III.

The Ricardian System

Principles of Political Economy and Taxation (1817) by David Ricardo was, in one sense, a critical commentary on the Wealth of Nations; in another sense, it gave an entirely new twist to the developing science of political economy. Ricardo invented the concept of an “economic model”, a tightly knit logical apparatus consisting of a few strategic variables that was capable of yielding, after some logical manipulation, results of enormous practical import. At the heart of the Ricardian system is the notion that economic growth must sooner or later peter out, owing to the rising cost of growing food on a limited land area. An essential ingredient of this argument is the Malthusian principle—enunciated in An Essay on the Principle of Population (1798) by Thomas Robert Malthus—that population constantly tends to increase up to the limits set by existing supplies of food. As the labour force increases, extra food to feed the extra mouths can be produced only by extending cultivation to less fertile soil, or by applying capital and labour to land already under cultivation, with diminishing results. Although wages are thereby held down, profits do not rise proportionately, because tenant farmers outbid each other for superior land. The chief beneficiaries of economic progress, therefore, are landowners.

Since the root of the trouble, according to Ricardo, is the declining yield of wheat per unit of land, one obvious solution is to import cheap wheat from other countries. Eager to show that Great Britain would benefit from specializing in manufactured goods and exporting them in return for food, Ricardo seized for proof on the “law of comparative costs”. He assumed that labour and capital are free to move within countries in search of the highest returns; between countries, however, they are not free to move. In these circumstances, Ricardo showed, the benefits of trade are determined by a comparison of costs within each country, rather than by a comparison of costs between countries. It pays a country to specialize in the production of those goods that it can produce relatively more efficiently and to import everything else; although Portugal may be able to produce everything more efficiently than Britain, Portugal is nevertheless well advised to concentrate its resources on wine production, in which its efficiency is relatively greater, and to import British textiles. The beauty of the argument is that if all countries take full advantage of the “territorial division of labour”, total world output is certain to be larger than it would be if some or all countries tried to become self-sufficient. Ricardo’s law became the fountainhead of 19th-century free trade doctrine, which would have been enough, if he had written nothing else, to give him a place in the economists’ pantheon.

The influence of Ricardo’s treatise was felt almost as soon as it was published, and for over half a century the Ricardian system dominated economic thinking in Britain. In 1848 the restatement of Ricardian thought by John Stuart Mill in his Principles of Political Economy brought it new authority. After 1870, however, most economists turned their backs on the range of problems that had concerned Ricardo and began to re-examine the foundations of the theory of value; that is, they became almost exclusively interested in the theory of why goods exchange at particular prices.