3. James Mill, Ricardo, and the Ricardian system

3.1 James Mill, the radicals' Lenin

3.2 Mill and libertarian class analysis

3.3 Mill and the Ricardian system

3.4 Ricardo and the Ricardian system, I: macro-income distribution

3.5 Ricardo and the Ricardian system, II: the theory of value

3.6 The law of comparative advantage

3.7 Notes

3.1 James Mill, the radicals' Lenin

James Mill (1771–1836) was surely one of the most fascinating figures in the history of economic thought. And yet he is among the most neglected. Mill was perhaps one of the first persons in modern times who might be considered a true ‘cadre man’, someone who in the Leninist movement of the next century would have been hailed as a ‘real Bolshevik’. Indeed, he was the Lenin of the radicals, creating and forging philosophical radical theory and the entire philosophical radical movement. A brilliant and creative but an insistently Number 2 man, Mill began as a Lenin seeking his Marx. In fact, he simultaneously found two ‘Marxes’, Jeremy Bentham and David Ricardo. He met both at about the same time, at the age of 35, Bentham in 1808 and Ricardo around the same date. Bentham became Mill's philosophic Marx, from whom Mill acquired his utilitarian philosophy and passed it on to Ricardo and to economics generally. But it has been largely overlooked that Mill functioned creatively in his relationship with Bentham, persuading the older man, formerly a Tory, that Benthamite utilitarianism implied a political system of radical democracy. David Ricardo (1772–1823) was an unsophisticated, young, but retired wealthy stockbroker (actually bond dealer) with a keen interest in monetary matters; but Mill perceived and developed Ricardo as his ‘Marx’ in economics.

Until he acquired his post at the East India Company in 1818, at the age of 45, Mill, an impoverished Scottish emigré and freelance writer in London, lived partially off Bentham, and managed to keep on good enough formal terms with his patron despite their severe personality conflicts. An inveterate organizer of others as well as himself, Mill tried desperately to channel Bentham's prolific but random scribblings into a coherent pattern. Bentham meanwhile wrote privately to friends complaining of the impertinent interference of this young whippersnapper. Mill's publication of his massive History of India in 1818 won him immediate employment to an important post at the East India Company, where he rose to the head of the office in 1830 and continued there until his death.

As for David Ricardo, self-taught and diffident, he scarcely acted as a Great Man. To the contrary, his admiration for Mill, his intellectual mentor and partly his mentor in economic theory, allowed him to be moulded and dominated by Mill. And so Mill happily hectored, cajoled, prodded and bullied his good friend into becoming the ‘Marx’, the great economist, that Mill felt for whatever reason he himself could or should not be. He pestered Ricardo into writing and finishing his masterpiece, The Principles of Political Economy and Taxation (1817), and then into entering Parliament to take an active political role as leader of the radicals. Mill was then delighted to become the leading and highly devoted Ricardian in economics.

As a ‘Lenin’ then, James Mill had a far more active intellectual role than the real Lenin would ever enjoy. Not only did he integrate the work of two ‘Marxes’; he contributed substantially to the system itself. Indeed, in endless conversations Mill instructed Ricardo on all manner of topics, and Mill looked over, edited, and undoubtedly added to many drafts of Ricardo's Principles. We have already seen, for example, that it was Mill who first absorbed and adopted Say's law and passed it on to his pupil Ricardo. Recent researches indicate that James Mill may have played a far more leading role in developing Ricardo's magnum opus than has been believed – for example, in arriving at and adopting the law of comparative advantage.

Mill's stance is surely unique in the history of social thought. Very often theorists and writers are anxious to proclaim their alleged originality to the skies (Adam Smith being an aggravated though not untypical case). But what other instance is there of a man far more original or creative than he liked to claim; how many others have insisted on appearing to be a mere Number 2 man when in many ways they were Number 1? It is possible, it should be noted, that the explanation for this curious fact is simple and materio-economic rather than depth-psychological. Mill, son of a Scottish shoemaker, was an impoverished Scot without steady employment trying to make his way and raise a family in London.. Bentham was a wealthy aristocrat who functioned as Mill's patron; Ricardo was a wealthy retired stockbroker. It is certainly possible that Mill's posture as devoted disciple was a function of a poor man keeping his wealthy mentor-disciples happy as well as maximizing the public's reception for their common doctrines.

As a pre-eminent cadre man, Mill possessed all the strengths and weaknesses of that modern type. Humourless, eternally the didact, but charismatic and filled with prodigious energy and determination, Mill found enough time to carry on an important full-time job at the East India House, while yet functioning as a committed scholar-activist on many levels. As a scholar and writer, Mill was thorough and lucid, committed strongly to a few broad and overriding axioms: utilitarianism, democracy, laissez-faire. On a scholarly level, he wrote important tomes on the history of British India, on economics, on political science, and on empiricist psychology. He also wrote numerous scholarly reviews and articles. But strongly committed, as Marx would be, to changing the world as well as understanding it, Mill also wrote countless newspaper articles and strategic and tactical essays, as well as tirelessly organizing the philosophic radicals, and manoeuvring in Parliament and in political life. With all that, he had the energy to preach and instruct everyone around him, including his famous and failed attempt to brainwash his young son John. But it must be noted that Mill's fierce and fervent education of John was not simply the crotchet of a Victorian father and intellectual; the education of John Stuart was designed to prepare him for the presumptively vital and world-historical role of James's successor as leader of the radical cadre, as the new Lenin. There was a method in the madness.

James Mill's evangelical Calvinist spirit was tailor-made for his lifelong cadre role. Mill was trained in Scotland to be a Presbyterian preacher. During his days as a literary man in London he lost his Christian faith and became an atheist, but, as in the case of so many later evangelically trained atheist and agnostic intellectuals, he retained the grim, puritanical and crusading habit of mind of the prototypical Calvinist firebrand. As Professor Thomas perceptively writes:

This is why Mill, a sceptic in later life, always got on well with (Protestant) dissenters [from the Anglican Church]... He may have come to reject belief in God, but some form of evangelical zeal remained essential to him. Scepticism in the sense of non-commitment, indecision between one belief and another, horrified him. Perhaps this accounts for his long-standing dislike of Hume. Before he lost his faith, he condemned Hume for his infidelity; but even when he had come to share that infidelity, he continued to undervalue him. A placid scepticism which seemed to uphold the status quo was not an attitude of mind Mill understood.¹

Or perhaps Mill understood Hume all too well, and therefore reviled him.

Mill's Calvinism was evident in his conviction that reason must keep stern control over the passions – a conviction which hardly fitted well with Benthamite hedonism. Cadre men are notorious puritans, and Mill puritanically disliked and distrusted drama or art. The actor, he charged, was ‘the slave of the most irregular appetites and passions of his species’, and Mill was hardly the one to delight in sensuous beauty for its own sake. Painting and sculpture Mill scorned as the lowest of the arts, only there to gratify a frivolous love of ostentation. Since Mill, in a typically Benthamite utilitarian manner, believed that human action is only ‘rational’ if done in a prudent, calculating manner, he demonstrated in his History of British India a complete inability to understand anyone motivated by mystical religious asceticism or by a drive for military glory or self-sacrifice.

If Emil Kauder is right, and Scottish Calvinism accounts for Smith's introduction of the labour theory of value into economics, then Scottish Calvinism even more accounts for James Mill's forceful and determined crusade for the labour theory of value and perhaps for its playing a central role in the Ricardian system. It also might explain the devoted adherence to the labour theory by Mill's fellow Scot and student of Dugald Stewart, John R. McCulloch.

A prime, and particularly successful example of Mill the cadre man at work was his role in driving through Parliament the great Reform Bill of 1832. The centrepiece of Mill's political theory was his devotion to democracy and universal suffrage; but he was sensibly willing to settle, temporarily, for the Reform Bill, which decisively expanded British suffrage from an aristocratic and gerrymandered to a large middle-class base. Mill was the behind-the-scenes ‘Lenin’ and master manipulator of the drive for the Reform Bill. His strategy was to play on the fear of the timorous and centrist Whig government that the masses would erupt in violent revolution if the bill were not passed. Mill and his radicals knew full well that no such revolution was in the offing; but Mill, through friends and allies placed strategically in the press, was able to orchestrate a deliberate campaign of press deception that fooled and panicked the Whigs into passing the bill. The campaign of lies was engaged in by important sectors of the press: by the Examiner, a leading weekly owned and edited by the Benthamite radical Albany Fonblanque: by the widely read Morning Chronicle, a Whig daily edited by Mill's old friend John Black, who made the paper a vehicle for the utilitarian radicals; and by the Spectator, edited by the Benthamite S. Rintoul. The Times was also friendly to the radicals at this point, and the leading Birmingham radical, Joseph Parkes, was owner and editor of the Birmingham Journal. Not only that; Parkes was able to have his mendacious stories on the allegedly revolutionary public opinion of Birmingham printed as factual reports in the Morning Chronicle and the Times. So well did Mill accomplish his task that most later historians have been taken in as well.

