[Samuel Hollander] Ricardo - The New View Collect(BookZZ.org)

RICARDO – THE NEW VIEW

RICARDO - THE NEW VIEW

Collected Essays I

Samuel Hollander

London and New York

First published 1995by Routledge

11 New Fetter Lane, London EC4P 4EE

Simultaneously published in the USA and Canadaby Routledge

29 West 35th Street, New York, NY 10001

This edition published in the Taylor & Francis e-Library, 2001.

©1995 Samuel Hollander

All rights reserved. No part of this book may be reprinted or reproduced or utilized in anyform or by any electronic, mechanical, or other means, now known or hereafter invented,including photocopying and recording, or in any information storage or retrieval system,

without permission in writing from the publishers.

British Library Cataloging in Publication DataA catalogue record for this book is available from the British Library

Library of Congress Cataloging in Publication Data

Hollander, Samuel,Ricardo – the New View: collected essays/Samuel Hollander.

p. cm.Includes bibliographical references and index.

1. Ricardo, David. 1772-1823. 2. Economists - - Great Britain.HB103.R5H723 1995330.15 E´ 3 - - dc20

95-7939CIP

ISBN 0–415–11582–5 (v. 1)ISBN 0-203-00649-6 Master e-book ISBNISBN 0-203-15988-8 (Glassbook Format)

Dedicated to my doctoral students who have had the

courage – in this day and age – to commit themselves

to the History of Economics:

Margaret Schabas, Evelyn Forget, Sandra Peart,

Tom Kompas, Richard Kleer, Nancy Churchman,

Tim Davis, Ingrid Peters-Fransen and Masazumi Wakatabe

Preface xiAcknowledgements xiiiIntroduction 1

Part I. On the interpretation of the early Ricardo

1. RICARDO’S ANALYSIS OF THE PROFIT RATE,1813–15 [1973] 19

2. RICARDO AND THE CORN PROFIT MODEL:REPLY TO EATWELL [1975] 44

3. PROFESSOR GAREGNANI’S DEFENCE OFSRAFFA ON THE MATERIAL RATE OF PROFIT [1983] 60

4. ON A ‘NEW INTERPRETATION’ OF RICARDO’SEARLY TREATMENT OF PROFITABILITY [1986] 71

5. SRAFFA’S RATIONAL RECONSTRUCTION OFRICARDO: ON THREE CONTRIBUTIONS TOTHE CAMBRIDGE JOURNAL OFECONOMICS [1995] 79

Part II. Responses to critics of The Economics of DavidRicardo

6. THE ECONOMICS OF DAVID RICARDO:A RESPONSE TO PROFESSOR O’BRIEN [1982] 91

7. A REPLY TO PROFESSOR RONCAGLIA [1982] 116

8. ‘PROFESSOR HOLLANDER AND RICARDIANECONOMICS’; A REPLY TO PROFESSORMOSS [1982] 127

CONTENTS

CONTENTS

viii

Part III. Ricardian micro-economics

9. ON THE SUBSTANTIVE IDENTITY OF THERICARDIAN AND NEO-CLASSICALCONCEPTIONS OF ECONOMICORGANIZATION: THE FRENCHCONNECTION IN BRITISHCLASSICISM [1982] 135

10. WHY MARSHALL WAS RIGHT ABOUT RICARDO [1989] 167

11. ON COMPOSITION OF DEMAND AND INCOMEDISTRIBUTION IN CLASSICAL ECONOMICS [1989] 195

12. ON THE ENDOGENEITY OF THE MARGINAND RELATED ISSUES IN RICARDIANECONOMICS [1991] 202

Part IV. The Ricardian growth model

13. ON THE INTERPRETATION OF RICARDIANECONOMICS: THE ASSUMPTIONREGARDING WAGES [1983] 219

14. THE WAGE PATH IN CLASSICAL GROWTHMODELS: RICARDO, MALTHUS AND MILL [1984] 226

15. RICARDIAN GROWTH THEORY:A RESOLUTION OF SOME PROBLEMS INTEXTUAL INTERPRETATION [1990] 241

16. A REPLY TO PROFESSOR STIGLER ANDDR PEACH [1990] 265

17. ON THE TEXTUAL INTERPRETATION OFRICARDIAN GROWTH THEORY: THE‘NEW VIEW’ CONFIRMED (AGAIN) [1994] 268

Part V. Further intellectual linkages

18. THE RECEPTION OF RICARDIANECONOMICS [1977] 283

19. THE ROLE OF BENTHAM IN THE EARLYDEVELOPMENT OF RICARDIAN THEORY: ASPECULATIVE ESSAY [1979] 323

CONTENTS

ix

20. ON PROFESSOR SAMUELSON’S CANONICALCLASSICAL MODEL OF POLITICALECONOMY [1980] 342

Index 363

There is more repetition of evidence and argument in this book than would beappropriate were it probable that readers would choose to work through it fromstart to finish, rather than read the essays (that stand by themselves) selectively. AndI have found it preferable to retain the originals in their entirety rather than devisea complex system of cross references to accommodate deletions and contractions.The overlap is probably greatest in the case of Chapter 9 and Chapter 10 but I choseto reproduce both since each was given as a public lecture (carrying with it fondmemories) while the second has never appeared in English in its entirety and containsmaterial not found in the first. Finally, the full flavour of the campaign that I havein effect been waging for more than two decades only becomes evident – it onlybecame fully evident to me – when the articles appear as they now do.

I note here, as a late bulletin, that the mystery posed in Chapter 19 may now havebeen solved with the apparent discovery of a Bentham Manuscript in the Sraffapapers held at Trinity College, Cambridge. On this matter, see my forthcoming‘Notes on a Probable Bentham Manuscript’, in the Cambridge Journal of Economics.

PREFACE

xiii

I am indebted to the following for permission to reproduce the materials in thisvolume:

1 Blackwell publishers, for ‘Ricardo’s Analysis of the Profit Rate, 1813–15’, Economica,August 1973, pp. 261–82 (Chapter 1); ‘Ricardo and the Corn Profit Model: Reply toEatwell’, Economica, May 1975, pp. 188–202 (Chapter 2); ‘On a “New Interpretation”of Ricardo’s Early Treatment of Profitability’, The Economic Journal, December 1986,pp. 1091–7 (Chapter 4).

2 Academic Press Ltd, for ‘Professor Garegnani’s Defence of Sraffa on the MaterialRate of Profit’, Cambridge Journal of Economics, 1983, pp. 167–74 (Chapter 3); ‘Sraffa’sRational Reconstruction of Ricardo’, Cambridge Journal of Economics, June 1995, pp.483–9 (Chapter 5).

3 Oxford University Press, for ‘The Economics of David Ricardo: A Response to ProfessorO’Brien’, Oxford Economic Papers, March 1982, pp. 224–46 (Chapter 6); ‘The WagePath in Classical Growth Models’, Oxford Economic Papers, 1984, pp. 200–12 (Chapter14); ‘Ricardian Growth Theory: A Resolution of Some Problems in TextualInterpretation’, Oxford Economic Papers, 1990, pp. 730–50 (Chapter 15); ‘A Reply toProfessor Stigler and Dr Peach’, Oxford Economic Papers, 1990, pp. 769–71 (Chapter16); ‘The Reception of Ricardian Economics’, Oxford Economic Papers, 1977, pp. 221–57 (Chapter 18).

4 M.E. Sharpe Inc., for ‘A Reply to Professor Roncaglia’, Journal of Post-KeynesianEconomics, 1982, pp. 360–72 (Chapter 7).

5 Eastern Economic Journal, for ‘A Reply to Professor Moss’, July 1982, pp. 237–41(Chapter 8).

ACKNOWLEDGEMENTS


xiv

6 The Canadian Economics Association, for ‘On the Substantive Identity of Ricardianand Neo-Classical Conceptions of Economic Organization’, Canadian Journal ofEconomics, 1982, pp. 586–612 (Chapter 9).

7 The History of Economics Society, for ‘On Composition of Demand and IncomeDistribution in Classical Economics’, History of Economics Society Bulletin, Fall 1989,pp. 216–21 (Chapter 11); ‘On the Endogeneity of the Margin’, Journal of the History ofEconomic Thought, Fall 1991, pp. 159–73 (Chapter 12).

8 The American Economic Association, for ‘On the Interpretation of RicardianEconomics’, The American Economic Review, May 1983, pp. 314–18 (Chapter 13); ‘OnProfessor Samuelson’s Canonical Classical Model’, Journal of Economic Literature, June1980, pp. 559–74 (Chapter 20).

9 Duke University Press, for ‘On the Textual Interpretation of Ricardian Theory:the “New View” Confirmed (Again)’, History of Political Economy, 1994, pp. 487–99(Chapter 17).

10 The Bentham Project, for ‘The Role of Bentham in the Early Development ofRicardian Theory’, The Bentham Newsletter, December 1979, pp. 2–17 (Chapter 19).

I also wish to acknowledge the award of a Grant by the Social Science and HumanitiesResearch Council of Canada which aided me in the preparation of the Introductionand Chapter 5 and Chapter 17.

1

When approached by a publishing house to preface a collection of articles andpapers by an autobiographical introduction, it is difficult not to imagine the soundof fluttering wings, harps and such like. Since I am feeling in reasonably good healthand wish to speculate a little further on the manner in which the fallibility andsubjectivity of the historian might affect – who knows, perhaps even improve – hiswork, I shall take the risk and postpone a full-fledged confession to a later volume inthis series of Collected Essays, limiting myself here to the minimum required to providethe present selection with an appropriate background.

Those familiar with Dr Donald Trefusis, Regius Professor of Philology at theUniversity of Cambridge and Extraordinary Fellow of St Matthew’s College, mayrecall that in one version of his obituary – College members traditionally write theirown obituaries to ‘save ... family and friends the pain and embarrassment of havingto make up lies themselves’ – he wrote of himself that ‘he was as reviled, scorned anddespised as any pure academic’ (Fry 1993, 43–4). I am able to claim that my work onDavid Ricardo and the classical economists has attracted reactions that would makeTrefusis green with envy – ‘bizarre’, ‘fantastic’, ‘ludicrous’, even ‘tragic’, are onlysome of the friendlier examples. Trefusis might have been inclined to cite Milton onmy behalf: ‘Truth never comes into the world but like a bastard, to the ignominy ofhim that brought her forth.’ He could say that; I could not possibly comment.

Of course no one is perfect. I have to admit to very strong support indeed fromother quarters, even some ‘conversions’. To give the flavour of the extraordinarilydisparate opinions I cannot do better than cite two polar extreme evaluations, eachinvolving a Decalogue. The first is by Professor Mark Blaug in his celebrated EconomicTheory in Retrospect :

I have left to the last the most recent and the most exhaustive study of theRicardian model and Ricardo’s views on just about everything: S. Hollander,The Economics of David Ricardo (1979). This massive book is nothing less thana full-scale frontal attack on the entire body of Ricardian scholarship, arguingthat absolutely everybody else has more or less misinterpreted Ricardo.

INTRODUCTION


2

Consider just some of the iconoclastic themes of Hollander’s opus: (1) Ricardo’smethod of analysis was identical to that of Adam Smith; (2) Ricardo’s workwas basically in the tradition of general equilibrium analysis that runs fromSmith to Walras to modern days and, in particular, Ricardo treated pricingand distribution as interdependent; (3) Ricardo’s profit theory did notoriginate in a concern over the Corn Laws and Ricardo never believed, evenin his earlier writings, that profits in agriculture determine the general rateof profit in the economy; (4) Ricardo’s value theory was essentially the sameas that of Marshall in that it paid as much attention to demand as to supply,and Ricardo never regarded the invariable measure of value as an importantelement in his theory; (5) Ricardo could have established his fundamentaltheorem that ‘profits vary inversely with wages’ without his invariable yardstickand frequently took the short-cut of assuming identical capital–labour ratiosin all industries to give him the answers he looked for; (6) wages in Ricardoare never conceived as constant or fixed at subsistence levels; (7) Ricardonever assumed a zero price-elasticity of demand for corn, in effect makingthe demand for agricultural produce a simple function of the size of thepopulation; (8) Ricardo was not a quantity theorist in the conventionalsense, nor a rigid Bullionist, nor did he hold a monetary theory that wasvery different from that of Adam Smith; (9) Ricardo did not predict a risingrental share, nor did he ever commit himself to any clear-cut predictionsabout any economic variable, least of all the rate of profit; and (10) Ricardowas never seriously concerned about the possibility of class conflict betweenlandowners, on the one hand, and workers and capitalists, on the other. Ibelieve that every one of these ten assertions is false but readers will have toconsult the book and to make up their own minds.

(Blaug 1985, 147)

I actually go a long way with Professor Blaug. Many of the assertions (especiallythose containing ‘never’ or the equivalent) are false. But these I do not recognize asmy own, claiming for myself and attributing to Ricardo a modicum of subtlety andsophistication. A fairer Decalogue – we may have proof here for Manicheism – is byProfessor Martin Bronfenbrenner in a review of my Classical Economics (1987, 1992)in which Ricardo figures large. This version has the merit of defining the context ofmy work with great clarity, saving me considerable effort:

The challenge of Hollander is on two fronts at once, which is to say, that itis directed against two categories of more or less complacent opponents:conventional marginalists to his political Right as well as ... Italo-CambridgeNeo-Keynesians to his political Left. Let me summarize in a decalogue ofpropositions his principal challenges to conventional marginalism, in which

3

INTRODUCTION

the present generation of economists (including the present writer) was largelytaught, and largely trained to consider classical economics outmoded in thefashion of Grandma’s hoop skirt and Grandpa’s stovepipe hat:1. The classical economists did not ignore the influence of demand on valueand price, either of inputs or of outputs, either in the short or the long run.Rather, their entire analysis was a development of supply and demand, seenas functional relationships and not as fixed quantities.2. The classical economists did not accept either a subsistence ‘iron law’ or awage-fund theory of wage rates.3. Nor did they maintain that the distribution of income would necessarilyshift in favour of the landlord class as a consequence of economic progress,whether or not such progress eventuated in a stationary state.4. The classical economists had vague, unformed general equilibrium systemsin mind, as products of supply and demand functions for both inputs andoutputs.5. Turning to macroeconomics: The classical economists espoused neither amechanical form of the quantity theory of money nor Say’s Law in the‘Identity’ sense which does not specify any equilibrium price level.6. The classical economists were not ‘savage deflationists’. Given a wartimefiat-money inflation to which the economy had largely adjusted, restorationof a metallic standard should not have required return to the prewar pricesof the precious metals.7. The classical method of economic analysis is better described as aninteraction and reinforcement between inductive and deductive methodsthan as pure deduction derived solely from introspection –Schumpeter’s‘Ricardian vice’. Their use of historical examples was more than window-dressing, and they sometimes went out of their way to consider apparentparadoxes and anomalies. (Ricardo’s ‘misdemeanor’, falling short of ‘vice’,was to include so few historical illustrations in his Principles of Political Economyand Taxation. He included them plentifully in his other writings.)8. In view of (1–7) above, the ‘marginal revolution’ of the 1870s was not infact a revolution at all, but ‘nothing more than a change in “concentrationof attention”’.9. Rather than a combinatory reconciliation of classical and marginalistconceptions, Alfred Marshall’s Principles of Economics should be looked uponas a modernized restatement of classical economics – the economics of Ricardo,in particular.10. Rather than ‘It’s all in Marshall’ – battle-cry of the pre-Keynesian ‘oldfogeys’ – they should have insisted that ‘It’s all in Ricardo’, meaning by‘Ricardo’ his essays on policy problems along with his Principles.


4

Professor Hollander has convinced me that a set of propositions much likethe above decalogue – if not that decalogue as it stands – is basically correct.

(Bronfenbrenner 1989, 36–8)

As will be clear from the Tablets cited above, a principal theme running throughThe Economics of David Ricardo and Classical Economics – it is true of the essays reprintedhere – is my contention that Ricardo’s economics constitutes – in its fundamentals, notmerely tangentially or in some inconsequential way – the economics of allocationinvolving the information conveying and signalling role of prices, the notion ofalternative costs, the principle of maximizing net returns and the market interactionof goods and services – in brief, the theory of the coordination of decentralizedeconomic activities. This is what I refer to by the designation ‘general equilibrium’in the Ricardo context. It is an unfortunate term if it conjures up Arrow, Debreu orHahn; but I had presumed it would be self-evident that this was not my intention.I have also made it clear throughout that Ricardo’s main objective was not that ofWalras, but rather to demonstrate the inverse wage–profit relation. 1 There were,moreover, contemporaries or near-contemporaries of Ricardo who developed aspectsof ‘general equilibrium’ not clear to Ricardo himself – Longfield, in particular. 2 Ihave never claimed that Ricardo said the last word.

There is a second theme – strictly it is this that seems to be usually intended bythe designation ‘New View’ – namely, that the process of growth subject to landscarcity entails a necessarily downward trend in both the real (commodity) wage andthe profit rate, the incidence of increasing land scarcity being shared between labourand capital in a ratio depending on capital-supply and labour-supply conditions.These are not independent exercises. To express the latter in value terms, anddemonstrate the necessary rise in the proportionate share of the value of the marginalproduct going to labour despite the fall in the real wage, necessitated a preliminaryinvestigation of value theory.

The allocation dimension implies that there was no paradigmatic or ‘revolutionary’break between Smithian and Ricardian theory, and also none in the early 1870s withthe work of the so-called ‘marginalist revolutionaries’. (This is sometimes referred toas the Continuity Thesis.) The growth dimension implies the undermining of thenotion of profit as ‘surplus’. Let me make myself perfectly clear. (1) I do not deny aconcern with the source of investible funds – the disposable surplus; but that mightbe found in all incomes, wages included. Thus with decreased land scarcity – ‘anadded tract of fertile land’ – real income and part of the disposable surplus would betransferred to labour and capital. (2) Profits could not be reduced, as by taxation,without an impact on the rate of accumulation, and, accordingly, could not berepresented entirely as surplus in the sense of ‘economic rent’. In the context of theinverse profit–wage relation, both incomes are exactly on a par since the real wage is

5

INTRODUCTION

not a datum and governs the population growth rate, just as the profit rate governsthat of capital. My Ricardo and Classical Economics contain much else includingdisquisitions on policy, money and banking and method; but it would be fair to saythat the foregoing résumé covers the themes that have attracted most attention.(Rather a pity.) These themes are developed and defended in Parts III and IV.

Professor Bronfenbrenner closes his review by asking:

Is the Hollander rehabilitation of classical economics a success? I think that itis, both in presenting what classical economics was and in stressing howmuch of it remains in both modern Micro- and modern Macro-economics.It represents an advance over, say, Mark Blaug’s Ricardian Economics (NewHaven, 1958) and Thomas Sowell’s Classical Economics Reconsidered (Princeton,1974) primarily in its superior treatment of the ‘Cambridge critique’. It istoo much to hope for this volume the status of last word on classical economics,but it surely defines a new orthodoxy and becomes the next target – not tobe confused with a sitting duck – for dissidents to attack.

(Bronfenbrenner 1989, 41)

He has been proven correct in his forecast. One ‘Sraffian’ reviewer of Classical Eco-nomics complained that it was ‘a tragic book. It shows a reluctance on Hollander’spart to benefit from the criticism his earlier work so abundantly received’(Groenewegen 1988, 89). This, of course, is academese for my unwillingness to aban-don my position in favour of the reviewer’s. I leave it to Professor Blaug to come tomy defence. He makes the point that ‘Sam Hollander is notorious for writing re-joinders to every adverse review of one of his books’ (Blaug 1987a, 19). Precisely.Some authors maintain a dignified silence in the face of criticism especially since –as Stigler has observed –scholars ‘seldom change their minds’ (1988, 210). For betteror for worse, I have chosen a different line. I have listened carefully to the criticisms,found them wanting and given my reasons for standing firm. This will become clearnot only in Part II which includes formal replies to critics of my Ricardo but through-out, since many of the papers entail responses. Nor can one be absolutely sure thatthere will be no converts; there is some evidence of weakening even on the part ofmy severest critic (see Chapter 17).3 It is also my hope that students will benefit fromobserving, or at least be amused by, the antics of the contending parties.

A particularly serious matter is raised by Professor Bronfenbrenner. If my positionis correct, as he believes it is, ‘how ... could so much eminent and honest scholarshiphave gone so awry over the generations which separated modern from classicaleconomics? How could so many great men in so many countries have so badlyconfused first approximation and “pedagogic clarities” with wrong-headedness, one-sidedness, narrow-mindedness, and sheer stupidity?’ (1989, 38). I shall try to give a(partial) answer to that question presently, pointing out now that, pace Blaug’s rhetorical


6

assertion that, in my view, ‘absolutely everybody else has more or less misinterpretedRicardo’, I have in fact done my best to give credit where credit is due for all or partof the so-called New View.4 And the fact that Professor Morishima (1989) reachesmuch the same perspective on Ricardo as I do, though by a very different path,provides a most pleasing corroboration.

I also find my position confirmed and reinforced by my researches for theEconomics of Thomas Robert Malthus (in press). There I show (1) that the simultaneousdecline in wage and profit rates was adopted by Ricardo before Malthus took it up;(2) that Malthus set forth the corn profit model that figures so large in Part I of thisselection, and developed a price theory that is compatible with Sraffa’s in his Productionof Commodities (1960); (3) that Ricardo insisted against Malthus on treating cornprecisely as any other product in terms of independent demand and supply functions;and (4) that Ricardo rejected the superior productivity attributed by Malthus toagriculture, a physiocratic concept appearing in the Wealth of Nations side by sidewith – from Ricardo’s perspective – a valid body of allocation theory. 5 I shall notspell out here the potentially radical implications for one’s perspective on thedevelopment of nineteenth-century economics.

As George Stigler put it so disarmingly in his memoirs: ‘One surprising featuretaught by intellectual history is the persistence of uncertainty over what a personreally meant. One might think that intellectual competence and goodwill are all thatare required to understand what a scholar intends to say, but the study of anyimportant scholar of the past will show that belief to be most naive’ (1988, 216).Here Stigler apparently takes for granted that our concern should be with ‘what ascholar intends to say’ though elsewhere he relegates this to a secondary category of‘personal’ rather than ‘scientific exegesis’ (below, Chapter 15). I wholeheartedly sharethis objective, and would regret the infiltration of ‘literary theory’ of thedeconstructionist variety into our discipline. It is the rejection of ‘authorial intent’as a valid concern which I cannot appreciate, though fortunately self-declared literarytheorists do not always practise what they preach. (I certainly do not mean by all thisthat one should ignore matters of style and ‘rhetoric’; on the contrary, these canprovide the clue to the author’s intentions.)

This leads me back to Professor Bronfenbrenner’s question – if my position onRicardo is correct, how to explain honest misreadings? It is not, I would say, strictlya matter of misunderstanding that has emerged ‘over the generations which separatedmodern from classical economics’. Ricardo was misunderstood from the outset andhimself vigorously protested at some of the worst cases, at one point uncharacteristicallyexclaiming against Malthus: ‘This is disingenuous.’ If Ricardo himself had problemsmaking himself understood to his own friends, any later commentators are going tohave their work cut out to get things straight.

7

INTRODUCTION

I illustrate from Malthus’s reading of Ricardo on profits: ‘to attempt to estimatethe rate of profits in any country by a reference to this cause alone [diminishingagricultural returns], for ten, twenty, or even fifty years together, that is for periodsof sufficient length to produce the most important effects on national prosperity,would inevitably lead to the greatest practical errors. Yet notwithstanding the utterinadequacy of this single cause to account for existing phenomena, Mr. Ricardo inhis very ingenious chapter on profits, has dwelt on no other’ (1820, 308); or again,the facts were ‘diametrically opposed to the theory of profits founded on the naturalquality of the last land taken into cultivation’ (320). Ricardo protested: ‘Mr. Malthushere brings a charge against me which he would find it very difficult to prove. Hehas himself Page 294 Section I of this Chapter stated his causes for the fall of profits’– agricultural productivity and variable corn wages. ‘I fully concur with him inthinking that profits never vary but from one or other of those causes’ (1951, II,264). As for the second formulation, he could scarcely contain himself:

This is disingenuous. Who has advanced a ‘theory of profits founded on thenatural quality of the last land taken into cultivation’. The theory is thatprofits depend on the productiveness of the last land taken into cultivation,whether that productiveness be owing to the natural quality of the land, orthe economy and skill with which labour may be applied to it. Profits areincreased, either by diminishing the quantity of labour bestowed on the lastland which yields a given produce, or by increasing the produce with agiven quantity of labour. Mr. Malthus will I am sure not say that I have everdenied this principle – he will not say that I have not distinctly advanced it.

(Ricardo 1951, II, 276–7)

A second instance of ‘misrepresentation’ relates to value theory: ‘[W]hen youreject the consideration of demand and supply in the price of commodities andrefer only to the means of supply, you appear to me to look only at the half of yoursubject. No wealth can exist unless the demand, or the estimation in which thecommodity is held exceeds the cost of production: and with regard to a vast mass ofcommodities does not the demand actually determine the cost?’ (Malthus to Ricardo,26 October 1820; in Ricardo 1951, VIII, 285). Ricardo immediately protested: ‘Ihave never disputed this’ (24 November; VIII, 302). And again he explained hisposition, in this case the weight placed on production costs as the determinant ofsupply conditions in the face of changes in demand: ‘I do not dispute either theinfluence of demand on the price of corn and on the price of other things, butsupply follows close on its heels, and soon takes the power of regulating price in hisown hands, and in regulating it he is determined by cost of production. I acknowledge


8

the intervals on which you so exclusively dwell, but still they are only intervals.’ Allthis was in line with his Principles, where Ricardo had spelled out the process of long-run cost determination of the corn price assuming increases of demand in the faceboth of constant-cost and increasing-cost conditions (I, 163). 6

Part of the blame for the propensity to misunderstand Ricardo reflects the linguisticcomplexity, though I find that one quickly becomes accustomed to Ricardo’sspecialized terminology and learns to translate. A focus on his strong cases – includingforms of expression designed to convey the ‘primacy’ of supply in value formation(see Chapter 12) – explains some of the error, though again I find the Principles itselfto be clear on the main lines of my interpretation with respect to allocation andgrowth and the interdependency between them. As Jacob Viner put it, a concentrationon the long run and a tendency to omit ‘explicit mention of qualifications whosevalidity he was prepared to acknowledge’ enabled critics ‘to expose him to rebuttaloften more damaging in appearance than in fact’ (1937, 140). 7 All this is furthercompounded by a tendency to take the strong statements out of context, encouraginga confusion between ‘rational’ and ‘historical’ reconstruction.

There is also the matter of technical error. For example, at one point in a recentaccount of Ricardo on policy, Mark Blaug attempts an ecumenical exercise suggestingthat while Pasinetti – who develops the constant subsistence wage growthinterpretation:

is unable to account for those passages in which Ricardo more or less clearlysays that real wages, expressed in terms of a basket of physical commodities, canfall alongside the falling rate of profit well before the economy has reached thestationary state ... even the ‘new’ view has difficulty in making sense of passagesin which Ricardo declares unambiguously that the rate of profit depends onlyon the cost of producing wage goods, and on nothing else; such passages areeasy to interpret, however, if we stick with the Pasinetti version of Ricardo ....It is not possible, therefore, to square everything that Ricardo said with anytotally consistent formulation of the entire Ricardian system.

(Blaug 1987b, 121).

Here Blaug repeats a perennial error. The New View can and does accommodateRicardo’s ‘unambiguous’ statement, since the falling real wage is part and parcel ofthat same process which drives down the profit rate, and the profit rate falls pre-cisely because the cost of producing the basket necessarily rises albeit that the magni-tude of the basket declines. Blaug is not alone. Even Stigler was not immune (seeChapter 15, Chapter 16). It was Ricardo, as mentioned already, who taught Malthusthat the falling real wage cannot prevent the fall in the profit rate, but the lesson hasnot yet been absorbed.

9

INTRODUCTION

Misinterpretation of Ricardo has, I believe, also been compounded by apresumption that, to avoid anachronistic readings, the researcher must pretend tolack knowledge of the future beyond the period under study. Of course we mustnever superimpose on an early writer reference frameworks that were developedonly after his death or even after a particular moment in his career (Skinner 1969,6). But this does not require that we avoid modern vocabulary and categories. Oneis writing, after all, for modern readers. More important, there is also a danger ofdenying the presence in an early writer’s work of modern concepts merely becausethey are expressed differently – a sophisticated form of anachronism. Tracing thefiliation of ideas may actually be impeded by a pretence of ignorance, a pretenceimplicit in a complaint that the debate over Ricardo has ‘taken on all the characteristicsof a bitterly contested paternity suit, with one side battling for Ricardo’s custodywithin the “neo-classical” home, the other for his adoption within the “Sraffian”home. My contribution to this debate is simple. Leave him within his ownsurroundings’ (Peach 1993, 303). 8 For my part, I disclaim any attempt to captureRicardo for the neo-classicals in any sense other than that specified above – the factthat the price-signalling mechanism of resource allocation is central, and explicitlyso, to Ricardo’s economics. If one were to imagine that the intellectual clock stoppedon 11 September 1823 with Ricardo’s last breath – that there were no more advancesbeyond his oeuvre – those features would still be there and recognizable. That theyare absorbed into the ‘neo-classical’ paradigm is another historical fact attested to byMarshall. 9 The recommendation to leave Ricardo ‘within his own surroundings’, if itis intended to convey anything more than the valid Skinner caution, is likely to blind one toperspectives actually extant and glaringly so in the Ricardo texts. In any event, whythe surprise at my reading of Ricardo? The allocative function of the price system isalready clearly present in Turgot. 10 And, of course, we must not forget Adam Smith. 11

There is a necessary, though insufficient, test for accurate interpretation. Anyreading which captures the author’s main theoretical conclusions inevitably leavesformulations conflicting with that interpretation. The choice between readings willturn in part on how convincingly these residuals are treated. My efforts to lay barethe residual features in my own interpretation – to state frankly the apparent weaknessesof my own interpretation – have given rise to charges of ‘flights of negativeimagination’. I suggest that those who oppose the New View should try to deal withtheir own residuals – those created by insistence that Ricardo’s economics excluded(1) a powerful price-theoretic or scarcity dimension, and/or (2) market processes inthe determination of the wage rate trend in a growing system subject to land scarcity. 12

Examples of the burial of residuals range far beyond the forementioned matters.One striking case relates to Ricardo’s concern that corn law reform had to be carefullytimed and slowly phased in:


10

We all have to lament the present distressed situation of the labouring classesin this country, but the remedy is not very apparent to me. The correctingof our errors in legislation with regard to trade would ultimately be ofconsiderable service to all classes of the community, but it would afford noimmediate relief: on the contrary I should expect that it would plunge usinto additional difficulties. If all the prohibitions were removed from theimportation of corn and many other articles, the sudden fall in the price ofcorn and those other articles, which could not fail to follow, would ruinmost of the farmers, and many of the manufacturers; and although otherswould be benefited, the derangement which such measures would occasionin the actual employment of capital, and the changes which would becomenecessary, would rather aggravate than relieve the distress under which weare now labouring.

(13 October 1819; Ricardo 1951, VIII, 103)

Clearly Ricardo wished to avoid any further disturbances that would magnifythe need for reallocation of resources, and therefore ruled out corn law repeal as ahelpful step. He called for legislation only in 1821 after the return of prosperity inthe manufacturing sector. Moreover, repeal – which was not to be total in any event– should be brought about by gradual steps and after due warning with recognitionof the possible need for compensation of those (other than landlords) adverselyaffected. The foregoing passage is cited by Professor Hutchison as evidence of ‘greatwisdom ... in the realization of ignorance and the scepticism regarding conclusionsdeduced from long-run, rapidly self-equilibrating models’ (1978, 49–50n). But it isread as an exception – the exception that proved the rule: ‘It amounts to an extremecontrast with the more typical kinds of Millian–Ricardian policy analysis.’ It is notat all clear to me why at this particular point, and nowhere else, Ricardo should haveshown such wisdom, and Hutchison offers no suggestions. I find Ricardo similarlyresponsible on the return to gold, poor law reform and – this I owe to my doctoralstudent Nancy Churchman – on the national debt. Had Hutchison bothered toponder the ‘exception’, he might have been led to reconsider his misleadingrepresentations of Ricardian method.

Let me address next a common complaint directed against my work:

Much of the vaunted ‘interdependence of pricing and distribution’ is, byHollander’s admission, not explicit in ‘classical analysis’. ... It is only byretrospectively filling this lacuna, asking, for example, how a change in tasteswould have been analysed had the ‘classical’ writers been compelled to use‘process analysis’ that Hollander’s arguments acquire their thin glaze ofplausibility. To use the phrase beloved by him, this strategy is a fine exampleof ‘altered concentrations of attention’, where the shift is away from the

11

INTRODUCTION

textual preoccupations and methods of analysis to those supplied and adaptedby Hollander.

(Peach 1988, 175)

The criticism merits serious consideration. In the course of my work, I point outthat certain disturbances may not formally have been dealt with by the originalwriter, but once having established that writer’s analysis of similar cases it is surelyfair to say how, if presented with such a disturbance, he would have been obliged todeal with it consistently with the system already established. I see nothing patentlyunreasonable about this procedure which is designed to recognize the status ofvarious propositions. In any event, the specific illustration is poorly chosen since –as I subsequently became aware – Ricardo did, in fact, explicitly consider the impact ofa change in tastes on distribution precisely in the manner to be expected, therebyconfirming my hypothesis (see Chapter 11).

I turn briefly to the general matter of ‘bias’ in interpretation. Bias, of course, neednot be political; it extends to one’s personal sympathy for an author, and may lead tothe discounting of features that less sympathetic readers put down as contradictory ormeaningless. No historian is immune and the best one can do is recognize the inevitabledegree of subjectivity and try to compensate. In my own case, I admit to a fondness forRicardo as a person; his candour, incorruptibility and sense of public duty shinethrough so much of his writing. Moreover, the two years that I spent in a theologicalacademy as a teenager reinforced an already-present concern with consistency rigorouslyinstilled since about age 7. I am aware of these ‘biases’. But both can serve well byencouraging recourse to the charge of inconsistency as a last not first resort.

Ideological bias in Ricardo interpretation is too big an issue to be dealt withhere. I refer to the problem in Chapter 12 with respect to the Sraffian reading andthere I refer to Bronfenbrenner’s hypothesis – it appears in the review cited above –that Sraffa may have confused Ricardo with Marx. But I also cannot help feeling thatHutchison – the Sraffian’s bête noire –attributed to Ricardo the sins of Stalin and thatthis perhaps somewhat coloured his interpretation (1978, 240–76). One needs tostand back from one’s subject to allow for a minimum of objectivity. I shall leavethese matters to a later volume in this series.

The essays printed below constitute contributions to the journals on Ricardo and‘Ricardian economics’ which touch directly or indirectly on the ‘New View’. Thatthe whole issue will not lie down is clear from the fact that the ink is scarcely dry onquite a few of the articles and the criticisms to which they respond. The precedingremarks have, I trust, placed Parts I through IV in perspective. Part V is a catch-allwith a common theme in a concern with intellectual linkages, supplementing in partthe evidence for the ‘continuity thesis’ in Chapter 9 and Chapter 10.


12

NOTES

1. For this purpose the ‘exclusion’ of rent from marginal costs by the differential renttheory applied to land was crucial, a procedure that would be questionable in the case ofmulti-use land (see Chapter 12). In several of my papers, I have maintained that Ricardoappreciated the distinction (see Chapter 9, Chapter 10). I now think this goes too far; heon occasion extended the principle to the multi-use case (see 1951, I, 250; II, 70–1).

2. See R.D.C. Black (1984). This paper is a model of fair-minded criticism. 3. I myself once taught the ‘old view’ (below, pp. 24, 29-30, 35-6). Sir John Hicks was

seduced away from the fix-wage interpretations (see the exchange between J.H. and S.H.prefacing Hicks and Hollander 1977). And the reviewer of Classical Economics for Historyof Political Economy recounts his personal odyssey (Young 1991).

4. My list would include inter alia Carlo Casarosa, David Levy, Pier Luigi Porta, S.C. Rankin,Lord Robbins, P.A. Samuelson, G.L.S. Tucker and Jacob Viner. And, of course, there isAlfred Marshall. I also might remind readers of at least two other commentators who havestated the so-called ‘continuity thesis’ much more strongly than I have done: ‘economicshas never had a major revolution: its basic maximizing model has never been replaced.Whether this is good or bad (and the fact is the despair of some), it is, I think, remarkablewhen compared to the physical sciences that an economist’s fundamental way of viewingthe world has remained unchanged since the eighteenth century’ (Gordon 1965, 124);‘economics may be regarded as more “uniformitarian” than the natural sciences, fordespite persistent and often penetrating criticism by a stream of heterodox writers ... it hasbeen dominated throughout its history by a single paradigm—the theory of economicequilibrium via the market mechanism’ (Coats 1969, 292).

5. The presence in Malthus’s writings of both concepts repeats the confused picture of1776 with the principal difference that the notion of agricultural surplus contributedtowards Malthus’s support for agricultural protection—as it had led the French torecommend free trade in agricultural products when France was a net corn exporter—whereas Smith never went that far.

6. A third instance of ‘misrepresentation’ that sorely troubled Ricardo relates to his chapter‘On Gross and Net Revenue’. Malthus read this chapter as arguing that a nationaladvantage resulted from obtaining a given net income with a lower work forcenotwithstanding a massive loss of employment. Ricardo protested that his sole objectivewas to argue that no national advantage flowed from generating a given net revenue bymeans of seven rather than five million men, having in mind specifically the magnitudeof net revenue with an eye to national ‘power’: ‘The employing a greater number of menwould enable us neither to add a man to our army and navy, nor to contribute oneguinea more in taxes’ (1951, II, 381). He had no intention of recommending a policyinvolving actual creation of massive unemployment.

7. Comparing James Mill’s Elements with Ricardo’s Principles, McCulloch rightly pointedout that what is valid procedure in the one case may be invalid in the other:This work, by the distinguished author of the ‘History of British India’ is a résumé of thedoctrines of Smith and of Ricardo with respect to the production and distribution ofwealth, and of those of Malthus with respect to population. But it is of too abstract acharacter to be either popular or of much utility. Those secondary principles and modifyingcircumstances, which exert so powerful an influence over general principles, are wholly, or

13

INTRODUCTION

almost wholly, overlooked by Mill. But though their consideration might be omitted inan original work like that of Ricardo, it is not so easily excused in an elementary treatise.(McCulloch 1845, 17)

8. Blaug cites these words with utter rapture (1993, 2). But I do not take this commendationfrom the author of Economic Theory in Retrospect seriously. Almost at random I pick outfrom that work the following interpretation of Smith’s Book 1, chapter vii on price formation:‘It will be noticed that Smith thinks of demand and supply as referring to people’s willingnessto buy or sell at a particular price rather than at all possible prices; the former is expressed inactual amounts desired or offered, the latter in a schedule of amounts, each correspondingto a different price. Still, the whole of the passage given above has no real meaning unlessdemand at any rate is interpreted in the sense of a schedule, and a negatively inclinedschedule at that. Here and elsewhere Smith intuitively gropes his way toward the right answer’(1985, 43).

9. If one wishes to call this ‘Whig history’ (Samuelson 1988, 1992) there is no harm, since Whighistory—if conducted responsibly—does not read into the record what is not there, but seeksto provide criteria for evaluation. But the Whig historian can go too far. For example,Samuelson: ‘If land is unaugmentable and permanent, and labor supply is procurable at asubsistence wage, then there is a genuine sense in which Quesnay’s Produit Net (and Ricardo’sNeat Product) is equal to Georgian land rent: the rest of national Gross Product is the wagefodder of labor’ (1988, 164). This is a valid insight as a positive statement regarding analysis;but it is not Quesnay. I touch on the contrast between ‘rational’ and ‘historical’ reconstruction.

10. See Schumpeter on Turgot’s Reflections as ‘first of all the treatises on Value and Distributionthat were to become so popular in the later decades of the nineteenth century’ (1954, 249).This opinion is confirmed by Groenewegen (1970) with parallels drawn between Turgot’sreasoning and that of Walras and Wicksell in the development of exchange models.Groenewegen is apparently ashamed of the sins of his youth. For he makes no mention ofthis paper in his contribution to the New Palgrave, where he rejects Schumpeter’s view thatTurgot anticipated much of what became important after the ‘marginal revolution’, claimingto the contrary that Turgot is ‘firmly in the classical tradition rehabilitated by Sraffa’ (1987,711). This is questionable, considering Turgot’s explicit account of the principle of competitionassuring that market prices tend to cost prices via the adjustments of supplies ( Reflections,Section LXXXVIII). Smithian and Ricardian, yes; Sraffian, no. Groenewegen himself pointsout that Turgot’s value theory ‘rested on a relationship between current (market) price andfundamental value dependent on competition and resource mobility’, which relationship ischaracteristically non- or anti-Sraffa.

