David Ricardo (1772-1823)

A successful trader in stocks who, like Malthus, devastated the optimistic idea of the market as an always way to improves society (basically, Adam Smith idea). While Smith saw the world as a concert, Ricardo saw conflict.

While Ricardo and Malthus shared objections against the mighty market, they had different point of views (sometimes opposite views). Indeed, oddly ones considering their careers.
Ricardo, the rich trader, was interested on economic laws (a theoretician) and against the rich landlords.
Malthus, the modest academician was interested in how well the economic laws were fitted to real world. He even defended the wealthy landowners.

In Ricardo’s view, society was not going up together on a escalator of progress: instead, the escalator worked different for different social classes: some advanced to the top effortless, while the guys who were making the escalator to move did not receive the benefits of their work. Moreover, Ricardo even identified those bad guys who got at the top of the escalator effortless: the landlords.

Ricardo identified two groups in the market: the rising industrialists who were working hard to get rich, and the landowners, already rich and not working that hard to keep their aristocratic parties. These two teams fought hard on parliament: the industrialist wanted to have cheaper food to their work force (that means free trading of crops). Not for humanitarian reasons, but to paid the workforce as low as they could. At the other side the landowners argued for protectionism to their business (not free trading of crops), producing expensive food.

Ricardo took one side which is clear in his statement: «The interest of the landlords is always apposed to the interest of every other class in the community». Ricardo was in the other class in the community.

To understand Ricardo position, we must understand Ricardo’s base vision on economy, which was much more simplistic than Smith. It was a real model; a simplified idea of the complex reality. The mains actors of the model were workers, the industrialists  and the landlords.

To Ricardo, the economy was always growing. Lets explain this in the next steps.

  1. As the capitalist accumulated, they saved and invested their savings in build new shops and factories.
  2. They new shops and factories requiere new workers (increasing the demand of workers). This boosted wages, temporary.
  3. High wages stops when workers started to have more kids, and they have to feed them. This increases population.
  4. As population expanded, there would be more mouth to feed. That means more grain is needed. More grain would demand more fields.
  5. As landlords uses their best lands firsts, the new fields won’t be as productive as the first ones. Then, cost increases (to produce the same quantity per area as a good field, the farmers should invest in fertilizers), and grain price would rise.
  6. As capitalist paid just enough to feed their workers, high grain prices would lead to high wages again.

Those six steps, only lead to one thing: tragedy. The industrialist, the man responsible for the progress, got into a double squeeze. First, he has to pay more to their workers, since grain is higher. So if the new business is not that well, high wages surely is going to struggle the poor industrialist. Secondly, the landlords are earning more, regards their old good lands. Since they are earning more, someone is paying more to him. That someone is the industrialist!.
So the only class that could get better in this growing market are the landlords.
What about the workers? They were condemned to subsistence wages as every time they earn more, they have more children. The industrialist saved and invested, only to find that wages are higher and profit are smaller. Meantime, the landlord just has to sit back and enjoy their profits increased.

That is, up until there is a greater market with more good lands and cheaper grain.

Back in that time, there were the Corn Laws (since 1815). The Corn Laws were trade laws designed to protect UK grain producers from outsiders producers. The laws granted a monopoly to the farmers. Whats the problem with the monopoly? High crop prices. Whats the problem with high crop prices? As we seen, high wages. Whats the problem with high wages? Less profit to invest for the capitalist. Whats the problem with low profit for capitalist? Less investment in machines, factories or development. Don’t forget we are in the rising of Industrial Revolution, and the thirst for development and entrepreneurship was getting in the veins o society. Particularly, Corn Laws were against Ricardo’s vision of UK as the World’s Workshop. But is not only a vision, it is completely logical idea with two purposes in mind: growing and development.

Why UK should become in the World’s Workshop? Because Ricardo believe they were good at manufacturing, and they could get better (be a wealthier country) if they dedicate to do what they are good at. Easy to say, but not that intuitive.
The idea is called Ricardo’s Law of Comparative Advantage. This is the diamond of Ricardo’s theory. Here a way to explain it:

First, recall Adam Smith’s absolute advantage trade model. From Bucholtz:
Imagine him (Adam Smith) espousing his theory and insulting the French by saying, «We don’t like them. They eat frogs. And I had a tedious time in Toulouse. But if they can make wine cheaper than we can, we should toast them and drink their wine. If they cannot make wine cheaply, let’s just snicker at them across the English Channel». A logical, intuitively correct statement.

Ricardo will not snicker at the French, and he could even trade with them!.

Lets say that there are only two guys on a island. One is an urban chilean, and other from the country side (chilean too, of course). Two task must be done in the island, fishing and collecting water.

The countryman, could have a fish dinner in 5 hours, and get a gallon of fresh water in 2 hours. The urban guy, could have a fish dinner in 10 hours, and a gallon of fresh water in 5 hours.

Adam Smith logic would say that the good countryman should move away from the urban guy since the country guy outperforms the urban in everything. But, in Ricardo’s view, they should work as a team!.

To see this, let’s calculate how many fish dinner and fresh water they could have on their own. Let say they work 60 hours per week, each. They also dedicate half time in each activity (30 hours per week making fish dinner, and 30 hours per week collecting fresh water)

If they work separated, they could produce:

Countryman: \frac{30}{5}=6 fish dinners and \frac{30}{2}=15 gallons of fresh water.
Urban guy: \frac{30}{10}=3 fish dinners and \frac{30}{5}=6 gallons of fresh water.

So in total there are 9 dinners and 21 gallons of fresh water per week in the island. Lets say 30 units of production of the island, per week.

What if they specialize? What if they work full time in just one task?
Lets say:

Countryman: \frac{60}{2}=30 gallons of fresh water.
Urban guy: \frac{60}{10}=6 fish dinners.

That is 36 units of production of the island, per week. That is a 20% of increment!. Not even counting that with specializing, they could perform even better in each task.

So, seeing just in rough numbers, task division has brought more production. And even more, it requieres the sociabilization of the system. The countryman and the urban guy could not get along very well at the beginning, but as they could see, their partnership has come with more wealth than working on their own and mumbling bad words against each other.

How different is from Adam Smith view? In Smith model, everybody gradually became better off as division of labor increased and made society more wealthy. But for Ricardo, the only class that could possibly benefits from progress of society were the landlords, unless they hold on grain prices were broken.

So why aren’t we ruled by landlords nowadays? Industrialism saved us, it has put brake on births and increase our ability to raise food from even very bad lands. Not to mention that free trade has ensured us low prices on grains.

What is the most valuable present hat Ricardo gave us then? The powerful tool of modeling. It is Ricardo’s gift for abstraction that we owe the claim of economics to be considered as a science.

One final observation, Ricardo saw the workers a passive class. There was impossible for them to introduce changes at the system. Not even think in a new one. That is about to change, in the next post.

3 pensamientos en “David Ricardo (1772-1823)

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