Ever the unifier of theory and praxis, James Mill paved the way for this organized campaign of deception by writing in justification of lying for a worthy end. While truth was important, Mill conceded, there are special circumstances ‘in which another man is not entitled to the truth’. Men, he wrote, should not be told the truth ‘when they make bad use of it’. Ever the utilitarian! Of course, as usual, it was the utilitarian who was to decide whether the other man's use was going to be ‘good’ or ‘bad’.

Mill then escalated his defence of lying in politics. In politics, he claimed, disseminating ‘wrong information’ (or, as we would now say, ‘disinformation’) is ‘not a breach of morality, but on the contrary a meritorious act... when it is conducive to the prevention of misrule. In no instance is any man less entitled to right information, than when he would employ it for the perpetuation of misrule’.

A decade and a half later, John Arthur Roebuck, one of Mill's top aides in the campaign, and later a radical MP and historian of the drive for reform, admitted that

to attain our end, much was said that no one really believed; much was done that no one would like to own... often, when there was no danger, the cry of alarm was raised to keep the House of Lords and the aristocracy generally in what was termed a state of wholesome terror.

In contrast to the ‘noisy orators who appeared important’ in the campaign, Roebuck recalled, were the ‘cool-headed, retiring, sagacious determined men... who pulled the strings in this strange puppet-show’. ‘One or two ruling minds, to the public unknown’, manipulated and stage-managed the entire movement. They ‘use[d] the others as their instruments...’. And the most cool-headed, sagacious and determined was the master puppeteer of them all, James Mill.

Although he worked as a high official for the East India Company and could not run for parliament himself, James Mill was the unquestioned cadre leader of the group of 10–20 philosophic radicals who enjoyed a brief day in the sun in Parliament during the 1830s. Mill continued to be their leader until he died in 1836, and then the others attempted to continue in his spirit. While the philosophic radicals proclaimed themselves Benthamites, the aging Bentham had little to do personally with this Millian group. Most of the parliamentary philosophic radicals had been converted personally by Mill, beginning with Ricardo over a decade earlier, and also including his son John Stuart, who for a while succeeded his father as radical leader. Mill, along with Ricardo, also converted the official leader of the radicals in Parliament, the banker and later classical historian George Grote (1794–1871). Grote, a self-educated and humourless man, soon became an abject tool of James Mill, whom he greatly admired as ‘a very profound thinking man’. As Mill's most faithful disciple, Grote, in the words of Professor Joseph Hamburger, was ‘so inoculated, as it were’ that for him all of Mill's dicta ‘assumed the force and sanction of duties’.

The Millian circle also had a fiery cadre lady, Mrs Harriet Lewin Grote (1792–1873), an imperious and assertive militant whose home became the salon and social centre for the parliamentary radicals. She was widely known as ‘the Queen of the Radicals’, of whom Cobden wrote that ‘had she been a man, she would have been the leader of a party’. Harriet testified to Mill's eloquence and charismatic effect on his young disciples, most of whom were brought into the Millian circle by his son, John Stuart. A typical testimony was that of William Ellis, a young friend of John, who wrote in later years of his experience of James Mill: ‘He worked a complete change in me. He taught me how to think and what to live for.’

3.2 Mill and libertarian class analysis

The theory of class conflict as a key to political history did not begin with Karl Marx. It began, as we shall see further below, with two leading French libertarians inspired by J.B. Say, Charles Comte (Say's son-in-law), and Charles Dunoyer, in the 1810s after the restoration of the Bourbon monarchy. In contrast to the later Marxist degeneration of class theory, the Comte-Dunoyer view held the inherent class struggle to focus on which classes managed to gain control of the state apparatus. The ruling class is whichever group has managed to seize state power; the ruled are those groups who are taxed and regulated by those in command. Class interest, then, is defined as a group's relation to the state. State rule, with its taxation and exercise of power, controls, and conferring of subsidies and privileges, is the instrument that creates conflicts between the rulers and the ruled. What we have, then, is a ‘two-class’ theory of class conflict, based on whether a group rules or is ruled by the state. On the free market, on the other hand, there is no class conflict, but a harmony of interest between all individuals in society cooperating in and through production and exchange.

James Mill developed a similar theory in the 1820s and 1830s. It is not known whether he arrived at it independently or was influenced by the French libertarians; it is clear, however, that Mill's analysis was devoid of the rich applications to the history of western Europe that Comte, Dunoyer, and their young associate, the historian Augustin Thierry, had worked out. All government, Mill pointed out, was run by the ruling class, the few who dominated and exploited the ruled, the many. Since all groups tend to act for their selfish interests, he noted, it is absurd to expect the ruling clique to act altruistically for the ‘public good’. Like everyone else, they will use their opportunities for their own gain, which means to loot the many, and to favour their own or allied special interests as against those of the public. Hence Mill's habitual use of the term ‘sinister’ interests as against the good of the public. For Mill and the radicals, we should note, the public good meant specifically laissez-faire-government confined to the minimal functions of police, defence and the administration of justice.

Hence Mill, the pre-eminent political theorist of the radicals, harked back to the libertarian Commonwealthmen of the eighteenth century in stressing the need always to treat government with suspicion and to provide checks to suppress state power. Mill agreed with Bentham that ‘If not deterred, a ruling elite would be predatory’. The pursuit of sinister interests leads to endemic ‘corruption’ in politics, to sinecures, bureaucratic ‘places’ and subsidies. Mill lamented: ‘Think of the end [of government] as it really is, in its own nature. Think next of the facility of the means – justice, police, and security from foreign invaders. And then think of the oppression practised upon the people of England under the pretext of providing them.’

Never has libertarian ruling-class theory been put more clearly or forcefully than in the words of Mill: there are two classes, Mill declared, ‘The first class, those who plunder, are the small number. They are the ruling Few. The second class, those who are plundered, are the great number. They are the subject Many’. Or, as Professor Hamburger summed up Mill's position: ‘Politics was a struggle between two classes – the avaricious rulers and their intended victims.’²

The great conundrum of government, concluded Mill, was how to eliminate this plunder: to take away the power ‘by which the class that plunder succeed in carrying on their vocation, has ever been the great problem of government’.

The ‘subject Many’ Mill accurately termed ‘the people’, and it was probably Mill who inaugurated the type of analysis that pits ‘the people’ as a ruled class in opposition to the ‘special interests’. How, then, is the power of the ruling class to be curbed? Mill thought he saw the answer: ‘The people must appoint watchmen. Who are to watch the watchmen? The people themselves. There is no other resource; and without this ultimate safeguard, the ruling Few will be forever the scourge and oppression of the subject Many.’

But how are the people themselves to be the watchmen? To this ancient problem Mill provided what is by now a standard answer in the western world, but still not very satisfactory: by all the people electing representatives to do the watching.

Unlike the French libertarian analysts, James Mill was not interested in the history and development of state power; he was interested only in the here and now. And in the here and now of the England of his day, the ruling Few were the aristocracy, who ruled by means of a highly limited suffrage and controlled ‘rotten boroughs’ picking representatives to Parliament. The English aristocracy was the ruling class; the government of England, Mill charged, was ‘an aristocratical engine, wielded by the aristocracy for their own benefit’. Mill's son and ardent disciple (at that time), John Stuart, argued in a Millian manner in debating societies in London that England did not enjoy a ‘mixed government’, since a great majority of the House of Lords was chosen by ‘200 families’. These few aristocratic families ‘therefore possess absolute control over the government... and if a government controlled by 200 families is not an aristocracy, then such a thing as an aristocracy cannot be said to exist’. And since such a government is controlled and run by a few, it is therefore ‘conducted wholly for the benefit of a few’.

It is this analysis that led James Mill to place at the centre of his formidable political activity the attainment of radical democracy, the universal suffrage of the people in frequent elections by secret ballot. This was Mill's long-run goal, although he was willing to settle temporarily – in what the Marxists would later call a ‘transition demand’ – for the Reform Bill of 1832, which greatly widened the suffrage to the middle class. To Mill, the extension of democracy was more important than laissez-faire, for to Mill the process of dethroning the aristocratic class was more fundamental, since laissez-faire was one of the happy consequences expected to flow from the replacement of aristocracy by the rule of all the people. (In the modern American context, Mill's position would aptly be called ‘right-wing populism’.) Placing democracy as their central demand led the Millian radicals in the 1840s to stumble and lose political significance by refusing to ally themselves with the Anti-Corn Law League, despite their agreement with its free trade and laissez-faire. For the Millians felt that free trade was too much of a middle-class movement and detracted from an overriding concentration on democratic reform.