11. I am delighted that Paul Samuelson comes to the defence of my position, which ‘has beenlampooned rather than praised for seeing supply and demand mechanisms everywhere in theclassical writers. Even Mark Blaug ... writes of Hollander as making Smith into more of aLéon Walras than a Ricardo, which I deem not to be a reductio ad absurdum, but rather amerited compliment for Smith’ (1992, 5). I note the unfortunate implication here thatRicardo, for Samuelson, is not in the Smithian tradition with respect to general equilibrium;but there is also his compensatory observation that ‘[e]ven before the 1951 and 1960eruption into print of Sraffa, my reading of every one of the classical masters found in theman earlier and more primitive version of the Walras–Marshall–Wicksell system’ (5–6; emphasisadded).

Powerful new evidence for Adam Smith as anticipator of general-equilibrium modellingwill be found in West, 1994.


14

12. Some commentators have just given up and concluded that Ricardo is so riddled with‘startling inconsistencies’ that he is not susceptible to coherent formulation on value ordistribution (Peach 1993, xii) .

REFERENCES

Black, R.D.C. (1984) ‘The Irish Dissenters and Nineteenth-century Political Economy’, inAntoin E. Murphy (ed.) Economists and the Irish Economy, Dublin: Irish Academic Press,120–37.

Blaug, Mark (1985) Economic Theory in Retrospect, 4th edn, Cambridge: Cambridge UniversityPress.

——(1987a) ‘On a Severe Case of Paranoia in the History of Economic Thought’, History ofEconomic Thought Newsletter 38 (Spring): 19–21.

——(1987b) ‘Ricardo and the Problem of Public Policy’, in Economic History and the History ofEconomics, New York: New York University Press, 115–27.

——(1993) Review of Peach, 1993, History of Economic Thought Newsletter 50 (Spring): 1–2.Bronfenbrenner, Martin (1989) ‘A Rehabilitation of Classical Economics’, Aoyama Kokusai

Seikei Ronshu [Aoyama University Journal of International Political Economy] 13: 35–41.Coats, A.W. (1969) ‘Is there a “Structure of Scientific Revolutions” in Economics?’ Kyklos 22:

289–96.Fry, Stephen (1993) ‘Trefusis’s Obituary’, Paperweight, London: Mandarin, 43–5.Gordon, D.F. (1965) ‘The Role of the History of Economic Thought in the Understanding of

Modern Economic Theory’, American Economic Review 55 (May): 119–27.Groenewegen, Peter D. (1970) ‘A Reappraisal of Turgot’s Theory of Value, Exchange, and

Price Determination’, History of Political Economy 2 (Spring): 177–96.——(1987) ‘Turgot, Anne Robert Jacques, Baron de L’Aulne’, in J. Eatwell, M. Milgate and P.

Newman (eds) The New Palgrave Dictionary of Economics, Vol. 4, London: Macmillan, 707–12.

——(1988) Review of Hollander, 1987, Economic Record 28 (September): 88–9.Hicks, John and Hollander, Samuel (1977) ‘Mr Ricardo and the Moderns’, Quarterly Journal

of Economics 91 (August): 351–69.Hollander, Samuel (1979) The Economics of David Ricardo, Toronto: University of Toronto

Press.——(1987) Classical Economics, Toronto: University of Toronto Press, 1992.Hutchison, T.W. (1978) On Revolutions and Progress in Economic Knowledge, Cambridge:

Cambridge University Press.Malthus, T.R. (1820) Principles of Political Economy, London: John Murray.McCulloch, J.R. (1845) The Literature of Political Economy, London: Longman, Brown, Green,

and Longmans.Morishima, Michio (1989) Ricardo’s Economics: A General Equilibrium Theory of Distribution and

Growth, Cambridge: Cambridge University Press.Peach, Terry (1988) ‘Samuel Hollander’s Classical Economics: A Review Article’, The Manchester

School 56 (June): 167–75.——(1993) Interpreting Ricardo, Cambridge: Cambridge University Press.Ricardo, David (1951–73) The Works and Correspondence of David Ricardo ed. P. Sraffa (11 vols),

Cambridge: Cambridge University Press.

15

INTRODUCTION

Samuelson, Paul A. (1988) ‘Keeping Whig History Honest’, History of Economics Society Bulletin10 (Fall): 161–8.

——(1992) ‘The Overdue Recovery of Adam Smith’s Reputation as an Economic Theorist’, inMichael Fry (ed.) Adam Smith’s Legacy: His Place in the Development of Modern Economics,London: Routledge: 1–14.

Schumpeter, J.A. (1954) History of Economic Analysis, New York: Oxford University Press.Skinner, Quentin (1969) ‘Meaning and Understanding in the History of Ideas’, History and

Theory 8, 3–33.Sraffa, Piero (1960) Production of Commodities by Means of Commodities, Cambridge: Cambridge

University Press.Stigler, George J. (1988) Memoirs of an Unregulated Economist, New York: Basic Books.Viner, Jacob (1937) Studies in the Theory of International Trade, New York: Harper and Brothers.West, Edwin G. (1994) ‘Joint Supply Theory before Mill’, History of Political Economy 26

(Summer): 267–78.Young, Jeffrey T. (1991) Review of Hollander, 1987, History of Political Economy 23 (Spring):

167–70.

Part I

ON THEINTERPRETATION OFTHE EARLY RICARDO

19

This essay is concerned with the early account (1813–15) provided by Ricardo of theprinciples governing the general rate of profit, the characteristic feature of which isdefined in the celebrated proposition that ‘it is the profits of the farmer which regulatethe profits of all other trades’. I shall attempt to justify the contention that the widelyheld explanatory hypothesis suggested by Piero Sraffa (cf. 1951, xxxi–xxxii) – accordingto which Ricardo’s proposition derives from the assumption that in agriculture bothinput and output consist of the same commodity (‘corn’) – does not in fact accuratelyreflect Ricardo’s intentions. It follows from the argument of this paper that substantiallythe same position as that ultimately appearing in the Principles was maintained from thevery outset, namely that variations in the money-wage rate, in consequence of changingprices of wage goods, will be accompanied by inverse movements in the general rate ofprofit. We consider below the correspondence between Ricardo and Malthus on the rateof profit during the period 1813–14, and the Essay on Profits (1815).

I . T H E T H E O R Y O F P R O F I T S ( 1 8 1 3 – 1 4 )

The explanatory principle adopted in the Principles to account for the determinationand secular movement of the general rate of profit runs in terms of the real cost ofproducing wage goods: ‘It has been my endeavour to shew throughout this work,that the rate of profits can never be increased but by a fall in wages, and that therecan be no permanent fall of wages but in consequence of a fall of the necessaries onwhich wages are expended’ (Ricardo 1951, I, 132). This fundamental relationship canin fact be found as early as mid-1813 in correspondence with Malthus, whereinRicardo rejected Malthus’s contention that either extensions of foreign trade, 1 orcapital accumulation as such would have any effect upon the rate of profits. Atten-tion rather should be directed at productivity in agriculture:

That we have experienced a great increase of wealth and prosperity since thecommencement of the war I am amongst the foremost to believe; but it is

1

RICARDO’S ANALYSIS OF THEPROFIT RATE, 1813–15


20

not certain that such increase must have been attended by increased profits, orrather an increased rate of profits, for that is the question between us. I havelittle doubt however that for a long period, during the interval you mention[1793–1813], there has been an increased rate of profits, but it has beenaccompanied with such decided improvements of agriculture both here andabroad, – for the French revolution was exceedingly favorable to the increasedproduction of food, that it is perfectly reconcileable to my theory. My conclusionis that there has been a rapid increase of Capital which has been prevented from shewingitself in a low rate of interest by new facilities in the production of food. 2

(17 August 1813; Ricardo 1951, VI, 94–5; emphasis added)

Implicit in the argument is the presumption that but for improved agriculturaltechnology during the Revolutionary and Napoleonic period the profit rate wouldhave declined with accumulation. 3

In the following year Ricardo defined the conflict between himself and Malthuson the determination of the profit rate with particular care. All influences apartfrom the productivity of agricultural resources are again excluded, and the key roleof the principle of diminishing returns in conditions of constant agriculturaltechnology carefully defined. What must be noted above all is the formal propositionthat ‘it is the profits of the farmer which regulate the profits of all other trades’:

I contend that the arena for the employment of new Capital cannot increasein any country in the same or greater proportion than the Capital itself –unless Capital be withdrawn from the land – unless there be improvements inhusbandry, – or new facilities be offered for the introduction of food fromforeign countries; – that in short it is the profits of the farmer which regulate theprofits of all other trades, – and as the profits of the farmer must necessarily decrease withevery Augmentation of Capital employed on the land, provided no improvements be atthe same time made in husbandry, all other profits must diminish and therefore the rateof interest must fall.

(To Hutches Trower, 8 March 1814;Ricardo 1951, VI, 103–4; emphasis added)

Malthus’s position – implying a mutual relationship between sectors – is then givenby contrast:

To this proposition Mr. Malthus does not agree. He thinks that the arenafor the employment of Capital may increase, and consequently profits andinterest may rise, altho’ there should be no new facilities, either by importation,or improved tillage, for the production of food; – that the profits of the farmerno more regulate the profits of other trades, than the profits of other trades regulate the

21

RICARDO’S ANALYSIS OF THE PROFIT RATE

profits of the farmer, and consequently if new markets are discovered, in whichwe can obtain a greater quantity of foreign commodities in exchange forour commodities, than before the discovery of such markets, profits willincrease and interest will rise ....

Nothing, I say, can increase the profits permanently on trade, with thesame or an increased Capital, but a really cheaper mode of obtaining food.A cheaper mode of obtaining food will undoubtedly increase profits saysMr. Malthus but there are many other circumstances which may also increaseprofits with an increase of Capital. The discovery of a new market wherethere will be a great demand for our manufactures is one.

(Ricardo 1951, VI, 104–5; emphasis added)4

In a letter to Malthus himself, 26 June 1814, Ricardo wrote that ‘the rate ofprofits and of interest must depend on the proportion of production to theconsumption necessary to such production’ (VI, 108). It is this particular statementwhich, Sraffa suggests, implies a model yielding the determining role of agriculturalprofits by assuming that agricultural capital and output both consist of the samephysical commodity, namely corn, so that total profits and the rate of profit oncapital can be determined in physical terms without reference to valuation. Since allother sectors utilize corn as input only it is the exchangeable value of their productswhich must be adjusted to yield the same profit rate as in agriculture.

Ricardo, however, himself stated in this letter what he had in mind, and hisexplanation does not relate to the preceding argument. Whatever the surfacemanifestation, the ultimate determinant of the general rate of profit was, in his view,the level of money wages, governed in turn by food prices, so that the secularbehaviour of the profit rate could be explained by inverse movements of moneywages. The ‘proportion of production to the consumption’ referred to above, heexplained, ‘essentially depends upon the cheapness of provisions, which is after all, whateverintervals we may be willing to allow, the great regulator of the wages of labour’. (Logically,the effect of import restrictions upon the profit rate would depend upon whetheror not the commodities involved entered into the wage basket.)

It must be carefully noted that the argument is stated in objection to Malthus’sview that the effects of trade restriction would be a reduction in aggregate capitaland a consequent increase in the rate of profits. 5 This is not the occasion to enter intoa detailed account of the Malthusian theory of capital accumulation and of ‘effectualdemand’ which envisaged a potential divergence between aggregate demand andsupply, but the full import of Ricardo’s treatment of the rate of profit cannot beappreciated unless the position of his opponent is kept in mind.

Ricardo insisted in his letter upon the identity of aggregate demand and supply:‘Demand has no other limits but the want of power of paying for the commodities


22

demanded. Every thing which tends to diminish production tends to diminish thispower’ (VI, 108). To Malthus’s formal criticism, several weeks later, of James Mill’s‘ingenious position which he lays down in his answer to Mr. Spence, that in referenceto a nation, supply can never exceed demand’, 6 Ricardo replied: ‘The desire ofaccumulation will occasion demand just as effectually as a desire to consume, it willonly change the objects on which the demand will exercise itself ..... We all wish toadd to our enjoyments or to our power. Consumption adds to our enjoyments, –accumulation to our power, and they equally promote demand.’ 7 While Malthuspresumed that corn restriction must have the effect of reducing aggregate capital,Ricardo for his part, saw no necessary connection. 8 On the contrary, the effect ofcorn restriction would be much the same as that of capital accumulation since extensionsto increasingly inferior land would be required in both cases. Accordingly, Ricardodirected his main attack against the Malthusian theory of effective demand, wherebythe profit rate would be influenced by capital accumulation because of a relativevariation in aggregate demand.

Ricardo was willing to concede at this stage of the correspondence only a declinein the level of activity – although not in aggregate capital – both supply and demandfalling proportionately. The reason offered is worth consideration since he was to alterhis position subsequently in a fundamental sense. The rise in the price of corn uponrestriction of importation would tend to reduce the demand for manufacturedgoods in the sense both of a shift of the demand curve and a movement along thecurve: ‘The rise of the price or rather the value of corn ... must necessarily diminishthe demand for other things even if the prices of those commodities did not risewith the price of corn, which they would (tho’ slowly) certainly do. With the sameCapital there would be less production, and less demand.’ 9 In his next letter toMalthus (25 July) Ricardo put even greater emphasis upon reduced demand formanufactured goods due to the rise in their cost prices :

You say that ‘the proportion of production to the consumption necessaryto such production, seems to be determined by the quantity of accumulatedcapital compared with the demand for the products of capital, and not bythe mere difficulty and expence of procuring corn’. It appears to me that thedifficulty and expence of procuring corn will necessarily regulate the demandfor the products of capital, for the demand must essentially depend on the price atwhich they can be afforded, and the prices of all commodities must increase if the priceof corn be increased.

(Ricardo 1951, VI, 114; emphasis added)

Let us take stock of Ricardo’s argument. The fundamental proposition is that thegeneral profit rate tends to fall upon restriction of corn imports because of the effectof high corn prices upon money wages. At the same time Ricardo’s attempt to deal

23


with Malthus’s contentions leads him to adopt the view that the prices of manufacturedproducts would also rise. He did not, evidently, realize the implications of hisconcession that higher wage costs might be passed on to consumers in the form ofhigher prices. 10 The problem, once it was recognized, came to represent a seriousstumbling block, but at this stage, Ricardo’s fundamental objection to Smith’s analysiswhereby higher wages result in higher prices of manufacturers (and lower rents) wasnot yet formalized. 11

We turn next to a second item of evidence offered in support of the ‘corn model’ asthe fundamental theoretical construct utilized by Ricardo. In a further letter toRicardo, Malthus objected: ‘In no case of production, is the produce exactly of thesame nature as the capital advanced. Consequently we can never properly refer to amaterial rate of produce, independent of demand, and of the abundance or scarcityof capital.’ 12 This formulation, it is said, suggests that Ricardo must have stated thecontrary argument either in certain ‘lost “papers on the profits of Capital” ’ or inconversation since we find nothing in any of his extant letters and papers (Sraffa1951, xxxi–xxxii). But Ricardo’s argument is perhaps in fact extant. It may well becontained in the letter of 25 July, just discussed, upon which Malthus was commenting.After explaining the expected reduced demand for manufactures as a consequence ofrising corn prices, Ricardo restated his own position on profit–rate determinationin terms of a corn surplus relative to a corn capital:

The capitalist ‘who may find it necessary to employ a hundred days labour instead offifty in order to produce a certain quantity of corn’ cannot retain the same share forhimself unless the labourers who are employed for a hundred days will be satisfied withthe same quantity of corn for their subsistence that the labourers employed for fifty hadbefore. If you suppose the price of corn doubled, the capital to be employedestimated in money will probably be also nearly doubled, –or at any rate willbe greatly augmented and if his monied income is to arise from the sale ofthe corn which remains to him after defraying the charges of productionhow is it possible to conceive that the rate of his profits – will not bediminished.


What weight are we to place upon the corn calculation in this letter of July, orthe estimate in terms of ‘a material rate of produce’ to use Malthus’s terminology? Inthe first place, we have already seen that in Ricardo’s earlier letter to Malthus of 26June, the decline of the general profit rate was attributed to upward pressure onmoney wages due to the rising costs of wage goods. But secondly, we draw attentionto a further letter to Malthus in August, wherein Ricardo clarifies significantly the


24

operation of this mechanism in the manufacturing sector. The manufacturer mustpay increased money wages, while the price of his product does not riseproportionately:

It is true that the Woollen or Cotton manufacturer will not be able to workup the same quantity of goods with the same capital if he is obliged to paymore for the labour which he employs, but his profits will depend on theprice at which goods when manufactured will sell. [But] ... the rise of his goodswill not be in the same proportion as the rise of labour, and consequently his percentageof profit will be diminished if he values his capital, which he must do, inmoney at the increased value to which all goods would rise in consequenceof the rise of the wages of labour.

(11 August 1814; Ricardo 1951, VI, 119–20; emphasis added) 14

In light of the consistent emphasis upon the role of the money wage rate in determin-ing the general rate of profit – both immediately before and after the letter containingthe corn calculation – it appears unjustified to interpret Ricardo’s intentions in termsof a corn model. Ricardo’s formulation of July represents a rather casual and inad-equate restatement – the significance of which should not be exaggerated – of his basicand consistently-maintained position. Moreover, it appears to be the case that whenMalthus criticized Ricardo on grounds that ‘in no case of production, is the produceexactly of the same nature as the capital advanced’ he was objecting to Ricardo’s refusalto accept his own ill-defined theory of effective demand, that is Ricardo’s tendency –in Malthus’s terms – ‘to underrate the wants and tastes of mankind in affecting prices,and consequently in affecting the means of profitably employing capital’ (see note 7).We should read no more into the criticism.

Ricardo was, however, willing to make the revealing concession that his differencewith Malthus regarding corn restriction was fundamentally ‘about the permanenceof the effects’ (VI, 128).15 In other words, his insistence upon the governing role ofagricultural productivity implied full operation of the population mechanism which assuredconstancy of real wages per head, while during an initial period average real wagesmight indeed decline and permit an increased rate of profit: ‘Profits are sometimeshigh when corn is scarce and dear, but this arises from the stimulus which the highprice gives to industry. If the population could immediately accommodate itself tothe scanty supply no such effects would follow; and in fact they only continue tilltime has gradually equalized them’ (VI, 129). We must keep this in mind in interpretingthe subsequent comment of Ricardo that ‘the state of the cultivation of the land isalmost the only great permanent cause. ... The state of production from the landcompared with the means necessary to make it produce operates on all [trades], andis alone lasting in its effects.’ 16

25


We introduce now a letter of October 1814 which brings together several strands ofRicardo’s argument – in terms very similar to those used in the Principles itself –defines Ricardo’s implicit assumptions, and isolates the remaining difficulties, par-ticularly those relating to ‘value’. In the letter in question Ricardo analysed theeffects on the profit rate of four possible causes of rising agricultural prices, namelycapital accumulation, bad seasons, general price inflation, and import restrictions,allowing at the same time that ‘there may be other causes of high price which do notat present occur to me’. 17

In the main case – the effects of capital accumulation – we should note twofundamental features of the argument. First, the increase in corn prices reflects thereduction in agricultural productivity in the long run only, after population expansionhas been allowed for. Secondly, the increase in price is not itself induced, or evenreinforced, by higher money wages: ‘A rise in the price of raw produce may beoccasioned by a gradual accumulation of capital which by creating new demands forlabour may give a stimulus to population and consequently promote the cultivationor improvement of inferior lands, – but this will not cause profits to rise but to fall,because not only will the rate of wages rise, but more labourers will be employedwithout affording a proportional return of raw produce. The whole value of thewages paid will be greater compared with the whole value of the raw produce obtained’(VI, 146)18

Thus far the argument applies to agriculture only. But it is extended, and thecontext once again is the rejection of Malthus’s view according to which accumulationentails a reduced price level:

Instead of anticipating a fall in the price of commodities we should expect a rise,because the fall of profits which generally follows accumulation is inconsequence of the increase in the price of production [costs], comparedwith the price of produce [revenue]; although they would both undoubtedlyrise. You appear to think, –indeed you say that you ‘know no other cause forthe fall of profits which generally takes place from accumulation than thatthe price of produce falls compared with the expence of production, or inother words that the effective demand is diminished’, and by what followsyou seem to infer that commodities will not only be relatively lower but really lower,and this is in fact the formulation of our difference with regard to the theory of Mr.Mill.


The crucial step in Ricardo’s argument – apart from the initial acceptance of‘Say’s Law’ (or rather Mill’s Law) and the Malthusian population mechanism – is thefailure of the prices of manufactured goods to rise in proportion with money wages. In


26

the case of agricultural produce we have seen that Ricardo did not allow for anyprice increase due to higher money wages although quite possibly this was an oversight.The Ricardian theory of a declining profit rate due to rising corn prices required ademonstration that higher money wages are not entirely passed on in the form ofhigher prices. In brief, what was needed was an explanation of the determination ofthe price level. Ricardo himself, in a context relating to the process of accumulation,put his finger on this issue: ‘It appears to me that the consideration of money value may bethe foundation of our difference on this point.’ 20

The problem of ‘value’ reappears in a different context subsequently in thecorrespondence of 1814. To a claim by Malthus (discussed below) that the generalprofit rate would rise with new lines of foreign trade Ricardo objected in termssimilar to those subsequently developed in the chapter ‘On Foreign Trade’ in thePrinciples. Trade as such increases the quantity of commodities available and communitywell-being, but there will ‘not be a greater value of commodities to be exchanged forthe raw produce, or for money’ and accordingly, he concluded, ‘no increased profitswill any where be made’. By this he had in mind the notion that if certain commoditiesare increased in supply it will be their exchange values only which would declinerelatively to those whose supply remained unchanged but the exchange value ofthese latter or of goods-in-general – relative to either corn or money – is not altered.‘It is here I think, that our difference rests.’ 21

According to our understanding of Ricardo’s position in the correspondence of1814 the profit rate in agriculture does not strictly determine the profit rate elsewhere.Rather the general profit rate varies inversely with the movements in money wages.In this case all depends upon the contents of the wage basket. If it contains solelyagricultural produce (corn) then productivity in agriculture alone will govern themoney wage. But if it contains manufactured goods then changes in manufacturingproductivity might, in principle, affect the money wage and accordingly the generalrate of profits. That Ricardo himself made this extension will now be demonstrated.

It is true that Ricardo had expressed himself in terms of the strong proposition:‘it is the profits of the farmer which regulate the profits of all other trades’ (above,p. 20). And late in 1814 Malthus defined the issue between himself and Ricardo interms of whether the agricultural rate does or does not ‘take the lead’. If it could beshown that events outside the agricultural sector can (permanently) effect the generalprofit rate, then Ricardo’s proposition – in either form, it may be remarked –would be jeopardized: ‘It is of course by no means enough to say that from the stateof production from the land, compared with the means necessary to make it produce,you can infer with certainty the state of general profits; as this is merely saying whatevery body knows, that all profits must ceteris paribus be on a level. But the question

27


is whether agriculture always takes the lead in the determination? and I shouldcertainly say that it did not.’ (23 November 1814; Malthus, in Ricardo 1951, VI,152–3). To illustrate the argument Malthus refers to the opening of ‘a new foreigncommerce’ –providing for the home market new and highly desirable products –whereby the profit rate on commercial capital is raised. ‘You allow’, he wrote, ‘thatin this case capital may be taken from the land. But to allow this is at once to allowthat the profits of foreign commerce determine in this case the profits on the landand that whichever is the highest will take the lead of the other.’ 22 In his replyRicardo categorically denied Malthus’s attribution: ‘I do not recollect ever havingallowed that an extension of foreign commerce will take capital from the land, unlesswe were an exporting country as far as regards corn, in which case my propositionwould be true, namely that the rate of profits can never permanently rise unlesscapital be withdrawn from the land.’ 23 More significantly, however, Ricardo concededthat the general profit rate might be affected by events outside the agriculturesector, if these events occur in the wage goods sector. He thereby widely extended thesignificance of his propositions:

I have been endeavoring to get you to admit that the profits on stock employed inManufactures and commerce are seldom permanently lowered or raised by any othercause than by the cheapness or dearness of necessaries, or of those objects on which thewages of labour are expended. Accumulation of capital has a tendency to lowerprofits. Why? because every accumulation is attended with increased difficultyin obtaining food, unless it is accompanied with improvement in agriculture;in which case it has no tendency to diminish profits. If there were no increaseddifficulty, profits would never fall, because there are no other limits to the profitableproduction of manufactures but the rise of wages. If with every accumulation of capitalwe could tack a piece of fresh fertile land to our Island, profits would never fall. I admitat the same time that commerce, or machinery, may produce an abundance andcheapness of commodities, and if they affect the prices of those commodities on which thewages of labour are expended they will so far raise profits; – but then it will be true thatless capital will be employed on the land, for the wages paid for labour form a part ofthat capital.

(Ricardo 1951, VI, 162; emphasis added) 24

Ricardo has thus clarified his position: He was not claiming that the agriculturalprofit rate determines the general rate but rather that agricultural productivitywhich determines the price of corn, playing upon the money wage rate, influencesprofits generally. Should the wage basket contain manufactured products, then changesin productivity in manufacturing will have similar consequences. But Ricardo without


28

doubt felt his position to be seriously threatened for he closed his argument, it willbe noted, by insisting that ‘less capital will be employed on the land’ following analteration in the cost of manufactured wage goods. This conclusion allowed him toclaim formally that a reduction in agricultural capital accompanies the increase in thegeneral profit rate; but the relationship is not a causal one, for it is not the reductionin capital which generates the increase in the general profit rate, but rather theconverse.25

During the first week of February 1815, Ricardo read Malthus’s newly publishedInquiry into the Nature and Progress of Rent. The theory of differential rent developedtherein met with Ricardo’s approval, fitting perfectly as it did into a general structurewhich was already prepared: ‘It is no praise to say that all the leading principles in itmeet with my perfect assent.’ Yet while Ricardo accepted the broad principle hepointed out certain applications of the theory which Malthus had deliberately orunwittingly failed to make, or about which Malthus had expressed uncertainty. Therapidity with which Ricardo absorbed the implications of the theory and incorporatedit into his own vision of the economic process is striking. For example, since ‘rentsare always withdrawn from the profits of stock’ the importation of cheap foreigncorn results in a social advantage measured by the price differential alone, therebeing no need to correct for the loss of rents; the taxation of necessaries cannot fallon the landlord since ‘the last portion of land cultivated, yields nothing more thanthe profits of stock’; land improvements (which raise output for a given outlay orreduce the outlay for a given output) will benefit the landlord only in so far as thefarmer brings poorer land into cultivation but in themselves are advantageous onlyto the farmer. 26

I I . T H E E S S A Y O N P R O F I T S

The Essay on the Profits of Stock 27 represents Ricardo’s contribution to the monographliterature of February 1815 dealing with the potential effects of the proposedrestrictions upon corn importation. Ricardo publicly recognized a debt to Malthusfor the theory of differential rent, 28 although he differed sharply on the deductionsto be drawn therefrom. In particular, he insisted that Malthus did not utilize logicallyand consistently the property of rent as a transfer payment.29 However, the mainvariable under investigation in the Essay was the general rate of profits, and thefundamental determinant thereof was as it had been in the correspondence of 1813and 1814 when the theory of differential rent was still unknown, namely the cost ofproduction of food:

Profits of stock fall because land equally fertile cannot be obtained, andthrough the whole progress of society, profits are regulated by the difficulty or

29


facility of procuring food. This is a principle of great importance, and has beenalmost overlooked in the writings of Political Economists. They appear tothink that profits of stock can be raised by commercial causes, independentlyof the supply of food.

(Ricardo 1951, IV, 13n)

Profits then depend on the price, or rather on the value of food. Everything which gives facility to the production of food, however scarce, orhowever abundant commodities may become [by contractions or extensionsof foreign trade, or the use of ‘machinery’], will raise the rate of profits,whilst on the contrary, every thing which shall augment the cost of productionwithout augmenting the quantity of food, will, under every circumstance,lower the general rate of profits.

(Ricardo 1951, IV, 26)30

The theory of differential rent was incorporated effortlessly into an already pre-pared general structure.

At the outset Ricardo stated his assumptions, namely that real wages per man areconstant (at subsistence) and that agricultural technology is unchanged: ‘We will,however, suppose that no improvements take place in agriculture, and that capitaland population advance in the proper proportion, so that the real wages of labour,continue uniformly the same; – that we may know what peculiar effects are to beascribed to the growth of capital, the increase of population, and the extension ofcultivation, to the more remote, and less fertile land’ (IV, 12). 31 On this basis heconstructed a well-known model – relating uniquely to the agricultural sector –which yields a declining profit rate as capital and population expand and are appliedto increasingly disadvantageous plots of land. In the model the plots of land areequally fertile but at increasing distances so that additional capital is required toyield the same results. Specifically, it is assumed that the capital of an (initial) farmerconsists of the ‘value of two hundred quarters of wheat’ (of which 100 representsfixed capital and 100 circulating capital), and that ‘the value of the remaining produce’– after maintenance of capital – amounts to ‘one hundred quarters of wheat, or [is]of equal value with one hundred quarters’ so that the rate of profit equals 100/200or 50 per cent (IV, 10). A further addition of 300 quarters requires a capital of 210quarters or rather the ‘value’ of 210 quarters so that the profit rate declines to 90/210 or 43 per cent. And since the common rate is ‘regulated by the profits made onthe least profitable employment of capital in agriculture’, 14 quarters of the originalfarmer’s profits are transferred by the competitive process to the landlord as rentsuch that the profit rate on intra-marginal capital falls to 43 per cent (IV, 13). 32 Inlight of Ricardo’s references to the value of wheat it would be misleading to designatethe illustration as a ‘corn model’ in the strict sense; corn is merely the numéraire. 33


30

Ricardo emphasized in particular the following results yielded by the model: thatthe net aggregate agricultural output (rent and profits only) rises with capitalaccumulation; that aggregate profits rise initially, but subsequently fall – ‘a view ofthe effects of accumulation which is exceedingly curious, and has, I believe, neverbefore been noticed’; that the profit rate (‘relative profits’) declines from the outset;and that the proportion of rent to agricultural capital (the ‘share of the landlord’)rises (IV, 16f). He is in fact mistaken in this final unqualified statement; beyond theeighth period the fraction actually falls – an early example of the dangers inherent inthe arithmetic method. And the fact that Ricardo did not emphasize the behaviourof the rental and profit shares in net or gross produce, but rather chose to examinethe ratio of rent and profits to capital ( both fixed and circulating ), suggests that hisprimary concern was not with the aggregative shares.

Ricardo was careful to observe that the data ‘are assumed, and are probably veryfar from the truth’. In particular, ‘in proportion as the capital employed on theland, consisted more of fixed capital, and less of circulating capital, would rentadvance, and [profits] fall less rapidly’ (IV, 15–16n). Doubtless he has in mind that agiven increase in aggregate capital, if the fixed capital constituent is relatively high,would entail a relatively smaller circulating capital (wages) increment and supportaccordingly a lesser increase in population, at the subsistence wage, than if the fixedcapital constituent were lower. 34 Ricardo here touches, for the first time, upon thethorny question of the relationships between different categories of capital, andbetween capital and labour. And it is clear that these relationships are presumed tobe technological data.

It seems to have been Ricardo’s intention to apply the model specifically to theagricultural sector; 35 but, as we shall see, he was well aware that the fundamental result– the decline in the rate of profit with capital accumulation – was irrelevant unlesssome explanation for the behaviour of the rate of profit outside the agricultural sectorcould be provided. Only if it is satisfactorily demonstrated that the external ratemoves pari passu with the internal rate can the model be said to reflect the economyas a whole. Any such demonstration, we may note, is independent of, and must beevaluated apart from, the model itself. Even in the event that an adequate relationshipis defined between the agricultural and general rates of profit the model would beunsuitable for the treatment of the income shares, and in fact Ricardo nowherestates the belief that there is a parallel movement between the aggregate incomeshares and the shares in agricultural output as yielded by the model.

We must recall at this stage of the argument a distinction between the ‘strong’proposition that the agricultural profit rate determines the profit rate elsewhere or amore sophisticated variation thereof that the state of agricultural productivity onthe margin of cultivation is the unique determinant of the general profit rate; and the

31


‘weaker’ proposition that the state of agricultural productivity exerts an influenceon the general profit rate although not to the exclusion of other forces. We havealready demonstrated that Ricardo’s position in the correspondence of 1814 impliesthe ‘weak’ formulation. We turn now to consider the position adopted in the Essay.

A preparatory statement by Ricardo is relevant for an evaluation of the ‘weights’attached to these propositions in the Essay: ‘I am only desirous of proving that theprofits on agricultural capital cannot materially vary, without occasioning a similarvariation in the profits on capital, employed on manufactures and commerce’ (IV,12n).36 This remark – which does not imply that the general rate is governed by theagricultural rate – is attached to the ‘proof’ itself: ‘In this state of society, when theprofits on agricultural stock, by the supposition, are fifty per cent. the profits on allother capital, employed either in the rude manufactures ... or in foreign commerce... will be also, fifty per cent. If the profits on capital employed in trade were morethan fifty per cent. capital would be withdrawn from the land to be employed intrade. If they were less, capital would be taken from trade to agriculture’ (IV, 12). 37

As the so-called ‘proof’ stands it is, in fact, nothing more than an assertion that theprofit rate cannot, in the long run (assuming competition), differ between sectors.It would be quite inadequate if intended as justification for the proposition that thegeneral rate is governed by the agricultural rate since it does not preclude thepossibility of variations induced by changes emanating outside the agriculturalsector.

Subsequently in the Essay Ricardo reconsidered the relationship between theagricultural and general rates of profit in a more sophisticated manner, reminiscentin certain important respects of the correspondence with Malthus of 1814. Accordingto the argument, the agricultural profit rate tends to decline during the process ofcapital accumulation because of declining agricultural productivity; while themanufacturing rate falls pari passu as a result of rising money wages – in turn due tothe rising corn price – in the face of constant commodity prices. The argument takesfor granted that the exchange value of a commodity reflects the ‘difficulty ofproduction’ and thus accounts for the rising price of corn, and the stable price ofmanufactured goods:

If the money price of corn, and the [money] wages of labour, did not varyin price in the least degree, during the progress of the country in wealth[capital] and population, still profits would fall and rents would rise; becausemore labourers would be employed on the more distant or less fertile land, inorder to obtain the same supply of raw produce; and therefore the cost ofproduction would have increased whilst the value of the produce continuedthe same. ...

[But] the exchangeable value of all commodities, rises as the difficulties of


32

their production increase. If then new difficulties occur in the productionof corn, from more labour being necessary, whilst no more labour is requiredto produce gold, silver, cloth, linen, &c. the exchangeable value of corn willnecessarily rise, as compared with those things. ... Wherever competition canhave its full effect ... the difficulty or facility of their production will ultimatelyregulate their exchangeable value. The sole effect then of the progress of wealth onprices ... appears to be to raise the price of raw produce and of labour, leaving all othercommodities at their original prices, and to lower general profits in consequence of thegeneral rise of wages.

(Ricardo 1951, IV, 18–20; emphasis added)38

The present argument in the Essay appears to contain an error which Ricardo wasultimately to correct. The increase in the price of corn reflects the fall in agriculturalproductivity and to this extent any fall in agricultural profits is prevented. Profitsdecline in agriculture for precisely the same reason that they decline in manufacturing,namely as a consequence of rising money wages. But Ricardo, at this stage, attributesthe decline in the agricultural profit rate to falling productivity and the decline inthe manufacturing profit rate to rising money wages. The formal argument, althoughtaken a step further than in the correspondence was, therefore, still not satisfactory. 39

It will be noted that Ricardo has here, once again, moved from the ‘strong’proposition that the agricultural profit rate determines the general rate – which wehave seen was never adequately justified – to the ‘weaker’ formulation since, inprinciple, any force generating a change in money wages would affect the profit ratewhether or not it has its origin in the agricultural sector. Yet in one vital respect theargument has progressed compared with that in the correspondence. For Ricardonow presumes the manufacturing price level to be unchanged during the process ofcapital accumulation. 40 The increase in the money wages rate itself in no way disturbseither the price structure – particularly the relative prices of agricultural andmanufactured products – or the price level. It remained to be shown precisely why,or under which conditions, this will be the case.

A preliminary attempt is made to deal with the issue in a brief criticism of aproposition by Adam Smith to the effect that an increase in the price of corn –regarded as the ultimate regulator of wages – will lead to a general price increase.Ricardo objected, distinguishing between a variety of causal influences:

It has been thought that the price of corn regulates the prices of all otherthings. This appears to me to be a mistake. If the price of corn is affected bythe rise or fall of the value of the precious metals themselves, then indeed willthe price of commodities be also affected, but they vary, because the value ofmoney varies, not because the value of corn is altered. Commodities, I think,

33


cannot materially rise or fall, whilst money and commodities continue in thesame proportions, or rather whilst the cost of production of both estimatedin corn continues the same.

(Ricardo 1951, VI, 21n)41

Clearly Ricardo has, to all intents and purposes, recognized the need for a ‘measure’of the ‘value’ or the ‘difficulty of production’ of commodities in dealing with theissue of the effect of wage-rate changes on prices.

We may refer to two applications of the general argument in order to illustratethe significance thereof for Ricardo. The analysis is applied to the general theory offoreign trade. A relaxation of restrictions upon the importation of corn would notalter the aggregate amount of trade, but the profitability of trade would be increased.This is because a low price of corn allows reductions in manufacturing costs whileselling prices remain unchanged : ‘Our commodities would not sell abroad for more orfor less in consequence of a free trade, and a cheap price of corn; but the cost ofproduction to our manufacturers would be very different if the price of corn waseighty, or was sixty shillings per quarter’ (IV, 36).

A second application is made to Malthus’s argument – based on David Hume –that a low price of corn would have depressing effects on the economy. Ricardoobjected on the grounds that there will be no general decline in prices, but rather ageneral increase in profits:

A recurrence to a better monetary system, it is said, though highly desirable,tends to give a temporary discouragement to accumulation and industry, bydepressing the commercial part of the community, and is the effect of a fallof prices: Mr. Malthus supposes that such an effect will be produced by thefall of the price of corn. If the observation made by Hume were well founded,still it would not apply to the present instance: – for every thing that themanufacturer would have to sell, would be as dear as ever: it is only what hewould buy that would be cheap, namely, corn and labour by which his gainswould be increased. I must again observe, that a rise in the value of moneylowers all things; whereas a fall in the price of corn, only lowers the wages of labour,and therefore raises profits.

(Ricardo 1951, IV, 37; emphasis added) 42

III . CONCLUSION

One final issue requires comment. Ricardo had insisted during 1814 that the generalprofit rate could not rise ‘unless capital be withdrawn from the land’ (see above, p.20) but in the Essay he formulates this condition more rigorously. On the assump-tion that (domestic) demand for corn is a function of population size only, and


34

therefore completely inelastic with respect to price, the margin of cultivation isinexorably determined given population and so, accordingly, is the agriculturalprofit rate. 43 Since in the long run there can be only one rate, the general rate mustcome into line following a disturbance in commerce or manufacturing:

It is contended, that they [the rates of profit in various branches of activity]alternately take the lead; and, if the profits of commerce rise, which it is saidthey do, when new markets are discovered, the profits of agriculture will alsorise; for it is admitted, that if they did not do so, capital would be withdrawnfrom the land to be employed in the more profitable trade. But if the principlesrespecting the progress of rent be correct, it is evident, that with the samepopulation and capital, whilst none of the agricultural capital is withdrawnfrom the cultivation of the land, agricultural profits cannot rise, nor can rentfall: either then it must be contended, which is at variance with all the principlesof political economy, that the profits on commercial capital will riseconsiderably, whilst the profits on agricultural capital suffer no alteration, or,that under such circumstances the profits on commerce will not rise.

(Ricardo 1951, IV, 23–4)44

According to this argument – which takes for granted that once the margin ofcultivation is given the agricultural profit rate is immediately determined – thecommercial rate must come into line, following an initial increase thereof, by newcapital investment in commerce (presumably financed by higher retained earnings)rather than by transfers from agriculture: ‘there will be such a fall in the price of theforeign commodity in the importing country, in consequence of its increasedabundance, and the greater facility with which it is procured, that its sale will affordonly the common rate of profit – that so far from the high profits obtained by thefew who first engaged in the new trade elevating the general rate of profits – thoseprofits will themselves sink to the ordinary level’ (IV, 24–5). 45 But it may be askedwhy equality between the two rates cannot be achieved simply as a consequence of anattempt to transfer capital from agriculture to trade, in the face of zero demandelasticity; such an attempt would force up the price of corn relative to that of othergoods and tend to bring the rates into equality. 46 If the gap is to be closed, thepresumption that the agricultural rate is given once the margin is determined mustbe justified.

According to the suggestion by Sraffa, it will be recalled, Ricardo had in mind in theEssay a model wherein both agricultural inputs and outputs consist of the same physicalcommodity (corn) so that total profits and the rate of profit on capital (a corn wagesfund) can be determined in physical terms without reference to valuation. Since all othersectors utilize corn as input only, it is the exchangeable value of their products relativeto their (corn) capitals which must be adjusted to yield the same profit rate as in

35


agriculture. If this is a justified attribution, then even though an attempt is made totransfer capital from agriculture and the price of corn consequently rises, the agriculturalprofit rate remains unchanged. Although this interpretation of Ricardo’s implicit logic isan attractive one, it was (as Sraffa himself remarks) never ‘explicitly stated by Ricardo’.Our study of the pertinent letters in 1814, which it is said lend support to thisinterpretation, suggests that it is unjustified to regard the arguments therein as implyingan analysis in terms of the corn model. Moreover, the fact that the tabular formulationsof the Essay do indeed reflect a corn model is inadequate proof since we are dealing nowprecisely with the justification for the use of such formulations.

