Contra ricardo an essay, p.1
Contra Ricardo: An Essay, p.1Edward E. Rochon
CONTRA RICARDO: AN ESSAY
Edward E. Rochon
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Contra Ricardo: An Essay
Copyright © 2016 by Edward E. Rochon
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Table of Contents
Chapter 1: Parable of the Isles
Chapter 2: Parable of the Work Crews
Chapter 3: Iron Law of Wages
Chapter 4: Tariffs
About the Author
David Ricardo (1772-1823), British financier, Member of Parliament, economist and writer, was noted for certain 'laws' of economics. He supposed a tendency of wages to always drop to bare subsistence level, that specialization is always better than a well rounded economy. Along with Adam Smith, he deemed labor to be the essential component of wealth, unrestricted free markets as ideal, and that maximizing productivity of scarce resources leads to loss of wealth in the form of what he called: rent. That is, too much labor and time is spent bringing marginal farmland (for example) into productivity. This increases costs passed onto the consumer, and tends to allow all prices of foodstuffs to rise.
A general critique of Ricardo's notions follows, in particular, his notion of 'comparative advantage' justifying excessive specialization of production.
Chapter 1: Parable of the Isles
Two islands rise from the sea, Isle A and Isle B. Isle A has an efficient economy, the latest technology, competent engineers, managers and artisans. Its business concerns produce everything more efficiently than the business concerns of Isle B. Reflecting the economy, the government and educational system are top notch as you might suppose. Well trained students make for well trained engineers, etc. A people accustomed to efficiently ran economic activity are less likely to tolerate inefficient government. And inefficient government generally is detrimental to a well run economy.
The GNP of the isles adds up to A + B = C. Isle A has no reason to trade with B, and B has nothing to trade with A, with the following possible exceptions. Isle B might trade with places on the mainland that desire its products, bringing in goods to B that Isle A might desire. B might have reserves of money that Isle A merchants will take in return for products. When the money runs out, a one way flow of cash, Isle B will have nothing to trade, unless it sells elsewhere to acquire money or goods that Isle A will want. We suppose some mainland goods are not available on Isle A or of better quality.
David Ricardo argues that the value of C can be increased by trade between the two isles regardless of any mainland trade. He supposes some of the industry on Isle B is closer in efficiency to the efficiently run equivalent industry on Isle A. In turn, some industry on Isle A is proportionately less efficiently run compared to those on B than some other B industries. The B folk should focus on the most efficiently run industries, specializing and concentrating intellectual activity, financial investment at the expense of the other industries, effectively forcing them out of business. As a side comment, the resultant unemployment in Isle B would drive down wages, free up labor and resources for the more efficient industries. Isle B would be forced to buy goods it needs from Isle A from wages earned on B. Isle B could try and sell its limited specialized production to the mainland or to Isle A. If Isle A still did not want the goods of B, they would lower prices in desperation to equivalent products on A, and perhaps to the mainland, to get more money and more competitive advantage against goods in Isle A. Isle A might consider this to be dumping, undercutting their industry at the expense of local employment, available assets for commerce, and government taxation. But they should not put up tariffs, as this, according to Ricardo, violates the sanctity of free trade and the ultimate long range goal of maximizing the total production of the two isles: C.
In the end Isle B should produce fewer goods more efficiently and Isle A should focus on those most efficient of its efficient industries. Now what is the real state of affairs between the two isles?
It is possible or likely that some advantages of Isle A industry has to do with ease of extraction of raw materials. It may have material not available on Isle B. But the overall state of the island economies does not indicate this to be the main problem. The real problem is a discrepancy in organization or wisdom of production. Ricardo supposes his specialization will lead to a value in place of C: A + B = C', and that C' will be greater than C. What Isle B really needs to do is figure out why A is so much more efficient than B and emulate it. We need free trade in knowledge rather than and over free trade in goods. This would produce the more ideal state of: A + B = C'', and C'' would be higher than C'. In addition, resources limitations can often be overcome by superior technology and substitution to produce products of equivalent value.
I might add that Ricardo is a microeconomist passing himself off as a macroeconomist. The same can be said for Adam Smith. The factory spews out poison into the river. This poison was a clever invention that improved production. The effects of the poison were not readily understood. The profits of the factory owner are at the expense of poverty and death to fishermen and consumer, to firms that require clean water and fish products. The river is causing other environmental problems at great expense to the economy, hardly worth the increased productivity of the factory. But, hey, the factory owner spends most of his time isolated in his office, lives up on the hill with his own spring water tap.
Ricardo readily ignores the pain, poverty, lost wages and productivity that invariably result from free trade specialization of production. Keeping people at work while adjusting to changes of new knowledge is much less stressful. For one thing, they keep their jobs. For another, learning ennobles men, teacher and student alike. We add that the real value of money is neither gold nor labor, but a well run economy and society that gives confidence in the future and stability for plans that are derived from that stability and confidence.
Ricardo was also a speculator. Separating means of production from consumers makes it easier for speculators to manipulate prices, government power to control speculators (weakened), and by its very nature is more likely to create price fluctuations. Why is that?
Suppose we have a number of countries that produce a range of agricultural products. Using Ricardo, each country specializes in one product. Now we have plagues, blights, bad weather, natural catastrophes in general, civil strife, and anything else you can think of. Any major impact on monoculture is a catastrophe of enormous impact, whereas a mixed economy would be less likely to suffer social dislocations. Well, maybe we can create an international insurance corporation that will buffer each country? Insurance is money based and much more inclined to embezzlement, market crashes, quarrels about honesty of claims made by each country, possibly resulting in war. Overc
The tendency for unrestricted business to drive down wages is compounded by the tendency to drive up profits. International trade makes it easier for middlemen to take ever larger shares of production. Indeed, this trade guarantees that middlemen income take will increase in percentage to the overall economy. Driving down wages makes middlemen profits more valuable, because lower labor costs lead to a relative increase in the value of money, and what is the result? We have unemployment leading to lost productivity. We have social unrest leading to loss of income due to violence and impaired commerce, with an increase of crime that always attends social conflict. Mr. Ricardo's benefits fly down the sewer of death, decay and poverty.
In sum, organization is much more vital to productivity than labor, minimizing division of labor as a factor in productivity. In point of fact, superior organization increases the wealth generated by division of labor to the maximum attainable given the knowledge base. I might add, organization justifies the wealth of the rich more forcibly than labor factors, giving more confidence to the rich, less reason for class resentment among the poor and modest income recipient, and inures into the rich the vital importance of superior organization in generating wealth, rather than trying to screw people out of good wages with competition as the excuse.
I might add that much or all of the wealth supposedly gained recently by more free trade is in fact the result of superior technology and organization in producing foodstuffs, goods and services. To be sure, the free flow of wisdom benefits the whole world.
As an afterword, just because the ignorance and weakness of men incite them to use division of labor to increase wealth, this does not make ignorance and weakness virtues that should be encouraged by excessive reliance on division of labor. Strong men make strong families, communities, strong nations. Wisdom and can-do-capacity make strong men. This should be encouraged. We have strayed much too far into overspecialization. The next parable deals with that. Back to Table of Content
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