Granted that the people would displace aristocratic rule, did Mill have any reason for thinking that the people would then exert their will on behalf of laissez-faire? Yes, and here his reasoning was ingenious: while the ruling class had the fruits of their exploitative rule in common, the people were a different kind of class: their only interest in common was getting rid of the rule of special privilege. Apart from that, the mass of the people have no common class interest that they could ever actively pursue by means of the state. Furthermore, this interest in eliminating special privilege is the common interest of all, and is therefore the ‘public interest’ as opposed to the special or sinister interests of the few. The interest of the people coincides with universal interest and with laissez-faire and liberty for all.

But how then explain that no one can claim that the masses have always championed laissez-faire? – and that the masses have all too often loyally supported the exploitative rule of the few? Clearly, because the people, in this complex field of government and public policy, have suffered from what the Marxists would later call ‘false consciousness’, an ignorance of where their interests truly lie. It was then up to the intellectual vanguard, to Mill and his philosophic radicals, to educate and organize the masses so that their consciousness would become correct and they would then exert their irresistible strength to bring about their own democratic rule and install laissez-faire. Even if we can accept this general argument, the Millian radicals were unfortunately highly over-optimistic about the time span for such consciousness-raising, and political setbacks in the early 1840s led to their disillusionment in radical politics and to the rapid disintegration of the radical movement. Curiously enough, their leaders, such as John Stuart Mill and George and Harriet Grote, while proclaiming their weary abandonment of political action or political enthusiasm, in reality gravitated with astonishing rapidity toward the cosy Whig centre that they had formerly scorned. Their proclaimed loss of interest in politics was in reality a mask for loss of interest in radical politics.

3.3 Mill and the Ricardian system

Much has been recently revealed about James Mill's formative and shaping role over his friend Ricardo's system. How much of Ricardianism is really Mill's creation? Apparently a great deal. One thing is certain: it was Mill who took from J.B. Say the great Say's law and converted Ricardo to that stand. Mill had developed Say's law in his important early book, Commerce Defended (1808), written shortly before he met Ricardo. Ricardo faithfully followed Say's law, and, while in Parliament, consistently opposed expenditure on public works during the depressed year of 1819. And we have seen that Mill and Ricardo together managed to kill the publication of Bentham's ‘pre-Keynesian’ True Alarm in 1811.

In expounding Say's law, Mill was carrying on and developing the important Turgot-Smith insights on saving and investment. But most of the rest of Mill's economic legacy was a disaster. Much of it was the heart and soul of the Ricardian system. Thus, in a forgotten early work, The Impolicy of a Bounty on the Exportation of Grain (1804), Mill sets forth the essence of Ricardianism, from the actual content, to the characteristic disastrous methodology of brutal and unrealistic oversimplification, and to a holistic concentration of unsound macro-aggregates unrelated to the actions of the individual, whether consumer or businessman, in the real world. Mill churns out chunks of alleged interrelations between these macro-aggregates, all seeming to be about the real world, but actually relevant only to deeply fallacious assumptions about the never-never land of long-run equilibrium. The methodology is essentially ‘verbal mathematics’, since the statements are only the implicit churning out of what are really mathematical relations but are never admitted as such. The use of the vernacular language adds a patina of pretend realism that mathematics can never convey. An open use of mathematics might at least have revealed the fallacious assumptions of the model.

Ricardo's exclusive concern with long-run equilibria may be seen from his own declaration of method: ‘I put those immediate and temporary effects quite aside, and fixed my whole attention on the permanent state of things which will result from them.’

Unrealistic oversimplification compounded upon itself is the ‘Ricardian Vice’. Both the Ricardian and the Say-Austrian methodology have been termed ‘deductive’, but they are really poles apart. The Austrian methodology (‘praxeology’) sticks close in its axioms to universally realistic common insights into the essence of human action, and deduces truths only from such evidently true propositions or axioms. The Ricardian methodology introduces numerous false assumptions, compounded and multiplied, into the initial axioms, so that deductions made from these assumptions – whether verbal in the case of Ricardo or mathematical in the case of the modern Walrasians or a blend of both as in the Keynesians – are all necessarily false, useless and misleading.

Thus, in his essay on a bounty on grain, James Mill introduces the typically ‘Ricardian’ error of melding all agricultural commodities into one, ‘corn’ (wheat), and claiming corn to be the basic commodity. With corn now adopted as a surrogate for all food, Mill makes the sweeping statement that the most scientific principle of political economy is ‘that the money price of corn, regulates the money price of everything else’. Why? Here, Mill introduces a typically and brutally drastic variant of Malthusianism. Not just that there is a long-run tendency for population to press on the means of subsistence so that wage rates are pushed down to the cost of subsistence. But more, in a typically Ricardian confusion of the non-existent long-run equilibrium with constant, everyday reality, that wage rates are always set by the price of corn (a surrogate for food, or subsistence, in general). Mill lays down the proposition that wage rates are always set directly by the price of corn as ‘so obviously necessary, that we need spend no more time proving it’. That takes care of that] He concludes therefore that the wage rate is ‘entirely regulated by the money price of corn’.

Mill's extreme version of Malthusianism can be seen in his statement that ‘no one... will hesitate to allow... that the tendency of the species to multiply is much greater than the rapidity with which there is any chance that the fruits of the earth will be multiplied’. Mill even goes so far in wild extremes as to say that ‘raise corn as fast as you please, mouths are producing still faster to eat it. Population is invariably pressing close upon the heels of subsistence; and in whatever quantity food be produced, a demand will always be produced greater than the supply’.

Another unfortunate notion contributed to Ricardo by Mill in his 1804 essay is an overriding focus on the behaviour of a few aggregate macro-shares. Labour was assumed to be of uniform quality; therefore, all ‘wages’ were pushed down to subsistence level by the price of corn. There are only three macro-distributive shares: ‘wages’, ‘profits’ and ‘rents’ in the Ricardian scheme. There is no discussion whatever of individual prices or wage rates -the proper concern of economic analysis – and no hint of the existence of or the need for the entrepreneur. Say's brilliant analysis of the entrepreneur's central role is completely forgotten; there is no role for a risk-bearing entrepreneur if all is frozen into a few aggregative chunks in long-run equilibrium, where change is slow or non-existent, and knowledge is perfect rather than uncertain. ‘Profits’, therefore, are the net returns aggregatively received by capitalists, which could well be called ‘interest’ or ‘long-run profits’.

If wages, profits and rents exhaust the product, then, tautologically and virtually by definition, if one of the three increases, and the total is frozen, one or both of the other shares must fall. Hence, the implicit Ricardian assumption of inherent class conflict between the receivers of the three blocs of distributive shares. In the Mill-Ricardian system, wages are fixed by the price of corn, or the cost of food. The cost of food, for its part, is always increasing because of the fixed supply of land and the alleged Malthusian necessity to move to ever less productive land as the population increases and presses on the food supply. Thus: rents are always slowly but inexorably increasing, and money wage rates are always rising in order to maintain the real wage at subsistence level. Therefore – hey presto! – aggregate ‘profits’ must always be falling.

Schumpeter's blistering critique of the Ricardian system is highly perceptive and perfectly apt:

... he [Ricardo] cut that general system [of economic interdependence in the market] to pieces, bundled up as large parts of it as possible in cold storage – so that as many things as possible should be frozen and ‘given’. He then piled one simplifying assumption upon another until, having really settled everything by these assumptions, he was left with only a few aggregative variables between which, given these assumptions, he set up simple one-way relations so that, in the end, the desired results emerged almost as tautologies. For example, a famous Ricardian theory is that profits ‘depend upon’ the price of wheat. And upon his implicit assumptions, and in the particular sense in which the terms of the proposition are to be understood, that is not only true, but undeniably, in fact trivially, so. Profits could not possibly depend upon anything else, since everything else is ‘given’, that is, frozen. It is an excellent theory that can never be refuted and lacks nothing save sense.³

3.4 Ricardo and the Ricardian system, I: macro-income distribution

While much of the Ricardian system turns out to be the creation of James Mill, perhaps most of it was due to Ricardo himself, who of course must, in any case, bear major responsibility for his own work. To continue the Marxian metaphor, in many ways the Mill-Ricardo relationship might be more of a Marx-Engels than a Lenin-Marx connection,

Ricardo was born in London into a prosperous family of Spanish-Portuguese Jews who had settled in Holland after having been expelled from Spain at the end of the fifteenth century. Ricardo's father had moved to London, where he prospered as a stockbroker, and had 17 children, of whom David was the third. At the age of 11, David was sent by his father to Amsterdam, to attend Orthodox Hebrew school for two years. At the age of 14, with only an elementary education, Ricardo began his business career, employed by his father's ‘stockbroker’ house. It must be emphasized that, with the exception of the quasi-governmental Bank of England, there were no corporations or corporate stocks in that era. Government bonds were then called ‘stocks’, and so ‘stockbrokers’ were what would now be called government bond dealers.