The basis for Ricardo’s argument seems rather to consist of the assumption thatthe exchangeable value of corn (as of any commodity) depends upon real costs – the‘difficulty of production’. If the agricultural margin is fixed, the productivity oflabour (and capital) on land is unchanged and so accordingly is the price of corn. Ifthen the money wage rate is dependent upon the corn price, it too is constant, sothat the agricultural profit rate remains unchanged. In this case the only way equalityacross the board can be achieved is if the profit rate elsewhere comes into line as aresult of expansion of commerce and manufacturing. 47

If our analysis of the Essay is an accurate reflection of Ricardo’s intentions it followsthat the ‘corn model’ was of little significance to him. For the results yielded therebyare of relevance only to the extent that we accept the arguments devised to accountfor the relationship between the agricultural and the general rate. Ricardo was wellaware of this. But in the event that these arguments are accepted the model is notstrictly required; it serves merely as a convenient method of portraying some of theprinciples in simple arithmetical form. The essence of the Essay is rather that variationsin the money-wage rate – in turn largely (though not necessarily wholly) determinedby the price of corn – are not reflected in final prices so that the profit rate movesinversely. This is the single significant ‘advance’ over the position already achievedin the correspondence of 1814 where some increase in the price level – albeit in lesserproportion than that in the wage rate – was allowed. All that was now required wasto isolate the precise conditions for the assurance of a constant price level in the faceof rising money wages. 48

It may also be convenient to contrast our conclusions with those in the well-known account of the Ricardian theory by Professor Stigler. According to thisaccount (Stigler 1965, 187), the Essay contains only two of the main elements whichconstitute the complete Ricardian system, namely the theory of rent and the dominantinfluence of diminishing returns in agriculture upon the general profit rate. Thefull system as presented in the Principles includes also the subsistence theory of wagesand the measure of value. According to our view of the matter, the subsistencetheory (involving the population mechanism) and the need for a ‘measure of value’


36

(although not, of course, its actual construction) are both apparent not only in theEssay but also in the correspondence of 1814.

NOTES

1. Letter dated 10 August 1813 (Ricardo 1951, VI, 93): ‘On further reflection I am confirmedin the opinion which I gave with regard to the effect of opening new markets or extending theold. ... This would again swell the value of our exports and imports but does not prove ageneral increase of profits nor any material growth of prosperity.’ Malthus and Ricardo metfrequently during 1813, and the issue of profit-rate determination was doubtless discussed inconversation. (Malthus’s letter to which Ricardo’s of 10 August is a reply, and Malthus’s replyto Ricardo, are both wanting.) None of the published letters prior to that of 10 Augusttouches on the issue.

2. For a discussion of the background to these letters, see Tucker 1954, 320–33. 3. The principle of diminishing returns was defined by Ricardo several years earlier in his Notes

on Bentham’s ‘Sur les Prix’ (1810–11): ‘It appears to me that the possession of new Land wouldadd to our sum of riches without additional labour, because the same labour employed ondouble the quantity of equally good land now in cultivation in England would produce agreater return. This opinion is founded on the decreasing power of the land to produce inproportion to the labour and capital employed on it’ (Ricardo 1951, III, 287).

4. The reference to the ‘same or an increased Capital’ doubtless should be understood asreferring to agricultural investment.

5. The relevant letter of Malthus, to which Ricardo’s of 26 June was written in reply, is wanting.But Malthus subsequently restated his position regarding the reduction in capital and theelevating effect on the rate of profits in a letter dated 6 July (Ricardo 1951, VI, 110–11):You observe that in the case supposed [of corn restriction], there would be less productionand less demand with the same capital; but surely there would be much less capital. Therewould be a smaller quantity both of corn, and of all other commodities, and everymonied accumulation would command less labour and less produce. The question thenseems to be whether production or demand would decrease the fastest? and as in myopinion the dearness of labour [money wages] would have more effect in diminishingcapital than in diminishing revenue, particularly, rents, I do not see why the usual effectsof a diminution of capital should not take place.

I can by no means agree with you in thinking that every thing which diminishesproduce, tends to diminish the power of paying for the commodities wanted, or as youintimate, to diminish the effective demand. ... [The] rate of production, or more definitelyspeaking, the proportion of production to consumption necessary to such production,seems to be determined by the quantity of accumulated capital compared with thedemand for the products of capital, and not by the mere difficulty and expence ofprocuring corn. ... The effects of a great difficulty in procuring corn would in my opinionbe, a diminution of capital, a diminution of produce, and a diminution in the real wagesof labour, or their price in corn; but not a diminution of profits.

The argument is expanded in a further letter of 5 August (VI, 116–17): Since themanufacturer must ‘pay more [money wages] for the labour which he employs, owing torestrictions upon importation, he will not be able to work up the same quantity of goodswith his capital; the goods will in consequence rise in price, and his profits, from thegeneral scarcity of capital, will be increased’.

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It must be noted that the consequence of a ‘retrograde capital’ would be a decline in thereal (corn) wage rate, since the price of produce tends to rise ‘without a proportionate riseof labour [money wages]’. According to Malthus, upward pressure on the profit ratewould swamp any depressing effects of extensions to marginal land: This ‘most naturaland frequent occurrance will allow of great variations in the rate of produce on land,and easily make up for some increase of difficulty in procuring corn’ (VI, 118).

6. Letter dated 11 September 1814, VI 132. 7. Letter dated 16 September 1814 (VI, 133–5). In reply, Malthus wrote (letter dated 9

October 1814, VI, 141):In stating the cause of high profits you seem to me to consider almost exclusively the expenceof production, without attending sufficiently to the price of produce, and greatly to underratethe wants and tastes of mankind in affecting prices, and consequently in affecting the means ofprofitably employing capital. ... It is in considering merely of the proportions of commoditiesto one another, and not of their proportions to the wants and tastes of mankind that the errorof Mr. Mill, in my opinion, consists. I cannot by any means agree with you in yourobservation that ‘the desire of accumulation will occasion demand just as effectually as adesire to consume’ and that ‘consumption and accumulation equally promote demand’.

Ricardo again insisted in reply (letter dated 23 October 1814, VI, 147–8): ‘I am not awarethat I have under-rated the effect of the wants and tastes of mankind on profits,—theyfrequently, occasion large profits on particular commodities for short periods,—but theydo not I think often operate on general profits because they do not often influence thegrowth of raw produce. ... I go much further than you in ascribing effects to the wants andtastes of mankind,—I believe them to be unlimited. Give men but the means of purchasingand their wants are insatiable. Mr. Mill’s theory is built on this assumption.’ More specifically‘the very term accumulation of capital supposes a power somewhere to employ morelabour,—it supposes the total income of the society to be increased and therefore to createa demand for more food and more commodities.’

8. Letter dated 25 July 1814 (Ricardo 1951, VI, 113). 9. Letter dated 26 June 1814 (Ricardo 1951, VI, 108). (By ‘value’ Ricardo means difficulty

of production.)10. There is a possibility that Ricardo was referring not to the increased prices of manufactured

goods due to higher money wages—in turn resulting from higher corn prices—but rather tothe use of raw materials produced at higher cost. But the references to corn suggest that, infact, he had in mind the effect of rising money wages on the prices of manufactured goods.

11. Cf. Jacob H. Hollander 1968, 85–6.12. Letter dated 5 August 1814 (Ricardo 1951, VI, 117–18). (Malthus concluded: ‘The more I

reflect on the subject, the more firmly I feel convinced, that it is the state of capital, or thegeneral profits of stock and interest of money, which determines the particular profitupon the land; and that it is not the particular profits or rate of produce upon the landwhich determines the general profits of stock and the interest of money.’)See also the letter dated 9 October 1814 (VI, 140–1) wherein Malthus concedes that the

cost of food affects the profit rate in a limiting sense only, and attributes to Ricardo ananalysis in physical terms:It appears to me that ... in the interval between the two extremes [of high and low profitsdue to good and poor land resources] considerable variations may take place; and thatpractically no country was ever in such a state as not to admit of increase of profits on theland, for a period of some duration, from the advanced price of raw produce.


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The Profits of stock, or the means of employing capital advantageously may be said tobe accurately equal to the price of produce, minus the expence of production. And consequentlywhenever the price of produce keeps a head of the price of production the profits of stockmust rise. ... It is not the quantity of produce compared with the expence of production thatdetermines profits, (which I think is your proposition) but the exchangeable value ormoney price of that produce, compared with the money expence of production. ...

13. The quotation at the outset is from Malthus’s letter of 6 July (Ricardo 1951, VI, 111).There is apparently a slight error in Ricardo’s argument. He must have meant that

capital nearly doubles estimated in corn, not in money, for money capital must more thandouble if the rate of profit is to fall, given the assumption which is made of a doubledmoney revenue. The argument allows for a reduction in the corn wage per man, althoughnot in proportion to the increase in the number of men since the total corn costs rise.

14. For Malthus’s position, according to which a rise in money costs could actually beaccompanied by an increased profit rate, see note 5.

15. Letter dated 30 August 1814.16. Letter dated 16 September 1814 (Ricardo 1951, VI, 133). Cf. letter dated 23 October 1814

(VI, 144f), in which Ricardo insists that Malthus had falsely ascribed to him the view thatthe state of agricultural productivity was the only determinant of the general profit rate.Temporary variations were possible for other reasons, but ‘even during these temporaryvariations, the great cause namely the accumulation of capital may be paving the way forpermanently diminished profits’ (VI, 145–6).

17. Letter dated 23 October 1814 (Ricardo 1951, VI, 146–7). (Cf. Principles of Political Economy,I, 161 where Ricardo lists bad harvests, capital accumulation, general price inflation, andtaxation of wage goods as causes of increase in corn prices.) ‘Bad seasons’ would raise theprofit rate as a consequence of high demand inelasticity for corn: the ‘price of producewould rise considerably more than in the proportion of the deficient quantity, and wouldtherefore be much ahead of the price of production’; a ‘fall in the value of the currency’would raise profits because of a lag in money wages behind prices. But these are temporaryphenomena only. Corn restriction too will raise the profit rate in the first instance ‘butthey will ultimately fall below their former level’ (VI, 146). Presumably he has in mind, inthe latter case, the proposition that the decline in the profit rate following restrictionrequires the full operation of the population mechanism.

18. By ‘value’ Ricardo doubtless means difficulty of production.19. The reference is to Malthus’s letter of 9 October (Ricardo 1951, VI, 142).20. Letter dated 18 December 1814 (Ricardo 1951, VI, 164); emphasis added.21. Letter dated 18 December 1814 (Ricardo 1951, VI, 163). It is important to note that

Ricardo defines his terms carefully to imply a long-run cost theory: ‘If we double thequantity, or rather double the facility of making stockings, we diminish their value onehalf, as compared with all other commodities.’ The argument is developed in a subsequentletter, dated 13 January 1815 (VI, 170–1), (although questions appear regarding the precisemechanism by which exchange value reflects costs since a price reduction without quantityincrease is allowed for):

If with the same labour we could obtain double the quantity of tin from the mines inCornwall, after prices have found their level, would the value of the whole mass ofcommodities be increased in England? Should we obtain the same quantity of deals fromNorway in exchange for a given quantity of tin as we now do? Although the mass ofcommodities both in the markets of Norway and in those of England would increase by the

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greater abundance of tin, or of some other commodity, if the labour employed in procuringtin were diverted to other objects, yet the estimated value of all their commodities, in corn,money, or any article but tin, would, it appears to me continue unaltered. It is sufficient thatdeals can be purchased cheaper in Norway than elsewhere to determine a portion of foreigntrade to that quarter, although it should yield no more profits than those of other trades.

22. It may be noted that this argument was designed to ‘trap’ Ricardo. Malthus himselfbelieved that even if capital is not withdrawn from agriculture the effect of ‘throwingnew objects of desire into the market’ would be to increase ‘the value of the whole massof commodities in the country, estimated either in money, or in corn and labour, andthere will in consequence be a greater value of commodities to be exchanged for the rawproduce. This increase in the value of the raw produce must raise the profits of farmingfor a period of some duration’ (letter 23 November 1814).

In his next letter (of 29 December 1814, Ricardo 1951, VI, 167) Malthus qualifiedhimself by conceding once again that ultimately the effects predicted by Ricardo wouldbe felt: ‘Of course I never mean to say that the high price of raw produce compared withthe price of production, occasioned, (in my opinion) by a prosperous commerce can bereally permanent. It is the nature of all such means of employing capital to become lessand less advantageous. And all that I contend for is that a period of some duration mayoccur (20 years for instance) when the profits of commerce will take the lead, andregulate the profits of agriculture.’ Ricardo jumped upon the concession (in a letterdated 13 January 1815, 170), since he too had admitted the possibility of temporaryvariations in the profit rate for various reasons (see above):

I thought you maintained, that the high or low profits on commerce were totallyindependent of the amount of capital which might be employed on the land; consequentlythat high profits might continue as long as commerce was prosperous, whether that wasfor 20 or for 100 years. I now understand you to say, that the profits of commerce maytake the lead, and may regulate the profits of agriculture for a period of some duration,possibly for 20 years.

I have always allowed that under certain circumstances profits on agriculture might bediverted from their regular course for short periods, so that we only appear to differ withrespect to the duration of such profits; instead of 20 years I should limit it to about 4 or 5.

Despite the conciliatory tone of this exchange the fact is that their respective ‘models’differed substantially and the debate was not merely one concerning the meaning of‘temporary’. If a variety of forces could influence the profit rate ‘temporarily’ forRicardo it was by relationships peculiar to his model alone. Similarly, when Malthusallows for ‘temporary’ variations of the general profit rate due to events in manufacturingand commerce he had in mind phenomena ruled out by Ricardo.

23. Letter dated 18 December 1814 (Ricardo 1951, VI, 163). For the ‘proposition’ referredto, see for example above, p. 20.

24. Malthus’s comment (29 December 1814, Ricardo 1951, VI, 168–9) on the effects of ‘apiece of fresh fertile land’ is revealing, for it suggests that he appreciated the role ofmoney wages in Ricardo’s argument: ‘I quite agree with you that a piece of fertile landadded to the country upon every increase of capital would prevent the fall of profits, butmore in my opinion from its increasing the demand for manufactures by increasing thenumber of people than by its preventing the rise of wages, an effect which it wouldprobably not have.’

25. Subsequently Malthus (letter dated 29 December 1814, Ricardo 1951, VI, 168) challengedRicardo’s position from another direction. He asked Ricardo to presume, for the sake ofargument, an increase in the foreign demand for home corn: ‘would not the profits of


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capital employed in agriculture be increased, although certainly more rather than lesscapital would be employed upon the land[?] The instruments of production comparedwith the price of produce would be cheaper, but it could not with any propriety be saidthat capital was withdrawn from the land.’But Ricardo answered quite shortly: ‘there can be no question that more capital would

be employed on the land, and I think profits would fall’ (VI, 171).26. Letter dated 6 February 1815 (Ricardo 1951, VI, 172–4). On the matter of the effects of

taxes on necessaries Malthus had stated in the Inquiry that the burden fell on thelandlord not the consumer. He conceded to Ricardo, in his reply (12 February 1815, VI,176) that in this respect he was in error. He continued to maintain strenuously thatagricultural improvements will raise rents despite the fact that they are ‘undoubtedly apart of the wealth already created’ (VI, 174).

27. Essay on the Influences of a Low Price of Corn on the Profits of Stock (Ricardo 1951, IV, 9–41).Published 24 February 1815. (Cf. Sraffa (ed.), Ricardo 1951, IV, 5, for this date and thosein the next note.)

28. Sraffa (ed.), Ricardo 1951, IV, 9, 15n, regarding the Inquiry into the Nature and Progress ofRent, and Grounds of an Opinion on the Policy of Restricting the Importation of Foreign Corn,published 3 February and 10 February 1815 respectively. (Other contributors to theliterature were Edward West, Essay on the Application of Capital to Land, 13 February, andRobert Torrens, Essay on the External Corn Trade, 24 February.)

29. ‘It is never a new creation of revenue, but always part of a revenue already created’(Ricardo 1951, IV, 18).

30. Value evidently means ‘difficulty of production’.31. With regard to the constancy of real wages per head, see also pp. 13, 18n, 23.32. Ricardo briefly refers also to an intensive margin (1951, IV, 14). He was on unsafe

ground when he criticized Malthus (letter dated 6 February, VI, 172) for not consideringseparately in his Inquiry ‘the relations of rent with the profits of Stock and the wages oflabour’. His stricture that ‘by treating of the joint effect of the two latter on rents’Malthus had ‘not made the subject so clear as it might have been’ can equally well bedirected at the Essay where wages are rather casually included within capital.

33. In the ‘Table shewing the Progress of Rent and Profit’ (Ricardo 1951, IV, 17) referenceis made to ‘capital estimated in quarters of wheat’.

34. The argument is probably based on Ricardo 1951, IV, 13: ‘if capital and populationincreased, more food would be required, and it could only be procured from land not soadvantageously situated .... The necessity of employing more labourers, horses, &c ...although no alteration were to take place in the wages of labour, would make it necessarythat more capital should be permanently employed to obtain the same produce.’ Theextent of population increase with wages per head at subsistence will depend upon thefraction of any given capital devoted to circulating capital relative to fixed capital.

35. For example, at the outset Ricardo refers to ‘the usual and ordinary rate of the profits ofagricultural stock’ (Ricardo 1951, IV, 10) and also the precise formulation of the resultsby the model would suggest this.

36. Cf. the assertion, p. 14, that as the profit rate in agriculture declines from 50 to 43 percent so the profits on all capital employed in trade would fall to 43 per cent.

37. Ricardo had in mind a ‘state of society’ where agricultural improvements are ruled outand real wages are constant, capital and population advancing ‘in the proper proportion’.

38. In a note attached to the passage Ricardo remarks that commodity prices are ‘ultimatelyregulated by’ and ‘always tending to, the cost of their production, including the general

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profits of stock’. In brief the ‘difficulty of production’ includes not only labour butcapital costs too. But in so far as Ricardo is attempting to explain the general rate ofprofits it cannot be taken for granted as a datum ; he is, therefore, entrapped in circularreasoning.A similar argument is developed later in the Essay (IV, 35–6). Technological improvement

in agriculture or a relaxation of corn import restrictions would lead to a fall in the priceof corn only and therefore of money wages but not of manufactures, and accordinglythe general profit rate would rise: ‘A fall in the price of corn, in consequence ofimprovements in agriculture or of importation, will lower the exchangeable value ofcorn only, the price of no other commodity will be affected. If, then, the price of labourfalls, which it must do when the price of corn is lowered, the real profits of all descriptionsmust rise; and no person will be so materially benefited as the manufacturing andcommercial part of society.’The margin of cultivation would in the latter case be pushed back, and capital and

labour released from agriculture would be available for use in the manufacturing sector.See p. 32: ‘If we were left to ourselves, unfettered by legislative enactments, we shouldgradually withdraw our capital from the cultivation of such [inferior] lands, and importthe produce which is at present raised upon them. The capital withdrawn would beemployed in the manufacture of such commodities as would be exported in return forthe corn.’In fact, Ricardo argued, opposition to easier corn imports on grounds that agricultural

capital would be withdrawn is no more reasonable than opposition to improvedmachinery. (Cf. also p. 35.)

39. In this regard we note a further statement (Ricardo 1951, IV, 26n): ‘If by foreigncommerce, or the discovery of machinery, the commodities consumed by the labourershould become much cheaper, wages would fall, and this, as we have before observed,would raise the profits of the farmer, and therefore, all other profits.’ What is revealingis Ricardo’s formulation to the effect that a change in the money wage rate influencesthe agricultural profit rate ‘and therefore all other profits’. In fact the agricultural rate risesfor the same reason that the rate elsewhere rises, because of the money wage reductiondue in turn to productivity increase in agriculture.

40. See above, p. 24, regarding Ricardo’s position in the correspondence of 1814. Prices ofmanufactured goods were said to rise although not in proportion with the rise in moneywages despite the fact that there was no change in the ‘difficulty of production’ or ‘value’as capital accumulation occurred.

41. ‘Value’ once more refers to ‘difficulty of production’. The calculation, it will be noted,is in terms of corn, but a parallel calculation in terms of resources used up might havebeen used since the productivity of labour (or labour-and-capital) is unchanged in moneyand manufactured goods. It is this latter phenomenon which Ricardo evidently intendedto emphasize.

42. According to the above analysis Ricardo had attempted to demonstrate that the generalprofit rate was governed by movements of the money wage rate. Although in thecorrespondence he allowed explicitly for variations in money wages due to productivityincreases in manufacturing (above p. 27), he did not formally do so in the Essay, butcontinually formulated variations of the theme that ‘profits depend on the price orrather on the value of food’. (Ricardo 1951, IV, 26; cf. 22: ‘If then, the principles herestated as governing rent and profit [the law of diminishing returns] be correct, generalprofits on capital, can only be raised by a fall in the exchangeable value of food’; or p. 23:


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‘in every society advancing in wealth [capital] and population, independently of theeffect produced by liberal or scanty wages, general profits must fall, unless there beimprovements in agriculture, or corn can be imported at a cheaper price.’) Yet we arenot obliged to understand by such statements an insistence that the wage basket consistssolely of food; they are more likely intended as a rejection of Malthus’s view accordingto which the general profit rate may be affected by events which do not play upon themoney wage at all.

43. In the correspondence of 1814, the notion of zero demand elasticity was not given aformal role in Ricardo’s argument. In fact, when the demand curve for corn wasconsidered Ricardo presumed it to be relatively, but not completely, inelastic. See, forexample, letters to Malthus, Ricardo 1951, VI, 129: ‘I sometimes suspect that we do notattach the same meaning to the word demand. If corn rises in price, you perhapsattribute it to a greater demand, – I should call it a greater competition. The demandcannot I think be said to increase if the quantity consumed be diminished, altho muchmore money may be required to purchase the smaller than the large quantity’; and p.146: in the case of a poor harvest ‘the price of produce would rise considerably morethan in the proportion of the deficient quantity’.

44. To this passage Ricardo attached the following note which confirms the role of zerodemand elasticity for corn:Mr. Malthus has supplied me with a happy illustration – he has correctly compared ‘thesoil to a great number of machines, all susceptible of continued improvement by theapplication of capital to them, but yet of very different original qualities and powers.’How, I would ask, can profits rise whilst we are obliged to make use of that machinewhich has the worst original qualities and powers? We cannot abandon the use of it; forit is the condition on which we obtain the food necessary for our population, and thedemand for food is by the supposition not diminished – but who would consent to useit if he could make greater profits elsewhere?

45. A version of the same argument is also applied to the case of a technological improvementintroduced by one or a few firms in a particular manufacturing industry. In the firstinstance profits will rise for these firms as their costs fall. But with increased outputpermitted by the increasing adoption of the invention price will decline ‘to the actualcost of production, leaving only the usual and ordinary profits’ (Ricardo 1951, IV, 25).In this case too there ought to occur no flow of capital between sectors if Ricardo is tobe consistent. Yet he inserted a paragraph immediately which does suggest a process oftransfer: ‘During the period of capital moving from one employment to another, theprofits on that to which capital is flowing will be relatively high, but will continue so nolonger than till the requisite capital is obtained.’ The difficulty, once again, is that anysuch mechanism implies that the new general rate will be somewhat higher than theoriginal level which is precisely the result which Ricardo was attempting to avoid, andindeed to disprove.

46. Cf. Stigler 1965, 186. The modern economist might be inclined to analyse the problemin terms of an upward shift in the (positively sloping) supply curve of corn reflecting thehigher alternative rate of return, in the face of a given, inelastic, demand curve. Assuminga given aggregate capital, since there will be no actual transfer of capital from agriculture,there can be no increase in manufacturing output either and the profit rate in agriculturerises to equality with the rate in commerce.

47. The analysis of the effects of technological change in manufacturing (see note 45)should be contrasted with that of technical change in agriculture, where the price of corn

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falls and where, accordingly, the money wage rate and the general profit rate are affected.(See note 38 regarding the Essay, pp. 35–6.) Unfortunately, Ricardo never explainedexactly how the price of corn in conditions of zero demand elasticity given populationcomes to reflect long-run costs with agricultural improvement. (A similar weaknessappears in the correspondence of 1814; see note 21.)The argument that the money-wage rate will be determined by the subsistence level, is

also made in too cavalier a fashion, at least in the present context. The argument impliesthe operation of the population mechanism while in fact population is assumed constant.

48. It seems, therefore, misleading to argue that ‘after the publication of the Essay, Ricardoretreated from the idea that “it is the profits of the farmer which regulate the profits ofall other trades”. The general idea that profits “depend on the price or rather on thevalue of food” was retained in the Principles, but emphasis was now laid almost exclusivelyon the effect which the changes in the value of food associated with accumulation wouldhave on profits through the medium of the consequential changes in wages’ (Meek 1967, 61–2).Sraffa himself, it may also be noted, allows that even in the Essay ‘there are passages

which foreshadow [Ricardo’s] full theory of value and already link it with the theory ofprofits’ (Sraffa 1951, xxxiii) .

REFERENCES

Hollander, Jacob H. (1968) [1910] David Ricardo: A Centenary Estimate, Baltimore: The JohnsHopkins Press.

Meek, R.L. (1967) ‘The Decline of Ricardian Economics in England’, in Meek, Economicsand Ideology and Other Essays, London: Chapman and Hall.

Ricardo, David (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 vols),Cambridge: Cambridge University Press.

Sraffa, P. (1951) ‘Introduction’ to Principles of Political Economy, The Works and Correspondenceof David Ricardo, vol. I, Cambridge: Cambridge University Press.

Stigler, G.J. (1965) ‘The Ricardian Theory of Value and Distribution’ ( 1‘ Journal of PoliticalEconomy LX, June 1952), reprinted in Stigler, Essays in the History of Economics, Chicago:University of Chicago Press.

Tucker, G.S.L. (1954) ‘The Origin of Ricardo’s Theory of Profits’, Economica XXI (November):320–33.

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I.

I am grateful to Mr Eatwell for obliging me to reconsider my article on Ricardo’searly position [Chapter 1]. Ricardo criticism is notoriously tricky and a reviewfrom time to time can be salutary. Upon careful consideration, much of Eatwell’sstatement turns out to be little more than assertion, apparently based upon apreconceived notion of the nature and content of Ricardian profit theory and ofRicardo’s place in the history of economic thought; I am given no reason, by way ofa demonstration of the inaccuracy or the inadequacy in other respects of my citations,to believe that I erred in my interpretation. Nevertheless, the exercise has turned outto be a fruitful one. I now believe, and hope to demonstrate in this reply, that mycase is stronger than originally formulated, in the light of a body of additionalevidence contained in the Ricardo–Malthus correspondence immediately followingthe publication of the Essay on Profits. 1

II.

In this section I wish to set the issues involved in accurate perspective. It is essentialto have explicitly before us the following elements which constitute Professor Sraffa’sposition and with which I took issue in my paper:

At first, both in the Essay and in Ricardo’s letters of 1814 and early 1815, abasic principle has been that ‘it is the profits of the farmer that regulate theprofits of all other trades ...’. After the Essay this principle disappears fromview, and is not to be found in the Principles.

The rational foundation of the principle of the determining role of theprofits of agriculture, which is never explicitly stated by Ricardo, is that in

2

RICARDO AND THE CORNPROFIT MODEL: REPLY TO

EATWELL

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RICARDO AND THE CORN PROFIT MODEL: REPLY TO EATWELL

agriculture the same commodity, namely corn, forms both the capital(conceived as composed of the subsistence necessary for workers) and theproduct; so that the determination of profit by the difference between totalproduct and capital advanced, and also the determination of the ratio of thisprofit to the capital, is done directly between quantities of corn without anyquestion of valuation. It is obvious that only one trade can be in the specialposition of not employing the product of other trades while all the othersmust employ its product as capital. It follows that if there is to be a uniformrate of profit in all trades it is the exchangeable values of the products ofother trades relatively to their own capitals (i.e. relatively to corn) that mustbe adjusted so as to yield the same rate of profit as has been established in thegrowing of corn; since in the latter no value changes can alter the ratio ofproduct to capital, both consisting of the same commodity.

(Sraffa 1951, xxxi)

With the exception of the criticisms by Malthus of Ricardo’s Table made inMarch 1815, which will be taken up in detail below, all the evidence brought byProfessor Sraffa in support of his case was taken into consideration before reachingmy conclusions. In the article the existence of formal statements of the principle of thedetermining role of agricultural profits was obviously at no time questioned. Butmy investigation led me to conclude, first, that Ricardo did not intend by hisformal statements to maintain that the profit rate in agriculture literally determinesthe rate elsewhere, but rather that agricultural productivity alone influences profitsgenerally in the event that corn alone enters the wage basket; and, secondly, that itdoes so by way of the effect of the price of corn upon money wages. According tothis view, in the event that the wage basket contains manufactured goods, an alterationin the prices of manufactures also may alter the general profit rate by way of preciselythe same mechanism. The argument depended upon the supposition that changes inthe money wage rate do not generate changes in final price, a supposition which, inRicardo’s case, hinged upon a labour theory of exchange value. According to myargument, the position adopted in the Essay – indeed earlier – is precisely that of thePrinciples, although clarification, correction, the explicit formulation of assumptionsthat were only implicit in the early versions, and specification of the conditionsrequired of the money medium were required. In brief there was no ‘transition’between an early model and a later and different model.

The restatement of Professor Sraffa’s position by Mr Eatwell leaves a great deal tobe desired. I have in mind particularly his cryptic comment in parentheses on p. 184that ‘to attain the required result it is only strictly necessary that the wage in othersectors should contain corn. But it is clear that the wage in this context is what was tobe called the “natural price of labour” ( Principles, p. 93), which was assumed to be


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everywhere the same’. The fact is that Sraffa’s ‘rational foundation’ for the principleof the determining role of the agricultural profit rate depends in a very central waynot only on the assumption that the wage basket consists entirely of corn but alsoon the assumption that the corn wage is fixed in all industries. This latter conditionis implied by the fact that in agriculture total profits and the profit rate are said tobe determined without reference to valuation, thus precluding the possibility offalling per capita corn wages due to a relative rise in the price of corn. It is alsoimplied by the argument that the profits in trades outside agriculture come intoline simply by way of alteration in the exchange values of their products to that ofcorn, which rules out quantity variations from their input accounts. 2 It is unfortunatethat Mr Eatwell deals with so important an issue in such an ambiguous manner.Ricardo’s treatment of the two assumptions in question is the ultimate test of thevalidity of the Sraffa interpretation.

In the Essay, unlike the early correspondence, Ricardo reverted in general to theassumption that corn alone enters the wage basket; since the commodity wage ispresumed for the argument to be constant this implies that the corn wage is constant.I do not believe that the formal assumption carries with it any substantive implications.In particular, it does not, I think, imply that he had in mind the model whichProfessor Sraffa attributes to him for the following reasons.

In the first place, when Ricardo deals specifically with the question of the linkbetween the agricultural and general rates of return, his argument – as in the earliercorrespondence – turns upon the relationship between money wages and moneyprices (see, for example, the evidence cited in Hollander 1973, 276–7, 277n [above,pp. 31–2]). Corn is not, as a matter of principle, the only ‘basic’ good and, logically, a changein the price of any wage good would carry with it the same consequences for profits. 3 Here,Ricardo’s comment of 18 December 1814 must be recalled: ‘I admit ... that commerce,or machinery, may produce an abundance and cheapness of commodities, and ifthey affect the prices of those commodities on which the wages of labour are expendedthey will so far raise profits’ (Ricardo 1951, VI, 162).

Secondly, we must bear in mind Ricardo’s insistence in 1814, already discussed inthe original article, that the profit rate will decline upon resort to increasinglyinferior land despite declining corn wages (Hollander 1973, 266 [above, p. 23]). Thirdly– and this matter is taken up in Section IV below – Ricardo’s post-publicationdefence of his Table without question takes for granted a mixed wage basket andfalling corn wages.

III.

What then are Mr Eatwell’s principal objections to my article? He finds (1975, 183)‘most extraordinary’ my claim that Ricardo’s theory ‘required a demonstration that

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higher money wages are not entirely passed on in the form of higher prices’, and hespeaks of my belief that wages were not assumed to consist only of corn as an‘assertion’. All I can say to this is that I have asserted nothing for which there is noevidence, while Mr Eatwell chooses not to address himself to my use of sources. Oneexception to this, the second paragraph of the comment, is not well taken. Thewhole point of my paper is that the money wage rate – the cost of production ofmoney of course unchanged – varies with the price of wages goods in general, notjust corn; moreover, Ricardo did not maintain as a matter of principle that the cornwage is constant. I suspect, therefore, that my claims appear extraordinary simplybecause Mr Eatwell does not believe that they accord with his preconception ofRicardian economics and its place in the history of economic thought.

Consider in particular the closing sentences of his paper. If my argument indeedobscures the significance of the Essay as the first complete statement of a theory ofdistribution based on the concept of surplus, but if it is soundly and accuratelybased on textual evidence, the logical step, I suggest, would be to re-examine theinitial preconception.

For my part I do not think that my interpretation carries with it any direconsequences, one way or the other, for Ricardo’s conception of the nature ofprofits. All I am saying is that the position of the Principles appears, in embryo, muchearlier than is usually believed – that Ricardo was preoccupied by the link betweenthe money price of corn, the money wage and the money price of manufactures (onthe assumption that the ‘value’ of money is constant) at a very early stage (see theevidence cited in Hollander 1973, 266–8 [above, pp. 23–5]). I find Mr Eatwell’sreaction exaggerated in the light of the extensive analysis of the effects of money-wage variations on prices and profits in the Wealth of Nations which constituted the‘received doctrine’ Ricardo felt obliged to reject, and which preoccupied himthroughout the Principles.

That Ricardo ‘located his theory [of profits] within the conditions of production’,as Mr Eatwell insists (183), is not at issue if by this is meant that he rejects theMalthusian conception of things. 4 I certainly nowhere maintain, as Eatwell suggests,and it is not implied by my argument, that Ricardo yielded to Malthus somethingof substance, or that his position carried with it the logical necessity to yieldsomething of substance, regarding demand variations as a determinant of profits.Events in the manufacturing or commercial sector certainly could affect the profitrate in Ricardo’s view, but positively not in the manner envisaged by Malthus.

Mr Eatwell also talks (185) of the ‘successful demonstration’ in the Table of theEssay on Profits of Ricardo’s propositions, asserting ‘that the Table was expressed interms of a single commodity ... on the basis of analytical insight, coupled with whatmight be believed to be a reasonable approximation to the real state of affairs’, and


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that ‘the success of the Essay on Profits in demonstrating Ricardo’s propositions andthe formal basis of that success are presumably indisputable’. Scarcely a word is saidto support these assertions, which I take to mean that Ricardo, quite deliberately,formulated the principle that it is the profits of the farmer that regulate the profitsof all other trades on the ‘rational foundation’ described by Sraffa. (Eatwell presumablyis not merely expressing a view regarding the logical validity of such rational foundationfor a principle of the determining role of agricultural profit, since this latter issue isnot in dispute.) What I find troublesome is the concession immediately following,that ‘what may be disputed is whether Ricardo deliberately presented his analysis interms of physical ratios’. If this is the case and if there is room for argument aboutthis central matter, as I believe there is, then it is hard to see why we are expected totake for granted as ‘indisputable’ Ricardo’s ‘analytical insight’. 5 In any event, as ‘conclusiveevidence’ for what is described as ‘the importance of a “corn wage” assumption inRicardo’s analysis, and his deliberate framing of the argument in physical terms’(185), we are referred to a letter by Malthus (to Horner) dated 14 March 1815 and aletter from Ricardo to Malthus of 27 March. Reference is also made in a note (186)to a letter of 8 May. 6

The letters to which Eatwell refers are part of a complex exchange lasting forseveral weeks and comprising more than a dozen items of relevance for theinterpretation of the Table. Ricardo’s defence of his procedures during this exchangemakes it clear that he did not base his Table upon the assumption that corn is the only wagegood and that the wage is fixed in corn terms. Moreover, when obliged under pressurefrom Malthus to spell out the implied assumptions, a variety of price calculationswhich underlie the Table come to the fore. The citation by Mr Eatwell of isolatedpassages from an exchange which, considered as a whole, yields conclusions whichare the precise reverse of those he suggests is, to put it mildly, questionable scholarlyprocedure.

IV.

Malthus’s principal objection to the Table was the failure of Ricardo, as he saw it, torecognize that a relative increase in the price of corn to those of manufactures willreduce total production costs in terms of corn in light of the presence of manufactureditems in capital, including the wages component thereof. Professor Sraffa (1951,xxxii n) emphasized the objection, but he neglected to consider Ricardo’s defence.The point to note is that Ricardo positively did not rest his case upon the assumptionthat corn was the only basic good, and he agreed willingly that the per capita cornwage would fall as the price of corn increased secularly (a result later emphasized inthe Principles ).

49


Ricardo conceded at the outset of the debate that the consequences of a rise inthe price of corn would indeed be, as Malthus insisted, reduced total costs in cornterms and consequently an increase in the corn surplus and in the rate of surplus –but only in the case that agricultural extensions are ruled out: ‘I cannot hesitate inagreeing with you’, he wrote, ‘that if from a rise in the relative value of corn less ispaid [in terms of corn] for fixed capital and wages, —more of the produce mustremain for the landlord and farmer together, – this is indeed self-evident, but isreally not the matter in dispute between us’ (letter of 14 March 1815; Ricardo 1951,VI, 189). Beyond this he refused to go, for his attention was entirely on the longruncost determination of prices. Accordingly, he rejected Malthus’s contentions on thegrounds that any rise in the price of corn reflected resort to inferior land, andnecessarily implied an increase in total labour and fixed capital costs (in terms ofcorn) relative to the increase in the surplus. At the same time, and this is quitecrucial for an accurate appreciation of Ricardo, he agreed quite readily that the per capitacorn wage will indeed decline during secular advance :

A rise of the price of corn and a fall in the corn price of labour is in myopinion incompatible, unless it be owing to something in the currency andit is not necessary to enquire here into what effects that would produce.Observe that I do not question that each individual labourer might receive a less cornprice of labour because I believe that would be the case, but I question whether thewhole corn amount of wages &c. paid for the cultivation of the land can bediminished with an increase of the exchangeable value of corn. If no morelabourers were employed and the price of corn rose your proposition couldnot be disputed, but the cause of the rise of the price of corn is solely onaccount of the increased expence of production.

(Ricardo 1951, VI, 189; emphasis added)

This position is consistent with the tabular formulation of the Essay, accordingto which – despite an increase in the corn surplus or ‘total produce in quarters ofwheat, after paying the cost of production’ – the ratio of the corn surplus to corncosts declines steadily. But Ricardo’s defence on the grounds that a rise in the cornprice necessarily implies a reduced ratio can scarcely be regarded as a rigorous one;we turn now to consider this issue in some detail for the various arithmeticalillustrations devised by Ricardo in defence of his position provide us with a splendidopportunity to pin down the precise assumptions of the analysis, and thus arrive atan accurate evaluation of the Table.

In the first place, a very brief example was given to support the statement alreadyalluded to ‘that corn can only permanently rise in its exchangeable value when thereal expences of its production increase’. In the event that 5,000 quarters require aninput consisting of ‘wages &c.’ amounting to 2,500 quarters, while 10,000 quarters


50

require 5,500 quarters, the price of corn will increase by 10 per cent (VI, 189). Thisconclusion is based upon a principle of ‘average-cost’ rather than ‘marginal-cost’ pricing,and the proposition that an increase in the (average) cost of corn production (incorn terms) leads to a proportionate increase in the money price of corn, impliesthat money prices are determined by relative (average) corn costs of production andthat the corn cost of producing a unit of money is unchanged. 7

Now Malthus commented upon Ricardo’s failure to emphasize ‘marginal’ costsin his calculations: ‘You seem to forget ... that it is only the last 500,000 quarters ofcorn that have been added to the mass, which require for their production a greaterquantity of capital’ (letter of 15 March; in Ricardo 1951, VI, 190–1). To this criticismRicardo replied:

I think you err in supposing it possible that the proportion of the wholecorn expenditure, to the produce obtained, can fall, with an increase of theprice of corn. The two are incompatible, either the whole corn expences ofproduction will be increased or not. If they be the price of corn will rise, –but if they be not I can see no reason for a rise in the price of corn. I admitthat it is only the last portion of capital employed on the land which will beattended with an increased corn expence, but unless it renders the wholeproduce together at an increased expence the price of produce will not rise.

(Letter of 17 March; Ricardo 1951, VI, 192–3)

The emphasis thus remains upon average-cost pricing, but Ricardo relies upon theproposition that in light of diminishing returns at the ‘margin’ average costs mustincrease.

