of Population appeared a quarter of a century after The Wealth of Nations, argued that population would in all circumstances expand, driving down the income of the working classes to bare subsistence, and pressing against the available supplies of food.

It is perhaps over simple, but still essentially correct, to say that the story of classical Political Economy from Smith through Ricardo to Marx is the story of inevitable class conflict, with the focus of that conflict shifting from the opposition between landlords and entrepreneurs in Smith and Ricardo to the opposition between entrepreneurs and workers in Marx, the change being in part a result of the decline and defeat of the landed interests and the ascendancy of capital.

Let me say that again, because it is so important. It was not Karl Marx who introduced into classical Political Economy the idea of class warfare. That idea comes straight out of Smith and Ricardo. Marx simply took it over and offered a new and different analysis of it. So modern so-called "Conservatives" who celebrate Adam Smith [they tend not to know anything about David Ricardo] and decry "class warfare" are just dead ignorant. That idea was introduced by their hero, Smith, not by their nemesis, Marx.