Seven years later, however, David married a Quaker girl, and left the Jewish faith, whereupon he was disowned by his parents. Eventually, he became a confirmed Quaker. A London bank, already impressed with young Ricardo, lent him enough money to set himself up in his own business as a stockbroker. Within a few years, Ricardo made an enormous amount of money in the bond business, until he was ready to retire to the country in his early 40s. In 1799, at the age of 27, Ricardo, bored while whiling away time at a health resort, chanced upon a copy of The Wealth of Nations, and devoured it, becoming, like so many others of that era, a dedicated Smithian.

As Schumpeter points out, Ricardo's Principles can only be understood as a dialogue with, and reaction to, The Wealth of Nations. Ricardo's logical bent was offended at the basic confusion of mind, the chaos that J.B. Say also saw in the Smithian canon, and he, like Say before him, set out to clarify the Smithian system. Unfortunately, and in deep contrast to Say, Ricardo simplified by taking all the most egregious errors in Smith, throwing out all qualifications and contradictions, then building his system upon what was left. The worst of Smith was magnified and intensified. In his basic method, all of Smith's historical and empirical points were tossed out. This was not bad in itself, but it left a deductive system built on deep fallacy and incorrect macro-models. In addition, while Ricardo's theoretical system might have been brutally oversimplified in relation to Smith, his writing style was inordinately crabbed and obtuse. The methodology of verbal mathematics is almost bound to be difficult and obscurantist, with blocks of words spelling out equilibrium mathematical relations in a highly cumbersome manner. But on top of that, Ricardo, in contrast to his mentor Mill, was undoubtedly one of the worst and most turgid literary stylists in the history of economic thought.

In contrast to Adam Smith, for whom the output, or wealth, of nations was of supreme importance, Ricardo neglected total output to place overriding emphasis on the alleged distribution of a given product into macro-classes. Specifically, into the three macro-classes of landlords, labourers and capitalists. Thus, in a letter to Malthus, who on this question at least was an orthodox Smithian, Ricardo made the distinction clear: ‘Political economy, you think, is an enquiry into the nature and causes of wealth; I think it should rather be called an enquiry into the laws which determine the division of the produce of industry amongst the classes who concur in its formation.’

Since entrepreneurship could not exist in Ricardo's world of long-run equilibrium, he was left with the classical triad of factors. His analysis was strictly holistic, in terms of allegedly homogeneous but actually varied and diverse classes. Ricardo avoided any Say-type emphasis on the individual, whether he be the consumer, worker, producer or businessman.

In Ricardo's world of verbal mathematics there were, as Schumpeter has astutely pointed out, four variables: total output or income, and shares of income to landlords, capitalists, and workers, i.e. rent, profits (long-run interest) and wages. Ricardo was stuck with a hopeless problem: he had four variables, but only one equation with which to solve them:

Total output (or income) = rent + profits + wages

To solve, or rather pretend to solve, this equation, Ricardo had to ‘determine’ one or more of these entities from outside his equation, and in such a way as to leave others as residuals. He began by neglecting total output, i.e. by assuming it to be a given, thereby ‘determining’ output by freezing it on his own arbitrary assumptions. This procedure enabled him to get rid of one variable – to his own satisfaction.

Next, on to wages. Here, Ricardo took from Mill the hard-core, or ultra-Malthusian, view that ‘wages’ – all wages – are always and everywhere pressing on the food supply to such an extent that they are always set, and determined, precisely at the level of the cost of subsistence. Labour is assumed to be homogeneous and of equal quality, so that all wages can be assumed to be at subsistence cost. While briefly and dimly acknowledging that labour can have different qualities or grades, Ricardo, like Marx after him, drastically assumed away the problem by blithely postulating that they can all be incorporated into a weighted quantity of ‘labour hours’. As a result, Ricardo could maintain that wage rates were uniform throughout the economy. In the meanwhile, as we have seen, food, or subsistence generally, was assumed to be incorporated into one commodity, ‘corn’, so that the price of corn can serve as a surrogate for subsistence cost in general.

Given these heroic and fallacious assumptions, then, ‘the’ wage rate is determined instantly and totally by the price of corn, since the wage rate can neither rise above the subsistence level (as determined by the price of corn) nor sink below it.

The price of corn, in its turn, is determined according to Ricardo's famous theory of rent. Rent served as the linchpin of the Ricardian system. For, according to Ricardo's rather bizarre theory, only land differed in quality. Labour, as we have seen, was assumed to be uniform, and therefore wage rates are uniform, and, as we shall see, profits are also assumed to be uniform because of the crucial postulate of the economy's always being in long-run equilibrium. Land is the only factor which miraculously is allowed to differ in quality. Next, Ricardo assumes away any discovery of new lands or improvements in agricultural productivity. His theory of history therefore concludes that people always begin by cultivating the most fertile lands, and, as population increases, the Malthusian pressure on the food supply forces the producers to use ever more inferior lands. In short, as population and food production rise, the cost of growing corn must inexorably rise over time.

Rent, in Ricardo's phrase, is payment for the ‘use of the original and indestructible powers of the soil’. This hints at a productivity theory, and indeed Ricardo did see that more fertile and productive lands earned a higher rent. But unfortunately, as Schumpeter put it, Ricardo then ‘embarks upon his detour’. In the first place, Ricardo made the assumption that at any moment the poorest land in cultivation yields a zero rent. He concluded from that alleged fact that a given piece of land earns rent not because of its own productivity, but merely because its productivity is greater than the poorest, zero-rent, land under cultivation. Remember that, for Ricardo, labour is homogeneous and hence wages uniform and equal, and, as we shall see, profits are also uniform and equal. Land is unique in its permanent, long-run structure of differential fertility and productivity. Hence, to Ricardo, rent is purely a differential, and Land A earns rent solely because of its differential productivity compared to Land B, the zero-rent land in cultivation.

To Ricardo, several important points followed from these assumptions. First, as population inexorably increases, and poorer and poorer lands are used, all the differentials keep increasing. Thus, say that, at one point of time, corn lands (which sums up all land) range in productivity from the highest, Land A, through a spectrum down to Land J, which, being marginal, earns a zero rent. But now population increases and farmers have to cultivate more and poorer lands, say K, L, and M. M now becomes the zero-rent land, and Land J now earns a positive rent, equal to the differential between its productivity and that of M. And all the previous infra-marginal lands have their differential rents raised as well. It becomes ineluctably true, therefore, that over time, as population increases, rents, and the proportion of income going to rent, increase as well.

Yet, though rent keeps increasing, at the margin it always remains zero, and, as Ricardo put it in a crucial part of his theory, being zero rent does not enter into cost.

Put another way: quantity of labour cost, being allegedly homogeneous, is uniform for each product, and profits, being uniform and fairly small throughout the economy, form a part of cost that can be basically neglected. Since the price of every product is uniform, this means that the quantity of labour cost on the highest-cost, or zero-rent, land, uniquely determines the price of corn and of every other agricultural product. Rent, being infra-marginal in Ricardo's assumptions, cannot enter into cost. Total rental income is a passive residual determined by selling prices and total income, and selling prices are determined by quantity of labour cost and (to a small extent) the uniform rate of profit. And since the quantity of labour needed to produce corn keeps rising as more and more inferior lands are put into production, this means that the cost of producing corn and hence the price of corn keep rising over time. And, paradoxically, while rent keeps rising over time, it remains zero at the margin, and therefore without any impact on costs.

There are many flaws in this doctrine. In the first place, even the poorest land in cultivation never earns a zero rent, just as the least productive piece of machinery or worker never earns a zero price or wage. It does not benefit any resource owner to keep his resource or factor in production unless it earns a positive rent. The marginal land, or other resource, will indeed earn less of a rent than more productive factors, but even the marginal land will always earn some positive rent, however small.

Second, apart from the zero-rent problem, it is simply wrong to think that rent, or any other factor return, is caused by differentials. Each piece of land, or unit of any factor, earns whatever it produces; differentials are simple arithmetic subtractions between two lands, or other factors, each of whichearns a positive rent of its own. The assumption of zero rent at the margin allows Ricardo to obscure the fact that every piece of land earns a productive rent, and allows him to slip into the differential as cause.

We might just as well turn Ricardo on his head and apply the differential theory to wages, and say, with Schumpeter, that ‘one pays more for good than for bad land exactly as one pays more for a good than a bad workman’.⁴

Third, in discussing the rise in cost of producing corn, Ricardo reverses cause and effect. Ricardo states that increasing population ‘obliges’ farmers to work land of inferior quality and then causes a rise in its price. But as any utility theory analyst would realize, the causal chain is precisely the reverse: when the demand for corn increases, its price would rise, and the higher price would lead farmers to grow corn on higher-cost land. But this realization, of course, eliminates the Ricardian theory of value and with it the entire Ricardian system.