The illustration devised to explain the case more fully (see Table 1) explicitly assumesthe wage basket to be composed of a fixed-proportion mix of corn and manufactured necessaries,the commodity wage to be constant, and the corn wage to fall as the relative price of corn rises.Pricing is still on an average productivity basis, but in the present case Ricardoutilizes, at least provisionally, a labour-quantity rather than a labour-cost theory ofrelative price. Ricardo’s objective in devising the illustration was to demonstratethat an increase in the corn price necessarily implies a rise in the average corn costsof corn production, or a rise in ‘the proportion of the whole corn expenditure tothe [corn] produce obtained’. Since he utilized a labour-quantity theory of pricing,the price of corn rises by 20 per cent while average [corn] costs rise by only 5 percent. But even this latter consequence simply follows from the particular assumptionmade regarding the labourer’s expenditure pattern; it is quite possible for average corncosts in corn terms to decline in the event that the corn component in the basket is accorded asomewhat higher weight so that the per capita decline in corn wages takes on greater significance.In brief, Ricardo completely failed to make his case on the basis of a labour-quantitytheory of value.

Table

1 12

34

56

78

9Co

rnE

mploy

ment

Out

put

Per c

apita

corn

Per c

apita

Per

Total

corn

Total

corn

Corn

costs

price

(milli

on(m

illion

consu

mptio

ncon

sump

tion

capit

a corn

wag

eswa

ges fo

rpe

r qua

rters

per

men)

quar

ter)

(qua

rters)

ofwa

ges (q

s)(0

00 q

s)ou

tput o

fqu

arter

manu

factu

res10

m. (

000

qs)

I£4

2.5

101

£4

250

0050

000.

5

II£4

.16.

04.

515

1£

41.

75a

7875

b52

50c

0.52

5d

Sour

ce: R

icard

o 19

51, V

I, 19

3.N

ote: R

icard

o’s

arith

met

ical c

alcul

atio

ns a

re s

light

ly fa

ulty

. The

fol

low

ing

corr

ectio

ns a

re r

equi

red:

a. 14

.64

bush

els =

1.8

3 qs

rat

her

than

14

bush

els =

1.7

5 qs

b. 8

,235

,000

c. 5,

490,

000

d. 0

.549


52

Malthus objected strongly to the illustration. He pointed to the irrelevance of anargument which involved an enormous addition to output of some 50 per cent.(letter of 19 March; in Ricardo 1951, VI, 195. He was, however, himself obliged toconcede that his own case held good only when agricultural expansions are truly‘marginal’.) And with regard to Ricardo’s pricing principle Malthus insisted that‘the natural price of corn depends entirely upon the price of the last additions, andit does not matter whether with regard to the old land, a capital yields 50 per cent(rent and profit together), or 20 per cent. In either case the price of corn on suchland has nothing to do with the cost of production.’

In his reply in a letter of 21 March (VI, 197–8) Ricardo maintained that the sizeof the incremental addition to output was irrelevant – which is perfectly true sincehis calculations were based on average costs; and that while he agreed with Malthus’ssecond observation he could not see how ‘the admission of this fact can assist[Malthus’s] argument, which relates only to the ratio of the surplus produce to thewhole capital employed’. Ricardo inexplicably failed to see the relevance of thesuggested pricing rule for his own calculations.

Ricardo took the opportunity in his next letter to point out that his adversarymade too cavalier a transfer from the proposition that the ratio of corn surplus tocorn costs tended to rise secularly to the proposition that the money value of thesurplus relative to money costs tended to rise. Ricardo observed first, that the latterproposition might hold good while the former was false; secondly, that he couldaccept the proposition expressed in money terms, since, when allowance is made forrent, the profit rate might still decline; and finally, that the ratio of corn surplus to corncosts must in fact fall :

You have I think totally changed your proposition. You before contendedthat in consequence of increasing wealth and the cultivation of poorer land,the whole corn cost of production on the land would bear a less proportionto the whole corn produce, – but now you say that the money cost ofproduction on the land will bear a less proportion to the money value of thewhole produce. Between these propositions there is a very material difference,as the latter might be true, at the very time that the former was false. Toadmit what you now contend for would not affect my theory, as though itwould prove that the landlord and tenant (together) got more money revenue,or if you will a greater proportion of money revenue as compared to themoney capital employed, yet the tenant might and I think would get a lessproportion, and therefore the rate of profit would fall. Such a state of priceis quite compatible with a greater proportion of men, as compared with theproduce obtained, being employed on the land; – but it is wholly

53


irreconcileable with the net corn produce bearing a larger proportion to thegross corn produce, – which was the principle before contended for.

(Letter of 27 March; Ricardo 1951, VI, 204)

In order to justify the foregoing propositions Ricardo devised a furtherarithmetical illustration (letter of 17 April, VI, 213). As a preliminary, he formallyassumed that ‘the prices of all commodities rise, with the rise of the price of corn,excepting those only on which the wages of labour are expended, and that inconsequence the corn wages of labour fall’ – his objective being to demonstrate thateven on Malthus’s Smith-like assumptions regarding the effects of corn price increaseson general prices, the agricultural rate must decline. However, the assumption thatmanufacturing goods, other than wage goods, rise in price plays no part in theillustration at all; while the assumption that the prices of manufactured wage goodsare constant, so that the corn wage declines, is in fact acceptable to Ricardo as wehave seen. The example is in effect based on a thoroughly ‘Ricardian’ foundation –a constant commodity wage, a rising secular price of corn but constant prices of all other goods,including manufactured wage goods, and a falling corn wage.

This illustration (Table 2) is more complex than the first for it explicitlydistinguishes between rent and profit and focuses attention upon the margin ofcultivation in calculating movements in the rate of profit. A second characteristic isthe formal emphasis upon money revenue and money costs.8

But there remain distinct contrasts with the Principles and a number of seriouserrors. The corn price increase of 12.5 per cent which is envisaged reflects the rise inaverage wage costs expressed in money terms; this, however, involves a case of circularitysince the money costs of labour depend upon the price of corn relative to that ofmanufactures in the first place. 9 And we are faced with the problem that the wagecosts per unit of the monetary commodity cannot be taken as constant. The contrastwith the Principles, it will be observed, is defined particularly sharply by the fact thatthe money value of the revenue yielded on the marginal land rises, from 320 to 360,while in the Principles the objective of Ricardo’s calculations is to assure the constancyof the value of the output yielded at the margin of cultivation. Ricardo thus failedto demonstrate that his result was a necessary outcome, in the sense that increasedmoney wages in an output of constant money value must necessarily reduce profits. 10

What then can be deduced from this post-publication defence of the Table of theEssay? Clearly in defending the principles of his table, Ricardo did not assume thewage rate to be fixed in terms of corn and the wage basket to consist only of corn.Ricardo upheld the propositions, particularly the supposed secular fall in the ratioof corn surplus to corn costs, even when full allowance is made for a mixed wagebasket and reductions in per capita corn wages. There are no price calculations in


54

the table of the Essay, it is true, but this it now seems clear is merely because Ricardobelieved his main results followed notwithstanding a decline in the corn wage inconsequence of the rise in the corn price. When obliged to spell out his position, hefound it necessary to make explicit the price calculations which underlie the table.(Eatwell’s note 1, p. 185, is unjustified for this reason.) These facts suggest to me thatthe corn calculation of the table cannot carry the weight which Professor Sraffasuggested might be placed upon it. The table merely served to portray Ricardo’smain themes in the simplest conceivable arithmetical form. This is my conclusion inthe article (Hollander 1973, 281–2 [above, pp. 35–6]) and the new evidence leads meto stand by it.

Table 2

Land I Land I Land II(marginal) (marginal)

1 Corn price per quarter (£) 4 2 Labour input to produce 80 qs 8 8 3 Per capita corn consumption 4 4 4

by labour (qs) 4 Money equivalent [3×1] (£) 16 18 18 5 Per capita consumption of 16 16 16

manufactures (£) 6 Per capita money wage [4+5] 32 34 34 7 Per capita corn wage [6/1] 8 c. c. 8 Total wage costs [2×6] (£) 256 272 289

(64 qs) (60.5 qs) (64.2 qs) 9 Revenue [80 qs × 1] (£) 320 360 36010 Surplus [9–8] (£) 64 88 71

(16 qs) (19.5 qs) (15.8 qs)11 Surplus/wages [10/8] (%) 25 32 19.7a

12 Rent per £100 wages 0 12.3b 0

Source : Ricardo 1951, VI, 213.Note: Ricardo’s arithmetical calculation is faulty. The following corrections are required:

a. 24.5 per centb. 7.5 per cent

It is clear that the letter of Malthus to Horner dated 14 March, cited both bySraffa and Eatwell, and Ricardo’s letter of 27 March, cited by Eatwell in his comment,do not carry the implications attributed to them; in Ricardo’s own view his modeldid not turn upon the assumption that the same physical product appears both inthe numerator and denominator of the profit rate expression or that the wage is

41

241

2

81

2

71

271

2

55


fixed in corn terms, whatever Malthus might have thought. There remains, however,one more item which requires consideration. Malthus also raised the issue of theeffects of a reduction in the corn price due to free trade. In this event he forecast adecrease in the rate of profit, as well as in rent. His argument turns on the rise of wagesand other capital items expressed in corn terms when the price of corn declines – themirror image of the case discussed hitherto. Ricardo’s reply must be given in full:

I have an account before me of the Capital actually employed on a farm of200 Acres in Essex. It amounts to £3433 – or about £17 pr. Acre, of whichnot more than £1100, or £1200 is of that description which is not subject tothe same variation of value as the produce of the land itself; for £2200 –consists of the value of the seeds in the ground, the advances for labour, –the horses and live stock, &c. &c. If then the money value of the producefrom the land should fall, from facility of production, it must ever continue tobear a greater ratio to the whole money value of the capital employed on theland, for there will be a great increase of average produce per acre, whilst thefall in money value will be common to both capital and produce and itcannot therefore be true that rent, profits and wages can all really fall at thesame time.

(Letter of 8 May; Ricardo 1951, VI, 226)

Mr Eatwell in his note 1, p. 186, refers to Ricardo’s assertion in the final sentencethat when the corn price falls due to increased productivity ‘the fall in money valuewill be common to both capital and produce’ as evidence for his opinion that ‘theidea of the rate of profit as a purely material ratio lingers on in the letters of 1815’.I suggest that the comment implies no such thing. In the first place, the data beforeRicardo indicate that two-thirds only of the capital stock in agriculture is made upof farm produce; this, however, is not the important point. What is important isthe fact that Ricardo’s answer flies in the face of his position as stated up till thatmoment in correspondence; in the case of a rising corn price due to reducedproductivity he did not make a similar defence, as we have seen at length. In isolationthe statement cited by Eatwell seems to be unambiguous in its implications; placedin due context it constitutes clutching at straws – an ill-considered reply on Ricardo’spart which contrasts totally with the preceding sustained defence of the table, andwhich plays no part in the argument thereafter.

V.

The correspondence following the Essay is important for much else apart from thedefence of the table, and contains analyses of technical change in the production ofmanufactured wage goods;11 the process whereby the general profit rate comes into


56

line with changes in the price of corn by way of money-wage movement; and theeffects of money-wages on prices.12 But on my reading all of this merely takes furtherthe line of thought already present in 1814. Eatwell (186) reiterates Professor Sraffa’sopinion that the transition between the Essay and the Principles came at the end of1815 when having set to work on the Principles Ricardo wrote to Mill: ‘I know I shallsoon be stopped by the word price.’ I believe (and have demonstrated in my paper)that the early references to the problem of value are more extensive and systematic.

Let me, however, clarify what I hoped was clear in my paper. Corn is the numéraireof the Table, but when Ricardo considers the central question of the determinationof the general profit rate it is ‘money’ which is chosen as standard as in the Principles.But obviously I am not asserting that the doctrine of the Principles leapt fully developedfrom Ricardo’s brain in 1814 or 1815. Apart from the fact that Ricardo frequentlyassumed in his various letters at this early stage an average productivity rather thana marginal productivity basis for his price calculations, and in addition sometimesconfused labour cost and labour quantity, the full specification of the standard hadstill to be formulated. Throughout 1815 and 1816 Ricardo was preoccupied with thepossibility of changes in the ‘value’ of the metal itself, and also with the precisetechnical coefficients required of the medium. But there was no ‘transition’ duringthis period, between two systems from the Essay to the Principles such as Sraffa envisages,for these problems were raised directly by the analysis of 1814 and early 1815.

VI.

I wish finally to emphasize that my interpretation in no way touches upon the‘usefulness’ of the corn profit model as an analytical structure. It is the historicalquestion of whether we can legitimately attribute such a structure to Ricardo whichis the subject matter of my article. The record suggests that we cannot. I would liketo point out a most interesting passage of Professor Sraffa’s regarding the temporalsequence of his own theoretical contribution and of his interpretation of Ricardo:‘It should perhaps be stated that it was only when the standard system and thedistinction between basics and non-basics had emerged in the course of the presentinvestigation that the above interpretation of Ricardo’s theory [that of Works, pp.xxxi–xxxii] suggested itself as a natural consequence’ (Sraffa 1960, 93).

I believe, in the light of the available documents, that Professor Sraffa read toomuch into Ricardo. The fact that Ricardo failed to make his case – except on thebasis of the particular data artificially inserted into his table – should warn us againstattributing to an author recognition of all the assumptions which may be requiredto make sense of his statements.

57


NOTES

1. Mr Eatwell is, however, perfectly correct in taking me to task in his note 1(ii) (187). Theobservation in note 1(i), while demonstrating a most commendable knowledge of the literature,seems to me irrelevant for my purposes. Other objections will be taken up below.

2. I would bring to the reader’s attention that the assumption of a fixed corn wage creeps into thethird paragraph of Eatwell’s text where reference is made to ‘the greater (corn) cost of producingthe (corn) wage’ which presumably refers to the given corn wage.

3. I would suggest, as a tentative hypothesis, that the emphasis in the Essay upon corn in the wagebasket has its source in two factors. The first is the policy orientation of the pamphlet whichmay have led Ricardo to work with strong cases to get the message across regarding the effectsof corn import restriction. The second is the very strong objection Ricardo took to Malthus’sview that the profit rate is affected by events which do not work their way through changes inthe cost of producing wage goods at all, but rather operate in terms of the relationship betweenaggregate demand and supply. For this purpose it was unnecessary to complicate the argument.

4. The citation of Ricardo’s statement to the effect that ‘the rate of profits and of interest mustdepend on the proportion of production to the consumption necessary to such production’ isunhelpful. Everything turns upon the phenomena which generate changes in the proportionin question. According to Ricardo ‘the proportion of production to the consumption ...essentially depends upon the cheapness of provisions, which is after all, whatever intervals wemay be willing to allow, the great regulator of the wages of labour’; according to Malthus ‘theproportion of production to the consumption necessary to such production seems to bedetermined by the quantity of accumulated capital compared with the demand for the productsof capital, and not by the mere difficulty and expence of procuring corn’ (in Ricardo 1951, VI:108, 111). The phrase by itself, while catchy, is an empty one.

5. I confess to being a little confused as to who precisely Mr Eatwell considers a hero. Comparethe following statements: (a) ‘It was in the search for the correct specification of “necessaries”and of the determination of the rate of profit in their conditions of production, that Ricardowas to make his ingenious simplification in the criticism of which Malthus was to enjoy somesuccess’ (184); (b) ‘In the face of the success of Ricardo’s “material ratio” Malthus was to beforced to rely on the complications of a many sector analysis to obscure the deficiencies of hisown argument, a fact which Ricardo was later to point out’ (183, n 1).

6. Professor Sraffa’s suggestion regarding Malthus’s comment of 5 August 1814 has been alreadydealt with at length in my paper. The quotation given from Malthus’s letter of 12 February1815 tells us nothing; Malthus himself accepted that ‘it sometimes tends to clear up thesematters to put money out of the question’. Mr Eatwell is therefore correct not to regard theseitems as ‘conclusive evidence’ for his case (see p. 185).

7. This last assumption is not satisfactory since Ricardo’s allowance for a decline in the per capitacorn wage implies a decline in corn costs of producing money – even when no changes occurin labour input per unit of the monetary commodity. In brief, Ricardo’s implicit use of alabour-cost, as distinct from a labour-quantity theory involves difficulties which he did notconsider. It might, however, be argued that since the fall in per capita corn wages affects labourin all commodities equally this variation can be ignored as a cause of relative price variations sothat any changes in money prices reflect an altered labour input only.


58

8. It is worth noting that while the ratio of total money surplus to total money costs rises from25 to 28 per cent, that between the total corn surplus and total corn costs declines from 25 to22 per cent, illustrating Ricardo’s continued adherence to the Table in the Essay, although itis now upon the money calculation that he places the emphasis.

9. Ricardo in fact conceded that if he had chosen a much larger corn price increase he wouldhave obtained a very different result but insisted that ‘some adequate cause must be shownfor such a rise and it cannot be arbitrarily assumed’ (1951, VI, 214).

10. It is noteworthy in this regard that Ricardo’s calculation of a profit rate decline from 25 to19.7 per cent is in error; a correct estimate involves a slight reduction to 24.5 per cent only.The error arises from calculating profits, at the margin, as the ratio of net revenue to revenuerather than to costs.

We may also bring to the reader’s attention Ricardo’s attempt to prove that even in theevent of general prices rising the rate of return must decline (1951, VI, 213). The proof is apartial one only – representing a reply to Malthus’s challenge to the Table – for it limits thediscussion to the agricultural rate alone: ‘I will however suppose that you and Mr. Torrens arecorrect, and that commodities do rise in price with every increased price of corn. The valueof fixed capital as well as of circulating capital employed on the land will then rise also, andaltho’ the money value of the produce should be increased on the old land it will still bear thesame proportion to the money value of the capital employed and as this produce will bedivided in different proportions between the landlord and the farmer the rate of profits ofthe latter will fall.’ While mention is made of fixed capital Ricardo neglects to take it intoaccount in the actual illustration; no allowance is made for depreciation in costs; and profitsare calculated on wages capital only.

11. See in particular Ricardo to Malthus, 17 March 1815 (1951, VI, 194), where increased profitsare accounted for by the supposition ‘that wages have been kept moderate by the improvementsin those manufactures which supply the poor with the necessaries on which a part of theirwages are expended’.

12. The appearance of Robert Torrens’s Essay on the External Corn Trade in February 1815provided an ideal opportunity for Ricardo to restate his position. Torrens repeated AdamSmith’s fundamental belief that increases in the price of corn are passed on to consumers,by way of rising money wages, and do not affect profits. Ricardo simply replied that Torrens‘on this part of the subject appears to me defective, as I think that the price of commoditieswill be very slightly affected either by a rise or fall in the price of corn. If so, every rise in theprice of corn, must affect profits on manufactures, and it is impossible that agriculturalprofits can materially deviate from them’ (letter of 17 April 1815: 1951, VI, 213).

REFERENCES

Eatwell, J. (1975) ‘The interpretation of Ricardo’s Essay on Profits’, Economica 42: 182–7.Hollander, S. (1973) ‘Ricardo’s Analysis of the Profit Rate, 1813–15’, Economica 40: 260–82.Ricardo, D. (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 vols), Vol.

I: The Principles of Political Economy and Taxation; Vol. VI: Letters, 1810–1815; Cambridge:Cambridge University Press.

59


Sraffa, P. (1951) ‘Introduction’ to The Works and Correspondence of David Ricardo, Vol. I: ThePrinciples of Political Economy and Taxation, Cambridge: Cambridge University Press.

—(1960) Production of Commodities by Means of Commodities, Cambridge: Cambridge UniversityPress.

60

I.

In two articles (1973, 1975) and in my Economics of David Ricardo (1979) I have givena blow-by-blow account of the evidence relating to Ricardo’s position on profits.Professor Garegnani’s (1982) criticisms do not lead me to retract. Much of hisargument is based on circumstantial evidence and fails to make accurate use of whatRicardo actually wrote on the matter, although he is aware of the materials available.The most useful path for me now is to review some of the key issues, limiting myself,however, to an examination of the evidence presented by Sraffa, who originated thehypothesis which is in dispute. There is no point in going further if this matter isnot resolved.

II.

We must have before us the Sraffa position in support of the material theory ofprofits, ‘the rational foundation’ of the principle expressed by Ricardo in his letterto Trower of 8 March 1814 that ‘it is the profits of the farmer which regulate theprofits of all other trades’ (Ricardo 1951, VI, 104):

Although this argument is never stated by Ricardo in any of his extantletters and papers, he must have formulated it either in his lost ‘papers onthe profits of Capital’ of March 1814 or in conversation, since Malthusopposes him in the following terms which are no doubt an echo of Ricardo’sown formulation: ‘In no case of production, is the produce exactly of thesame nature as the capital advanced. Consequently we can never properlyrefer to a material rate of produce. ... It is not the particular profits or rate

3

PROFESSOR GAREGNANI’SDEFENCE OF SRAFFAON THE MATERIAL

RATE OF PROFIT

61

PROFESSOR GAREGNANI’S DEFENCE

of produce upon the land which determines the general profits of stock; andthe interest of money’ [5 August, 1814]. The nearest that Ricardo comes toan explicit statement on these lines is in a striking passage in a letter of [26]June 1814: ‘The rate of profits and of interest must depend on the proportionof production to the consumption necessary to such production.’ Thenumerical examples in the Essay reflect this approach; and particularly in thewell-known Table which shows the effects of an increase of capital, bothcapital and the ‘neat produce’ are expressed in corn, and thus the profit percent is calculated without need to mention price.

(Sraffa 1951, xxxi–xxxii)

Sraffa, it will be seen, placed considerable reliance when making his case on theformulation in Malthus’s letter of 5 August 1814 which he claims is ‘no doubt anecho of Ricardo’s own formulations’ in the lost manuscript on profits or inconversation. But Sraffa’s argument is entirely unconvincing, for it neglects thecontext of Malthus’s statement. The statement is in fact preceded by the following: ‘Ifthe nominal price of corn be doubled, and the nominal amount of capital employed,be not quite doubled which you seem to allow might be the case, instead of saying“how is it possible to conceive that the rate of profits will not be diminished” Ishould say how is it possible to conceive that it should not be increased? In no caseetc.’ (Malthus, in Ricardo 1951, VI, 117). Malthus obviously had in mind neitherRicardo’s manuscript nor his conversation as Sraffa suggests, but specifically Ricardo’sletter of 25 July to which he was replying. There is no need then for any furtherspeculation regarding the origin in Ricardo of Malthus’s formulation.

Let us then look at the extract in the Ricardo letter of 25 July to which Malthusreferred:

The capitalist ‘who may find it necessary to employ a hundred days labourinstead of fifty in order to produce a certain quantity of corn’ [Malthus, 6July, VI, 111] cannot retain the same share for himself unless the labourerswho are employed for a hundred days will be satisfied with the same quantityof corn for their subsistence that the labourers employed for fifty had before.If you suppose the price of corn doubled, the capital to be employed estimatedin money will probably be also doubled, – or at any rate will be greatlyaugmented and if his monied income is to arise from the sale of the cornwhich remains to him after defraying the charges of production how is itpossible to conceive that the rate of his profits will not be diminished.

(Ricardo 1951, VI, 114–15)

There is an error to be noted first in Ricardo’s formulation (alluded to, it will benoted, by Malthus). In place of the capital nearly doubling, Ricardo should have


62

written nearly quadrupling to reflect the two forces at work on costs which reflect thesupposed decline in agricultural productivity: (1) a doubled labour input per unitof corn, and (2) a doubled money wage which compensates for the doubled price ofcorn.1 As Ricardo pointed out, only if the corn wage should fall, and fall in proportionto the reduced labour productivity, would (money) costs merely rise in proportionto the rise in revenue thus preventing a squeeze on profits. The correction, we shallsee, was to be made by Ricardo himself.

In this passage it is clear enough that corn alone enters into costs: the case islimited in its axioms. 2 But the actual mechanism at work on profits, it is also clear, involvesthe upward pressure exerted by rising money wages. The fall in corn surplus relative to corninput is merely the outcome of this mechanism. Before elaborating upon this matter,I wish to point out that the ellipses in the citation by Sraffa from Malthus’s letter of5 August conceal a revealing observation. What Malthus wrote in fact was this, that‘In no case of production, is the produce exactly of the same nature as the capitaladvanced. Consequently we can never properly refer to a material rate of produce,independently of demand, and of the abundance or scarcity of capital’ (VI, 117; emphasisadded). It is his own theory of profit-rate determination involving the aggregatedemand problem that he had in mind: the possibility due to aggregate demandvariation of increase (decrease) in money revenue but no proportionate increase(decrease) in wage costs that he believed Ricardo had ruled out. He may have objectedto Ricardo’s assumption that expenses amount entirely to wages and that wages arespent on corn, but this says nothing about the mechanism Ricardo had in mind:that involving upward pressure of money wages.

Ricardo’s mechanism again appears very clearly later in 1814. And in this caseRicardo carefully corrected what he saw as a misreading by Malthus of his positionand thereby cast a flood of light on his precise intentions.

Malthus’s statement must be given first:

The Profits of stock, or the means of employing capital advantageously maybe said to be accurately equal to the price of produce, minus the expence ofproduction. And consequently whenever the price of produce keeps a headof the price of production the profits of stock must rise. ... It is not thequantity of produce compared with the expence of production that determinesprofits, (which I think is your proposition) but the exchangeable value ormoney price of that produce compared with the money expence ofproduction. And the exchangeable value of produce is not of course alwaysproportioned to its quantity. ... In stating the cause of high profits you seemto me to consider almost exclusively the expence of production, withoutattending sufficiently to the price of produce, and greatly to underrate thewants and tastes of mankind in affecting prices, and consequently in affecting

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the means of profitably employing capital.(9 October 1814; Malthus, in Ricardo 1951, VI, 140–1)

Again we have Malthus’s complaint that Ricardo neglected price of output andrevenue, and did so by focusing on the physical output of corn.

Malthus’s observation to Ricardo regarding physical quantities – ‘which I thinkis your proposition’ – is the first point to be noted. Had Ricardo explicitly stated amaterial theory in the lost papers on profits or in conversation this is surely nothow Malthus would have phrased the matter. There would have been no room fordoubt. But there is no need at all for surmise; for Ricardo explicitly denied that Malthus’sattribution was an accurate one :

It does not appear to me that we very materially differ in our ideas of theeffects of the facility, or difficulty, of procuring food, on the profits ofStock. You say ‘that I seem to think that the state of production from theland, compared with the means necessary to make it produce, is almost thesole cause which regulates the profit of stock, and the means of advantageouslyemploying capital.’ This is a correct statement of my opinion, and not asyou have said in another part of your letter, and which essentially differsfrom it, ‘that it is the quantity of produce compared with the expence ofproduction, that determines profits’. You, instead of allowing the facility ofobtaining food to be almost the sole cause of high profits, think it may besafely said to be the main cause, and also a difficulty of acquiring food themain cause of low profits. There appears to me to be very little difference inthese statements.

(23 October, Ricardo 1951, VI, 144–5)

Ricardo thus accepts responsibility for the general notion that (setting aside short-run fluctuations) profits are governed by agricultural productivity, but no morethan that.

Now the operation of agricultural productivity works its way on profits throughthe money prices of corn and labour ; Malthus was wrong in attributing to him a neglectof corn prices. This is clear from the same letter, where Ricardo wrote regarding theeffects of accumulation: ‘A rise in the price of raw produce may be occasioned by agradual accumulation of capital which by creating new demands for labour may givea stimulus to population and consequently promote the cultivation or improvementof inferior lands, – but this will not cause profits to rise but to fall, because not onlywill the rate of wages rise, but more labourers will be employed without affording aproportional return of raw produce. The whole value of the wages paid will begreater compared with the whole value of the raw produce obtained’ (VI, 146). Toreiterate ‘the principle’ here formulated: the agricultural profit rate falls with


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diminishing returns because while the price of corn rises and revenue (for any givenoutput) increases to reflect the lower productivity, there are two (related) forcesplaying on the costs required to produce that output: an increased labour input,which is paid a higher money wage to reflect the higher corn price. This sequence isexactly that earlier expressed on 25 July with the correction required inserted.

Ricardo, one may add, did not deny the consequences for profits of short-runvariations in the corn price, due for example, to bad seasons: profits rise since ‘theprice of produce would rise considerably more than in the proportion to thedeficient quantity, and would therefore be much a head of the price of production’,i.e. money costs; similarly, general price inflation ‘would raise the price of produce,for a time, more than it would wages, and would therefore raise profits’. But thesewere ‘temporary causes, no way affecting the principle itself, but merely disturbingit in its progress’ (VI, 146). In all cases, it is the behaviour of the money price ofcorn and money wage costs that provides the key.

It will be noted how very close the general system of 1814 is to that of 1817. Thedifference in approach is a formal one only: in 1817 Ricardo holds labour inputunchanged and assumes the yield to fall; profits are squeezed since the money valueof the (lower) output remains constant while the money costs of production (themoney wages paid the given work force) rise. In the earlier version of 1814, as noted,the money value of a given output rises, but the money costs, representing a greaterlabour input, rise in greater proportion. But in both cases the price of corn increasesto reflect reduced labour productivity alone and not the increased money wage rateso that profits are forced down.

There is much more pointing to my conclusions. The very statement in the letterof 26 June upon which Sraffa put so much weight as ‘the nearest that Ricardo comesto an explicit statement on [material] lines’ (above, p. 61) – ‘the rate of profits and ofinterest must depend on the proportion of production to the consumption necessaryto such production’ – surely does not support Sraffa. For Ricardo himself tells us onthe spot that this proportion ‘essentially depends upon the cheapness of provisions,which is after all, whatever intervals we may be willing to allow, the great regulator ofthe wages of labour’ (VI, 108).

III.

I do not see how much clearer Ricardo could have been that his doctrine of 1814regarding the squeeze on profits involved the pressure exerted by money wage. Buthow does Garegnani deal with the evidence? He engages in impressive shadow boxingin his efforts to avoid my conclusion; he does not hit the real target. He concedesthe existence of Ricardo’s references to money wages as the regulator of profits (e.g.

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p. 72); indeed it would be impossible to do otherwise. I do not, however, find thathe provides any general rationalization of Ricardo’s repeated insistence upon therole of money wages. He only attempts, if I understand him correctly (73), to avoidthe obvious conclusion by contending that Ricardo maintained the material theoryof profits – ‘reasoning on the basis of the physical quantities of agriculture’ – but(legitimately) switched to money value terms without compromising the Sraffa logic.What is supposedly involved is ‘an underlying reasoning in physical terms [which]is used to argue about the behaviour of money values’ (77). To take this position issurely to confuse cause and effect. A corn calculation can always be made even withinthe fullfledged Ricardian doctrine of the Principles ; assuming a simple case wherecorn alone enters the wage basket the calculation is very easy. If the profit rate falls inagriculture, it will then be the case that the ratio of corn surplus to corn costsdeclines. But this is not a causal matter; it is not this that determines the profit rate, itis a consequence. The causal mechanism involved for Ricardo the relation betweencorn prices and money wages; as he phrased it so very simply, the physical proportion‘essentially depends upon the cheapness of provisions, which is ... the great regulator ofthe wages of labour’.

IV.

I shall return to the foregoing matter when I take up the precise content of the wagebasket. Let us now look more closely at the general profit rate. I take note first ofGaregnani’s objection (68) that I illegitimately equate Ricardo’s comment in theletter to Trower of 8 March that ‘it is the profits of the farmer which regulate theprofits of all other trades’ (VI, 104) with ‘the state of agricultural productivity’ as thedetermining factor, thereby arriving at my more general interpretation. My reply isthat there is nothing illegitimate about the identification, since I merely followRicardo’s own practice. In that same letter to Trower Ricardo himself emphasizesthat general profits vary with ‘improvements in husbandry, – or new facilities ... forthe introduction of food from foreign countries’ (obviously features defining thestate of agricultural productivity), and then restates this formulation in terms of whatis obviously nothing more than a catch phrase: ‘in short it is the profits of thefarmer which regulate the profits of all other trades’ (104). Conversely, he objects toMalthus’s view ‘that the profits of the farmer no more regulate the profits of othertrades, than the profits of other trades regulate the profits of the farmer’, andidentifies this proposition with a denial of his own insistence upon the role playedby agricultural productivity (profits possibly rising for Malthus ‘altho’ there shouldbe no new facilities either by importation, or improved tillage, for the productionof food’).


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Now to substantive matters. In his letters to Malthus of 26 June and 25 July –both of which contain the money-wage mechanism as we have seen – the effect of ahigher corn price on the manufacturing sector is taken up. 3 While increased moneywages (due to the higher corn price) will cause manufacturing prices to rise, demandfor these products is constrained: ‘The rise of the price or rather the value of corn... must necessarily diminish the demand for other things even if the prices of thosecommodities did not rise with the price of corn, which they would (tho’ slowly)certainly do. With the same Capital there would be less production, and less demand’(VI, 108). Similarly:

You say that ‘the proportion of production to the consumption necessaryto such production, seems to be determined by the quantity of accumulatedcapital compared with the demand for the product of capital, and not by themere difficulty and expence of procuring corn’. It appears to me that thedifficulty and expence of procuring corn will necessarily regulate the demandfor the products of capital, for the demand must essentially depend on theprice at which they can be afforded, and the prices of all commodities mustincrease if the price of corn be increased.

(Ricardo 1951, VI, 114)

On 11 August Ricardo explained further – always in the same context of importrestriction – how reduced demand for manufactures constrained the rise in manu-facturing prices behind the increase in money wage costs:

It is true that the Woollen or Cotton manufacturer will not be able to workup the same quantity of goods with the same capital if he is obliged to paymore for the labour which he employs, but his profits will depend on theprice at which his goods when manufactured will sell. If every person isdetermined to live on his revenue or income, without infringing on hiscapital, the rise of his goods will not be in the same proportion as the rise oflabour, and consequently his percentage of profit will be diminished if hevalues his capital, which he must do, in money at the increased value towhich all goods would rise in consequence of the rise of the wages of labour.

(Ricardo 1951, VI, 119–20)

I have always emphasized that Ricardo’s argument regarding the effect of higher wageson manufacturing prices was to undergo further changes and correction. But thepoint will be clear that the mechanism whereby manufacturing profits were alreadyenvisaged in 1814 as coming into line with those in agriculture entails upward pres-sure on money wages due to higher corn prices, and not that claimed by Sraffa.

This general principle is that of the Essay on Profits and the Principles. That it isindeed the principle of the Essay requires a word of support, for Sraffa in his

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interpretation denied it, arguing that in Ricardo’s statement of 1815 ‘the profit rateis calculated without the need to mention price’ (above, p. 61). What Sraffa neglected,however, is that while this is true of the Table it is not true of the essay as a whole,the Table constituting a simplified pedagogical device. Thus we read in the Essay:‘The sole effect then of the progress of wealth on prices, independently of allimprovements, either in agriculture or manufactures, appears to be to raise theprice of raw produce and of labour, leaving all other commodities at their originalprices, and to lower general profits in consequence of the general rise of wages’(Ricardo 1951, IV, 20). Could anything be more explicit?

We return now to 1814 to deal with one further issue: the content of the wagebasket. In all the citations so far from Ricardo’s correspondence it appeared thatcorn alone is included. But Ricardo allowed that this was not a necessary part of theargument and explained that should manufacturing goods be consumed by labour,a change in their prices will also affect profits, again by acting on the money wage:

I have been endeavoring to get you to admit that the profits on stockemployed in Manufactures and commerce are seldom permanently loweredor raised by any other cause than by the cheapness or dearness of necessaries,or of those objects on which the wages of labour are expended. Accumulationof capital has a tendency to lower profits. Why? because every accumulationis attended with increased difficulty in obtaining food, unless it isaccompanied with improvement in agriculture; in which case it has no tendencyto diminish profits. If there were no increased difficulty, profits wouldnever fall, because there are no other limits to the profitable production ofmanufactures but the rise of wages. If with every accumulation of capital wecould tack a piece of fresh fertile land to our Island, profits would never fall.I admit at the same time that commerce, or machinery, may produce anabundance and cheapness of commodities, and if they affect the prices ofthose commodities on which the wages of labour are expended they will sofar raise profits; – but then it will be true that less capital will be employedon the land, for the wages paid for labour form a part of that capital.

(18 December 1814, Ricardo 1951, VI, 162)

V.

I cannot see how there can be any doubt whatsoever that it is changing moneywages, whatever the components of the wage basket, upon which Ricardo relied forhis analysis of profits in 1814. There is no basis for the Sraffa interpretation. Butwhat has Garegnani to say about all this?


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Just as he does not deny Ricardo’s references to the action of money wages in theagricultural sector, he also does not deny that ‘occasionally’ Ricardo allowed for thepresence of non-wage items in the wage basket. Indeed, he is troubled by the fact thatRicardo frequently switches from the simple to the complex wage basket, referringto this practice as an ‘inconsistency’. But it is, he asserts, an inconsistency whichdisappears when ‘we return to Sraffa’s interpretation of the principle of thedetermining role of the profits of the farmer’. For,

the basis of Ricardo’s argument lay in the physical corn quantities of agricultureand therefore, implicitly, on the simplification of wages consisting entirelyof corn with its approximate correspondence to reality. An analogy with thecorn argument would, however, allow Ricardo to see easily, and occasionallyadmit, that productivity in the non-agricultural wage goods sectors couldalso influence the rate of profit. In fact the fall in the general profit rateresulting from decreasing agricultural productivity, which Ricardo coulddetermine on the basis of the quantities of corn in agriculture, would haveto operate through a fall in the ratio between value of product and value ofwages: it was then easy for Ricardo to think that the analogous changes inlabour productivity in non-corn wage goods would act similarly.

However, this analogy would in no way alter Ricardo’s need to hold onto the argument founded on physical corn quantities – and therefore to theprinciple of the determining role of farmers’ profits – as the only firmlogical foundation of his admittedly approximate conclusions.

(Garegnani 1982, 69–70)

[Ricardo] was, in fact, concerned with conclusions applicable to reality andnot, merely, with correct deductions from an assumption – that of wagesconsisting entirely of corn – the realism of which could, and would, beimmediately disputed. Given the decisive importance of agricultural productsin agricultural capital, he would feel confident that conclusions reached byadopting the simplification of wages consisting entirely of ‘corn’ would beof general validity: and he would argue these conclusions with reference to areality where agricultural capital consisted mostly, though not exclusively, ofcorn. Indeed ... he never rigorously adhered to the simplification of cornwages and, occasionally, even went on to consider the effects on the rate ofprofit of improvements in the production of wage goods other than corn.

(Garegnani 1982, 71-2; cf. 74)

Now, with respect, this represents a very forced defence of Sraffa; Garegnanipresumes the legitimacy of the Sraffa interpretation and then (not surprisingly) finds

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himself obliged to engage in pure speculation regarding Ricardo’s mental process.And it is a defence that actually undermines the logic which Sraffa ascribes to Ricardo.Let us recall that logic:

The rational foundation of the principle of the determining role of theprofits of agriculture, which is never explicitly stated by Ricardo, is that inagriculture the same commodity, namely corn, forms both the capital(conceived as composed of the subsistence necessary for workers) and theproduct; so that the determination of profit by the difference between totalproduct and capital advanced, and also the determination of the ratio of thisprofit to the capital, is done directly between quantities of corn without anyquestion of valuation. It is obvious that only one trade can be in the specialposition of not employing the products of other trades while all the othersmust employ its product as capital.

(Sraffa 1951, I, xxxi)

For Sraffa, therefore, it is clearly essential to the presumed ‘rational foundation’ thatagricultural capital consist entirely of corn wages; without that assumption the argu-ment collapses. Worse still on Garegnani’s reading, when allowance is made for non-corn wages, a fall in the general profit rate must occur ‘through a fall in the ratiobetween value of product and value of wages’. But this too flies in the face of Sraffa’sstatement of the mechanism, namely that ‘if there is to be a uniform rate of profit inall trades it is the exchangeable values of the products of other trades relatively totheir own capitals (i.e. relatively to corn) that must be adjusted so as to yield thesame rate of profit as has been established in the growing of corn’ (xxxi).

Since it is so apparent that Ricardo does not insist on a corn wage basket, andsince this creates no difficulties whatsoever if understood within a general approachto profits involving the effects of money-wage changes, I suggest Garegnani followme in abandoning the Sraffa argument. In any event, there is something very wrongwhen unnecessarily complex arguments are used to force Ricardo’s relaxation of thecorn-capital assumption into a particular mould which is not logically required.

VI.

There is much else that could be said in response to Garegnani’s challenge. But byfocusing upon the evidence presented by Sraffa we deal with the essentials of theproblem. I submit that Sraffa’s evidence is unconvincing for the reasons given, andthat Garegnani’s defence does not in fact serve its purpose. My interpretation, bycontrast, has the merit that it does not turn on the possible content of some appar-ently no longer extant ‘more explicit statements’ by Ricardo of his position. I basemy case on the open books before us.


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NOTES

1. I failed to note this simple correction in Hollander 1973, 266n [above, Chapter 1, n 13];and, as will become clear, I was needlessly preoccupied with this formulation.

2. Garegnani (1982, 71) unnecessarily weakens his own case by allowing for the possibility ofnon-corn inputs in this context.

3. The question at hand relates to the consequences of corn import restriction.

REFERENCES

Garegnani, P. (1982) ‘On Hollander’s Interpretation of Ricardo’s Early Theory of Profits’,Cambridge Journal of Economics 6, 1 (March).