And fourth, as numerous critics have pointed out, it is certainly not true historically that people always start using the highest-quality land and then sink gradually and inevitably down to more and more inferior land. Historically, there have always been advances, and enormous ones, in the productivity of agriculture, in the discovery and creation of new lands, and in the discovery and application of new and more productive agricultural techniques and types of products. Defenders of Ricardo counter that this is a purely historical argument, ignoring the logical beauty of the Ricardian theory. But the whole point is that Ricardo was, after all, advancing a historical theory, a law of history, and he certainly claimed historical accuracy for past and future predictions for his theory. And yet it is all a purely arbitrary, and hence largely untrue, assumption of his logical doctrine in the guise of a theory of history. Ricardo's basic problem throughout was making cavalier and untrue historical or empirical generalizations the building blocks of his logical system, from which he drew self-confident and seemingly apodictically true empirical and political conclusions. Yet from false assumptions only false conclusions can be drawn, regardless how imposing the logical structure may or may not be.

Ricardo's differential rent theory has been widely hailed as the precursor of the neoclassical law of diminishing returns, which the neoclassicals were supposed to have generalized from land to all factors of production. But this is wrong, since the law of diminishing returns applies to increasing doses of a factor to homogeneous units of other, logically fixed, factors – in this case land. But the whole point of Ricardo's differential rent theory is that his areas of land are not homogeneous at all, but varying in a spectrum from superiority to inferiority. Therefore the law of diminishing returns – as grasped by Turgot and rediscovered by the neoclassicals – simply does not apply.⁵

Rent, though increasing, is then effectively zero and not part of expenses or costs. Rent is disposed of in the Ricardian equation. But we have not yet finished the determination of wages, which so far we have said is precisely fixed at the subsistence level. What will happen to the costs of subsistence over time? They will rise as the cost of the production of corn rises with the increasing population, forcing the cultivation of ever more inferior lands. Over time, in the slow-moving long-run Ricardian equilibria, the cost of food will rise, and since wages must always be at the subsistence level, wages will have to rise to maintain real wage rates equal to the cost of subsistence. Now we begin to close the Ricardian circle. Rents are in effect zero, and wage rates, always at subsistence, must rise over time as the cost of food increases, in order to keep precise pace with the rising cost of subsistence. But, then -voila! – we have finally determined all the variables except profits (at least to Ricardo's satisfaction), and, since total income is ‘given’ or kept frozen, this means that profits are the residual from total income. With rents out of the picture, if wage rates have to keep rising over time, this necessarily means that profits, or profit rates, have to keep falling. Hence the Ricardian doctrine of the ever-falling rate of profit (i.e. long-term rate of interest). Note that this is not the same as Adam Smith's view that the profit rate falls over time because and in so far as capital continues to accumulate; profit was supposed to be an inverse function of the stock of capital. Ricardo's doctrine of the falling rate of profit follows by triumphant tautology from his attempt to determine the other factor shares of total income. When profits fall to zero, or at any rate to a low level, capital will cease to accumulate and we arrive at Ricardo's ‘stationary state’.

Ricardo, even more than Smith, totally leaves out the entrepreneur. There can be no role for the entrepreneur, after all, if everyone is always in long-run equilibrium and there is never risk or uncertainty. His ‘profits’, as in Smith, are the long-run rate of return, i.e. the rate of interest. In long-run equilibrium, furthermore, all profits are uniform, since firms rapidly move out of low-profit industries and into high-profit ones until equalization takes place. We then have ‘profits’ at a uniform rate throughout the economy at any given time.

A plausible insight into Ricardo's habitual confusion of long-run equilibrium and instantaneous adjustments with the real world has been offered by Professor F.W. Fetter. Fetter points out that Ricardo's practical familiarity was not with business and industry (as was, we might note, J.B. Say) but with the bond and foreign exchange markets. Ricardo ‘usually assumed that even in industry and agriculture, adjustment took place on the basis of as small price differences, and almost as quickly, as did arbitrage in government securities and in foreign exchange’.⁶

To return to the Ricardian world: note that Ricardo does not say that the cost of corn rises over time because rents keep rising on corn land. He must get rid of the rent variable, and he can only do so by assuming that rent is zero at the margin, and therefore never forms any part of costs. Rent, then, is effectively zero. Why then does the cost of corn rise? As we have indicated, because the quantity of labour needed to produce corn, and hence the cost of producing corn, rises over time. This brings us to Ricardo's theory of cost and value. Rents are now out of it. Wages are not costs either, because a key to Ricardo's system is that rising wages lead only to lower profits, and not to higher prices. If rising wages meant that costs increased, then Ricardo, who as we shall see had a cost-theory of value and price, would have to say that prices rose rather than that profits would necessarily fall. Wages he treated as uniform, since Ricardo, like Marx after him, maintained that labour was homogeneous in quality. Not only did that mean that wages were uniform; but Ricardo could then treat, as the crucial part of its labour cost, the quantity of labour embodied in any product. Differences in quality or productivity of labour could then be dismissed as simply trivial and as a slightly more complex version of the quantity of labour hours. Quality has been quickly and magically transformed into quantity.

We have reached the edge of the Ricardian – and Marxian – labour theory of value. So far we just have a labour-quantity theory of cost. Ricardo vacillated at this point, between a strict labour theory of cost, and a labour-quantity theory plus the uniform rate of profit. But, since the uniform rate of profit, presumably around 3–6 per cent, is small compared to the quantity of labour hours, Ricardo may be pardoned for dismissing the profit-rate part of cost as of trivial importance. And, since all profit rates are assumed to be uniform, and, as we shall see, Ricardo had a cost theory of value or price, he could easily dismiss the uniform and small proportion, profit, as of no account in explaining relative prices.

It is, of course, peculiar to consider profits, even profits as long-run interest, as part of the ‘costs’ of production. Again, this usage stems from eliminating any consideration of entrepreneurial profits and losses, and focusing on interest as a long-run ‘cost’ of inducing savings and the accumulation of capital.

If profits for Ricardo are always uniform, how is this uniform profit determined? Curiously, profits are in no way related to savings or capital accumulation; for Ricardo, they are only a residual left over after paying wages. In short, to hark back to our original equation of Ricardian distribution: total output (or income) = rent + profits + wages. Remarkably, Ricardo has attempted to determine all the variables with only one variable explicitly determined. Output, as we have seen, was assumed as mysteriously given, from outside the Ricardian system. Wages (‘the’ uniform wage throughout the economy) is the only explicitly determined variable, determined completely to equal the cost of subsistence, embodied in the cost of producing corn. But that leaves two residuals, rents and profits, to be determined. The way Ricardo tries to get around that problem is to dispose of rents. Rents are the differential between the lands in cultivation and the least productive, zero-rent, land in use. The cost of producing corn is equal to the quantity of labour hours embodied in its production. Since rents are zero at the margin, they do not enter into costs, and are passively determined; at the no-rent margin, labour and capital's shares exhaust output. And since wages are supposedly determined by the cost of raising corn, this means that profit can only be a truistic residual of wages, otherwise the variable would be overdetermined, and the system would evidently collapse.

The alleged historical laws follow from the model. Since increasing population forces more and more inferior land into cultivation, the cost of labour in producing corn (i.e. the quantity of labour hours needed to produce it), must keep rising. And since price is determined by cost, supposedly boiled down into the quantity of labour hours to produce the good, this means that the price of corn must keep rising over time. But since real wage rates are fixed always at the cost of subsistence, and this is assumed to be the price of corn, money wage rates must keep rising over time (while workers remain at the subsistence level), and therefore profits must keep falling in the course of history.

Adam Smith believed that the rate of profit, or the long-run rate of interest return, is determined by the quantity of accumulated capital, so that more capital will lead to a falling rate of profit. While this theory is not fully correct, it at least understands that there is some connection between saving, capital accumulation, and long-run interest or profit. But to Ricardo there is no connection whatever. Interest on capital is only a residual. By a series of fallacies, and holistic, locked-in assumptions, trivial conclusions are at last ground out, all with a portentous air, allegedly telling us conclusive insights about the real world. As Schumpeter scornfully puts it: propositions such as ‘profits depend upon wages’, and the falling rate of profit, are excellent examples of ‘that Art of Triviality that, ultimately connected with the Ricardian Vice, leads the victim, step by step, into a situation where he has got either to surrender or to allow himself to be laughed at for denying what, by the time that situation is reached, is really a triviality’.⁷

3.5 Ricardo and the Ricardian system, II: the theory of value

This brings us to Ricardo's theory of value, or price. While Ricardo formally admitted that supply and demand determine day-to-day market pricing, he tossed that aside as of no consequence, and concentrated solely on long-run equilibrium, i.e. ‘natural’ price and the alleged macro-distribution of income in that equilibrium. Utility Ricardo brusquely disposed of as ultimately necessary to production but of no influence whatever on value or price; in the ‘value paradox’ he embraced exchange value and abandoned utility completely . Not only that: he frankly and boldly discarded any attempt to explain the prices of goods that are not reproducible, that could not be increased in supply by the employment of labour. Hence Ricardo simply gave up any attempt to explain the prices of such goods as paintings, which are fixed in supply and cannot be increased. In short, Ricardo abandoned any attempt at a general explanation of consumer prices. We have arrived at the full-fledged Ricardian – and Marxian – labour theory of value.