Hollander, S. (1973) ‘Ricardo’s Analysis of the Profit Rate, 1813–15’, Economica 40 (August);260–82.

——(1975) ‘Ricardo and the Corn Profit Model: Reply to Eatwell’, Economica 42 (May); 188–202.

——(1979) The Economics of David Ricardo, Toronto: University of Toronto Press.Ricardo, D. (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 vols),

Vol.IV: Pamphlets, 1815–1823; Vol.VI: Letters, 1810–1815; Cambridge: Cambridge UniversityPress.


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In a recent paper Dr Terry Peach (1984) has gravely misrepresented my analysis ofRicardo’s early treatment of profitability in The Economics of David Ricardo (1979)(henceforth EDR). Peach asserts that on my account ‘Ricardo’s treatment must becharacterized in terms of the manipulation of money variables; that is in terms ofthe relationship between money wages (which may be influenced by changes in theprice of corn, although this is only one possibility), prices and profits’ (1984, 734),and he refers to ‘Hollander’s belief that Ricardo adopted an undifferentiated moneyvariables approach to the analysis of both the agricultural and manufacturing sectors’(741n). In making these global assertions Peach distorts my position. For I havealways emphasized that Ricardo proceeded in his early writings by distinguishingthe agricultural and the manufacturing sectors. Thus, conspicuously, in discussingthe Essay on Profits (1815), I refer ‘to his well-known model, relating to the agriculturalsector’ in which corn is used as numéraire (EDR, 136–7), and reiterate that ‘it seems tohave been Ricardo’s intention to apply the model specifically to the agriculturalsector’ (138). And I could not have been more explicit that ‘there are no pricecalculations in the table of the Essay’ (162). I have sought, however, to demonstratethat when Ricardo turned to analyse the economy-wide return on capital he workedwithin a money-variables framework. The agricultural model served an introductorypurpose only; in particular, the material rate does not determine the general rate inthe manner perceived by Sraffa. I have also sought to show how the argumentmatured over time culminating in the Principles, for in the early accounts the ‘general’theory – involving the impact on profits of upward pressure on money wagesreflecting diminishing agricultural returns – is not yet fully developed (140).

Apart from the foregoing misrepresentation, Peach also charges me with ‘anunfortunate and ... distorting participation in the ... unhelpful game ... of striving

4

ON A ‘NEW INTERPRETATION’OF RICARDO’S EARLY

TREATMENT OFPROFITABILITY


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to establish lineages’ (1984, 751) – a ‘neoclassical lineage’ in my case – the ‘majorimplication’ of his own paper being, he writes, a demonstration ‘that the interest inassimilating [Ricardo’s] writings to a type of economics is nugatory, at best’ (733). Acareful reading of Peach’s paper provides scarcely a hint of the basis for this chargeagainst me – what there is has no justification – nor, for that matter, of the alleged‘implication’.

Limited space precludes further elaboration of these matters. I shall attend ratherto the specifics of Peach’s exegesis. In my view Peach fails to substantiate his assertionsregarding Ricardo’s analysis of 1814. Furthermore, he adds nothing to what is inmy EDR regarding the analysis of the Essay; on the contrary, he neglects much ofrelevance for the accurate interpretation of that analysis.

II.

The main theme of Peach’s paper relates to Ricardo’s treatment of the agriculturalsector. It is proposed that in 1813–14, before the Essay on Profits, Ricardo assumedthat all prices (including the prices of manufactured inputs) rise in proportion withthe price of corn – a proposition identified with Smith’s ‘adding-up’ theory; 1 andthat in the 1815 Essay itself all prices are constant (notwithstanding extensions tomarginal land). By either of these assumptions Ricardo was enabled, so runs theargument, to calculate the material profit/capital ratio (using corn as numéraire )without assuming literal homogeneity of input and output – the logical assumptionSraffa ascribed to Ricardo’s model – since relative price changes are precluded.

That Ricardo sought to estimate the profit ratio in material terms is a presumptionturning on Malthus’s objection in correspondence with Ricardo that ‘in no case ofproduction, is the produce of the same nature as the capital advanced. Consequentlywe can never properly refer to a material rate of produce, independent of demand,and of the abundance or scarcity of capital’ (1984, 737; citing letter of 5 August1814; Ricardo 1951, VI, 117). But unlike Sraffa, who presumed that Ricardo musthave asserted a material rate of produce in the sense that corn is both input andoutput, Peach has it that Ricardo ‘abstract[ed] from monetary disturbances whichwould mask the true magnitude of the materially specified profit share’ by assumingequiproportionate price movements of corn and manufactures (737, 741–3).

Peach makes heavy weather of Ricardo’s use of a corn calculation. He puts far toomuch weight on a passage in Ricardo’s reply to Malthus of 11 August, namely‘Individuals do not estimate their profits by the material production, but nationsinvariably do. If we had precisely the same amount of commodities of all descriptionsin the year 1815 that we now have in 1814 as a nation we should be no richer, butif money had sunk in value they would be represented by a greater quantity ofmoney, and individuals would be apt to think themselves richer’ (Ricardo VI, 121;

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ON A ‘NEW INTERPRETATION’

cited Peach 1984, 737). This passage in fact says nothing about the profit rate orprofit share – ‘a rate of produce’; it merely insists that wealth is not well representedby money, variable as money is or may be in its purchasing power, but can bemeasured unambiguously if the mix of commodities remains unchanged – constancyof wealth implying ‘precisely the same amount of commodities of all descriptions’.This general (and non-controversial) observation carries no necessary implicationswhatsoever for the representation of the profit rate in material terms. Secondly, thepassage is not limited to the agricultural sector. This latter point is actually recognizedby Peach himself – ‘this technique was not believed to be limited in application tothe agricultural sector’ (737) – so that it is difficult to appreciate how he can use thepassage as prologue to his attribution to Ricardo of an approach in the agriculturalsector based upon the profit share in material terms.

Fortunately, all this tortuous meandering is unnecessary. 2 For we find Ricardoexplicitly referring to the agricultural profit rate in terms of a corn surplus relativeto a corn capital in a letter of 25 July 1814 (Ricardo 1951, VI, 114–15) – the letter towhich Malthus was replying on 5 August – and there is also a letter of June 14: ‘therate of profits and of interest must depend on the proportion of production to theconsumption necessary to such production’ (108). In the light of these letters Ireadily accept the corn calculation (see EDR, 127–8). What, however, is quiteunconvincing is Peach’s attribution to Ricardo at this period of ‘contemporaneousand proportional price rises’ (1984, 742), and ‘equi-proportional price changes’(743).

For the outstanding feature of the 1814 correspondence is Ricardo’s new insistenceon a less-than-proportional increase in manufacturing prices relative to the presumedmoney wage and (a fortiori ) corn price increase upon agricultural extensions: ‘the riseof [the manufacturer’s] goods will not be in the same proportion as the rise oflabour’ (11 August; Ricardo 1951, VI, 120; cited EDR, 129; a lag in the money wagereaction behind the price of corn is alluded to, 6 June; VI, 108; cited EDR, 125). YetPeach wants us to believe that these facts – of which he is very well aware (1984, 746)– were set aside by Ricardo in the treatment of the agricultural sector ‘for the sake ofanalytical convenience’ (741, 746). 3

For the attribution of equiproportional price movements not a shred of evidenceis provided. The most explicit statement regarding the agricultural sector in factpoints away from the attribution: ‘If you suppose the price of corn doubled, thecapital to be employed estimated in money will probably be also nearly doubled – orat any rate will be greatly augmented; and if his money income is to arise from thesale of his corn which remains to him after defraying the charges of productionhow is it possible to conceive that the rate of his profits will not be diminished?’ (25July 1814; Ricardo 1951, VI, 115). I am not concerned now with the ambiguities ofthis passage, but with Peach’s admirably candid observation that it ‘apparently conflicts


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with [his own] interpretation that Ricardo assumed the prices of manufactures torise pari passu with the price of corn’ (1984, 745). Yet he still insists on the ‘conjecture’– albeit ‘only for analytical convenience in formal analysis’.

There is one further piece of ‘evidence’ which scarcely merits consideration.Peach refers to the post-Essay correspondence and draws upon a passage in whichRicardo – for the sake of argument – assumes equiproportionate price increases (‘Iwill ... suppose that you [Malthus] and Mr. Torrens are correct, and that commoditiesdo rise in price with every increased price of corn’) to support his case regardingRicardo’s pre-Essay position when Ricardo ‘maintained the positive relationshipbetween movements in corn prices and movements in general prices’ (1984, 743).This later formulation is said to provide ‘further support for the interpretation thathe went through a stage of assuming equiproportional price changes between cornand other commodities’. It is beyond me how adoption of an assumption in 1815purely for argument’s sake can be said to indicate that the same assumption hadbeen adopted in 1814. In any event the fact is that the post- Essay ‘argument’ assumesproportionate price increases, rather than the less-than-proportionate increases of 1814.The argument breaks down totally.

Peach, in brief, fails to justify his assertion that Ricardo based his statements of1814 involving a calculation in material terms upon equiproportionate price increases.I think it unlikely for the reasons already given. There is a further matter. Aconspicuous feature of Ricardo’s letter of 25 July 1814 is the insistence that the cornsurplus relative to corn capital falls with agricultural extensions notwithstanding adecline in the average corn wage – this in contrast to Malthus’s earlier insistence that‘the effects of a great difficulty in procuring corn would ... be a diminution in thereal wages of labour, or their price in corn; but not a diminution of profits’ (6 July;Ricardo 1951, VI, 111; cited EDR, 128). This difference of opinion was to surfaceagain in discussion of the Essay. I mention it now because the fall in the corn wage(accepted by both correspondents) does not suggest equiproportionate increases inall money variables; it is consistent rather with a rise in the corn price relative tomanufactured prices which (assuming a given mixed wage basket) will imply a lowercorn wage.

III.

In his discussion of the Essay, Peach (1984, 739) focuses upon the fact that in thefamous Table (which summarizes the discussion of the agricultural sector) the ‘capital’on the first portion of land (estimated in quarters of wheat) remains unchanged asfurther capital is applied to less productive or less advantageously situated plots.This procedure (supposing, as Ricardo indeed supposed, that capital is not comprisedof corn alone) would be unacceptable should there occur a relative increase in the

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corn/manufactures price ratio. But now the implicit constancy of relative prices is nolonger attributed to an assumption of equiproportional price increases, as in 1814,but rather to constancy of all prices – notwithstanding Ricardo’s insistence in the Essayitself that the impact of diminishing returns is ‘to raise the price of raw produce andof labour, leaving all other commodities at their original prices, and to lower generalprofits in consequence of the general rise of wages’ (Ricardo 1951, IV, 19–20).

The assumption of constant prices in agriculture, is said to be ‘confirmed’ by apassage which represents the ‘conclusion’ to the agricultural analysis: ‘If the moneyprice of corn, and the wages of labour, did not vary in price in the least degree,during the progress of the country in wealth and population, still profits would falland rents would rise; because more labourers would be employed on the moredistant or less fertile land, in order to obtain the same supply of raw produce; andtherefore the cost of production would be increased, whilst the value of the producecontinued the same’ (Ricardo IV, 18; cited 1984, 741). Peach is here largely concernedwith controverting Sraffa who had asserted (with homogeneity of input and outputin mind) that ‘the profit rate was calculated [by Ricardo] without need to mentionprice’. For Peach the absence of price considerations follows ‘because of a tacitassumption about price behaviour’ rather than the ‘technical identity between productand capital’.

A ‘tacit assumption about price behaviour’ is a high-faluting way of saying thatRicardo chose not to take the relative increase in the corn price into account whendevising the Table, or (as I put it in my book) that ‘there are no price calculations inthe table of the Essay’ (EDR, 162). The question Peach neglects to ask is why Ricardoshould proceed thus – unless, heaven forbid, Sraffa should be right – when hehimself was so insistent that the corn price does rise while manufactures remainconstant (Ricardo 1951, IV, 19). That it was a matter of ‘analytical convenience’(Peach 1984, 145) scarcely answers the question. An answer is given in my EDR, 154f.It is that formal allowance for an increased price of corn would not, Ricardo believed,change the direction of the tendencies summarized in the Table and could, on a firstview, be neglected without distortion. A brief summary of this argument follows.

It is Malthus who – much as in 1814 – set the ball rolling by raising the problemthat corn price increases upon agricultural extensions will reduce the corn value ofthe capital stock applied to intra-marginal land in consequence of a reduced cornvalue of fixed capital and a reduced corn wage (the given wage basket composed ofa fixed-proportions mix of food and manufactures), with a resultant increase in thecorn surplus: ‘Pray think once more of the effect of a rise in the relative price ofcorn, upon the whole surplus derived from land already in cultivation. It appears tome, I confess, as clear as possible that it must be increased. The expences estimated inCorn will be less, owing to the power of purchasing with a less quantity of corn, thesame quantity of fixed capital, and of the circulating capital of tea sugar cloaths &c:


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for the labourers; and consequently more clear surplus will remain in the shape of rent andprofits together (no matter which) ’ (12 March 1815; Malthus, in Ricardo 1951, VI, 185).Two days earlier he had written: ‘I confess I think that the kind of calculation whichI mentioned to you in Town, shews in what manner profits on land may rise decidedly,from the alteration in the relative value of corn’ (10 March 1815; VI, 182).

These formulations imply that Ricardo in discussing his table had not defendedhimself by asserting constancy of the corn price. And in fact this impression is confirmedby an explicit statement that ‘my table is applicable to all cases in which the relative priceof corn rises from more labour being required to produce it’ (21 April 1815; VI, 220).

4Ricardo’s position is not difficult to appreciate. He accepted readily ‘that if froma rise in the relative value of corn less is paid [in corn terms] for fixed capital andwages, – more of the produce must remain for the landlord and the farmer together,–this is indeed self evident’ (14 March 1815; VI, 189). But this ‘self evident’ propositioncould not be automatically applied in the event that the corn price increase reflectsreduced agricultural productivity, for then (notwithstanding lower per capita cornwages) total costs (measured in corn) must increase:

A rise of the price of corn and a fall in the corn price of labour is in myopinion incompatible ... observe that I do not question that each individuallabourer might receive a less corn price of labour ... but I question whetherthe whole amount of wages &c. paid for the cultivation of the land can bediminished with an increase of the exchangeable value of corn. If no morelabourers were employed and the price of corn rose your proposition couldnot be disputed, but the cause of the rise of the price of corn is solely onaccount of the increased expence of production.

Since corn costs rise absolutely with agricultural extensions the possibility of(relatively) increasing net returns could be excluded: ‘You will see by what I havesaid, that a rise in the price of corn is always in my opinion accompanied by a lessmaterial surplus produce. ... Of this produce the landlord gets so large a share thatin spite of the rise of produce [in price] the situation of the farmer is constantlygetting worse’ (VI, 190). Evidently Ricardo is not denying that the corn surplus risesabsolutely, but is pointing to a constantly diminishing increase in the total surplusreflecting the continued upward pressure on capital costs measured in corn. 5 This isconfirmed by a comment to Malthus of 21 March: ‘if you meant only that thesurplus produce would increase with every accumulation of capital on the land,though in a diminishing ratio to the capital employed on the land, that is not onlyadvanced, but strenuously maintained as the groundwork of my theory, and is thebasis on which my table is formed’ (VI, 197).

This latter statement is very revealing, especially when coupled with that of 21April asserting that the table applied ‘to all cases in which the relative price of corn

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rises from more labour being required to produce it’. Observation of the table itself(IV, 17) confirms that ‘total produce in quarters of wheat, after paying the cost ofproduction’ (i.e. the surplus) rises but in diminishing increments and relative tototal capital; that ‘profit per cent on the whole capital’ falls; and ‘rent per cent of thewhole capital’ rises. Ricardo does not revalue, as it were, the earlier applications ofcapital in corn terms. But it is clear why; in Ricardo’s view, notwithstanding theimpact of a relative rise in the price of corn in reducing the corn wage rate, totalcorn costs relatively to the total surplus (i.e. average costs) necessarily rise withexpansion. It is that increase which counted and any ‘revaluations’ would not reversethe general tendencies portrayed in the table. 6

Since Peach is confessedly working in the realm of ‘conjecture’ (1984, 745), and‘inference’ (742), let me be permitted a conjecture myself. Ricardo in 1814 (seeabove, p. 74) had allowed for a reduced corn wage, insisting none the less upon a fallin the corn surplus relative to corn costs. My conjecture is that he could do so forprecisely the same reason as that just given, and not because he ‘tacitly assumed’equiproportionate price increases. For in both 1814 and 1815 Ricardo insistedupon a relative increase in the corn price, the sole difference being that in 1814 hestill allowed for some increase in the manufacturing price whereas in 1815 he insistedthat manufacturing prices remain constant. One and the same rationale accounts forthe decision to neglect the complication.

IV.

There remains one further matter. In a recent ‘overview’ of ‘What Ricardo Saidand What Ricardo Meant’ Professor Mark Blaug asserts that I err in proceeding‘from the denial of the corn model interpretation to deny that Ricardo everbelieved in an “agricultural” theory of profits, whereas Ricardo clearly held theview, in his early writings that “the profits of the farmer” determine the generalrate of profit’ (Blaug 1985, 7n). On this we are referred to ‘the definitive exegesisof Peach (1984)’. Yet a principal feature of Peach’s article happens to be the insistence(which I share) that by the ‘regulatory’ role of farmers’ profits (in the famousletter of 8 March 1814) Ricardo did not intend ‘the mathematically precise conceptof “unique determination” ’, i.e. that a ‘regulatory’ role must not be identifiedwith a ‘determining role’ (1984, 735)! Professor Blaug has misread Dr Peach andreversed the message in the process.

NOTES

1. This identification is actually misleading. The ‘adding-up’ theory was thus labelled bySraffa (1951, xxxv), who keeps it distinct from the positive impact of wages on prices.


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2. Peach himself seems doubtful of the material calculation; he refers not to ‘the previousreference by Ricardo to a “material rate of produce”’ but to ‘any previous reference’.

3. Yet more strongly, Peach insists that ‘the [Smithian] “adding-up” approach was central tothe treatment of profitability prior to the Essay’ (1984, 734); and ‘before the Essay, theargument seems to have been pure Adam Smith’ (745). This is simply wrong. Smith’sposition was that all prices rise in proportion to the corn price; Ricardo’s position in 1814insisted on less-than-proportional general price increases.

4. Cf. also 17 March 1815: ‘It can never happen ... that profits can fall, and encourage thecultivation of poor land in the manner assumed in my table, without a rise in the price ofcorn’ (Ricardo 1951, VI, 194).

5. I make unnecessary difficulties for myself regarding this matter in EDR, 156n.6. As I show in EDR, 154f, Ricardo was to make explicit some of the price calculations in a

formal attempt to justify his position. In these extensions the problem of marginal versusaverage pricing arises.

REFERENCES

Blaug, M. (1985) ‘What Ricardo Said and What Ricardo Meant’ in G.A. Caravale (ed.) TheLegacy of Ricardo, Oxford: Basil Blackwell, 3–10.

Hollander, S. (1979) The Economics of David Ricardo, Studies in Classical Economics, Vol. II,Toronto: University of Toronto Press.

Peach, T. (1984) ‘David Ricardo’s Early Treatment of Profitability: A New Interpretation’,Economic Journal 94: 733–51.

Ricardo, D. (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 vols), Vol.IV: Pamphlets, 1815–1823, Vol. VI: Letters, 1810–1815, Cambridge: Cambridge UniversityPress.


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I .

In this Note I consider some circumstantial evidence offered in three contributionsto the Cambridge Journal of Economics (Langer 1982; de Vivo 1985; Prendergast1986) in support of Sraffa’s interpretation of Ricardo’s early theory of profit as amaterial or corn ratio model, resting on a ratio of corn input to corn output andrelying on variation in the corn price of manufactured goods to bring other sectorsinto line (Sraffa 1951, xxxi). These contributions were all directed against my owndenial of the validity of Sraffa’s rational reconstruction in favour of an interpretationinvolving the impact on the profit rate of money-wage variations, such that thegeneral (including the agricultural) profit rate entails a value calculation (e.g. Hollander1979, 162–3, 183–4, 685–6). Groenewegen (1986, 456) observes regarding theevidence by Langer and de Vivo that none of it ‘has been effectively rebutted’ bycritics of the Sraffa interpretation. It is high time to provide an effective rebuttal. 1

II.

Langer ascribes an explicit corn-profit model to Robert Torrens and points to Ricardo’sapproval: ‘I am very much pleased with Col. Torrens essay in the last Edinb.Review’ [October 1819]; ‘I do not think there is more than one proposition in itwhich I should be disposed to dispute’ (letter to McCulloch, 28 February 1820;1951, VIII, 159). Since Torrens makes no mention of the money-wage mechanismin profit-rate determination (which I ascribe to Ricardo), Langer concludes that Ricardo’s

5

SRAFFA’S RATIONALRECONSTRUCTION OFRICARDO: ON THREE

CONTRIBUTIONS TO THECAMBRIDGE JOURNAL OF

ECONOMICS


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praise for the paper must allude to the determination of the profit rate as a physicalratio.

Now to the substance of Langer’s case. The first citation that he gives from Torrens(1819, 455–6) describes a single-sector (agricultural) case with no implications whatsoeverfor Sraffa’s interpretation which involves both agriculture and manufacturing. Butthere is also a second ‘cause’ influencing profits apart from the ‘quality of the soil’, 2

which Langer mentions but does not deal with, and this does constitute a test case. Inthe course of the discussion of ‘the degree of Skill and economy with which labour isemployed, whether in agriculture, or in manufactures’ we find (a) that Torrens refersto expenditure by a farmer of 100 quarters of corn, or the value of 100 quarters; and(b) that Torrens assumes a mixed wage basket in dealing with the impact of manufacturingimprovements. Evidently a value relationship is required to obtain the corn ratio:

The second circumstance which influences the rate of profit, is the d egree ofSkill and economy with which labour is employed, whether in agriculture, or inmanufactures. If a farmer expend 100 quarters of corn, or the value of 100quarters, in cultivation, and obtain a reproduction of 200 quarters, it makes notthe smallest difference with respect to the rate of profit, whether this return beraised from a very fertile soil unskilfully managed, or from one of inferiorquality judiciously managed. In either case there are 100 quarters expended, and200 produced; and though the cause of the increased proportion in which thereturn exceeds the advance is different, the effect is the same, and the rate ofprofit in either case is cent. per cent.

Improvements in manufactures have the same influence on the rate of profitas improvements in agriculture. If a farmer were to employ 50 labourers incultivating fields which yielded 150 quarters of corn, and were to expend 60quarters on the food and seed, and 60 on the clothing and implements theyconsumed while at work, his total surplus or profit would be 25 per cent.; but ifan improvement in manufacturing industry were to take place, which so reducedthe productive cost, and consequently the exchangeable value for wroughtnecessaries, that the farmer could purchase the clothing and implements consumedby his 50 labourers for 40, instead of 60 quarters of corn, his profit would risefrom 25 to 50 per cent.; for, in this case, the reproduction of 150 quarters wouldbe obtained by an advance of 60 quarters for food and seed, and 40 for clothingand implements.

(Torrens 1819, 456)

Secondly, both the quality of land and degree of skill (technology) are said to have‘precisely the same effect in regulating the rate of manufacturing [profit] that they

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SRAFFA’S RATIONAL RECONSTRUCTION OF RICARDO

have in regulating the rate of agricultural profit’. In the calculation he makes preciselythe same sort of estimation for the industrialist as for the farmer, thereby precludinga Sraffian perspective:

Now, the two causes which we have mentioned, namely, the quality of the landunder cultivation, and the degree of skill with which labour is applied, haveprecisely the same effect in regulating the rate of manufacturing that they havein regulating the rate of agricultural profit. When a master-manufacturer, byadvancing to 100 labourers their clothing and tools, with food and materialequal to these in value, can fabricate clothing and tools for 300, his surplus ofproduct above expenditure will be 50 per cent. But if, in consequence ofcultivating inferior soils, or of pursuing a less skilful mode of husbandry, theproductive cost, and consequently the exchangeable value of agricultural produceshould be so increased, that for the food and raw material furnished to his 100labourers he is obliged give clothing and tools for 150 instead of for 100, hisprofit would sink to 20 per cent.; because, in producing clothing and tools for300, he would have expended the clothing and tools of 250.

(Torrens 1819, 456–7)

That there is no Sraffian technical model at play is further confirmed by theelaboration of the impact of growth on the profit rate, where we have allusion tothe rising Pc/Pm ratio reflecting diminishing returns in corn production andincreasing returns in manufacturing. In the Sraffa model an increase in Pc/Pm reducesthe manufacturing rate in line with the falling agricultural rate; but for Torrens thedecline in Pm acts to increase the general rate, though he believed it to be outweighedby the impact of increasing Pc:

Thus, as population and improvement advance, manufactured articles areconstantly falling in value, as compared with agricultural produce. But, onthe principles already unfolded, increased facility in producing wroughtnecessaries, has the same effect in raising the rate of profit, which diminishedfacility in producing food and material has in lowering it. And hence it willfrequently happen, that a greater degree of economy and skill in the applicationof labour may completely counteract the effects of resorting to inferior soils;and that the return upon productive capital may rise, on the whole, thoughthe difficulty of obtaining food and material should increase. Such a process,however, could not continue long. Under any given degree of skill andeconomy in the application of labour, the return upon capital will bedetermined by the quality of the land in cultivation; and as inferior soils areresorted to, the rate of profit will constantly diminish, until that stationary


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state is attained, in which no additional capital can be employed, and alltendency to increased population must be checked by famine.

(Torrens 1819, 459; cf. Torrens 1829, 119–20)3

I conclude that Torrens’s little arithmetical examples – including that in 1819 (457–8, cited in Langer 1982, 399), involving a joint manufacturer– farmer – are no morethan extreme simplifications designed to convey specific points and without theanalytical content ascribed to them by Langer. But what of Ricardo’s high praise forthe article? Langer presumes that it must refer to the corn-profit model. Even were sucha model present, which for the reasons given above there is reason to doubt, how canone be sure that Ricardo had it in mind? There is so much else, including, quite apartfrom the general impact of diminishing returns on the profit rate (e.g. 1819, 461, 464,465), (a) the dependence of employment on capital accumulation and of accumulationon the rate of return (466); (b) the criticism of Owen’s schemes on grounds of Say’s orMill’s Law of Markets – the review after all has the running head ‘Mr. Owen’s Plans forRelieving the National Distress’ (470–5); (c) the case for a free corn trade to counteractdiminishing returns (461–3, 475–6); and (d) objections to heavy taxation (462).

III.

De Vivo purports to bring stronger evidence that Torrens ascribed to the logic of theSraffian reconstruction, and argues further that Torrens formally acknowledged hisindebtedness to Ricardo regarding profit-rate determination (1985, 90–1). The referencesare (a) to the second edition (1820) – the new Fourth Part – of Torrens’s Essay on theExternal Corn Trade especially the ‘general principle, that in whatever proportion thequantity of produce obtained from the soil exceeds the quantity employed in raisingit, in that proportion the value of manufactured goods will exceed the values of thefood and material expended in preparing them’ (1820, 362), and (b) to the derivationof the appropriate manufacturing/corn price ratio which brings the manufacturingrate into line (364–5).

That Torrens allows for ‘materials’ as well as corn in advances, so that value isinvolved in estimating advances in corn, is referred to by de Vivo as a ‘weakness’(1985, 91). But this surely is another way of admitting that we do not have aSraffa model. A passage added to the third (1826) edition of the Essay, said byde Vivo (91) to confirm the Sraffa construction, is subject to the same qualification:

In agriculture, some of the things produced are generally homogeneouswith some of the things expended in production; and, to whatever extentthis may be the case, the exchangeable value of the production will haveno influence on profit. In manufactures, however, it very frequently happens,that the advances and the reproduction are altogether heterogeneous, and thatno part of the former can be directly replaced by the latter. In these branches of

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manufacture, therefore, the profit of the capitalist must depend entirely uponthe proportion which the value of the whole of the reproduction bears to thevalue of the whole of the advance.

(Torrens 1826, 105; also in 1827, 1829 editions)

The problem for the corn model interpretation is that in his text Torrens assumesthat the wage in all sectors, agriculture included, comprises clothing as well asfood; and the 1820 allowance for ‘materials’ amongst the advances is retained.

There is, moreover, de Vivo’s failure to demonstrate that ‘Torrens’s “corn ratio”theory of profits’ – subject to the foregoing qualifications – ‘did in fact derive fromRicardo’ (1985, 92). First and foremost, he fails to cite Torrens’s own claim topriority on the ‘general principle’ in question: ‘The laws, indeed, which determinethe difference between the value of produce in the raw, and in the manufacturedstate, have not, as far as I know, been traced out by any preceding writers; and Imust therefore entreat the indulgence of the reader while I endeavor to supplywhat, as it appears to me, has hitherto remained a desideratum in economicalscience’ (Torrens 1820, 360). This compromises the view that Torrens drew onRicardo for his (‘weak’) Sraffa corn-profit model. But the same conclusion emergesif we consider the positive evidence relied on by de Vivo for a Ricardo connection(1985, 90–1). This comprises (a) Ricardo’s comment to Malthus that Torrens hadadopted ‘all my views respecting profits and rent’ (23 February 1816; 1951, VII,24); (b) his comment, also to Malthus, that Torrens is ‘quite a convert to all whatyou have called my peculiar opinions on profits, rent, &c. &c.’ (28 May 1816; VII,36); and (c) the appearance of the second edition of the Essay – written, de Vivoasserts, ‘while under the influence of Ricardo’s Essay on Profits ’ (but delayed byextraneous circumstances) ‘where we find both the determination of the agriculturalrate of profit in physical terms and the determination of the value of manufacturedgoods relative to corn using the given agricultural rate of profit’ and a prefatorialexpression of indebtedness to Ricardo’s ‘original and profound inquiry into thelaws by which the rate of profit is determined’ (Torrens 1820, xix).

We shall deal with the foregoing arguments in sequence. De Vivo (1985,91) himself recognizes that Ricardo’s original objections to Torrens relate tothe latter’s Smithian view expressed in the first edition of the Essay on theExternal Corn Trade – that ‘when corn and wages rise, a universal rise incommodities will take place’ (1815, 243; de Vivo might also have cited pp.81–93 which establish the proposition). Regarding this Smithian linkage Ricardowrote to Malthus on 17 April 1815: ‘You, I think agree with Mr. Torrens that arise in the price of corn will be followed by a rise in the price of homecommodities ... Mr. Torrens theory however on this part of the subject appears tome defective, as I think that the price of commodities will be very slightly affected


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by a rise or fall in the price of corn. If so every rise in the price of corn must affectprofits on manufactures, and it is impossible that agricultural profits can materiallydeviate from them’ (Ricardo 1951, VI, 212–13). As mentioned, the letter of 23 February1816 (to which de Vivo alludes) refers to Torrens’s adoption of ‘all my views respectingprofits and rent’. But we cannot simply presume that Ricardo had a corn model inmind; and in fact, the one specific instance given by Ricardo of Torrens’s conversionrelates to the constancy of manufacturing prices in the face of a rise in the wage, i.e.to Torrens’s abandonment of the Smithian position on the impact of the wage onprices: ‘Have you seen Torrens’ Letter to Lord Liverpool? – He appears to me tohave adopted all my views respecting profits and rent; and in some conversationswhich I had with him a few days ago, he unequivocally avowed that he was now ofmy opinion that the price of labour, arising from a difficulty of procuring food,did not affect the prices of commodities. He confessed that his former view of thatsubject was erroneous’ (VII, 24).4

The Letter to Lord Liverpool itself, it is true, makes no mention of the newopinion and, in fact, brief remarks pertaining to the impact of wages on prices,suggests the old Smithian position (Torrens 1816, 31–2); but its commendationof the ‘very able and original publication on the Profits of Stock, by D. Ricardo,Esq’ (30n) relates in the most general terms to that work, disallowing de Vivo’spresumptive reading – at least without additional justification for it: ‘The influencewhich the high price of corn, and the bringing in of inferior land, has upon theprofits of stock, is one of the most interesting and important topics connectedwith the science of wealth. From the invariable law of competition, that whichlowers agricultural profit, must also lower profit in every other occupation. Atpresent, however, it is not my intention to consider the effect of an artificialscale of prices upon the general industry of the country’ (30–1). 5

As for the second letter to Malthus (28 May 1816), this too tells us too little. ‘All[Ricardo’s] peculiar opinions on profits, rent, etc.’ might well have been a referenceto the mechanism involving the relationship between money wages and commodityprices and the differential rent doctrine, especially when we have in mind theviews expressed in conversations alluded to in the letter of 23 February.

Finally, what of the statement of indebtedness by Torrens in 1820 for Ricardo’sinstruction? De Vivo presumes that this refers to the Essay on Profits. In factTorrens alludes to both the Essay and the Principles (1820, xviii–xix), anddoes not specify which he had in mind in making his commendation, referringonly to ‘the works of Mr. Ricardo’. In any event, it cannot be taken for grantedthat he interpreted the Essay on Profits in terms of Sraffa’s corn-profit model.After all, it is in the Essay that Ricardo maintained: ‘The sole effect then of the progressof wealth on prices ... appears to be to raise the price of raw produce and of labour,leaving all other commodities at their original price, and to lower general profits in

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consequence of a general rise of wages’ (1951, IV, 20). It is also pertinent that in 1820Torrens refused to surrender priority for several of the themes common to himself,Ricardo and Malthus in 1815, none of which specify the corn-profit perspective.Moreover, a statement which insists on priority in the first edition of 1815 scarcelysupports de Vivo’s claim that the revised edition was written ‘while under the influenceof Ricardo’s Essay on Profits ’:

[The author] now feels that he was less successful in tracing the effects of thiscommerce upon the distribution of wealth. The greater part of the work wascomposed and printed before he had read Mr. Malthus’s Inquiry into theNature and Progress of Rent; and the whole was printed and published beforehe saw Mr. Ricardo’s Essay on the Influence of the Price of Corn upon theProfits of Stock. Previously, indeed, to his perusing these able and originalworks, the Author, in the First Edition of the Essay on the Corn Trade [1815],had stated, that the value and the rent of the better soils are in proportion totheir superiority to the inferior soils which may be profitably tilled; and thatan increased difficulty in raising corn diminishes the net produce or profitobtained in manufacturing industry. In a tract, also, entitled, The EconomistsRefuted, published several years before, the Author had pointed out the influenceof low or high wages in raising or lowering the rate of profit, as well as thetendency of profits to conform to a common level, and of capital to emigratefrom countries where the rate of profit is lower, to those in which it is high.

(Torrens 1820, xv–xvii)

In this retrospective view the closest we come to our topic is the proposition ‘thatan increased difficulty in raising corn diminishes the net produce or profit obtainedin manufacturing industry’. But the full analysis of this proposition (1815, 69f)entails a mixed wage basket disallowing a material profit rate.

IV.

Prendergast (1986, 188–9) maintains that Malthus rejected the corn-ratio theory ofprofits in the second edition (1836) of his Principles of Political Economy on the groundsthat to estimate profits by quantity is to neglect supply and demand. On her reading,Malthus insisted (even in the case of homogeneous input and output) on a valuecalculation. She suggests that this rejection of the estimation of profits by quantitymay have been motivated by Torrens’s objection to the formal definition of theprofit rate in terms of value ratios in the 1820 Principles, on the grounds that profitis a surplus which would exist ‘quite independently of value’ originating ‘not in theinterchange of commodities nor in the quality of value which wealth therby acquires,


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but in the power of human industry to produce a greater quantity of the necessariesof life than is sufficient to support the labourers by whom it is carried on’. 6

That Malthus read Torrens I do not dispute. But one cannot presume that he readTorrens as proposing a corn output–input solution (which he himself rejected). Torrensseems to have been making a more general point about the source of profits, in fact ofall non-wage incomes.7 But let us assume, for our purposes in this paper, that Prendergastis right on all the above scores. 8 It is difficult to appreciate her further assertion thatMalthus’s rejection of the corn-ratio theory of profits in his revised Principles ‘seems tosupport Sraffa’s conjecture that “the rational foundation of the principle of thedetermining role of the profits of agriculture, in Ricardo’s early theory of profits, is thatin agriculture the same commodity, namely corn, forms both the capital and the product”’(1986: 189). Malthus himself made no such claim when undertaking his revisions; and itis difficult to see how a position on profit-rate determination taken by one economist inthe 1820s casts light on the position taken by another economist in 1815.

NOTES

1. Mention should also be made of Skourtos (1991). This paper maintains the debatableproposition that ‘The question of legitimately attributing to Ricardo’s Essay on Profits theimplicit use of a corn model cannot be answered independently of the answer to the moregeneral question: was such an analytical construct a part of the classical tradition ingeneral?’ (215), a construct which ‘was well acknowledged and widely discussed in theclassical tradition although not unanimously adopted’ (217). But Skourtos (who evidentlytakes for granted the validity of Sraffa’s interpretation) goes no further than to assertregarding his text that it provides ‘hints ... which do, if not establish, foster the impressionof the existence of the Ricardian link’, i.e., the impression that Ricardo himself did rely onthe corn-profit model in his early writings. This weak claim comes as a surprise consideringthe initial proposition; and in fact the paper casts no light at all on Ricardo’s position.

2. According to Torrens there were three ‘causes’ which determine the profit rate: ‘thequality of the soil under cultivation’, ‘the degree of skill with which labour is applied’, and‘the proportion of the produce absorbed as wages’ (Torrens 1819, 458; cited Langer 1982,398).

3. See also Torrens 1819, 468–9:If a piece of ground will produce 100 quarters of corn, and if the labourers employedupon it expend 50 quarters for seed and food, with clothing and implements which cost50 quarters more, then it is evident that such land will not be cultivated; and for the plainreason, that its cultivation will afford the farmer no profit. But if improved machinerywere to lower the price of manufactured goods, until the farmer could purchase for 30quarters the same quantity of necessary clothing and implements which formerly costhim 50, then this land would be eagerly sought, for the purpose of tillage; because in thiscase the diminished expenditure of 30 instead of 50 quarters for the purchase of clothingand implements, would yield the farmer a profit of 25 per cent.

4. The change of mind to which Ricardo referred left no mark on the first three parts of theEssay including pages 81–93 and 243 expressing the Smithian position. But the new Part

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Four does reflect the change: ‘though the price of corn were the only circumstance whichregulated the price of materials and of labour, it would by no means follow, as [Smith]asserts, that it thereby regulated the price of all home-made goods’ (Torrens 1820, 351–2).

5. As for the analysis of ‘the effects which the high price of the produce of the soil’ has on theagricultural profit rate, that runs in terms of quarters of corn or ‘what is the same thing’their value (Torrens 1816, 28–30).

6. R. Torrens, review in The Traveller, No. 6624, 26 April 1820.7. In a continuation of the review of the Principles for the Traveller of 1 May 1820, Torrens

extended to rent his denial that value is essential, making out a case that rent could existeven were institutions not of the exchange variety: ‘Rent, like profit has its origin in thepower of human industry to produce a greater quantity of wealth than is necessary tosupport the labour by which it is carried on; and may appear though there should beneither markets nor market prices, neither exchange nor exchangeable value.’ It wouldexist ‘in a state of society, in which there was no division of employment, and in whicheach capitalist engaged his labourers in the immediate production of the several articles heconsumed’ (see Robbins 1958, 282–3).

8. I would dispute Prendergast’s interpretation of Malthus. The evidence suggests that Malthusdid maintain the corn-ratio theory (Hollander 1994).

REFERENCES

de Vivo, G. (1985) ‘Robert Torrens and Ricardo’s “Corn-Ratio” Theory of Profits’,Cambridge Journal of Economics 9: 89–92.

Groenewegen, P. (1986) ‘Professor Porta on the Significance of UnderstandingSraffa’s Standard Commodity and the Marxian Theory of Surplus’, History ofPolitical Economy 18: 455–62.

Hollander, S. (1979) The Economics of David Ricardo, Toronto: University of TorontoPress.

——[1994] forthcoming, ‘Malthus and the Corn Profit Model’, in Heinz Kurz (ed.)Piero Sraffa’s Contributions.

Langer, G.F. (1982) ‘Further Evidence for Sraffa’s Interpretation of Ricardo’, CambridgeJournal of Economics 6: 397–400.

Prendergast, R. (1986) ‘Malthus’s Discussion of the Corn Ratio Theory of Profits’,Cambridge Journal of Economics 10: 187–9.

Ricardo, D. (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa(11 vols), Vol. I: The Principles of Political Economy and Taxation, Vol. IV: Pamphlets,1815–1823, Vols VI–VIII: Letters, Cambridge: Cambridge University Press.

Robbins, L.C. (1958) Robert Torrens and the Evolution of Classical Economics, London: Macmillan.Skourtos, M. (1991) ‘Corn Models in the Classical Tradition: P. Sraffa Considered Historically’,

Cambridge Journal of Economics 15: 215–28.Sraffa, P. (1951) ‘Introduction’ to The Works and Correspondence of David Ricardo,

Vol. I, Cambridge: Cambridge University Press.Torrens, R. (1815) An Essay on the External Corn Trade, London: Hatchard.——(1816) A Letter to the Rt. Hon. the Earl of Liverpool on the State of the Agriculture of the United

Kingdom, London: Hatchard.