The Ricardian system is now complete. Prices of goods are determined by their costs, i.e. by the quantity of labour hours embodied in them, trivially plus the uniform rate of profit. Specifically, since the price of each good is uniform, it will equal the cost of production on the highest-cost (i.e. zero-rent) or marginal land in cultivation. In short, price will be determined by cost, i.e. the quantity of labour hours on the zero-rent land used to work on the product. As time goes on, then, and population increases, poorer and poorer soils must be brought into use, so that the cost of producing corn continues to increase. It does so because the quantity of labour hours needed to produce corn keeps increasing, since labour must be employed on ever poorer soil. As a result, the price of corn keeps increasing. Since wage rates are always kept precisely at the subsistence level (the cost of growing corn) by population pressure, this means that money wage rates must continue to increase over time in order to keep real wage rates in pace with the ever-rising price of corn. Wage rates must increase over time, and hence profits must keep falling until they are so low that the stationary state is reached.

To return to the idea of rent as not entering into cost: if we focus, as we should on the ‘micro’ – on the individual farmer or capitalist – it should be clear that the individual must pay rent in order to gain use of any particular plot of land in the productive process. To do so, he must outbid other firms in his own as well as other industries. Ricardo's refusal to even consider the individual firm, and his focus on holistic aggregates, enables him to overlook the fact that rents, even if differentials, enter into costs the way every expense on factors of production enters into them. This is the only way that is real and that counts in the real world: the point of view of the individual firm or entrepreneur. There is, in fact, no ‘social’ point of view, since ‘society’ as an entity does not exist.

Ricardo's system is both gloomy and rife with allegedly inherent class conflict on the free market. First, there is tautological conflict because, given the fixed total, the income shares of one macro-group can only increase at the expense of another. But the point of the free market in the real world is that generally production increases, so that the total pie tends to keep rising. And, second, if we focus on individual factors and on how much they earn, as does the later marginal productivity theory (and as did J.B. Say), then each factor tends to earn its marginal product, and we need not even concern ourselves with the alleged but non-existent laws and conflicts of macro-class income distribution. Ricardo kept his eye unerringly on the radically wrong problem – or rather, problems.

But there is even more class conflict here than implied by Ricardo's tautological macro-approach. For if value is the product solely of labour hours, then it becomes easy for Marx, who was after all a neo-Ricardian, to call all returns to capital exploitative deductions from the whole of ‘labour's’ product. The Ricardian socialist call for turning over all of the product to labour follows directly from the Ricardian system – although Ricardo and the other orthodox Ricardians did not of course make that leap. Ricardo would have countered that capital represents embodied or frozen labour; but Marx accepted that point and simply riposted that all labour producers of capital, or frozen labour, should obtain their full return. In fact, neither was right; if we wish to consider capital goods as frozen anything, we would have to say, with the great Austrian Böhm-Bawerk, that capital is frozen labour and land and time. Labour, then, would be earning wages, land would earn rent, and interest (or long-run profits) would be the price of time.

Recent analysts, in an attempt to mitigate the crude fallacy of Ricardo's labour theory of value, have maintained, as in the case of Smith but even more so, that he was attempting not so much to explain the cause of value and price but to measure values over time, and labour was considered an invariable measure of value. But this hardly mitigates Ricardo's flaws; instead, it adds to the general fallacies and vagaries of the Ricardian system another important one: the vain search for a non-existent chimera of invariability. For values always fluctuate, and there is no invariable, fixed base of value from which other value changes can be measured.

Thus, in rejecting Say's definition of the value of a good as its purchasing power of other goods in exchange, Ricardo sought the invariable entity, the unmoved power:

A franc is not a measure of value for any thing, but for a quantity of the same metal of which francs are made, unless francs, and the thing to be measured, can be referred to some other measure which is common to both. This, I think, they can be, for they are both the result of labour; and, therefore, labour is a common measure, by which their real as well as their relative value may be estimated.

It might be noted that both products are the result of capital, land, savings, and entrepreneurship, as well as labour, and that, in any case, their values are incommensurable except in terms of relative purchasing power, as Say had in fact maintained.

Part of Ricardo's impassioned quest for an invariable measure of values undoubtedly stemmed from his deep-dyed scientism. Ricardo was almost as interested in the natural sciences as in economics. From his early youth, Ricardo was keenly interested in the natural sciences, in mathematics, chemistry, mineralogy and geology. He joined the Geological Society in his 30s shortly after it was founded. It is probable that Ricardo's quest for an invariable measure of values was based on the physical science model; if ‘scientific’ in the physical sciences meant measurement, then surely this would be required in the human sciences as well. As Emil Kauder wrote, ‘I venture to say that Ricardo and his contemporaries believed that economics could only reach the dignity of a science if it could be based on objective measures like the Newtonian Physics’.⁸

An even stronger and more direct class struggle than that implied by the labour theory of value stemmed from Ricardo's approach toward landlords and land rent. Landlords are simply obtaining payment for the powers of the soil, which, at least in the hands of many of Ricardo's followers, meant an unjust return. Furthermore, Ricardo's gloomy vision of the future held that labour must be kept at subsistence level, capitalists must see their profits inevitably falling – these two classes doing as badly as ever (labour) or always worse (capital) while the idle and useless landlords keep inexorably adding to their share of worldly goods. The productive classes suffer, while the idle landlords, charging for the powers of nature, benefit at the expense of the producers.⁹ If Ricardo implies Marx, he implies Henry George far more directly. The spectre of land nationalization or the single tax absorbing all land rent follows straight from Ricardo.

One of the greatest fallacies of the Ricardian theory of rent is that it ignores the fact that landlords do perform a vital economic function: they allocate land to its best and most productive use. Land does not allocate itself; it must be allocated, and only those who earn a return from such service have the incentive, or the ability, to allocate various parcels of land to their most profitable, and hence most productive and economic uses.

Ricardo himself did not go all the way to government expropriation of land rent. His short-run solution was to call for lowering of the tariff on corn, or even repeal of the Corn Laws entirely. The tariff on corn kept the price of corn high and ensured that inferior, high-cost domestic corn land would be cultivated. Repeal of the Corn Laws would enable England to import cheap corn, and thereby postpone for a time the use of inferior and high-cost land. Corn prices would for a while be lower, money wage rates would therefore immediately be lower, and profits would rise, adding to the accumulation of capital. The dread stationary state would be put further off on to the horizon.

Ricardo's other anti-landlord action was political: by entering Parliament by joining Mill and the other Benthamite radicals in calling for democratic reform, Ricardo hoped to swing political power from the grip of the aristocracy, which meant in practice the landlord oligarchy, to the mass of the people.

But if Ricardo was too individualistic or too timorous to embrace the full logical consequence of the Ricardian system, James Mill characteristically was not. James Mill was the first prominent ‘Georgist’, calling frankly and enthusiastically for a single tax on land rent. In his high office in the East India Company, Mill felt able to influence Indian government policies.

Before obtaining this post, Mill had characteristically presumed to write and publish a massive History of British India (1817) without ever having been in that country or knowing any of the Indian languages. Steeped in the contemptuous view that India was thoroughly uncivilized, Mill advocated a ‘scientific’ single tax on land rent. Mill was convinced as a Ricardian that a tax on land rent was not a tax on cost and therefore would not reduce the incentive to supply any productive good or service. Hence a tax on land rent would have no bad effect on production – it would only have the effect of eliminating the ill-gotten gains of the landlords. In effect, a tax on land rent would be no tax at all! The land tax could be up to and including 100 per cent of the social product caused by the differential fertility of the soil. The state, according to Mill, could then use this costless tax for public improvement, and largely for the function of maintaining law and order in India.

We see now the pernicious implications of the fallacious view that any part of the expense of production is in some way, from a holistic or social point of view, ‘really’ not a part of cost. For if an expense is not part of cost, it is in some sense not necessary to the factor's contribution to production. And therefore this income can be confiscated by the government with no ill effect. Despite the deep pessimism of Ricardo about the nature and consequences of the free market, he oddly enough cleaved strongly, and more firmly than Adam Smith, to laissez-faire. Probably the reason was his strong conviction that virtually any kind of government intervention could only make matters worse. Taxation should be at a minimum, for all of it cripples the accumulation of capital and diverts it from its best uses, as do tariffs on imports. Poor laws – welfare systems – only worsen the Malthusian population pressures on wage rates. And as an adherent of Say's law, he opposed government measures to stimulate consumption, as well as the national debt. In general, Ricardo declared that the best thing that government can do to stimulate the greatest development of industry was to remove the obstacles to growth which government itself created.

While Adam Smith's free market views concentrated on the sinister nature of predatory government action, Ricardo was particularly struck by government's pervasive ineptness and counterproductivity. A typical and charming note was struck in a letter from Germany by Ricardo to James Mill in 1817: ‘We were very much delayed by the dilatoriness of the German Post, which being a monopoly, is of course very much mismanaged...’.

The paradox of Ricardo's gloom about the alleged class conflict on the free market and his determined opposition to virtually all government intervention was best and most wittily described by Alexander Gray:

Such is the Ricardian scheme of distribution; in place of the old harmony of interest, he has placed dissension and antagonism at the heart of things. ‘The interest of the landlord is always opposed to that of the consumer and manufacturer;’ So also the interests of the worker and the employer are eternally and irreconcilably opposed; when one gains, the other loses. Further, the outlook for all, except the landlord, is a process of continual pejoration.... Yet Ricardo remains immovably non-interventionist. ‘These, then’, he says, ‘are the laws by which wages are regulated’; and he adds inconsequently, ‘like all other contracts, wages should be left to the fair and free competition of the market, and should never be controlled by the interference of the legislature’. In a world of Ricardian gloom one might ask, and did in effect ask, why there should not be interference. An optimist carolling that God's in his Heaven, and that all's right with enlightened self-interest has a right to nail the laissez-faire flag to the mast, but a pessimist who merely looks forward to bad days and worse times ought not in principle to be opposed to intervention, unless his pessimism is so thorough-going as to lead to the conviction that, bad as all diseases are, all remedies for all diseases are even worse.¹⁰

Finally, a fundamental and fatal flaw in Ricardo's whole approach in his system was that he started at the wrong end. He began with his overriding focus on the laws of macro-income distribution; his theory of value and price was only a subsidiary appendage, enabling him to maintain that wages are not a part of cost, and therefore that the only influence of rising wages was to cause profits to fall. Ricardo, in short, never grasped the crucial point understood by his continental counterpart, J.B. Say: that there are no laws of macro-income distribution. Economics only establishes ‘micro’-laws determining price, including the prices of the various factors of production. In a sense, of course, the distribution of income in practice is a spin-off of market-determined factor prices; but this ‘distribution’ also depends on entrepreneurial profits and losses, in short on entrepreneurial responses to risk and uncertainty, and on the supplies at any time of the respective factors. None of the latter can be determined by economic theory. Once again, David Ricardo was pursuing a chimera, and in doing so took British economic theory off on a detour, or rather into a dead end.

Put another way, the French (Cantillon-Turgot-Say) analysis of the free market demonstrated that on the market there is no separate ‘distribution’ of income process, as there indeed would be under a state-controlled, or socialist economy. ‘Distribution’ is the indirect consequence of free production, exchange, and price determination.¹¹

All of this escaped David Ricardo, who had little or no conception of the economy as a web of ‘micro’-relations linking together individual utilities, exchanges and prices. As Frank Knight has pointed out, Ricardo, in a letter to his disciple McCulloch, denied that ‘the great questions’ of macro-income distribution were ‘essentially connected’ with the theory of value. And further, Ricardo and his followers gave ‘practically no hint of a system of economic organization worked out and directed by price forces’.¹²

There is another point that needs to be made about Ricardo's basic economic goal. Chiding Adam Smith for being primarily interested in the total wealth of the nation rather than in the macro-distribution of income, Ricardo pursues his Malthusian hostility to population growth by asking what is the point of looking at gross rather than net income. As Ricardo puts it, in a famous and astonishing passage:

what would be the advantage resulting to a country from the employment of a great quantity of productive labour, if, whether it employed that quantity or a smaller, its net rent and profits together would be the same... To an individual with a capital of £20,000, whose profits were £2000 per annum, it would be a matter quite indifferent whether his capital would employ a hundred or a thousand men... provided, in all cases, his profits were not diminished below £2000. Is not the real interest of the nation similar? Provided its net real income, its rent and profits be the same, it is of no importance whether the nation consists of ten or of twelve millions of inhabitants.

The difference between ten and twelve million may not make any difference to David Ricardo, but it makes a considerable difference, I should think, to the two million who would not have been around, and to their parents, friends and relations. There is no better example of the aggregative utilitarian economist looking upon the economy from the holistic viewpoint of a social slavemaster, rather than from the point of view of individuals on the market. As Alexander Gray, in his witty and perceptive way, puts it:

[Ricardo's] logic would lead to the desirability of the population being reduced to one, and that last remnant producing a vast net surplus with the aid of sorcery and mechanical contrivances. The repellent doctrine that man exists for the production of wealth, rather than that wealth exists for the use of man, here finds its classical utterance.¹³

3.6 The law of comparative advantage

Even the most hostile critics of the Ricardian system have granted that at least David Ricardo made one vital contribution to economic thought and to the case for freedom of trade: the law of comparative advantage. In emphasizing the great importance of the voluntary interplay of the international division of labour, free traders of the eighteenth century, including Adam Smith, based their doctrines on the law of ‘absolute advantage’. That is, countries should specialize in what they are best or most efficient at, and then exchange these products, for in that case the people of both countries will be better off. This is a relatively easy case to argue. It takes little persuasion to realize that the United States should not bother to grow bananas (or, rather, to put it in basic micro-terms, that individuals and firms in the United States should not bother to do so), but rather produce something else (e.g. wheat, manufactured goods) and exchange them for bananas grown in Honduras. There are, after all, precious few banana growers in the US demanding a protective tariff. But what if the case is not that clear-cut, and American steel or semi-conductor firms are demanding such protection?

The law of comparative advantage tackles such hard cases, and is therefore indispensable to the case for free trade. It shows that even if, for example, Country A is more efficient than Country B at producing both commodities X and Y, it will pay the citizens of Country A to specialize in producing X, which it is most best at producing, and buy all of commodity Y from Country B, which it is better at producing but does not have as great a comparative advantage as in making commodity X. In other words, each country should produce not just what it has an absolute advantage in making, but what it is most best at, or even least worst at, i.e. what it has a comparative advantage in producing.

If, then, the government of Country A imposes a protective tariff on imports of commodity Y, and it forcibly maintains an industry producing that commodity, this special privilege will injure the consumers in Country A as well as obviously injuring the people in Country B. For Country A, as well as the rest of the world, loses the advantage of specializing in the production of what it is most best at, since many of its scarce resources are compulsorily and inefficiently tied up in the production of commodity Y. The law of comparative advantage highlights the important fact that a protective tariff in Country A wreaks injury on the efficient industries in that country, and the consumers in that country, as well as on Country B and the rest of the world.

Another implication of the law of comparative advantage is that no country or region of the earth is going to be left out of the international division of labour under free trade. For the law means that even if a country is in such poor shape that it has no absolute advantage in producing anything, it still pays for its trading partners, the people of other countries, to allow it to produce what it is least worst at.

In this way, the citizens of every country benefit from international trade. No country is too poor or inefficient to be left out of international trade, and everyone benefits from countries specializing in what they are most best or least bad at – in other words, in whatever they have a comparative advantage.

Until recently, it has been universally believed by historians of economic thought that David Ricardo first set forth the law of comparative advantage in his Principles of Political Economy in 1817. Recent researches by Professor Thweatt, however, have demonstrated, not only that Ricardo did not originate this law, but that he did not understand and had little interest in the law, and that it played virtually no part in his system. Ricardo devoted only a few paragraphs to the law in his Principles, the discussion was meagre, and it was unrelated to the rest of his work and to the rest of his discussion of international trade.

The discovery of the law of comparative advantage came considerably earlier. The problem of international trade sprang into public consciousness in Britain when Napoleon imposed his Berlin decrees in 1806, ordering the blockade of his enemy England from all trade with the continent of Europe. Immediately, young William Spence (1783–1860), an English physiocrat and underconsumptionist who detested industry, published his Britain Independent of Commerce in 1807, advising Englishmen not to worry about the blockade, since only agriculture was economically important; and if English landlords would only spend all their incomes on consumption all would be well.