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[Torrens, R.] (1819) ‘Mr Owen’s Plans for Relieving the National Distress’, Edinburgh Review,October.

Torrens, R. (1820) An Essay on the Influence of the External Corn Trade upon the Production andDistribution of National Wealth, 2nd edn, London: Hatchard.

——(1826) An Essay on the External Corn Trade, 3rd edn, London: Longman, Rees,Orme and Brown.

——(1827) An Essay on the External Corn Trade, 4th edn, London: Longman, Rees,Orme and Brown.

——(1829) An Essay on the External Corn Trade. A New Edition, London: Longman,Rees, Orme and Brown.

Part II

RESPONSES TO CRITICSOF

THE ECONOMICS OFDAVID RICARDO

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I . INTRODUCTION

Professor O’Brien has paid me the high compliment of subjecting my Economics ofDavid Ricardo (1979) to a very close examination. I am grateful to him despite thefact that he takes strong exception to what he calls my ‘frontal assault upon theaccumulated body of Ricardo scholarship’ (1981, 385). I have given his objectionsthe serious consideration which they merit, and find, in my turn, his defence of thestandard textbook interpretation of Ricardo’s economics to be unconvincing. I donot see that he adds to the documentation, primary and secondary, that was availableand taken into account when I composed my volume or to the appropriateinterpretation of that documentation. On the contrary, what he has to say convincesme that the consensus view does far less justice to Ricardo than the historical recorddictates.

Before turning to substantive matters I wish to correct a misapprehension. O’Briensuggests that my rejection of the ‘standard’ or ‘majority’ or ‘unanimous’ interpretationof Ricardo – I use his terms (365, 377, 385) – stems from ‘disagreement with Cambridge’(385). This is, in fact, not so: it is my belief that several of the Cambridge criticisms ofneo-classical equilibrium economics – ‘substitutionist’ economics as I have heard it calledby Sir John Hicks - have merit. But the question of the desirable content of moderneconomics must be kept apart from the historical record and it is solely the Cambridgereading of the history of nineteenth-century economics to which I object in my book. Imight add that this is not the position with which I commenced my researches (seeHollander 1973, 11–17); it was the outcome, not the starting point, of my analysis. I refernow, of course, to the illegitimacy of that interpretation which attributes to Ricardo anapproach involving the treatment of distribution, ‘natural’ prices and production levels

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THE ECONOMICS OF DAVIDRICARDO: A RESPONSE TO

PROFESSOR O’BRIEN


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by means of separate models – purportedly reflecting the isolation of ‘one-way direction’relationships or sequential analysis or the ‘causal ordering’ of variables (Dobb 1973;Pasinetti 1974; Garegnani 1976; Roncaglia 1978).

It is not only Cambridge that denies Ricardian economics the characteristic ‘neo-classical’ interdependency of distribution and pricing. This same notion pervadesthe orthodox textbooks, including O’Brien’s own The Classical Economists (1975).

In his review O’Brien subscribes explicitly to ‘one-way models’ as distinct from ‘two(or n) way causation’ (1981, 359) in Ricardo interpretation – and it is apparent that theonly economics that has merit for O’Brien is that entailing one-way causality which, hebelieves, allows clear-cut prediction subject to unambiguous empirical testing; mutualcausation is apparently anathema to him. This is clear from the following summarypassage which also states his main objections to my book:

Hollander feels constrained to throw out all the work that has been done tomake sense of Ricardo, and instead to reinterpret Ricardo in a kind of loosegeneral equilibrium framework. Now one of the key features of generalequilibrium – which renders it virtually useless – is that it results in a modelof complete generality in which virtually anything can happen, and which isalmost completely devoid of predictions that can be subject to empiricaltesting. And this is more or less the end-product of Hollander’s re-interpretation of Ricardo. The Hollander version goes something like this.‘Wages will no longer be necessarily at subsistence. They may or they may notbe. Rental share may or may not increase. It is not clear that Ricardo thoughtabout this. Profits can decline it is true. But this is not an immediate problem.’Almost all the predictive element (and all the rigour) of Ricardo’s own thinkinghave gone. The Ricardian Vice therefore never existed. Ricardo did notreally even build models.

(O’Brien 1981, 385)

To appreciate fully the issues at stake between us this summary statement shouldbe read bearing in mind the version of Ricardo outlined in O’Brien’s The ClassicalEconomists. ‘Ricardo’s system’, we are there instructed, ‘was, if not entirely the first,certainly the first sweepingly successful example of economic model building. Itsessence was the “corn model” of aggregate economic relationships’ (1975, 37). Thenfollows the famous Kaldor diagram with its emphasis upon the fix-wage or subsistence-wage secular path from which can be seen, runs the text (40), ‘how it was thatRicardo was able to draw from his model precise predictions (none of which was infact borne out by events) about the distributive shares’, and the downward trend ofthe profit rate to some minimum level:

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A RESPONSE TO PROFESSOR O’BRIEN

Now this is the core of Ricardo’s system and it is important to be clear aboutthis. The corn model is quite clearly the fundamental concern of Ricardo’sprinciples. It is a model designed to prove one central proposition: that theexistence of the Corn Laws, which hindered the import of corn, caused resort toinferior land at home, involving a fall in the average and marginal products oflabour and capital and hence bringing about a stationary state in the not verydistant future. Smith had envisaged a stationary state, but it was nothing likeimminent and its achievement was not mechanical. Ricardo on the other handhad provided a mechanical model to establish its fairly immediate likelihood.

(O’Brien 1975, 41; see also O’Brien 1970, 296)

And on method let us also have before us the following elaboration from O’Brien’stext:

But if the Corn Model does constitute the core of Ricardo’s system there isanother characteristic of his work which is of great importance and whichhas to be taken account of in estimating his contribution to Classicaleconomics. For Ricardo’s deductive method, his model-building, was to beof the greatest importance. Ricardo essentially invented these techniques. Hisprocedure not only contrasts strongly with Adam Smith’s basically inductiveapproach, but, as a process of heroic abstraction, it not only neglects thefrictions in the economic system but also habitually reasons in terms of theimmediate relevance of the long run.

(O’Brien 1975, 42)

I repeat: this is the version of Ricardo with which I take issue in my book;O’Brien’s review constitutes a restatement of that version. Reference is made to‘Ricardo’s remarkable tendency to carve up the economy into one giant farm andone giant firm for the purposes of the corn model’ (1981, 365) and ‘without a cornmodel’, it is asserted, ‘Ricardo’s inverse relationship between wages and profits ismuch more difficult to establish’ (356). There is the same insistence upon a subsistenceor fixed commodity wage (365–6, 368). We have repeated allusions to the notionthat Ricardo’s model was designed for specific prediction and the observation that‘once Ricardo stepped outside his model his predictions did not always follow’(356). And the sharpest distinctions are again drawn between Smithian and Ricardianmethod: ‘Smith used short chains of reasoning in the Scottish tradition, whileRicardo essentially used “as if” methodology but with the status of verificationsomewhat unclear. Smith had continuous resort to factual material while Ricardo’s1815 Essay and 1817 Principles contain no facts at all’ (358). In the same spirit, emphasisis placed on the ‘mechanical nature’ of Ricardian economics (358) and on ‘Ricardo’shabit of telescoping the long run and the short run’ (373).


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Since I evidently failed in my book to divert my critic from this erroneousinterpretation, I am not very hopeful that I shall succeed now. But I am duty-boundto make another attempt to seduce him a little closer to my position. I cannot hopeto respond to every one of the reviewer’s criticisms but will attempt to cover theprimary issues raised.

I I . R I C A R D O A S M O D E L B U I L D E R

As we have seen, O’Brien – apparently because I reject the corn model interpretationwith its subsistence wage and its sequential approach to distribution and pricing –attributes to me the view that ‘Ricardo did not really even build models’ (385). Thisis no rhetorical flourish to close his article. This theme is stated at the outset: ‘thealgebraic models of Ricardo are ... comprehensively rejected’ (352); it is an attributionto me formally listed amongst thirty-two Hollander propositions (I would havepreferred thirty-nine): ‘Ricardo made free use of special assumptions which shouldnot be taken to represent a model’ and ‘the use of models in interpreting Ricardo isnot helpful’ (354); twice I read of my ‘throwing away the explicit Ricardian model’(355; cf. 358); I am told that ‘I am not looking for a consistent model’ (357) and alsothat, on my interpretation ‘there is no specific model’ (359).

I must be a very poor expositor indeed if this is the impression I have left. Letme therefore reiterate to avoid any chance of further misunderstanding on thiscentral issue: I do ascribe model-building to Ricardo, but not the simple-mindedmodel-building of the textbooks. Thus I attribute to Ricardo the growth modeldescribed geometrically in a joint article with Sir John Hicks (Hicks and Hollander1977) and elaborated verbally in my book ( EDR, 308–10, 395–404), to the algebraicrendition by Carlo Casarosa (1978) and to the version by David Levy (1976).

I have also taken an entire chapter to outline Ricardo’s model of allocationtheory in a static framework. The formal combination of the static and the growthmodels involves technical problems which Ricardo, of course, did not fully address.But to the extent that the allocation mechanisms can be grafted on to a growingsystem they will provide the key to an appreciation of the transition between‘equilibrium’ positions on Ricardo’s secular path of wages, since the inverse wage–profit relation is at play along the road to stationariness and this relation ( EDR, xi,302f) entails the mechanisms of allocative adjustment.

In this context the cracking of the ice over which Professor O’Brien is skatingcan be distinctly heard. I have in mind his statement already cited that ‘without acorn model, Ricardo’s inverse relationship between wages and profits is much moredifficult to establish’. More difficult – true, but can this possibly be a valid reason todeny the existence of such a relationship in theoretical contexts other than the cornmodel as O’Brien seems to do? If so we have a new and extraordinary principle

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whereby historical evidence can be set aside for the sake of theoretical simplicity. Inany event, the modern readings alluded to above have demonstrated the technicallegitimacy of Ricardo’s insistence upon the inverse wage-profit relation in the complexcases – including that of contemporaneous decline in both the real wage and theprofit rates. I shall have more to say about this matter in the next section.

It is also appropriate to correct, at this juncture, a theoretical error regarding thewage–profit relation – the inverse relation between the money wage and the profitrates – the appearance of which surprises me: ‘It is not clear to me that Ricardowould have been very happy about reliance on money wages’, writes O’Brien (1981,362), referring to Ricardo’s statement that ‘profits ... depend on wages; not onnominal, but real wages; not on the number of pounds that may be annually paid tothe labourer, but on the number of days’ work necessary to obtain those pounds’. Itreally should not be necessary at this late stage to have to explain that when one talksof ‘money’ wages in the context of the theorem on distribution one has in mindmoney of constant general purchasing power – to which end Ricardo devised his‘gold’, a unit designed to reflect labour embodiment in the wage basket (and, ofcourse, proportionate wages).

I I I . S O M E P R O B L E M S O F I N T E R P R E T A T I O N

In this section I carry the matter of Ricardian model-building a step further,addressing myself to the central complaint in the review, namely that ‘by presentingRicardo’s qualifications as the main argument and the main argument as thequalifications, Hollander manages to achieve a picture which is a complete reversalof the normal – and, it seems to me, correct – view of Ricardo’ (O’Brien 1981, 371).Similarly ‘I feel that Hollander has read too much into Ricardo’s qualifications andhints in correspondence’ (384). This theme is reiterated repeatedly (e.g. 355, 357,373, 374, 378, 381) and deserves careful consideration.

The isolation of the ‘main argument’ in a writer’s work can be a tricky problem.My complaint against O’Brien is that he does not adequately appreciate the difficultiesinvolved; he takes the easy way out by representing the most uncompromising ofRicardo’s strong cases as the main picture. On his reading the details and fine pointsof the analysis appear as unabsorbed and often unabsorbable afterthoughts frequentlyforced on an unwilling Ricardo – ‘qualifications’ for which there is neither rhymenor reason. As O’Brien himself puts it, ‘there was a sort of guerrilla warfare in whichevery time Malthus succeeded in drawing Ricardo from the stronghold of his modelhe inflicted casualties’ (356). Yet quite inconsistently the review opens with theresounding theme that ‘a picture of some internal consistency, which showed Ricardoto be a very powerful theorist, had eventually emerged’ (352). Some ‘powerful


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theorist’! In my judgment O’Brien’s perspective casts Ricardo in a poor light whichdoes him less than justice.

Let me illustrate from monetary theory before turning to the growth modelitself. Ricardo’s remarkably forceful statements of the case that can be made fordevaluation of the currency in order to avoid the deflationary pressures on outputand employment typically associated with resumption of gold payments ( EDR, 488f)are simply dismissed by O’Brien with the cryptic comment that the case is ‘greatlyoverplayed’ in my work (1981, 371). Or consider my citation of the following clearstatement of temporary excess demand for money reflecting an initial reduction inthe money supply:

[A] reduction in the amount of the circulating medium should speedilyoperate on prices, but the resistance which is offered – the unwillingness thatevery man feels to sell his goods at a reduced price, induces him to borrowat a high interest and to have recourse to other shifts to postpone thenecessity of selling. The effect is however certain at last, but the duration ofthe resistance depends on the degree of information, or the strength of theprejudices of those who offer it, and therefore, it cannot be the subject ofanything like accurate calculation.

(EDR, 512–13).

In this context I also cite a lengthy passage from the Principles which constitutes anembryonic statement of J.S. Mill’s famous essay ‘Of the Influence of Consumptionon Production’. O’Brien merely dismisses my belief that Ricardo allowed for temporaryexcess demand for money with the comment that it is ‘based upon two quotations’– he overlooks the case for devaluation – ‘which only [sic] show that, given inelasticexpectations, prices can be sticky downwards’ (1981, 372). Similarly, when I demonstrateRicardo’s recognition that the import of corn may be paid for in gold rather thancommodities, my reviewer responds ‘If Ricardo had really recognized such apossibility he could no longer have remained the strict Bullionist he was’ (373).

I fear that O’Brien has closed his mind to the import of some of Ricardo’s mostinteresting formulations. He has decided that Ricardian economics involves the‘telescoping’ of the long and short run and an unconcern with ‘transitional effects’(373–4) and henceforth – this is conspicuous not only in the discussion of moneybut also in that of the Corn Laws (377) and the Poor Laws (374) – is obliged to setat nothing much of the evidence pointing to a different conclusion by either denyingit outright or representing it as involving insignificant ‘exceptions’ to the rule.

My next illustration of the errors, as I see them, into which Professor O’Brien isdrawn comes from the theory of growth – particularly his subscription to the fix-wage interpretation of the corn model. Ricardo’s growth model is expounded in theEssay on Profits on the basis of a constant real wage and constant technology ( EDR,

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136f). This I do not question. But Ricardo himself explains precisely why he proceedsthus: ‘We will, however, suppose ... that no improvements take place in agriculture,and that capital and population advance in proper proportion, so that the realwages of labour continue uniformly the same; – that we may know what peculiareffects are to be ascribed to the growth of capital, the increase of population, andthe extension of cultivation, to the more remote, and less fertile lands’ (1951, IV, 12;EDR, 136). Quite obviously he intended nothing more than two simplifyingassumptions for the sake of clear exposition of the principle at hand. There is noreason to believe that anything more was at stake when he devised the famousnumerical illustrations of the fifth and sixth chapters of the Principles involving theconstant wage assumption.

The method involved was elaborated quite generally in correspondence withMalthus in the following well-known terms: ‘After the frequent debates between us,you will not be surprised at my saying that I am not convinced by your argumentson those subjects on which we have long differed. Our differences may in somerespects, I think, be ascribed to your considering my book as more practical than Iintended it to be. My object was to elucidate principles, and to do this I imaginedstrong cases that I might shew the operation of those principles’ (VIII, 184). Ricardowas evidently conscious of the scope and method of his own work and recognizedthe imminent danger of misunderstanding by his readers. With respect, O’Brienwould have done well to heed Ricardo’s warning not to confuse the strong-casesimplifying assumptions with the entire analysis. He would then not have committedhimself to the statement that ‘Ricardo believed in simple models more unreservedlythan almost any other economist in the nineteenth century’ (1981, 376).

I do not deny for one moment that when one follows my path and attempts to takeseriously what an author writes in a variety of contexts and occasions without pre-judgment one is often faced with the need to resolve apparent conundrums: Ricardo’sanalysis of the postwar depression despite his recognition of the phenomenon ofexcess commodity supply is one such and requires attention ( EDR, 514f). But this isthe nature of any serious exercise in intellectual history. If an author is worthtreating the attempt must be made to see his work as a whole on the presumptionthat – unless proven otherwise – his ideas are consistent. There are difficulties withmy procedure but I submit that it carries us further and deeper than does thepractice of ignoring or treating as unabsorbed ‘qualification’ evidence which doesnot fit well into the preconceived model.

It so happens that the technical and methodological details essential for anappreciation of the full picture can often be gleaned from a careful reading of thePrinciples itself – this is indeed so in the case of the assumption regarding wages in thegrowth context. Sometimes, however, one is obliged to go further afield. For we


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must not forget the relatively narrow scope of the main text: ‘it will be easier forme’, Ricardo explained to James Mill late in 1816, ‘to publish only those parts of thescience which have particularly engaged my attention’ – this in reply to Mill’s advicethat he decide ‘whether ... to include in it a view of the whole science’ or only ‘thoseparts of the science which you yourself have improved’ (Ricardo 1951, VII, 112;EDR, 5). Similarly (also to Mill): ‘I hope I shall be able to convince you of thegeneral correctness of my principles. I have dwelt very little on the effect of thosetaxes on which there can be no difference of opinion, and have not mentionedmany which have been ably handled by Adam Smith’ (VII, 88). The Principles was notdesigned as an all-inclusive textbook but as a technical monograph with a veryparticular objective – to correct an illustrious predecessor on specific points – fromwhich kind of work the author’s full position cannot possibly be appreciated.

When, as in our case, we have at hand a rich correspondence wherein Ricardomore fully expounds his position it is surely foolhardy to minimize the opportunityto fill in the gaps. And this source is no less significant when ‘concessions’ are drawnfrom our author as part of the learning process generated by the cut and thrust ofdebate. For we then have indications of the extent various relationships can beabsorbed by the model even if they had not been part of the author’s originalintellectual baggage. (The correspondence with Malthus following the Essay on Profitsis supremely worthwhile in this respect; cf. EDR, 146f.)

My case thus far in effect calls upon what Stigler has labelled ‘personal exegesis’ – thebiographical information we have regarding Ricardo’s style and purpose. But thesame conclusion follows from Stigler’s criterion of ‘scientific exegesis’ referred to byO’Brien (1981, 355), namely that ‘we increase our confidence in the interpretationof an author by increasing the number of his main theoretical conclusions which wecan deduce from (our interpretation of) his analytical system’ (1965, 448). The fact isthat many of O’Brien’s so-called ‘qualifications’ are far more easily absorbed withinmy version of the growth model than his. Most important, on his reading thesecular path of real wages described by Ricardo (1951, I, 101–2) – an initial stage ofrising real wages and a subsequent stage of declining real wages, each accompanied bya falling profit rate – simply cannot be accommodated. The corn model is at a loss todeal with a central theme of Ricardian growth theory – against which fact I setO’Brien’s assertion, already noted, that ‘without a corn model, Ricardo’s inverserelationship between wages and profits is much more difficult to establish’.

IV . ON PREDICTION

From my denial that Ricardo designed his economics for purposes of specifichistorical prediction O’Brien draws further support for his assertion that I refuse toattribute to Ricardo model-building (1981, 376). This is a non sequitur reflecting

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O’Brien’s view of appropriate methodology. G.L.S. Shackle has urged that a theoryought to be ‘a classificatory one, putting situations in this box or that according towhat can happen as a sequel to it. Theories which tell us what will happen are claimingtoo much’ (1972, 72– 3). My investigation suggests to me that this was Ricardo’sposition ( EDR, ch. 11). His repeated insistence that changes in the costs and henceprices of goods which enter the wage basket can affect profits, whilst changes in thecosts and prices of those not so included cannot, is precisely of this order. And heimplied in an early reaction to Malthus that he did not charge his growth modelwith the task of generating specific historical prediction, by retaining faith in itsvalidity despite an observed upward trend in the profit rate – and this because ofchanges in the ceteris paribus condition relating to new technology: ‘I have little doubt... that for a long period, during the interval you mention [1793–1813], there hasbeen an increased rate of profits, but it has been accompanied with such decidedimprovements of agriculture both here and abroad ... that it is perfectly reconcileablewith my theory. My conclusion is that there has been a rapid increase of Capitalwhich has been prevented from shewing itself in a low rate of interest by newfacilities in the production of food’ (Ricardo 1951, VI, 94). I can see no reason tobelieve that Ricardo’s reaction would have been any different had the period involvedextended beyond twenty years.

As I also carefully explain in my book ( EDR, 600–1) we must distinguish the(secular or historical) prediction that in a protected economy the rate of profit willnecessarily undergo a decline, from the (comparative statics) proposition that theCorn Laws rendered the rate of profit lower at any and every point of time than itwould otherwise be. Ricardo certainly engaged in this kind of exercise. Similarly heused his model in this manner to deal with the distributional effects of agriculturalinnovation and public finance ( EDR, 642). O’Brien would surely admit that thereare uses to which models can be put apart from specific historical prediction.

It is also regrettable that O’Brien does not explain his charge (1981, 379) that Ihave taken out of context Ricardo’s letter to McCulloch following his Parliamentaryspeech of 7 March 1821 which I bring in support of my interpretation ( EDR, 615–21). It would also have been helpful had he given us his analysis of the detailedexchange wherein McCulloch makes a case for a continually declining rate of returnand consequential loss of capital abroad and protests to Ricardo for taking a muchmore optimistic line.

O’Brien doubtless would designate Ricardo’s response to Malthus, cited above, asa face-saving concession. But much more is involved. This was standard ‘classical’method. Thus J.S. Mill insisted upon the distinction between ‘verification’ and‘prediction’: a model cannot be expected to make accurate historical predictions andmay be retained provided it is ‘verified’ – allowance made for changes in the ceteris


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paribus conditions. More pertinent for us here, however, is the fact that Ricardo waswriting in the Smithian tradition. For it is Smith who, when faced by a fall in theprice of corn since the corn export bounty was established, insisted that ‘the priceof corn had not been lowered in consequence of the bounty, but in spite of it’(1937, 474) and refused to question the validity of his model, seeking rather for thedisturbing cause at work. (I shall return to this matter presently.)

V . T H E S M I T H I A N L E G A C Y A N D T H E R I C A R D I A NREACTION

It is O’Brien’s position that Ricardo’s historical pessimism provides the raison d’êtreof his theorizing: if my interpretation of Ricardo as optimist were correct, he states,‘Ricardo’s theoretical work ... would have been pointless’ (1981, 375–6). This matterhas been in part dealt with in the foregoing paragraphs. But I wish to carry itfurther. By taking this position I suggest that O’Brien neglects an entire body ofhistorical evidence relating to the late eighteenth and early nineteenth centurieswhich casts a bright light on the nature of Ricardo’s objectives in the Principles.

There is evidence pointing to the preoccupation of economists in the post-Smithian period with the relationship Smith envisaged between corn prices, moneywages and general prices, particularly the notion that a rise in corn prices – due (say)to a subsidy on the export of corn – will be passed on in the form of highermanufacturing prices by way of upward pressure on money wages:

[The] money price of corn regulates that of all other home-made commodities.It regulates the money price of labour, which must always be such as to

enable the labourer to purchase a quantity of corn sufficient to maintainhim and his family either in the liberal, moderate, or scanty manner inwhich the advancing, stationary or declining circumstances of the societyoblige his employers to maintain him.

It regulates the money price of all the other parts of the rude produce ofland, which, in every period of improvement, must bear a certain proportionto that of corn, though this proportion is different in different periods. Itregulates, for example, the money price of grass and hay, of butcher’s meat,of horses, and the maintenance of horses, of land carriage consequently, orthe greater part of the inland commerce of the country.

By regulating the money price of all the other parts of the rude produceof land, it regulates that of the materials of almost all manufactures. Byregulating the money price of labour, it regulates that of manufacturing artand industry. And by regulating both, it regulates that of the completemanufacture. The money price of labour, and of every thing that is the

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produce either of land or labour, must necessarily either rise or fall inproportion to the money price of corn.

(Smith 1937, 476–7; EDR, 21)

This complex set of relationships, which precludes any change in the relativeprice and profitability of agricultural produce by acting on the price of corn isencapsulated in Smith’s famous statement that ‘the nature of things has stamped uponcorn a real value which cannot be altered merely by altering its money price. Nobounty upon exportation, no monopoly of the home market, can raise that value. Thefreest competition cannot lower it’ (1937, 482; EDR, 31–2n). Similarly ‘the real effect ofthe [corn export] bounty is not so much to raise the real value of corn, as to degradethe real value of silver; or to make an equal quantity of it exchange for a smallerquantity, not only of corn, but of all other home-made commodities’ (1937, 476).

Now Ricardo had originally adopted the Smithian position. He maintained, forexample, that a change in the profit rate can affect the general level of prices –Smith’s ‘adding-up’ cost approach implied that whichever of the cost elements changegenerated a corresponding change in general prices; and he conceded to Bosanquetthat rising corn prices due to the poor harvest of 1800 and 1801 ‘must have producedsome rise in the price of commodities’ ( EDR, 106, 109, 112). By mid-1813 he hadbecome aware that the Smithian principle of ‘competition of capitals’, whereby thediscovery of new markets would assure a rise in profits and the value of commoditiesin general, clashed with the requirement for an expanded money supply that wouldnot be forthcoming ( EDR, 114–15, 118); and by late 1814 Smith’s positive relationbetween corn prices and general prices via money wages came to be questioned inthe light of ‘considerations of money value’ ( EDR, 131). The Essay on Profits states thenew view succinctly:

It has been thought that the price of corn regulates the price of other things.This appears to me to be a mistake. If the price of corn is affected by the riseor fall in the value of the precious metals themselves, then indeed will theprice of commodities be also affected, but they vary, because the value ofmoney varies, not because the value of corn is altered. Commodities, I think,cannot materially rise or fall, whilst money and commodities continue in thesame proportion, or rather whilst the cost of production of both estimatedin corn continues the same.

(Ricardo 1951, IV, 21n; EDR, 141)

From this point on Ricardo was prepared to base his theorem on distribution –that a rise in money wages is accompanied by a fall in the profit rate rather than ageneral price rise – alternatively upon a commodity (real-cost) theory or a quantitytheory of the value of money.


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The extent of Ricardo’s departure may be gauged from a letter to James Millprior to publication of the Principles : ‘In reading Adam Smith, again, I find manyopinions to question, all I believe founded on his original error respecting value.He is particularly faulty in the chapter on bounties’ (Ricardo 1951, VII, 100; EDR,5). The ‘original error’ in question is explicitly referred to in correspondence withMcCulloch: ‘Your system proceeds upon the supposition that the price of cornregulates the price of all other things, and that where corn rises or falls, commoditiesalso rise or fall, – but this I hold to be an erroneous system although you have greatauthorities in your favour, no less than Adam Smith, Mr. Malthus and Mr. Say’ (VII,105). Or equally we may refer to the Principles : ‘Dr. Smith’s error throughout hiswhole work lies in supposing that the value of corn is constant; that though thevalue of all other things may, the value of corn never can be raised’ (I, 374; EDR,204). Ricardo’s decision to attempt to settle the problem of the effect of a change inwages upon prices in the very first chapter as prelude to the establishment of theinverse relation is easily understood in this context.

What is Professor O’Brien’s reaction to all this? First he minimizes the significanceof the Smithian cost-push model of inflation to the point almost of actually denyingits presence in the Wealth of Nations : ‘I found Hollander’s account of Smith’s own workrather odd. l cannot recognize the account of the key features of the Smithian systemgiven by Hollander. ... The emphasis upon the corn price and the general price level inHollander’s account of Smith makes it possible to represent Ricardo as continuing thework of Smith but correcting the mistaken analysis. This allows the rest of Smith’swork to be smuggled in largely by implication. It is however upon this last thatHollander bases his “Walrasian” claims for Ricardo’s analysis’ (O’Brien 1981, 359).

I am a little taken aback by the fact that O’Brien apparently finds me sodisingenuous. I must emphasize that I do not ‘smuggle’ Ricardo’s Smithian heritagein at all. I carry it quite unselfconsciously through the Nothing to Declare Exit:Ricardo’s subscription to Smith’s allocation mechanisms is an explicit part of myargument in Chapter 6 upon which I base my ‘Walrasian claims’. But quite enoughhas been said already about Ricardo’s own designation of the Principles as a workpresuming continuity.

What I find truly difficult to comprehend is how the Smithian model relatinggeneral prices to the price of corn can be swept aside so casually in O’Brien’s fashion.I am forced to conclude that he cannot escape from the belief that Smith used ‘shortchains of reasoning’.

This leads me to the second prong of O’Brien’s approach. My account of the complaintsby Smith’s contemporaries that he engaged in excessive abstraction and was prone toleap prematurely to policy conclusions on the basis of such abstraction is dismissed asinvolving ‘a ragbag of quotations from around 1800 concerning contemporary views ofSmith’s methodology which seem to prove nothing’ (1981, 358).

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Since O’Brien (quite rightly) has much respect for James Anderson1 let me askhim how he feels able to throw into the ‘ragbag’ Anderson’s criticism of what heunderstood to be Smithian procedure:

Soon after Dr. Adam Smith’s excellent work on the wealth of nations waspublished, it fell into my hands. I read it with the attention that it deserved,and with no small degree of satisfaction and improvement in many respects;but the satisfaction was not without alloy. While I admired the liberality of hisgeneral turn of thinking, the ingenuity of his arguments, the perspicuity ofarrangement, and the acute accuracy of discrimination, that are eminentlyconspicuous in that work, I could not help lamenting that in it, as in all othersthat I have seen on practical subjects, which have been written by speculativemen, the conclusions were, on too many occasions, deduced from theoreticalprinciples, rather than from a patient induction of actual facts. It is much tobe lamented, that, when the mind is thus occupied with preconceived notions,many important facts are suffered to escape notice; and those only are deemedworthy of attention which serve to corroborate the favourite hypothesis. Whena mind is under the influence of this disposition, acuteness of talents onlytends to lead it the farther astray, by suggesting plausible combinations, thatserve only to prevent the objects from appearing in their true light to theinquirer himself; and, of course, he will find no difficulty in representingthem under false colours to others. Few writers, of eminence, in modern timeshave been more frequently under the influence of this fascinating power thanthe author of the Wealth of Nations.

(Anderson 1801, 16-17; EDR, 39–40).

It is Anderson, be it also noted, who made reference to Smith’s quest for disturbingcauses long before I did: ‘when Dr. Smith found himself pressed by the obviousargument, that the price of corn had declined ever since the bounty was [established],while that of other commodities had been almost universally advancing, he attributesthis circumstance solely to the general prosperity of the nation, which resulted fromthe revolution, and he peevishly asserts, “that the price of corn had not been loweredin consequence of the bounty, but in spite of it”. As if the same argument would notequally apply to the price of all other commodities.’

How too does O’Brien feel able to throw into his ‘ragbag’ Malthus’s criticisms ofSmith’s abstract modelling and hasty application. I refer to the Essay on Populationwhere Malthus wrote with reference to the corn export bounty in these terms:

The most plausible argument that Dr. Smith advances against the corn laws,is, that, as the money price of corn regulates that of all other home-madecommodities, the advantage to the proprietor from the increased money


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price is merely apparent, and not real; since what he gains in his sales he losesin his purchases.

This position, however, is not true, without many limitations. The moneyprice of corn, in a particular country, is undoubtedly by far the most powerfulingredient in regulating the price of labour, and of all other commodities;but it is not the sole ingredient. Many parts of the raw produce of land,though affected by the price of corn, do not, by any means, rise and fallexactly in proportion to this price. When great improvements inmanufacturing machinery have taken place in any country, the part of theexpense arising from the wages of labour will bear a comparatively smallproportion to the whole value of the wrought commodity, and consequently,the price of it, though affected by the price of corn, will not be affectedproportionally.

(Malthus 1803, 458–9; EDR, 46)

Similarly, in his Observations on the Effects of the Corn Laws (1814) Malthus turned againto Smith’s analysis of the corn export bounty and in particular the special treatmentaccorded corn pricing: ‘I have always thought, and still think, that this peculiar argu-ment of Dr. Smith, is fundamentally erroneous’ (1970 [1814], 96–7; EDR, 48). Oncemore he insisted that the money-wage rate does not rise proportionately with the cornprice, and this because of the existence in the wage basket of home and importedgoods other than corn (98–9). Moreover, the reaction of money wages to a rise in thecorn price is lagged, not immediate: ‘corn and labour rarely keep an even pace to-gether; but must often be separated at a sufficient distance and for a sufficient time, tochange the direction of capital’. In brief, ‘the real price of corn is capable of varyingfor periods of sufficient length to give a decided stimulus or discouragement toagriculture’ (106); Smith’s extreme theoretical case had led him to violate his own‘great principles of supply and demand’ and contradict ‘the general spirit and scope ofthe reasonings, which pervade “the Wealth of Nations”’ (97).

Surely O’Brien must admit the abstract nature of Smith’s complex analysis of theconsequences of an increase in the corn price and the fact that it attracted theadverse criticism of competent contemporaries.

This leads me to O’Brien’s third point. It is to minimize the significance of theinverse relationship so that Ricardo’s correction of Smith appears inconsequential:

this inverse relationship [between wages and profits] is virtually all that is leftafter Hollander has thrown out everything else. Of course if that is all that isleft, it is easier to dismiss Ricardo’s critics ... and argue that his work leadsdirectly to that of Marshall.

(O’Brien 1981, 356–7).

Of course it is highly likely that Ricardo decided that wages and profits

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moved inversely at quite an early stage. But this hardly amounted to a newtheory of profit. The obvious Bullionist objection (that either the moneysupply or velocity must rise if cost increases are to raise the price level) toSmith’s cost-push view of inflation hardly amounts to laying the foundationof Ricardo’s later models. Because Ricardo was a Bullionist he would, in histypically single-minded way, have rejected all explanations for price rises thatdid not involve increases in the money supply.

(O’Brien 1981, 360–1)

Here we have the classic error of reading history backwards. I have shown abovethat the ‘Bullionist’ objection to the Smithian model was by no means so obvious toRicardo at the time. A lengthy and difficult intellectual effort was required before herealized the disaccord between the notion that a rise in wages leads to a general priceincrease and the quantity or cost theory of the value of money and, thus, arrived atthe theory of proportionate wages – the inverse profit–wage relation. O’Brien hassimply failed to take into account the available evidence.

This evidence extends beyond the record of Ricardo’s intellectual history duringthe period 1809–17 summarized above. After the event Malthus himself admitted thesignificance of the Ricardian innovation. I cannot imagine that O’Brien has takeninto account Malthus’s statement: ‘Of all the truths which Mr Ricardo has established,one of the most useful and important is that profits are determined by the proportionof the whole produce which goes to labour. It is, indeed, a direct corollary from theproposition, that the value of commodities is resolvable into wages and profits; butits simplicity and apparent obviousness do not detract from its utility’ (1963 [1824],189; EDR, 229). Similarly, ‘we fully agree with the author of the present treatise’ –this a reference to McCulloch’s Principles – ‘that when it is said that profits dependon wages, they must be understood to depend on ... proportional wages, that is, onthe share of the commodities produced by the labourer, or of their value, which isgiven to him’ (1963, 199).

Evidently we are not dealing with a matter of minor theoretical importance asO’Brien would have it. But if all this is still not enough let him compare McCulloch’sposition after 1817 with that maintained earlier: ‘a forced rise in the price of cornbeing attended with a corresponding rise in the price of labour, must equally augmentthe price of almost every article the farmer purchases ... they receive more moneywith one hand, but they are forced to pay away more with the other’ (1816, 138;EDR, 59). Alternatively, to convince himself that more was involved than he hasadmitted so far let O’Brien compare James Mill’s Elements with his characteristicallyuncompromising statement of the Smithian theorem in 1804: ‘No proposition isestablished more thoroughly to the conviction of those who have studied the scientific


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principles of political economy than this; that the money price of corn, regulatesthe money price of everything’ (1804, 36; EDR, 57).

I rest my case on these matters bar one final observation. The falling profit rate inconsequence of the pressures exerted by land scarcity involves one applicationonly of the inverse wage–profit relationship. Why is O’Brien so unwilling toadmit to others? Ricardo himself did: ‘I have invariably insisted that high or lowprofits depend on low and high wages, how then can it be justly said of me thatthe only cause which I have recognized of high or low profits is the facility ordifficulty of providing food for the labourer. I contend that I have also recognizedthe other cause, the relative amount of population to capital, which is another ofthe great regulators of wages’ (Ricardo 1951, II, 264–5; EDR, 640).

But we surely are not bound to limit ourselves forever to the applications theinnovating theorist happened to make. The Ricardian analysis is pertinent to theinvestigation of the consequences for prices and profits of a wage increase whateverits cause. Thus it proved the key for Mill’s analysis of trade unions as late as 1872:

You must have been struck as I have been, by the thoroughly confused anderroneous ideas respecting the relation of wages to price, which have shewnthemselves to be almost universal in the discussions about the recent strikes.The notion that a general rise of wages must produce a general rise ofprices, is preached universally not only by the newspapers but by politicaleconomists, as a certain and admitted economical truth; and politicaleconomy has to bear the responsibility of a self-contradicting absurditywhich it is one of the achievements of political economy to have exploded.It provokes one to see such ignorance of political economy in the wholebody of its self-selected teachers. The Times joins in the chorus .... Certainlyno one who knows, even imperfectly, what the Ricardo political economyis, whether he agrees with or not, can suppose this to be it. I hope you willcome down upon it with all the weight of your clear scientific intellect,your remarkable power of exposition, and the authority of your name asa political economist.

(To Cairnes, Mill 1972, XVII, 1909–10)

And it was the model used by Mill in his treatment of differential rates of returnon capital in Great Britain and the USA. My point is that the Ricardian modelhad implications extending far beyond the Corn Law issue. O’Brien’s perspectivecannot accommodate the post-Ricardian record, particularly the Ricardo–Millrelationship.

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VI . ON PRICING AND ALLOCATION

In what follows I give my reaction to a range of rather more specific objections onO’Brien’s part. First the matter of value and allocation. I do not know upon whatO’Brien bases his assertion that in my account ‘Ricardo did not attach very muchimportance to the Invariable Measure’ (1981, 363; cf. 354, 370). It is in fact given acentral place in my account of the analytical core of Ricardian economics, particularlythe derivation of the fundamental theorem on distribution ( EDR, 5f) and theinvestigation of Ricardo’s legacy ( EDR, 660f; see also my article (below, Chapter 18)on the topic for this Journal, July 1977). Moreover, some fifty pages (7 per cent ofthe text) are devoted to the technical details of the measure ( EDR, 218–69). I doargue that Ricardo took the sensible position that ‘even in the event an adequatemeasure could not be achieved, he was none the less prepared to maintain theinverse wage–profit relation’ (EDR, 227) and did so sometimes in terms of a quantitytheory of the value of money as distinct from a realcost theory ( EDR, 243). And inmy Chapter 6 I argue further that the allocation process involved when we tracethrough the consequences of a change of wages for relative prices and the profit ratecan be appreciated apart from the measuring device ( EDR, 302f). All this I certainlybelieve to be true. But nowhere do I claim, nor do my arguments imply, that theInvariable Measure was unimportant to Ricardo.

I shall not repeat here my full case for Ricardo’s appreciation of demand– supplytechnique upon which O’Brien heaps scorn (1981, 363–4). I must, however, say thata reader who relies on the skimpy account given of my Chapter 6 on AllocationMechanisms would not have a fair indication of the available evidence which helpsexplain what has hitherto been a mystery – Marshall’s insistence upon the significanceof demand–supply analysis in Ricardo’ thought. 2 Secondly, for O’Brien to emphasizeon one page (363) differential factor ratios and consequential change in the averageupon alteration in the composition of output only to insist on the next that demandhas no role to play in Ricardian economics other than to select the marginal unit inagriculture, suggests a failure to appreciate the theoretical issues at stake: it is uponthe alteration in the average fixed–circulating capital ratio with change in theconfiguration of final demand that a case can be made for the interdependence ofdistribution and pricing – a main theme of the chapter.

It is appropriate to allude here to O’Brien’s observations on agriculturalimprovement in the context of the principle of profit-rate equalization (364–5).O’Brien appeals to the famous Marshall–Stigler diagram to demonstrate that theimprovement leads to ‘increased factor rewards in agriculture’ and thus to two ratesof profit in the system as released factors flow to manufacturing. This argument isfaulty as I explained ( EDR, 293f). The increase in marginal product, given population(and thus the demand for corn) implies a corresponding fall in the corn price. What


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follows will depend upon the assumption made regarding the commodity wage. (i)If the commodity wage is assumed fixed, then of course the money wage falls generatingthe familiar inverse movement in the profit rate. But the fall in wages is common toall sectors, not agriculture alone – there are thus no differential effects (unlessfortuitously differing factor ratios pertain in the different sectors, in which caseallocative readjustments would be set in motion until equilibrium is achieved). (ii)If real wages rise upon the fall in the price of corn – if we assume constant moneywages – there will be no change in the general profit rate at all in consequence of theimprovement. In both cases labour and capital released from agriculture can bereabsorbed in manufacturing without difficulty in consequence of the operation ofthe law of markets. I cannot make the matter clearer than this.

One further substantive matter falling within the present range of topics meritsconsideration: the theory of rent. O’Brien refers to my statement in the concludingchapter that ‘Ricardo had shown a thorough awareness that differential rent is but aspecial case of a more general phenomenon’ as a ‘sweeping assertion’ for which Iprovide no evidence (1981, 384). The evidence will be found on the same page as theassertion. I shall repeat it here (from EDR, 665–6):

no one would pay for the use of land, when there was an abundant quantitynot yet appropriated, and, therefore, at the disposal of whosoever mightchoose to cultivate it.

On the common principles of supply and demand, no rent could be paidfor such land, for the reason stated why nothing is given for the use of airand water, or for any other of the gifts of nature which exist in boundlessquantity ... as the supply is boundless, they bear no price. If all land had thesame properties, if it were unlimited in quantity, and uniform in quality, nocharge could be made for its use, unless it possessed peculiar advantages ofsituation.

(Ricardo 1951, I, 69).

[if] air, water, the elasticity of steam, and the pressure of the atmosphere,were of various qualities; if they could be appropriated, and each qualityexisted only in moderate abundance, they, as well as the land, would afford arent, as the successive qualities were brought into use.

(Ricardo 1951, I, 75)

Dr. Smith does not reflect that rent is the effect of high price. ... It is ... fromthe price at which the produce is sold, that the rent is derived; and this priceis got not because nature assists in the production, but because it is the pricewhich suits the consumption to the supply.

(Ricardo 1951, I, 77n; citing Buchanan)

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I see here a very obvious recognition of land scarcity as the underlying source ofdifferential rent. That such recognition ‘would rob Bailey and Senior of credit forgeneralising the rent concept’ bothers O’Brien for some reason (1981, 384). It doesnot bother me. It is part of the historical record so we have no alternative but torecognize it and follow its implications wherever they may lead us.

Finally, I note that it is in the context of allocation theory that we find anotherof O’Brien’s somewhat extraordinary historiographical principles. Against mydemonstration of the significance attached by Ricardo to the allocative losses ofagricultural protection O’Brien asserts that ‘it was hardly in the forefront of Ricardo’spicture’, adding ‘if it had been it would diminish his independent standing as anoriginal thinker’ given Smith’s earlier preoccupation with allocative loss (381). I amquite at a loss. This principle, if taken seriously, would sweep away all textual evidenceof intellectual continuity in the interest of novelty. What kind of history is this?Nor is it an accidental remark. The same reasoning is implied by O’Brien’s earlierreference (above p. 102) to my ‘smuggling in’ of Smith’s work to justify my Walrasianclaims for Ricardo’s analysis.

V I I . W A G E S A N D T A X A T I O N

At one point in his review O’Brien makes the very pertinent comment that ‘Failureto solve a theoretical problem does not mean that the problem is automaticallyregarded as unimportant’ (1981, 363). It would have been nice had he applied thisvalid principle to the problem of Ricardian wages in the taxation context. O’Briensubscribes to the standard view that this analysis hinges on the subsistence wageassumption. I do not. But I do not in my book ( EDR, 375f) hide the analyticalproblems entailed by the more general perspective I believe Ricardo to have taken,particularly the precise mechanisms of population adjustment involved where wagesare above subsistence. Yet focusing on these problems O’Brien (1981, 366f) leaps tothe conclusion that Ricardo’s analysis was based on the simplest case. And this willnot do.

As I explain in my book ( EDR, 383) Ricardo’s taxation theorems ‘can be interpretedas applying to the case where a subsistence wage rules’. I provide textual evidencefrom the chapter ‘On Wages’ and elsewhere to this effect. But I then show that thewage taxation theorems do not stand or fall with the subsistence assumption (386).For during the course of his discussion (in the chapter on ‘Taxes on Raw Produce’)of the effect upon the money-wage rate induced by the taxation of necessaries,Ricardo introduced the qualification that the ‘rate of progression’ of the economyis throughout taken for granted, implying that the analysis is intended to applywhether or not wages are initially at ‘subsistence’: ‘Those who maintain that it is theprice of necessaries which regulates the price of labour, always allowing for the


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particular state of progression in which the society may be, seem to have concededtoo readily, that a rise or fall in the price of necessaries will be very slowly succeededby a rise or fall of wages’ (Ricardo 1951, I, 161). If this statement were the only oneof its kind, it might perhaps be dismissed as unrepresentative. But the fact is that thechapter ‘On Taxation of Wages’ itself is formally contingent upon it.

The chapter ‘On Taxation of Wages’ unlike that ‘On Wages’ is based upon Smith’sproposition that ‘the demand for labour, according as it happens to be eitherincreasing, stationary, or declining, or to require an increasing, stationary, or decliningpopulation, regulates the subsistence of the labourer, and determines in what degreeit shall be either liberal, moderate, or scanty’ (215). That Ricardo should have proceededin the chapter ‘On Wages’ and in other contexts on the assumption of a subsistencewage rate, despite his acceptance of the Smithian position according to which theequilibrium wage is that wage which assures an appropriate positive rather than azero growth rate of labour supply, is not difficult to appreciate. It is another exampleof his general method which is to simplify the analysis wherever this can be donewithout loss.

The broader application of the taxation theorems means that the mechanism ofpopulation adjustment to wages above or below a given ‘subsistence’ rate must nowbe applied to wage variations about a long-run labour supply curve relating thewage rate to the growth rate of population. There are technical difficulties but thesedo not imply that the foregoing texts vanish into thin air.

V I I I . M O N E T A R Y T H E O R Y

O’Brien’s very critical stance leads him to make irrelevant complaints in the contextof monetary thought once again charging me with giving a false impression ofcontinuity between Smith and Ricardo:

My severest reservations about Hollander’s treatment concern his discussionof monetary thought. ... I am particularly concerned, however, aboutHollander’s attempt to establish that Ricardo’s monetary theory was somehowSmithian. This involves playing down the importance of David Hume inthe history of monetary thought to the point where he virtually disappears.Thus the so-called ‘Smithian’ ( EDR, 105–6) position that the rate of interestis not affected by increases in the money supply is not only Hume’s (andthus derived from the same place as the rest of Ricardo’s monetary thought)but also available in the works of Massie. By inflating the role of AdamSmith vis-à-vis classical monetary theory Hollander is able to give the impressionof a continuity between Smith and Ricardo which otherwise does not exist.The account of pre-Bullion-Report monetary theory I found strange. It leavesout Hume (apart from a few oblique references to Hume-type mechanisms)

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placing Adam Smith at the forefront of pre-Ricardian monetary theory (wherehe certainly does not belong) and considerably overrating Ricardo’s ownimportance as a monetary theorist vis-à-vis Thornton and others.

(O’Brien 1981, 370)

This amazes me. The reader who had not examined my book and the referencesthere given (EDR, 105–6) would be excused for concluding that the following statementsby Ricardo are figments of my fruitful imagination:

It has been shewn incontrovertibly by that able Writer, Dr. Adam Smith,that the rate of interest for money is regulated by the rate of profits on thatpart of capital only which does not consist of circulating medium, and thatthose profits are not regulated but are wholly independent of the greater orlesser quantity of money which may be employed for the purposes ofcirculation; that the increase of circulating medium will increase the pricesof all commodities, but will not lower the rate of interest.

(Ricardo 1951, III, 25–6)

If Sir John [Sinclair] will take the trouble to consult the 4th chap. 2d book,of Dr. A. Smith’s celebrated work, he will there see it undeniably demonstrated,that the rate of interest for money is totally independent of the nominalamount of the circulating medium. It is regulated solely by the competitionof capital, not consisting of money.

(Ricardo 1951, III, 143)

In the 4th chapter of the 2d book of the Wealth of Nations, to which I, inmy last letter referred, it is demonstrated that the rate of interest depends onthe rate of profits, which again is totally independent of the nominal amountof the circulating medium.


If after the able exposition of Dr. Smith any further argument were necessaryto prove that the rate of interest is governed wholly by the relation of theamount of capital with the means of employing it, and is entirely independentof the abundance or scarcity of the circulating medium, this illustration,would, I think afford it.


All of this from the letters to the Morning Chronicle and the Reply to Bosanquet. Thereis no mention of Hume. It is incontrovertible that Ricardo had before him the text ofthe Wealth of Nations. That Hume may indeed have been the source for Smith is a quiteirrelevant matter for the purpose at hand in my discussion which was to establish theidentity of position between Ricardo and Smith at the early period in question.


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Let me add that in the High Price of Bullion (Ricardo 1951, III, 88f) also there areextensive verbatim quotations from the Wealth of Nations to the effect that ‘the rateof interest is not regulated by the abundance or scarcity of money, but by theabundance or scarcity of that part of capital not consisting of money’ followed onlyby the brief statement that ‘Mr Hume has supported the same opinion’. I do notthink I have distorted the record.

I X . O N C L A S S C O N F L I C T A N D T H E S E C U L A R S H A R E S

O’Brien makes a great deal of Ricardo’s supposed emphasis upon class conflict,particularly that between landlords and other classes and complains of my positionon this issue (1981, 355, 375, 382). He finds it ‘very surprising that in the section(EDR, 586–93) “Ricardo as Radical” his attitude towards improvements is notmentioned’ (382). I do not know how to satisfy so severe a critic since Ricardo’sattitude to the class of landlords is examined in this section in detail specifically interms of the problem of improvements.

I certainly do ‘refuse to recognize the importance of class conflict in Ricardo’ formy reading reveals no evidence of this order. Ricardo himself denied it firmly. I alsoraise the question in the context of agricultural improvement: ‘can it be said thatRicardo, despite his protestations, had in fact unduly emphasized the lag in populationresponse, uncharacteristically weighing the short-term consequences of technical changeon the landlords’ interests as Malthus indeed charged?’ ( EDR, 591) – a questionanswered in the negative in the light of my demonstrations in other contexts of hisconcern with the consequences of disturbances prior to population expansion.

I would like to call attention here to the fact that the characteristic approachadopted by Ricardo in his formal work – his deliberate devising of ‘strong cases’better to portray his principles (cited above, p. 97, from Ricardo 1951, VIII, 184) –is specifically illustrated from the treatment of the effects of agricultural improvements:‘I never thought for example that practically any improvements took place on theland which would at once double its produce, but to shew what the effect ofimprovements would be undisturbed by any other operating cause, I supposed animprovement to that extent to be adopted, and I think I have reasoned correctlyfrom such premises. I am sure I do not undervalue the importance of improvementsin Agriculture to landlords, though it is possible that I may not have stated it sostrongly as I ought to have done.’ This, we know, is standard Ricardian method.Ricardo’s protestations ring true.

It is appropriate also to recall his insistence upon his method in the more generalcontext, ‘On Machinery’: ‘The statements which I have made will not, I hope, lead tothe inference that machinery should not be encouraged. To elucidate the principle,I have been supposing, that improved machinery is suddenly discovered, and extensively

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used but the truth is, that these discoveries are gradual, and rather operate indetermining the employment of the capital which is saved and accumulated, than indiverting capital from its actual employment’ (I, 395). I emphasize this becauseO’Brien has insisted (1975, 130) that recognition that population and improvementstend to go hand in hand, or at least that any fall in rent due to improvement ismerely a short-run phenomenon and reversed in the long run upon populationexpansion, are post-Ricardian arguments. They are in fact Ricardo’s arguments, andnot ‘fleetingly’ and unwillingly made as O’Brien has it (see also Ricardo 1951, I, 79–80, 412; IV, 19, 81n).

It would also help if we follow Ricardo and distinguish between agriculturalinnovation and the protection issue. Landlords did not have it in their power toprevent the former:

I have indeed observed that improvements in agriculture were in theirimmediate effects injurious to the landlord, and beneficial to consumers,but that ultimately when population increased, the advantage of theimprovement was transferred to the landlord. To this opinion I also adhere,but in saying so I cast no reproach on landlords – they have not the powerto arrest improvements, nor would it be their interest to do so if they could.Great improvements in any branch of production are in their first effectsinjurious to the class who are engaged in that branch, but this is a statementof a fact or of an opinion, and cannot be supposed to cast any injuriousreflections. Mr. Malthus is not justified by any thing I have said in pointingme out as the enemy of the landlords, or as holding any less favorable opinionof them, than of any other class of the community.

(Ricardo 1951, II, 118–19)

Landlords, however, were in a position to lobby effectively for protection againstforeign imports; it is to this of course that Ricardo strongly objected in the Parlia-mentary speeches cited by O’Brien (1981, 383; see my EDR, 625). But I do not seethat this attitude is a matter of class bias. Ricardo typically objected to any specialinterest group exerting pressure at the expense of the community as a whole. O’Brien’scase still does not convince me.

Finally, it is appropriate to raise in this context the matter of the secular shares.O’Brien insists upon a wealth of evidence suggesting that Ricardo made a case for arising rental share and suggests such evidence supports his view of class conflict(1981, 374–5). He alludes especially to the Table in the Essay on Profits indicating (1)that rent as a share of net output rises from 7.3 per cent to 60.4 per cent; (2) thatrent as a share of net output plus capital rises from 2.3 per cent to 13 per cent; and(3) that rent as a proportion of capital rises (from 3.5 per cent to 16.5 per cent). Thefact is that none of these measures refers to an index appropriate for class income


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distribution: ‘net output’ in the Table includes profits and rent only excludingwages; while ‘capital’ includes more than wages fund. I stand by my conclusion thatRicardo was not concerned with three-fold class income distribution ( EDR, 404–11).

X. CONCLUSION

In my view Professor O’Brien’s version of Ricardo rests upon error – error whichhe shares with others. He is totally committed to the corn model of growth, to thevision of Ricardo as an extreme abstractionist, to a sharp discontinuity in doctrineand method between Smith and Ricardo, to the notion of Ricardian economics as a‘detour’ in nineteenth-century thought.

My views on these matters differ from those of O’Brien and similar thinkers. Ihave tried to present Ricardo in all his complexity in order to build up a consistentpicture, as far as possible, from the available evidence – the texts, the letters, thespeeches, the pamphlets – without being strait-jacketed from the outset by the versionof sundry textbooks. The full evidence does not, I maintain, support the ‘majority’view.

NOTES

1. I have a harsh critic. He charges me at one point with ‘fail[ing] to quote and discuss thevital material on diminishing returns which McCulloch believed meant that Andersonshould be credited with inventing rent theory’ except ‘grudgingly and in criticism ofAdam Smith’ (1981, 384). This despite my detailed discussion of Anderson’s work whichconcludes ‘The notion of no-rent land at the (extensive) margin of cultivation is expoundedwith most impressive clarity in an account that has much in common with that regardedas “revolutionary” nearly forty years later’ – an account which ‘has much in common withthat of Ricardo’ and which J.R. McCulloch described as marking ‘an-important era in thehistory of economic science, etc.’ ( EDR, 43).

2. I am very surprised not to find a reference to the paper by Rankin (1980) whichindependently reached many of the same conclusions as myself.

REFERENCES

Anderson, J. (1801) A Calm Investigation of the Circumstances that Have Led to the Present Scarcityof Grain in Britain, London: J. Cumming.

Casarosa, C. (1978) ‘A New Foundation of the Ricardian System’, Oxford Economic PapersXXX: 38–63.

Dobb, M. (1973) Theories of Value and Distribution since Adam Smith, Cambridge: CambridgeUniversity Press.

Garegnani, P. (1976) ‘On a Change in the Notion of Equilibrium in Recent Work on Valueand Distribution’, in M. Brown, K. Sato and P. Zarembka (eds) Essays in Modern CapitalTheory, Amsterdam: North-Holland

Hicks, J.R. and Hollander, S. (1977) ‘Mr. Ricardo and the Moderns’, Quarterly Journal ofEconomics XCI: 351–69.

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Hollander, S. (1973) The Economics of Adam Smith, Toronto: University of Toronto Press.——(1977) ‘The Reception of Ricardian Economics’, Oxford Economic Papers XXIX: 221–57.——(1979) The Economics of David Ricardo, Toronto: University of Toronto Press.Levy, D. (1976) ‘Ricardo and the Iron Law: A Correction of the Record’, History of Political

Economy VIII: 235–52.McCulloch, J.R. (1816) Essay on the Question of Reducing the Interest on the National Debt,

Edinburgh: David Brown, and Adam Black.Malthus, T.R. (1803) An Essay on the Principle of Population, London: Joseph Johnson.——(1970) [1814] Observations on the Effects of the Corn Laws (London) in Pamphlets of T.R.

Malthus, New York: Augustus M. Kelley.——(1963) [1824] ‘Political Economy’ in B. Semmel (ed.) Occasional Papers, New York: Burt

Franklin.Mill, J. (1804) An Essay on the Impolicy of a Bounty on the Exportation of Grain, London: C. and

R. Baldwin.Mill, J.S. (1972) Collected Works, vol. XVII, Toronto: Toronto University Press.O’Brien, D.P. (1970) J.R. McCulloch: A Study in Classical Economics, London: George Allen and

Unwin.——(1975) The Classical Economists, Oxford: Clarendon Press.——(1981) ‘Ricardian Economics and the Economics of David Ricardo’, Oxford Economic

Papers XXXIII: 352–86.Pasinetti, L. (1974) Growth and Income Distribution: Essays in Economic Theory, Cambridge:

Cambridge University Press.Rankin, S. (1980) ‘Supply and Demand in Ricardian Price Theory: A Re-interpretation’,

Oxford Economic Papers XXXII: 241–62.Ricardo, D. (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 vols),

Cambridge: Cambridge University Press.Roncaglia, A. (1978) Sraffa and the Theory of Prices, Chichester and New York: John Wiley.Shackle, G.L.S. (1972) Epistemics and Economics: A Critique of Economic Doctrine, Cambridge:

Cambridge University Press.Smith, A. (1937) [1776] The Wealth of Nations, New York: Modern Library.Stigler, G. (1965) ‘Textual Exegesis as a Scientific Problem’, Economica XXXII: 447– 50.

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Professor Roncaglia and I are still far apart in our conceptions of Ricardian economics.Yet I myself once adopted Roncaglia’s version: ‘The classification of Ricardian economicsas a “detour” ... might be valid if it can be demonstrated that the characteristically“Ricardian” features lie within the tradition of allocation economics. That this is so isby no means certain. To the extent that Ricardo was in fact developing an alternative“basic theory” – whereby distribution and value are treated separately – the view ofKnight and Schumpeter ... is seriously misleading’ (Hollander 1973, 14).

This perspective coloured my view of the nature of subsequent developments inclassical economics and I again committed myself to a sharp conceptual distinctionin writing of J.S. Mill as attempting an impossible balancing trick (1976). It was onlyafter living with Ricardo for an extended period of time that the implicationsregistered with me of his characteristic methodology – deliberate simplificationwhere appropriate for purely pedagogic purposes, pre-eminently constancy of thereal wage and uniform factor ratios. Here will be found a principal source, so it nowseems, of the vastly different interpretations yielded by honest readings of Ricardo’sPrinciples.

I . T H E M A J O R I S S U E

The main theme of Roncaglia’s review is that in Ricardian (classical) theory, ‘technologyand the wage rate are the necessary and sufficient data for determining the rate ofprofits (and “exchange values”)’ (1982, 342; cf. 354). As for ‘technology’ (whichincludes the levels of production in the various sectors): ‘In the classical (“surplus”)approach the economic system reproduces itself over time, and the study of theforces modifying the structure of production is severed from the analytical “core”of the system. Ricardo, in particular, does not consider “the choice” of the structureof production; this is visualized as a historical problem, with the production structureevolving from social habits and technological developments’ (355). The wage rate –given at subsistence (341) – is similarly treated as ‘exogenous’ or ‘external to the

7

A REPLY TO PROFESSORRONCAGLIA

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A REPLY TO PROFESSOR RONCAGLIA

analytical core’ (356). On this ‘Cambridge’ view value and output levels are notdetermined within a single model. But consumer demand and thus output mightinfluence cost prices by acting upon the relative scarcity of the factors and thus theirreturns. To divorce value and output level is to exclude this possibility, therebyimplying the divorce of value and distribution.

The ‘classical’ perspective is then set in contrast to that of the neoclassicist ormarginalist ‘allocation’ theory, which treats the optimum allocation of scarce resourcesas a problem ‘typically solved by the simultaneous determination of equilibriumprices and quantities’ (355). Similarly: ‘In the Walrasian model ... once technology,consumers’ tastes, and the initial endowments of resources are given, all prices,including the services of the factors of production, are the solution to a generalequilibrium system. Here “distribution and pricing are interdependent”, for theyare one and the same thing’ (356).

If the wage rate and the structure of production are treated exogenously, Roncaglia’s‘Cambridge’ results immediately fall into place. It is my argument in The Economics ofDavid Ricardo (1979), by contrast, that there is a symmetrical explanation of thereturns to labour and capital in terms of equilibrium between the demand andsupply for the factors, reflecting an interdependence of the two systems of markets –that for factors and for products. Specifically, consumer choices (and hence outputs)can affect the relative scarcity of labour and capital, and thus the wage and interestrates; and distributional changes in turn can alter relative costs and thus prices andoutputs, given the pattern of demand schedules. From my argument there followsthe identity of the conceptions of classical ‘natural’ and neoclassical long-run ‘normal’prices reflecting uniform rates of wages and uniform rates of profit on the supplyprices of capital goods, and the identity in the two general systems of adjustments tosuch prices. The centres of gravitation to which even Ricardo’s prices tend aregenuine ‘equilibria’ between supply and demand.

This is the general perspective from which I approach Roncaglia’s review. 1

II . THE WAGE RATE AS ENDOGENOUS VARIABLE

I turn first to Roncaglia’s rejection of the Ricardian model of growth by Hicks andHollander and Casarosa. In these renditions population growth is tied to the wagerate, treated as an endogenous demand-and-supply variable. To Roncaglia, however,‘Ricardo does not state that the greater the gap between actual and subsistence wagerates, the faster the growth of population; he avoids even a hint of a tight leashbetween wage rate and population growth’ (1982, 349). I shall now briefly reviewsome of the contrary evidence supporting a Ricardian labour-supply function.

We have first the standard ‘Malthusian’ case, stated even earlier by Adam Smith,who defined the same general functional dependency (1937, 80). This was later takenover by Ricardo, whose chapter ‘On Taxation of Wages’ is based upon Smith’s


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proposition that ‘the demand for labour, according as it happens to be eitherincreasing, stationary, or declining, or to require an increasing, stationary, or decliningpopulation, regulates the subsistence of the labourer and determines in what degreeit shall be either liberal, moderate, or scanty’ (1951, I, 215). Accordingly, the wage

will be just sufficient to support the population, which at that time the stateof the funds for the maintenance of labourers, requires. If the labourer’swages were before only adequate to supply the requisite population, theywill, after the tax, be inadequate to that supply, for he will not have the samefunds to expend on his family. Labour will, therefore, rise, because thedemand continues, and it is only by raising the price, that the supply is notchecked. ... Suppose the circumstances of the country to be such, that thelowest labourers are not only called upon to continue their race, but toincrease it; their wages would be regulated accordingly. Can they multiply[in the degree required], if a tax has taken from them a part of their wages,and reduced them to bare necessaries?

(Ricardo 1951, I, 219–20)

I do not see how there could be a clearer expression of the functional relationshipbetween population and the wage rate.

Ricardo’s position, in essentials, is precisely that of Smith and Malthus. The rateof capital accumulation acts as an ‘independent variable’ which determines what thecommodity wage rate must be to guarantee an equivalent growth rate of population.The assumption that the rate of capital accumulation is an independent variable –totally unaffected by the reduction in profits corresponding to an increase in moneywages – is, however, no more than a first approximation. A reduction in profitswould, Ricardo conceded, probably have some effect on accumulation, so that thecompensatory increase in money wages would not entirely prevent a fall in realwages in consequence of taxation (I, 221–2).

Most important for us here is the fact that once it is recognized that wages, forRicardo, are an endogenous variable, it becomes difficult to represent profits in termsof ‘surplus’ (Roncaglia, 1982, 341, 350–1). Profits, of course, ‘depend on wages’, butlabour demand and thus the wage rate are in turn affected by changes in the profitrate. There is a mutuality of interrelation between profits and wages (within a supplyand demand framework) – well-expressed by Ricardo himself, I emphasize, in termsof a ‘natural equilibrium’ (1951, I, 226).

I I I . P R O F I T S : A R E W A R D F O R ‘ W A I T I N G ’

I am sceptical of the notion of surplus if a change in the profit rate acts upon therate of accumulation via the ‘motive’ to save. What was Ricardo’s position in fact?

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Roncaglia denies Marshall’s belief that the rate of profit is related by Ricardo to‘waiting’ (1982, 345). It can always be said (with Roncaglia) that ‘ given the existenceof profits and the level of the rate of profits, prices must behave to accommodatethem, without implying anything by way of explanation’. But I have tried to resolvethis issue (1979, 211, 214, 317ff, 326, 672) and stand by my previous conclusionupholding Marshall’s interpretation.

Ricardo’s famous letter to McCulloch (13 June 1820) places ‘compensation fortime’ on a par with ‘compensation for labour’: ‘When the times are unequal, therelative quantity of labour bestowed on [commodities] is still the main ingredientwhich regulates their relative value, but it is not the only ingredient, for besidescompensating for the labour, the price of the commodity, must also compensate forthe length of time that elapses before it can be brought to market. All the exceptionsto the general rule come under this one of time’ (1951, VIII, 193). This formulationis incorporated into the third edition of the Principles with an important addendum:the values of commodities (cloth or cotton) produced in a two-year process areshown to be more than double that of a commodity produced in one year (corn),although precisely double the labour is assumed to be embodied in the former cases,‘for the profit on the clothier’s and cotton manufacturer’s capital for the first yearhas been added to their capitals, while that of the farmer has been expended andenjoyed’ (I, 34). Does not Ricardo imply a pain cost that requires compensation ifthe period of investment of capital is to be lengthened? The observation in the Noteson Malthus to the effect that ‘the power and will to save ... must depend upon theshare of the produce allotted to the farmer or manufacturer’ (II, 303; emphasisadded) seems to clinch the matter. The evidence bears out Marshall’s position.

To summarize: if, as Ricardo seemed to believe, profit is a compensation for‘postponed enjoyment’, its representation as ‘surplus’ in the sense of ‘residual’(Roncaglia 1982, 351) is unhelpful. It may be retained to describe an income potentiallyavailable for accumulation or taxation, and also (as I explain, 1979, 265ff) in thesense that the sole contractual payment in the system is that made to labour. I wouldemphasize too that allowing a functional relationship between savings decisions andthe interest rate conflicts in no way with the basic inverse profit–wage relationship,as Roncaglia appears to believe.

I V . R I C A R D O O N D E M A N D A N D T H E ‘ C I R C U L A R - F L O W ’PROCESS

I turn now to demand theory, with at least a mild protest at Roncaglia’s assertionthat ‘all Hollander can find in Ricardo’ on demand is the proposition that‘consumption is the sole end and purpose of all production’ (1982, 342). My book(1979, ch. 6) demonstrates the rationalization of the elasticity property, the use ofthat property (together with supply elasticity) in the derivation of the ‘Marshallian’


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principles of tax incidence, and the role accorded demand–supply analysis in cost-price determination, costs including the average (uniform) profit rate. 2 I rehearsehere merely a fraction of the evidence supporting Marshall’s insistence that Ricardo‘seems to be feeling his way towards the distinction between marginal and totalutility’ (1920, 814), a position strongly denied by Roncaglia (1982, 344).

Consider first Ricardo’s defence of Smith against Say:

M. Say accuses Dr. Smith of having overlooked the value which is given tocommodities by natural agents, and by machinery, because he consideredthat the value of all things was derived from the labour of man; but it doesnot appear to me, that this charge is made out; for Adam Smith no whereundervalues the services which these natural agents and machinery performfor us, but he very justly distinguishes the nature of the value which theyadd to commodities – they are serviceable to us, by increasing the abundanceof productions, by making men richer, by adding to value in use; but asthey perform their work gratuitously, as nothing is paid for the use of air,of heat, and of water, the assistance which they afford us, adds nothing tovalue in exchange.

(Ricardo 1951, I, 286–7)

I read this statement as a recognition of the distinction between total utility andmarginal utility – in this case a marginal utility of zero. But let us simply addRicardo’s statement a few pages before that ‘by scarcity the value of commodities israised’ (I, 276; see also 69–70 cited below).3

On p. 354 of the review I read ‘that neither Ricardo nor Smith uses supply anddemand schedules’. I strongly disagree. In my Economics of Adam Smith (1973, 117ff), Idemonstrate Smith’s use of demand and supply schedules in his famous chapter ‘Ofthe Natural and Market Price of Commodities’ in the context of profit-rate equalization.Ricardo fully subscribed to all this (1951, I, 91). Indeed, the analysis of market priceand its tendency to natural price is incomprehensible without demand schedules, forthe output movements, which Roncaglia (1982, 354) allows occur when market andnatural prices diverge, are surely responsible for the inverse movements of market pricestoward their long-run equilibria, implying variation up or down demand curves.

In Ricardian theory there is no formal discussion of the imputation from the valueof the final product to that of the productive service (derived demand); indeedthere is no conception of incremental variation of individual productive factors.Do not these characteristics set Ricardian economics apart from the later neoclassicalvariety? I do not think so.

Recall that along with his fourth proposition on capital, that ‘demand forcommodities is not demand for labour’, J.S. Mill explicitly adopted the view that ‘all

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concerned in production depend for their remuneration on the price of a particularcommodity’ and ‘derive their remuneration from the ultimate product’ (Mill 1965,32–3, 455). There is no logical incompatibility between the two perspectives: thefourth proposition on capital was not designed to deal with the return to labour inparticular uses but rather with aggregate wages and aggregate employment. Accordingly,the later neoclassical developments along imputation lines are best envisaged as anelaboration of a relatively neglected aspect of distribution rather than a paradigmaticdisplacement of the earlier position. 4

Mill’s position is no different from Ricardo’s. Consider first a statement by J.B.Say in the Traité d’économie politique :

It is utility which determines the demand for a commodity, but it is the costof its production which limits the extent of its demand. When its utilitydoes not elevate its value to the level of the cost of production, the thing isnot worth what it cost; it is a proof that the productive services might beemployed to create a commodity of a superior value. The possessors ofproductive funds, that is to say, those who have the disposal of labour, ofcapital or land, are perpetually occupied in comparing the cost of productionwith the value of the things produced, or which comes to the same thing, incomparing the value of different commodities with each other; because thecost of production is nothing else but the value of productive services, consumed informing a production; and the value of a productive service is nothing else than thevalue of the commodity, which is the result. The value of a commodity, the valueof a productive service, the value of the cost of production are all, then,similar values when every thing is left to its natural course.

(Say; cited by Ricardo 1951, I, 281–3; emphasis added)

Not unexpectedly Walras much later believed Say to have been on the right road(1954, 425). But so did Ricardo, who commented on this passage: ‘M. Say maintainswith scarcely any variation, the doctrine which I hold concerning value.’ The solecomplaint related to Say’s treatment of the services of land (1951, I, 283–4). 5

I fail therefore to appreciate Roncaglia’s representation of ‘modern or marginalisttheory’ as a one-way avenue that leads from ‘factors of production’ to ‘consumptiongoods’ in contrast to the classical ‘system of production and consumption as acircular process’ (1982, 342; cf. 354). Every orthodox ‘Principles of Economics’commences by expounding a ‘circularflow’ process of production and consumption.And, as we have just shown, this approach, formally stated by J.B. Say, was commendedby Ricardo.

Also relevant here is Ricardo’s representation of rent as ‘that compensation, whichis paid to the owner of land for the use of its original and indestructible powers’(1951, I, 67). The exposition of rent is in terms of scarcity considerations: ‘no one


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would pay for the use of land [in new settlements], when there was an abundantquantity not yet appropriated, and, therefore, at the disposal of whosoever mightchoose to cultivate it’, and draws on J.B. Say: ‘On the common principle of supplyand demand, no rent would be paid for such land, for the reason stated why nothingis given for the use of air and water ... as the supply is boundless they bear no price’(I, 69–70). There is too the insistence (against Adam Smith) that it is ‘from the priceat which the produce is sold, that rent is derived; and this price is got ... because itis the price which suits the consumption to the supply’ (I, 77n). We are here on theway toward a productivity explanation of factor returns with an eye on ‘derived’demand. The final-demand dimension is certainly most obvious in the case of land; 6

but, by accepting Say’s formulation of circular flow, Ricardo recognized itspervasiveness and applicability to factors whose returns do enter into the calculationof cost prices in the form of wages and profits.

Roncaglia insists that for Ricardo ‘profits are generated in production’ (1982, 342;cf. 354). This is true, and nothing that has been said thus far controverts the point.But he seems also to believe that Ricardo’s rejection of Smith’s approach to profitsin terms of ‘competition of capitals’ implies rejection of demand–supply analysis infactor markets, and this is a misconception. Ricardo’s rejection of Smith’s positionturned upon the law of markets, for it seemed that Smith allowed excess overallsupply by his formulations (Hollander 1979, 509). This reaction fits perfectly withour demonstration of Ricardo’s adherence to Say’s conception of economicorganization.

V . R I C A R D I A N C O S T P R I C E A N D T H E S C A R C I T YPRINCIPLE

The absence of a generalized conception of the incremental variation of factorproportions does not constitute an irreparable constraint on the applicability ofRicardian theory to standard neoclassical ‘rationing’ problems. In effect, economy-wide substitution between capital and labour was incorporated by Ricardo eventhough neglected within the enterprise–the procedure in the early editions of Walras’Elements. To this matter I turn next, having in mind Roncaglia’s assertions thatRicardo ‘does not consider “the choice” of the structure of production’ which is ‘ahistorical problem ... evolving from social habits, and technological developments’(1982, 355); that ‘natural prices and production structure are clearly understood [byRicardo] as previously determined data for the adjustment process [of market tonatural price]’ (355); and that ‘for the classical theory, relative values reside in theobjective “difficulty of production”, be it represented by a single magnitude (labor-contained) or by the technical coefficients of production’ (343).

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This position can easily be shown to be defective: relative values (reflecting costprices) are for Ricardo a function of distribution and not only of technology orproduction techniques. In fact, Ricardo’s discussion of longrun cost pricedetermination provides a beautiful illustration of the operation of the scarcityprinciple as it pertains to capital and labour.

Ricardo makes it clear that the process of market-price adjustment to cost priceoccurs by way of supply variation: ‘I do not say that the value of a commodity willalways conform to its natural price without an additional supply, but I say that thecost of production regulates the supply, and therefore regulates the price’ (1951, II,48–9). Consider now the case of differential factor proportions and Ricardo’s firstchapter, where it is explained that the consequence of a rise in wages assuming aninitial equilibrium (uniform rate of profit) is an altered structure of cost prices,labour-intensive commodities rising relative to capital-intensive commodities. I askone simple question: What else can possibly be involved here but a rise in costs ofthe one category relative to the other in consequence of the supposed disturbance tothe initial equilibrium, followed by a contraction in output of the first categoryand an expansion of the second until market prices reach the new cost levels? And ifthis is so, what is at work if not a rationing of labour – an economy-wide substitutionagainst labour – by way of alterations in the outputs of the various commodities?

The implications of this perspective are extensive. Wages, we have seen, are treatedby Ricardo as a price, determined by demand – supply relations. The analysis proceedsat the aggregate level, demand represented by part of the capital supply and supplyby the work force; it is the average wage that is at stake, not the wage rate paid toparticular categories of workers. Now Ricardo followed the Smithian procedure inhis approach to wage-rate determination, but took an important step forward in thechapter ‘On Machinery’, where variations in the circulating–fixed capital divisionwere introduced and the implications for labour demand and the wage rate tracedout. It is true that his formal analysis of the allocative effects of changes in thepattern of demand implies uniformity of factor proportions (Hollander 1979, 287–8).7 But once this restrictive assumption is relaxed, and the principle developed inthe discussion of machinery extended generally, there is no way of avoiding theconclusion that changes in the pattern of final demand may affect the demand forlabour and thus the general wage rate (by altering the overall circulating–fixed capitalratio), leading in turn to a reorganization of the commodity mix to reflect thealtered cost relativities. I am not claiming that Ricardo himself spelled out thismechanism, but that the mechanism is consistent with the existing corpus of Ricardiantheory; there are no ‘paradigmatic’ differences between Ricardian and neoclassicaltheory in so far as concerns the effects upon distribution of a change in the patternof final demand.

The structure of production – like the wage rate itself – is a key variable of


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Ricardo’s theoretical system, and the effort to divorce Ricardo from later nineteenth-century neoclassical developments is unconvincing. To my mind it is Ricardo’s greatachievement to have demonstrated that a rise in the wage rate can alter the structureof cost prices (and outputs) – a correction of the Smithian ‘adding-up’ analysis,using allocation tools learned largely from the Wealth of Nations itself. To see thingsin this light does not, I think, ‘fog communication’ (Roncaglia 1982, 325).

VI . AN ECUMENICAL POSTSCRIPT

The differences between Roncaglia and myself are perhaps less great than wouldappear. Throughout the review I find concessions which narrow the gap. For example:

The distinction between the classical surplus and the marginalist– neoclassicalthemes has been characterized as a counterposition of reproducibility versusscarcity. ... Yet, both aspects are present in each approach: in the classicaltheory scarcity is a prerequisite for a good to be a commodity, i.e. to beeconomically relevant – air is not a commodity. For marginalists theproductive transformation of primary resources into useful goods is takeninto account as a complication which does not imply substantial modificationof the structure of the analysis.

(Roncaglia 1982, 343)

Roncaglia is too hesitant in his allowance regarding the scarcity dimension of classi-cism; and I do not quite understand his point regarding the marginalists. But Icommend the spirit of the observation.

Roncaglia says of my demonstration of the interdependence of distribution andpricing in the Ricardian system that it is ‘correct, in part’, appending the qualificationthat the wage rate is ‘external to the analytical core’ (356). I do not mind so muchwhether one defines the wage rate as ‘external’ if it is conceded that final demandpatterns play a part in its determination.

On one occasion, Roncaglia, in the context of market-price movements, seems toaccept Marshall’s position regarding the complementarity of objective and subjectivetheories of value, but insists that ‘the analysis of the adjustment process is clearlydistinguished by Ricardo from his main theoretical preoccupation on thedetermination of “natural” or “normal” prices’ (344). It is a step in the right directionto recognize Ricardo’s use of demand–supply analysis in the market case, since theCambridge view denies this. What remains is to recall that the classical natural priceis nothing but the Marshallian, and as can be shown, Walrasian (cf. Hollander 1981[see Chapter 9]), long-run supply price; and second, that an economy-wide wagechange can affect the entire structure of cost prices. Cost prices are the prices to

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which market prices ‘tend’, but we must not forget that they are themselves subjectto disturbance by distributive as well as technological changes.

Finally, I am gratified by Roncaglia’s commendation of my position that the keytheorem of Ricardian economics is the inverse wage–profit relationship while theanalysis of the secular fall in the profit rate is only a A REPLY TO PROFESSORRONCAGLIA writes with reference to the inverse relationship of ‘a certain set ofanalytical propositions, as being somehow separable from the others as the “core” towhich the term “science” is fully applicable’ (350). I agree with this observation,although as it stands it is rather vague. As I see it, there is no question that Ricardoconstructed a growth model and that this was part of his analytical endeavour. Butas I have demonstrated (1979, ch. 9), this model was not intended to yield a specifichistorical prediction relating to the wage and profit rates, considering the likelihoodof changes in technology; yet the movement in the profit rate, whatever it might be,is always explicable in terms of the inverse profit–wage theorem, which holds goodwhatever the particular values of the distributive variables that may be historicallyrelevant. This formulation may help define the nature of the ‘scientific core’ thatRoncaglia is seeking.

NOTES

1. Roncaglia (1982, 351) leaves aside my criticism of the ‘corn model’ and the ‘physical rateof profit’ attributed to Ricardo, relying on an ‘apt refutation’ by Eatwell. See, however, myreply to Eatwell (Hollander 1975).

2. Roncaglia (1982, 355) seeks to make much of Ricardo’s statement that ‘no general rulecan be laid down for the variations of price in proportion to quantity’. But here Ricardo(very reasonably) is simply rejecting the possibility of specifying a particular elasticitycoefficient pertinent to all commodities at all times (see Hollander 1979, 276).

3. In this same context Roncaglia (1982, 344) objects to my representing Ricardo’s concernfor real per capita income as a concern for utility. How then are we to explain Ricardo’sstatements that ‘consumption is the sole end and purpose of all production’ (1951, V,271), or that ‘by increasing production ... you increase the general happiness’ (I, 271), or(on the disadvantages of a closed system) ‘I do not want to know what value we could haveobtained ... but what riches we might have got – what means of happiness to the community’(II, 203), or similarly, the representation of the gain from trade following J.B. Say as ‘anutilité produite ’ (I, 320)? On all this see my book, 1979, 544ff.