Spence's tract caused a storm of controversy, stimulating early works by two noteworthy British economists. One was James Mill, who critically reviewed Spence's work in the Eclectic Review for December 1807, and then expanded the article into his book, Commerce Defended, the following year. It was in rebuttal of Spence that Mill attacked underconsumptionist fallacies by bringing Say's law to England. The other work was the first book of young Robert Torrens (1780–1864), an Anglo-Irish officer in the Royal Marines, in his The Economists Refuted (1808).¹⁴ It has long been held that Torrens first enunciated the law of comparative advantage, and that then, as Schumpeter phrased it, while Torrens ‘baptized the theorem’, Ricardo ‘elaborated it and fought for it victoriously’.¹⁵ It turns out, however, that this standard viewpoint is wrong in both its crucial parts, i.e., Torrens did not baptize the law, and Ricardo scarcely elaborated or fought for it. For, first, James Mill had a far better presentation of the law – though scarcely a complete one – in his Commerce Defended than did Torrens later the same year. Moreover, in his treatment, Torrens, and not Mill, committed several egregious errors. First, he claimed that trade yields greater benefits to a nation that imports durable goods and necessities as against perishables or luxuries. Second, he claimed also that advantages of home trade are more permanent than those of foreign trade, and also that all advantages of domestic trade remain at home, whereas part of the advantages of foreign trade are siphoned off for the benefit of foreigners. And finally, following Smith, and anticipating Marx and Lenin, Torrens asserted that foreign trade, by extending the division of labour, creates a surplus over domestic requirements that must then be ‘vented’ in foreign exports.

Six years later, James Mill led Robert Torrens again in presenting the rudiments of the law of comparative advantage. In the July 1814 issue of the Eclectic Review, Mill defended free trade against Malthus's support for the Corn Laws in his Observations. Mill pointed out that labour at home will, by engaging in foreign trade, procure more by buying imports than by producing all goods themselves. Mill's discussion was largely repeated by Torrens in his Essay on the External Corn Trade, published in February of the following year. Furthermore, in this work, Torrens explicitly hailed Mill's essay.

Meanwhile, at the very time when this comparative cost ferment was taking place among his friends and colleagues, David Ricardo displayed no interest whatever in this important line of thought. To be sure, Ricardo weighed in to second his mentor Mill's attack on Malthus's support for the Corn Laws, in his Essay on... Profits, published in February 1815. But Ricardo's line of argument was exclusively ‘Ricardian’, that is, based solely on the distinctive Ricardian system. In fact, Ricardo displayed no interest in free trade in general, or in the arguments for it; his reasoning was solely devoted to the importance of lowering or abolishing the tariff on corn. This conclusion, as we have noted, was deduced from the distinctive Ricardian system, which was to be fully set forth two years later in his Principles. For Ricardo the key to the stifling of economic growth in any country, and especially in developed Britain, was the ‘land shortage’, the contention that poorer and poorer lands were necessarily being pressed into use in Britain. In consequence, the cost of subsistence kept increasing, and hence the prevailing (which must be the subsistence) money wage kept increasing as well. But this inevitable secular increase of wages must lower profits in agriculture, which in turn brings down all profits. In that way, capital accumulation is increasingly dampened, finally to disappear altogether. Lowering or abolishing the tariff on corn (or other food) was, for Ricardo, an ideal way of postponing the inevitable doom. By importing corn from abroad, diminishing fertility from corn land is deferred. The cost of corn, and therefore of subsistence, will fall sharply, and therefore money wage rates will fall pari passu, thereby raising profits and stimulating capital investment and economic growth. There is no hint in any of this discussion of the doctrine of comparative cost or anything like it.

But how about the mature Ricardo, the Ricardo of the Principles! Once again, except for the three paragraphs on comparative advantage, Ricardo displays no interest in it, and he instead repeats the Ricardian system argument for repeal of the Corn Laws. Indeed, his discussion in the rest of the chapter on international trade is couched in terms of the Smithian theory of absolute advantage rather than of the comparative advantage found in Torrens and especially in Mill.

The three paragraphs on comparative advantage, furthermore, were not only carelessly worded and confused; they were the only account, brief as they were, that Ricardo would ever write on comparative advantage. Indeed, this was his only mention at any time of this doctrine. Even Ricardo's sudden reference to Portugal and his absurd hypothesis that the Portuguese had an absolute advantage over Britain in the production of cloth, seem to indicate his lack of serious interest in the theory of comparative cost.

Furthermore, Ricardo's views on foreign trade in the Principles received almost no comment at that time; writers concentrated on his labour theory of value, and his view that wage rates and profits always move inversely, with the former determining the latter.

If Ricardo had no interest in the theory of comparative advantage, and never wrote about it except in this single passage in the Principles, what was it doing in the Principles at all? Professor Thweatt's convincing hypothesis is that the law was injected into the Principles by Ricardo's mentor James Mill, whom we know wrote the original draft, as well as the revisions, for many parts of Ricardo's magnum opus. We know also that Mill prodded Ricardo on including a discussion of comparative cost ratios. As we have seen, Mill originated the doctrine of comparative cost, and led in developing it eight years later. Not only that: while Ricardo dropped the theory as soon as he enunciated it in the Principles, Mill fully developed the analysis of comparative advantage further, first in his article on ‘Colonies’ for the Encyclopedia Britannica (1818), and then in his textbook, The Elements of Political Economy (1821). Once again, Robert Torrens tailed after Mill, repeating his discussion with no additional insights in 1827, in the fourth edition of his 1815 Essay on the External Corn Trade.¹⁶ Meanwhile, George Grote, a devoted Millian disciple, wrote in 1819 an important, unpublished essay setting forth the Millian view on comparative advantage.

And so, once again, James Mill, by the force of his mind as well as his personal charisma, was able to foist an original analysis of his own on to the ‘Ricardian system’.¹⁷ It is true that Mill was every bit a fan of the Ricardian system as Ricardo himself; but Mill was a man of far broader scope and erudition than his friend, and was interested in far more aspects of the disciplines of human action. It seems possible that Mill, the inveterate disciple and Number 2 man, was Number 1 man far more often than anyone has suspected.

3.7 Notes

1. William E.C. Thomas, The Philosophic Radicals: Nine Studies in Theory and Practice 1817–1841 (Oxford: The Clarendon Press, 1979), p. 100.

2. Joseph Hamburger, Intellectuals in Politics: John Stuart Mill and the Philosophic Radicals (New Haven: Yale University Press, 1965), p. 44.

3. J.A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), pp. 472–3. Compare Walter Bagehot on Ricardo: ‘He dealt with abstractions without knowing they were such: he thoroughly believed that he was dealing with real things. He thought that he was considering actual human nature in its actual circumstances, when he was really considering a fictitious nature in fictitious circumstances. And James Mill, his instructor on general subjects, had on this point as little true knowledge as he had himself.’ Quoted in T.W. Hutchison, ‘James Mill and Ricardian Economics: a Methodological Revolution?’ in Hutchison, On Revolutions and Progress in Economic Knowledge (Cambridge: Cambridge University Press, 1978), p. 57; also see ibid., pp. 26–57.

4. Schumpeter, op. cit., note 3, p. 676n.

5. As Schumpeter points out, Ricardo has been falsely credited with anticipating marginal productivity analysis, particularly since some later marginal productivity theorists, such as J.B. Clark, ‘represented their theory as an outgrowth of Ricardo's theory of rent’. Yet they didn't realize that ‘they were not generalizing Ricardo's schema but upsetting it’. Schumpeter, op. cit., note 3, pp. 674n, 675–6.

6. Frank W. Fetter, ‘The Rise and Decline of Ricardian Economics’, History of Political Economy, 1 (Spring 1969), p. 73.

7. Schumpeter, op. cit., note 3, p. 653n.

8. Emil Kauder, “The Retarded Acceptance of the Marginal Utility Theory’, Quarterly Journal of Economics, 67 (Nov. 1953), p. 574.

9. As St Clair sums up Ricardo's view: landlords, ‘though contributing nothing in the way of work or personal sacrifice, will nevertheless receive an ever-increasing portion of the wealth annually created by the community’. Oswald St Clair, A Key to Ricardo (New York: A.M. Kelley, 1965), p. 3.

10. Alexander Gray, The Development of Economic Doctrine (London: Longmans, Green and Co., 1931), pp. 186–7.

11. Schumpeter, op. cit., note 3, pp. 567–8.

12. Frank H. Knight, ‘The Ricardian Theory of Production and Distribution’, in On the History and Method of Economics (Chicago: University of Chicago Press, 1956), p. 41. Also see ibid., pp. 61–3.

13. Gray, op. cit., note 10, pp. 188–9.

14. Torrens served in the Royal Marines from 1797 to 1834.

15. Schumpeter, op. cit., note 3, p. 607.

16. Torrens, furthermore, was scarcely in a position to take the leadership of the free trade forces, since he had abandoned his previously radical defence of unilateral free trade on behalf of reciprocal trade agreements between countries. As for Mill's fellow leading Ricardian and Scotsman, John Ramsey McCulloch, he stuck to the Smithian line, and publicly repudiated the doctrine of comparative cost.

17. See William O. Thweatt, ‘James Mill and the Early Development of Comparative Advantage’, History of Political Economy, 8 (Summer 1976), pp. 207–34.