4. Roncaglia is in error when he asserts (1982, 341) that the classical ‘vision’ of economicprocess entails the notion of literal pre-accumulations of subsistence. Ricardo, for one,rejected the notion; see Hollander 1979, 274, 326ff. So did Mill, but I cannot go into thatmatter here.

5. See also the doctrine of productive services in Say (1967, 12ff) regarding which Ricardowrote to Malthus: ‘if he would give up rent, he and I should not differ very materially onthat subject’ (1951, VIII, 277), and to Say: ‘In your doctrine of productive services I almostfully agree, but I submit to you, whether, as rent is the effect of high price, and not the


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cause of it, it should not be rejected when we estimate the comparative value of commodities’(VIII, 279).

6. ‘It is in connection with rent that we find the nearest approach in the classical writings toa process of imputation on the basis of final increments’ (Knight 1956, 69).

7. The passage cited by Roncaglia (1982, 354) from Ricardo (1951, I, 382) applies to this case.

REFERENCES

Hollander, Samuel (1973) The Economics of Adam Smith, London and Toronto: University ofToronto Press.

——(1975) ‘Ricardo and the Corn Profit Model: Reply to Eatwell’, Economica 42.——(1976) ‘Ricardianism, J.S. Mill, and the Neo-classical Challenge’ in J.M. Robson and M.

Laine (eds) James and John Stuart Mill: Papers on the Centenary Conference, Toronto: Universityof Toronto Press.

——(1979) The Economics of David Ricardo, London and Toronto: University of Toronto Press.——(1981) ‘On the Substantive Identity of the Classical and Neo-classical Conceptions of

Economic Organization’ (unpublished manuscript).Knight, F.H. (1956) On the History and Method of Economics, Chicago: University of Chicago

Press.Marshall, Alfred (1920) Principles of Economics, 8th edn, London: Macmillan.Mill, J.S. (1965) [1848] Principles of Political Economy, Collected Works, vols II and III, Toronto:

University of Toronto Press.Ricardo, David (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 vols),

Cambridge: Cambridge University Press.Roncaglia, A. (1982) ‘Hollander’s Ricardo’, Journal of Post Keynesian Economics IV, 3 (Spring):

339–59.Say, J.B. (1967) [1821] Letters to Mr. Malthus, London: Sherwood, Neely, and Jones.Smith, Adam (1937) [1776] The Wealth of Nations, New York: Modern Library.Walras, Léon (1954) Elements of Pure Economics, ed. W. Jaffé, 4th definitive edn(1926), London: George Allen and Unwin.

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I.

Professor Moss (1979) provides a helpful and commendably accurate summary ofthe various interpretations to be found in the literature on Ricardian economicsincluding my position which gives pride of place to the inverse profit–wagerelationship and regards changes in the price of corn simply as one possible cause ofvariation in the money wage.

Moss (505–6) draws the valid distinction between two forms of the inverse profit–wage relation: first, what he calls the ‘tautological version that, if wages plus profitsequal output and output is held constant, then a rise in wages will lower profits’; andsecondly the version involving market process. Now I do not claim in my book thatthe second version was spelled out in any detail by Ricardo; what I do claim is thatcompetitive allocation analysis is a central part of Ricardian theory, and that theconsequences of a change in the wage rate for prices and profits outlined by Ricardoimply the operation of the market process even though he left the exercise to hisreaders. In making my case for a significant influence upon his successors, however,it is the first version that takes pride of place since I do not suggest that Ricardo’sreaders appreciated the implicit process analysis entailed.

Moss subscribes to the ‘consensus view’ that the essence of Ricardianism liesspecifically in the agricultural theory of profit (the corn model as it is sometimescalled) rather than the general inverse profit–wage relation (503). The reason for this,in part, seems to be his belief that the inverse wage– profit relation Mark I is quiteinsignificant. On this we must part company. Even the first version I regard as ofthe highest significance so that if, as I believe can be demonstrated, Ricardo persuadedhis successors to adopt it one can speak of a meaningful legacy.

8

‘PROFESSOR HOLLANDER ANDRICARDIAN ECONOMICS’ : AREPLY TO PROFESSOR MOSS


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Does not Moss’s historical perspective go awry when he dismisses the first versionas ‘tautological’ – ‘to deny the validity of this proposition is surely tantamount todenying the basic logical law of noncontradiction’ – and ‘unimportant’? I am notsure why he takes for granted that what is ‘tautological’ is necessarily ‘unimportant’as he seems to do; on the contrary, surely the growth of knowledge involves in parta growing awareness of ‘tautological’ relationships. This indeed seems to be the casein the present instance.

It is obviously true that an increase in a proportionate share must imply adecrease in the residual proportionate share. But Ricardo’s efforts were not devotedto proving this proposition – his concern was with the preceding stages of the argument(cf. my The Economics of David Ricardo, 267f).

In the first place, he struggled (unsuccessfully as he realized) to devise a means ofassuring constancy in the value of the total to be shared between wages and profits.Secondly, if this problem is put aside, or assumed away, and we presume in principle(if not in practice) an approximately unchanged value of the produce to be distributed,Ricardo sought to demonstrate that only certain categories of wage-rate variationmay be identified with variations in the wage share. Specifically, a wage-rate increasewhich reflects an increase in the cost of producing wage goods or a larger wagebasket (in conditions of unchanged productivity) is identifiable with an increasedwage share of output (net of rent), while a wage-rate increase which is purely nominal– reflecting an alteration in the cost (or quantity) conditions of the monetary medium– leaves the share of wages unchanged, a constructive distinction of the very firstimportance.

Thirdly, the identification of an increase in the ‘real’ wage with an increase in thewage share in output net of rent is itself not a truism because it does not hold gooduniversally. An increase in the labour embodied in wages may not involve an increasein the wage share if the value of output-as-a-whole (net of rent) should be increasing.An increase in the share of wages is implied unambiguously only if the value of percapita wages rises.

The fact must also be taken into account that Ricardo did not exert all his effortsmerely to arrive at a statement of the inverse relation between wages and profitsenvisaged as proportions. This was only a step towards the ultimate objective whichwas to define the determinants of the rate of return on capital. The rate of profit issaid to be dependent upon, but is certainly not identified with, the share of profitsin per capita or total output (net of rent), and the relationship is certainly not a‘truistic’ one since the capital stock considered by Ricardo in his calculations –including those of the chapter ‘On Profits’ – is not generally reduced entirely towage advances.

However, when all is said and done, the full significance of the inverse profit–wage nexus can be evaluated, and accordingly Ricardo’s place in the development of

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economic thought identified, only if full attention is paid to the instigating forcebehind his investigations. The relevant consideration in this regard is Ricardo’sobjection to received doctrine based upon the Smithian analysis. The charge thatRicardo merely formulated a ‘truism’ will be seen to be without foundation if it isremembered that contemporary thought did not distinguish between those (‘nominal’)wage increases which do not and those (‘real’) wage-rate increases which do involvea change in the distributive shares, and in fact implied that even wage increasesfalling within the latter category may be passed on by employers in the form ofhigher prices in the manufacturing sector and lower rents in agriculture.

I have traced in detail Ricardo’s odyssey, lasting several years from subscriptionto the Smithian position (in 1809–10) until his own position was fully formulated(EDR, ch. 3). The demonstration of the fallacy of Smith’s position took variousforms. At the simplest level there is the argument that it is logically self-contradictoryto maintain that all prices (including the medium) rise simultaneously upon a risein wages – a truly general wage increase can only affect the structure of prices. If thenwe assume constancy of the general purchasing power of money, a money wageincrease cannot but force down the profit rate since the level of prices is constant.The ‘measure of value’ was, in effect, designed precisely to preclude purely nominalchanges in the medium of account, but as shown in my book an equivalent solutionwas based upon the quantity theory: ‘All commodities cannot rise at the same timewithout an addition to the quantity of money. This addition could not be obtainedat home ... nor could it be imported from abroad. To purchase any additionalquantity from abroad, commodities at home must be cheap, not dear. The importationof gold, and a rise in the price of all home-made commodities with which gold ispurchased or paid for, are effects absolutely incompatible’ (Ricardo 1951, I, 104–5;EDR, 244).

To all of this Ricardo added that even were the price level to rise, ‘the propositionwould not be less true, which asserts that high wages invariably affect the employersof labour, by depriving them of a portion of their real profits. ... I have endeavouredto show, first, that rise of wages would not raise the price of commodities but wouldinvariably lower profits; and secondly that if the prices of all commodities could beraised, still the effect on profits would be the same, and that in fact the value of themedium only in which prices and profits are estimated would be lowered’ (I, 126–7;EDR, 245). Here we have the allusion to erosion of the real value of profits.

These arguments do not in themselves explain the precise adjustment mechanismat work following a wage variation. They operate, as it were, purely on the logicalplane. Inverse relation Mark II is required to provide economic content to theargument. Nevertheless, to dismiss the matter as ‘tautological’ and ‘unimportant’misses the point. Ricardo did not exert such mental effort to establish somethingself-evident to any layman.


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II.

Let us turn briefly to the Ricardian ‘legacy’ and the assertion that ‘most (if not all)of the economists of the day who defended Ricardo’s fundamental theorem, defendedonly the definitional and unimportant version of the theorem’ (Moss 1979, 505).That most economists defended the inverse relationship Mark I is not at issue. It isthe downplaying of Ricardo’s influence which I challenge. How does Moss explainMalthus’s explicit insistence upon the ‘importance’ of the theorem despite its ‘apparentobviousness’? ‘Of all the truths which Mr. Ricardo has established, one of the mostuseful and important is, that profits are determined by the proportion of the wholeproduce which goes to labour. It is, indeed, a direct corollary from the proposition,that the value of commodities is resolvable into wages and profits; but its simplicityand apparent obviousness do not detract from its utility’ (1963 [1824], 189).

How also does he explain Torrens’s initial description of the inverse relationshipas ‘equally untenable, whether the terms alteration of wages, alteration of profits areemployed with a reference to proportions, or whether they are used in relation toquantities’ (1826, xv–xvi). Some tautology! Or his later concession (after readingLongfield) that since Ricardo ‘explained and explained correctly the laws whichregulate rent, wages and profits, under the circumstances which he assumed ’ he ‘renderedimportant service to the science of Political Economy’ (1844, xxvi) or his descriptionof the device of the ‘proportions-measuring money ’ in the derivation of the relationshipas ‘of great practical importance’ (xxiii). Similarly, I do not see that Moss showsLongfield to have minimized the significance of the relationship.

I cannot help noting, incidentally, that Moss himself in his own book on Longfield,at least at one point, seems to take my position on what constitutes the main themeof Ricardian theory: ‘It is ... ironic that, when Torrens did mention Longfield’sname it was to credit him with having removed “the main objection to ... Ricardo’stheory of profit” by explaining in what sense it is to be understood that wages andprofits vary inversely. What a curious turn of events that Longfield, who set out tosupplant the English theory of wages and profits with a new one of his own, shouldbe hailed in England as one who defended the principal pillar of the Ricardian theory ofdistribution ’ (1976, 120–1; emphasis added).

III.

Moss (1979, 507) asks me to explain why Ricardo was so eager to establish that anexogenous increase in the commercial or manufacturing profit rate will be correctedto assure equality with the going rate in agriculture if my argument is correct thatthe core of his theory is not the determination of the general rate in the agricultural

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sector. Surely Moss has given my answer on that same page: if the agricultural ratecomes into line with the rate elsewhere the legitimacy of the inverse relationship isat stake since the general profit rate then varies without any alteration in the moneywage having occurred. What more is to be said?

Moss’s assertion that an innovation in textiles could have been easily accommodatedby assuming that the money wage is affected (textiles entering the wage basket) isquite beside the point. If indeed textiles do enter the wage basket and the moneywage falls then certainly the general profit rate will rise – this in fact is a centralargument of my book, namely that for Ricardo it is immaterial which category ofwage goods varies in price. But how would the differential in rates initially presupposedbe corrected by a general wage reduction? Of course Ricardo did not take this route!(In any event what if manufactured wage goods are not involved?)

I am not at all convinced by Moss’s observation regarding the consistency of myposition and that of those who attribute the agricultural profit theory to Ricardo(509). I am fussy about my bedfellows. There are key experiments, the outcome ofwhich vary totally according to the two views. For example, as I show in considerabledetail (EDR, ch. 6), technological improvement in the agricultural sector releaseslabour and capital for employment in other sectors which are reabsorbed elsewherewith no alteration in their respective returns in consequence of the operation of thelaw of markets; the price of corn falls to the lower cost level and the return inagriculture (temporarily raised) comes back into line with the given general rate.Thus, despite a change in the ‘margin of cultivation’, the profit rate remains constant.Similarly, freer corn importation leaves the general profit rate unchanged despite acontraction of the domestic margin. The process involves a fall in the price of cornand the transfer of resources to the manufacturing sector with no effect on thegeneral profit rate. These are not the outcomes predicted by the agricultural profitmodel.

Now Ricardo certainly insisted that if the price of luxury goods (silks, velvets,etc.) rises there would be no effect on profits, ‘for nothing can affect profits but arise in wages; silks and velvets are not consumed by the labourer, and thereforecannot raise wages’ (1951, I, 118). But this is a quite separate analytical issue. Ricardohimself tried to keep the issues separate. Indeed he felt able to proceed in his treatmentof the corn-export bounty in terms of an exposition of the fundamental principlesat stake involving the (provisional) assumption that agriculture is a constant-costindustry; in this case there is no long-run change in the corn price at all, and thusno change in the ‘money’ wage. The subsequent allowance for rising money wages inconsequence of increasing costs, is a separate complication. In a different contextRicardo recognized the possibility that technical change might reduce the cost andprice of corn and yet leave ‘money’ wages unaffected – in which case the profit rateremains unchanged (although the commodity wage rises). Similarly, an increase in


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the price of corn might leave the money wage unchanged with labourers reducingtheir consumption of other goods, in which case again the profit rate is unaffected.With such a wide variety of possibilities it is essential not to confuse the effects onthe profit rate induced by a change in the margin of agriculture itself – and I haveargued there are none – and the effects of a change in the price of corn workingupon the general profit rate by way of money wages. It is the attribution to Ricardoof a fixed (real) wage assumption which precludes this essential distinction, and thisassumption is the essence of the agricultural model.

IV.

Ricardian economics, I have argued in EDR, has relevance quite apart from theCorn Laws (as J.S. Mill so well explained) for the inverse relation is at play no matterwhat the reason for a change in wages. But I do not maintain that the secularbehaviour of corn prices was an irrelevant matter for Ricardo; or deny thatdiminishing returns constituted the key to his growth model. I simply do notbelieve that model to have been the corn model; nor does one require the corn modelto allow a significant role to movements in the price of corn in profit-ratedetermination. Moss’s quest for ‘a “motive” on Ricardo’s part for holding on to[the agricultural] theory’ (1979, 508) is thus based on a false premise.

REFERENCES

Hollander, S. (1979) The Economics of David Ricardo, Toronto: University of Toronto Press.Malthus, T.R. (1963) [1824] ‘Political Economy’, in B. Semmel (ed.) Occasional Papers, New

York: Burt Franklin.Moss, L.S. (1976) Mountifort Longfield: Ireland’s First Professor of Political Economy, Ottawa,

Illinois: Green Hill Publishers.—— (1979) ‘Professor Hollander and Ricardian Economics’, Eastern Economic Journal, December.Ricardo, D. (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 vols), Vol.

I: The Principles of Political Economy and Taxation, Cambridge: Cambridge University Press.Torrens, R. (1826) An Essay on the External Corn Trade, 3rd edn, London: Longman, Rees,

Orme and Brown.—— (1844) The Budget: On Commercial and Colonial Policy, London: Smith, Elder.

Part III

RICARDIAN MICRO-ECONOMICS

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STATEMENT OF ISSUES

My paper is a contribution to the ongoing debate regarding the nature of the neo-classical developments of the 1870s, particularly the legitimacy of the term ‘revolution’,which implies analytical discontinuity, as a valid description of those developments.This representation has become particularly topical, since the notion of a neo-classicalor marginalist economics, contrasting sharply in analytical essentials with Ricardianclassicism, constitutes a central theme of the historiography of the modern Cambridge(UK) School. The evidence discussed in this paper suggests, on the contrary, howuseful in the present context is the notion of altered ‘concentrations of attention’(Hicks 1976, 208–9), which avoids a revolutionary connotation. For what seems tohave occurred in the 1870s was a narrowing of focus, specifically a greater concernwith exchange and allocation in their own right; a sharpening of theoretical tools,particularly those relating to consumer choice; and the algebraic formulation ofgeneral-equilibrium relationships. These are developments which could have beenabsorbed by the traditional corpus of analysis, whereas the impatience of themarginalists and their apparent wish to wipe the slate clean meant that much of greatimport in classical theory for their own chosen and relatively narrow sphere ofdiscourse was not recognized, and spurious analytical distinctions were artificiallyreinforced. My evidence, in short, suggests how justified was Marshall’s insistence,

9

ON THE SUBSTANTIVEIDENTITY OF THE RICARDIAN

AND NEO-CLASSICALCONCEPTIONS OF ECONOMIC

ORGANIZATION:THE FRENCH CONNECTION IN

BRITISH CLASSICISM*


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against both Jevons and Walras, upon the essential continuity of nineteenth-centurydoctrine: ‘Under the honest belief that Ricardo and his followers had rendered theiraccount of the causes that determine value hopelessly wrong by omitting to lay stresson the law of satiable wants, [Jevons] led many to think he was correcting greaterrors; whereas he was really only adding very important explanations’ (Marshall1920, 101n). Indeed Marshall found Ricardo’s formulation of pricing preferable tothat of Jevons, who ‘substitutes a catena of causes for mutual causation’ (818). GeraldShove’s estimate of four decades ago stands the test of time:

the analytical backbone of Marshall’s Principles is nothing more nor less thana completion and generalization, by means of a mathematical apparatus, ofRicardo’s theory of value and distribution as expounded by J.S. Mill. It isnot ... a conflation of Ricardian notions with those of the ‘marginal utility’school. Nor is it an attempt to substitute for Ricardian doctrine a newsystem of ideas arrived at by a different line of approach. ... [So] far as itsstrictly analytical content is concerned, the Principles is in the direct line ofdescent through Mill from Ricardo.

(Shove 1960 [1942], 712)

A preliminary word on the contrary positions may be helpful, first and foremostthat of the marginalists themselves. Distribution was envisaged by Jevons (ideally) asa matter of service pricing ‘entirely subject to the principles of value and the laws ofsupply and demand’, with input prices ‘the effect and not the cause of the value ofthe produce’ – ‘I hold labour to be essentially variable, so that its value must be determinedby the value of the produce, not the value of the produce by that of labour’ ; and cost ofproduction as a reflection of opportunities forgone (Jevons 1924: xliii f, 186). Heaccordingly directed his criticisms at the wage fund and subsistence approaches towage-rate determination and the cost approach to value – as he understood them –paying tribute to the French tradition: ‘the only hope of attaining a true system ofEconomics is to fling aside, once and for ever after, the mazy and preposterousassumptions of the Ricardian School. Our English Economists have been living in afool’s paradise. The truth is with the French School’ (xliv–xlv). 1

Jevons recognized elements of the ‘correct’ position in Mill’s Principles – that rententers into cost where land has alternative uses, that all inequalities (whether naturalor artificial) generate economic rents, and the representation of demand and supplyas a law ‘anterior’ to costs (xlviii, li, 197) – but could not resist remarking (in thecontext of the generalization of the rent concept) that ‘those who have studied Mill’sphilosophic character as long and minutely as I have done, will not for a momentsuppose that the occurance of this section of Mill’s book tends to establish itsconsistency with other positions in the same treatise’ (li).

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Walras, whose intellectual origins include par excellence J.B. Say (Schumpeter 1954,828), similarly objected to the classical pricing and distribution model (as he understoodit) – particularly the cost orientation and the natural-wage approach. By neglecting afinal demand dimension, and accordingly derived demand, the English had constructedan underdetermined system (Walras 1954, 434–5; cf. Jevons 1924, 269).

In more recent times we have the famous criticism of classicism along similarlines by Knight (1956). For Knight, of course, prices depend on the relative subjectiveappeal to consumers, the flow of goods and thus their marginal utilities governedby cost consideration, where ‘costs’ reflect alternatives surrendered rather than ‘pain’in the sense of labour or abstinence. On this view the economizing principle involvesmaximizing the total return from any resource, by equalizing the increments ofreturn at the margin to the scarce resource in alternative uses.

It has been suggested (Arrow and Starrett 1973, 132–3) that once the subsistencetheory of wages broke down, ‘the most natural alternative was to explain wages bythe productivity of labor, an explanation only useful if labor was intrinsically scarce.In short labor had to be treated like land.’ Moreover, recognition of the phenomenonof non-competing groups implied a multiplicity of primary factors which, so it isargued, ‘required a new theory’. The founders of the neo-classical school ‘understoodthe glaring omission of demand from the classical model’.

In his Nobel lecture (1970) Ragnar Frisch neatly stated precisely that reading ofthe record that I dispute:

The classical theory of value – as we find it streamlined in Stuart Mill – wasessentially a theory of production costs ... there emerges a sort of gravitationalforce that pulls prices down. The cost of production is so to speak the solidbase on to which the prices fall down and remain ....

This theory contains, of course, an irrefutable element of truth. But it istoo simple to give even a crude presentation of the forces at play. Theeconomic process is an equilibrium affair where both technological andsubjective forces are at play. The subjective element was nearly left out by theclassicists.

On this point economic theory was completely renewed in the yearsbetween 1870 and 1890. ...

(Frisch 1981, 5)

As remarked above, the theme of a revolutionary break by the general equilibriumeconomists from classicism is also a feature of modern ‘Cambridge’ historiography.Thus Joan Robinson:

either there may be a tendency towards uniformity of wages and the rate ofprofit in different lines of production [ – the classical position – ] or prices


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may be governed by supply and demand, but not both. Where supply anddemand rule, there is no room for uniform levels of wages and the rate ofprofits. The Walrasian system makes sense if we interpret it in terms of anartisan economy, where each producer is committed to a particular product,so that his income depends on his output and its price. Each can have aprospective rate of return on investment in his own line, but there is nomechanism to equalize profits between one line and another.

(Robinson 1961, 57)

This observation is apparently based on the supposition that among the data of theWalrasian system are included the quantities of each and every specific kind oflabour, capital good and land.

Following Piero Sraffa, Professor Roncaglia (1982, 341–3) similarly represents theanalytical core of neo-classicism as ‘the model of pure exchange’, whereby perfectcompetition guides us to the optimal allocation of scarce resources. Prices are ‘indexesof resource scarcity relative to wants; income distribution comes out as a by-productof price-determination, distributive variables being but the prices for the services ofthe so-called “factors of production”. Production processes are only an intermediatestage connecting final consumers’ tastes to the initial scarce resource endowments.’By contrast, ‘classicism’ is represented as a reproductive process (involving the‘production of commodities by means of commodities’) wherein ‘at the beginningof the production period, specific quantities of commodities are advanced, as meansof production or as subsistence for the workers employed’ – both technology(including the structure of production) and wages are exogenously determined – theutilization of which yields outputs exceeding the initial stocks, a surplus ‘consistingof a heterogeneous set of commodities’. In this system ‘relative prices must be suchas to allow all sectors a profit inducement to repeat the production sequence’; thespread between product prices and costs must generate a uniform rate of profit inall sectors, the average profit rate itself being determined solely by the exogenouslygiven wage rate and technology. 2

It is an essential part of the foregoing argument that in the classical system valueand output levels are not determined simultaneously by the forces of demand andsupply.3 This separation of value and output precludes the possibility that a changein the pattern of consumer demand can influence factor returns, and thus costs, byplaying upon the relative scarcity of the factors: the divorce of value and outputimplies a divorce of value and distribution (cf. Dobb 1973, 261; Garegnani 1972,278f; 1976, 24–45; Pasinetti 1974, 43–4; Roncaglia 1978, 119f).

All this is in contrast to Walrasian theory. Indeed, the paradigmatic contrastshave led to the charge that Walras was seriously inconsistent for conceiving thecapital endowment of the community as a set of given quantities of ‘capital-goods

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proper’ yet also (in parts of his Elements) adopting the notion of uniformity ofprofit rates (Garegnani 1976, 34, 36).

It is my contention that Ricardian economics – the economics of Ricardo and J.S.Mill – in fact comprises in its essentials an exchange system fully consistent with themarginalist elaborations. In particular, their cost-price analysis is pre-eminently ananalysis of the allocation of scarce resources, proceeding in terms of generalequilibrium, with allowance for final demand, and the interdependence of factorand commodity markets. 4 Serious and long-lived misconceptions regarding classicismflow from a failure to recognize that the classical notions of wages and interest ascompensation for effort and abstinence were pertinent only at the macro-economiclevel where the determinants of aggregate factor supplies are under investigation andnot in the micro-economic context where costs referred to forgone opportunities. 5

My perspective places J.S. Mill directly in the Ricardian theoretical tradition.That we find simultaneously in his Principles both ‘neo-classical’ and ‘Ricardian’ featuresimplies neither inconsistency (Hollander 1976) – or no more inconsistency than inRicardo himself – nor a process of escape, or attempted escape, from his Ricardianheritage, a view expressed recently in the following terms:

A silent revolution in the direction of the marginalist supply-and-demandtheory was brought about [by Marshall] in the course of adopting, extendingand transforming some ideas in Mill. As Mill himself had departed considerablyfrom Ricardo, Marshall was thus moving even further from the Ricardiansource.

(Bharadwaj 1978, 254)

It was precisely the beginnings in Mill of considerable deviations fromRicardo’s theory of distribution that called for and received at Marshall’shands ... extensions and refinement, so that Marshall’s deliberations on valueand distribution departed systematically from questions Ricardo posed andthe framework of analysis he employed. ... What Shove regarded as extensionsand generalisations of Ricardo in [Marshall’s] Principles (the introduction ofthe demand side, the functional relation between costs and output, the supplyand demand determination of wages and profits) are radical departures fromthe Ricardian standpoint.

(Bharadwaj 1978, 269)6

My perspective is one that avoids the difficult psychological problems posed byinterpretations that refuse to accept at face value Marshall’s statements of his relationshipwith his classical forebears, or those of Mill regarding his intellectual relationship withRicardo – his repeated insistence that he was elaborating upon Ricardian themes. The


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demand side, the functional relation between cost and output, and the supply anddemand determination of wages and profits, far from being ‘radical departures’ fromRicardianism, are central to that doctrine without which neither the cost theory ofprice nor the inverse wage–profit relation can be understood. 7

The second and third sections of this paper will demonstrate the key role accordedby Ricardo and J.S. Mill to opportunity cost and derived factor demand: theirsimultaneous and consistent attachment to cost theories of value and to the general-equilibrium conception of economic organization as formulated by J.B. Say andmuch admired by Walras. Such demonstration clearly has important implicationsfor the nature of the ‘neo-classical’ developments of the 1870s.

But we must also consider the reverse side of the coin, from which perspective itagain becomes clear that the term ‘revolution’ to describe that doctrine is unhelpful.In his criticisms of Ricardo, Walras wrote that it is ‘the price of the products whichdetermines the price of productive services’ (1954, 425). Similarly, he praised Jevons’sstatement of the ideal procedure according to which ‘the formula of the Englishschool, in any case the school of Ricardo and Mill, must be reversed, for the pricesof productive services are determined by the prices of the products, and not theother way round’ (45). This clearly does not constitute a picture of mutualinterdependence between factor and product markets. It is in fact a statement thatemphasizes what the classics had supposedly omitted, and does so by implicitlyadopting a short-run perspective. My fourth section is devoted to a demonstrationthat Walras accepted the ‘classical’ conception of long-run cost prices – ‘costs’incorporating profits at a uniform rate on the supply prices of capital goods –employing the Ricardian or Marshallian adjustment mechanism of output responseto deviations between demand and supply prices. It also becomes clear that thecharge of inconsistency for so doing is unfounded; he insisted upon profit-rateuniformity, as Ricardo had done and as Marshall was to do, only when allowance ismade for changes in the outputs of the different types of capital goods. (The sameapplies to labour.) Walras adhered to classical cost-price analysis given the appropriatelong-run assumptions and, like Ricardo and Marshall, distinguished betweenmaximizing decisions regarding new investments and the actual return on capitalgoods once constructed.

The fifth section will draw the threads of our analysis together. Brief considerationwill then be given to the sources of some of the erroneous views regarding classicismdescribed above.

R I C A R D O O N E C O N O M I C O R G A N I Z A T I O N : T H E S A YTRADITION

We set out with J.B. Say’s well-known statement in the Traité d’économie politique ofmutual interdependence between product and factor markets incorporating the

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principles of opportunity cost and of imputing the values of factors from the valuesof their products – in broad terms only because of the absence of a marginalconception whereby the physical contributions of individual factors can be isolated:

It is utility which determines the demand for a commodity, but it is the costof its production which limits the extent of its demand. When its utility doesnot elevate its value to the level of the cost of production, the thing is notworth what it cost; it is a proof that the productive services might be employedto create a commodity of a superior value. The possessors of productive funds,that is to say, those who have the disposal of labour, of capital or land, areperpetually occupied in comparing the cost of production with the value ofthe things produced, or which comes to the same thing, in comparing thevalue of different commodities with each other; because the cost of productionis nothing else but the value of productive services consumed in forming aproduction; and the value of a productive service is nothing else than thevalue of the commodity, which is the result. The value of a commodity, thevalue of a productive service, the value of the cost of production are all, then,similar values when every thing is left to its natural course.

(Say; cited in Ricardo 1951, I, 282–3)

Now Walras certainly believed Say to have been on the right road by this formula-tion of general interdependency (1954, 425). But so did Ricardo, who commented onthe passage: ‘M. Say maintains with scarcely any variation, the doctrine which I holdconcerning value.’ His sole complaint related to Say’s treatment of the services ofland on a par with those of capital and labour, in the light of his own (implied)presumption of one-use land (to be elaborated presently) whereby rent is excludedfrom (marginal) cost (1951, I, 283–4). 8

Ricardo’s subscription to Say’s position cannot easily be appreciated in terms ofthose interpretations that envisage a sharp divergence between the ‘British’ and the‘French’ traditions. Yet the notion of opportunity cost pervades Ricardo’s work.Indeed his cost prices make no sense except in these terms. To this matter we now turn.

It is inviting to identify Ricardian cost price with labour embodied, as Malthusin fact did, but it would be incorrect to do so:

It is necessary for me also to remark, that I have not said, because onecommodity has so much labour bestowed upon it as will cost 1000 l. andanother so much as will cost 2000 l. that therefore one would be of the valueof 1000 l. and the other of the value of 2000 l. but I have said that their valuewill be to each other as two to one, and that in those proportions they willbe exchanged.

(Ricardo 1951, I, 46–7)


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Mr. M. ... misunderstands me ... I say its whole value will be in proportion toa portion of its cost, and I do not say this without allowing for modificationsand exceptions – though I consider these of no great magnitude. I have saidthat the relative value of commodities is in proportion to the quantity oflabour bestowed on them. That value may be double what the labour cost.

(Ricardo 1951, II, 100–2)

‘Cost of production’ or natural price thus includes profits as well as wages each atits average or ordinary rate as Smith had explained (I, 291). Under the appropriatetechnological conditions defined in the first chapter of the Principles (namely uniformfactor proportions) a state of general equilibrium, such that prices reflect coststhroughout the system, will be one satisfying the principles of profit rate (and wagerate) equalization and proportionality of prices to labour inputs. More accurately,under the stated circumstances uniformity of profit rates (and wage rates) requirethat proportionality. The following passage (drawn from a discussion of subsidizedlabour for some firms in a manufacturing industry) beautifully summarizes thepoint, and does so in a context expressing that what is relevant is marginal labourinput: ‘The manufacturer enjoying none of these facilities might indeed be drivenaltogether from the market, if the supply afforded by these favoured workmen wereequal to all the wants of the community; but if he continued in the trade, it wouldbe only on condition that he should derive from it the usual and general rate of profits onstock, and that could only happen when his commodity sold for a price proportional to thequantity of labour bestowed on its production ’ (I, 73n; emphasis added).

Now it is the possibility of capital (and labour) movement between uses orcommodity-supply adjustment that assures the tendency to cost price andproportionality to labour input – a matter of great importance that is apparentlydenied by Cambridge writers and others. This can be illustrated from the discussionof an exogenous change in tastes:

Let us suppose that all commodities are at their natural price, and consequentlythat the profits of capital in all employments are exactly at the same rate. ...Suppose now that a change of fashion should increase the demand for silks,and lessen that of woollens; their natural price, the quantity of labour necessaryfor their production, would continue unaltered, but the market price ofsilks would rise, and that of woollens would fall; and consequently the profitsof the silk manufacturer would be above, whilst those of the woollenmanufacturer would be below, the general and adjusted rate of profits. Notonly the profits, but the wages of the workmen, would be affected in theseemployments. This increased demand for silks would however soon be supplied, by the

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transference of capital and labour from the woollen to the silk manufacture ; whenthe market prices of silks and woollens would again approach their naturalprices, and then the usual profits would be obtained by the respectivemanufacturers of those commodities.

It is then the desire, which every capitalist has, of diverting his funds from a lessto a more profitable employment, that prevents the market price of commodities fromcontinuing for any length of time either much above, or much below their naturalprice. It is this competition, which so adjusts the exchangeable value ofcommodities, that after paying the wages necessary to their production,and all other expences required to put the capital employed in its originalstate of efficiency, the remaining value or overplus will in each trade be inproportion to the value of the capital employed.

(Ricardo 1951, I, 90–1; emphasis added)

In circumstances of differential factor ratios the same assumption of factormobility dictates a divergence of (relative) cost prices from (relative) labour inputsas Ricardo explained at length in his first chapter. But the entire notion of costprice presumes factors that have alternative uses; and in all cases, whether or notcosts are proportional to labour inputs, only those returns that reflect alternativeopportunities are allowed for in costs. Embodiment of labour or for that matter thepain cost attached to labour and abstinence are not in themselves the relevantconsideration, 9 as is clear from the fact that since ‘it is through the inequality ofprofits that capital is moved from one employement to another’ (I, 119), aneconomy-wide change in labour productivity or the wage rate or any otherdisturbance will leave cost prices unaltered should all commodities be impingedupon equally.

The implications of this perspective are legion. For example, from the contextof public finance:

From this circumstance [the differential impact on agriculture of the poorrates] it follows, that the farmer will be enabled to raise the price of hisproduce by the whole difference. For since the tax falls unequally, andpeculiarly on his profits, he would have less motive to devote his capital tothe land, than to employ it in some other trade, were not the price of rawproduce raised. If on the contrary, the rate had fallen with greater weighton the manufacturer than on the farmer he would have been enabled toraise the price of his goods by the amount of the difference, for the samereason that the farmer under similar circumstances could raise the price ofraw produce ...; for there can be no reason why their profits should be


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reduced below the general rate of profits, when their capitals might beeasily removed to agriculture.

(Ricardo 1951, I, 260–1)

The conception in question bears strategically upon the nature of trade: ‘If any causeshould raise the price of a few manufactured commodities, it would prevent orcheck their exportation; but if the same cause operated generally on all, the effectwould be merely nominal, and would neither interfere with their relative [cost]value, nor in any degree diminish the stimulus to a trade of barter, which all commerce,both foreign and domestic really is’ (I, 228). And the principle that cost pricesreflect alternative opportunities provides the rationale for the fundamental theoremof distribution itself – the inverse wage–profit relation. A general wage increase eitherleaves cost prices entirely unaffected, thus forcing down profits (the special case ofidentical factor proportions), or, by disturbing the structure of profit rates, sets inmotion appropriate supply adjustments that lead to the establishment of a new coststructure, assuring again uniform profit rates in all industries albeit at a lowergeneral level (Hollander 1979, 302f).

One also should not forget that although disturbances to the wage structure werelargely set aside by Ricardo, the rationale for this procedure was reliance upon theoperation of ‘competition’ – the demand–supply mechanism – which assured a patternof relativities reflecting ‘the comparative skill of the labourer, and intensity of thelabour performed’ (1951, I, 20).

It will be apparent that Ricardo’s cost prices make no sense except within ademand–supply framework allowing for alternative uses of resources. Yet Ricardo isfrequently said to have rejected demand–supply analysis (except perhaps for marketprice determination). This is a misconception. What he actually complained of was‘the opinion that the price of commodities depends solely on the proportion ofsupply to demand or demand to supply’ (I, 382; emphasis added), a complaintalluding to those formulations that appeared to exclude a role for cost conditions inthe mechanism. Thus his observation to Say: ‘You say demand and supply regulatesthe price of bread; that is true, but what regulates supply? the cost of production’(IX, 172). Indeed, Ricardo’s point (as is apparent from the following reaction to thetreatment by Say of a commodity tax) was precisely that Say had failed to follow outthe logic of his own approach to pricing which runs in terms of alternative uses:

It is observed by M. Say, ‘that a manufacturer is not enabled to make theconsumer pay the whole tax levied on his commodity, because its increasedprice will diminish its consumption’. Should this be the case, should theconsumption be diminished, will not the supply also speedily be diminished?Why should the manufacturer continue in the trade if his profits are below

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the general level? M. Say appears here also to have forgotten the doctrinewhich he elsewhere supports, ‘that the cost of production determines theprice, below which commodities cannot fall for any length of time, becauseproduction would be then either suspended or diminished’.

(Ricardo 1951, I, 243n)

The essence of the matter is captured exquisitely in a letter to Malthus: ‘You saydemand and supply regulates value – this I think is saying nothing ... – it is supplywhich regulates value – and supply is itself controlled by comparative cost of produc-tion’ (VIII, 279; emphasis added).

On matters of principle Ricardo’s line is that of Lausanne: equality of wage rates andof profit rates maximizes the return to the factors ‘capital’ and ‘labour’. 10 Moreover,it must be emphatically stated that these average returns themselves are, in principle,variables governed by the relative scarcity of the factors: ‘I have invariably insisted,that high or low profits depend on low and high wages, how then can it be justlysaid of me that the only cause which I have recognized of high or low profits is thefacility or difficulty of providing food for the labourer[?] I contend that I have alsorecognized the other cause, the relative amount of population to capital, which isanother of the great regulators of wages’ (II, 264–5).11 On this view, and keeping inmind Ricardo’s further insistence that ‘the power of employing labour depends onthe increase of a particular part of capital, not on the increase of the whole capital’(IX, 127), the way is open for an allowance that the adjustment process following avariation in the pattern of final demand itself will affect the average factor returns.In short, output levels can affect relative cost prices by playing upon the relativescarcity of labour and capital, an outcome in line with neo-classical theorizing.

We can sharpen our understanding of Ricardo’s position on the nature of cost priceby considering the contrast between costs and rents. I shall first establish Ricardo’sawareness that the phenomenon of differential rent, which plays so large a part inhis system, is but a special case of a more general phenomenon – land scarcity.

Rent is provisionally defined as the payment to the landlord ‘for the use of theoriginal and indestructible powers of the soil’ (I, 67) – a productivity phenomenon.But in the following passage the ultimate rationale is more specifically expressed interms of productivity and scarcity (demand and supply):

On the first settling of a country, in which there is an abundance of rich andfertile land, a very small proportion of which is required to be cultivated forthe support of the actual population or indeed can be cultivated with thecapital which the population can command, there will be no rent; for no


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one would pay for the use of land, when there was an abundant quantity notyet appropriated, and, therefore, at the disposal of whosoever might chooseto cultivate it.

On the common principles of supply and demand, no rent could be paidfor such land, for the reason stated why nothing is given for the use of airand water, or for any other of the gifts of nature which exist in boundlessquantity. With a given quantity of materials, and with the assistance of thepressure of the atmosphere, and the elasticity of steam, engines may performwork and abridge human labour to a very great extent; but no charge ismade for the use of these natural aids, because they are inexaustible, and atevery man’s disposal. In the same manner the brewer, the distiller, the dyer,make incessant use of the air and water for the production of theircommodities; but as the supply is boundless, they bear no price.

(Ricardo 1951, I, 69)

Here J.B. Say is cited to the same effect: ‘The earth ... is not the only agent of naturewhich has a productive power; but it is the only one, or nearly so, that one set ofmen take to themselves, to the exclusion of others; and of which, consequently, theycan appropriate the benefits.’

Using these principles Ricardo rejected physiocratic residues in the Wealth ofNations, specifically the notion that in manufactures ‘nature does nothing, man doesall; and the reproduction must always be in proportion to the strength of the agentsthat occasion It’. Factor productivity, runs Ricardo’s argument, is a necessary butinsufficient condition for a positive return:

Does nature nothing for man in manufactures? Are the powers of wind andwater, which move our machinery, and assist navigation, nothing? The pressureof the atmosphere and the elasticity of steam, which enable us to work themost stupendous engines – are they not the gifts of nature? to say nothing ofthe effects of the matter of heat in softening and melting metals, of thedecomposition of the atmosphere in the process of dyeing and fermentation.There is not a manufacture which can be mentioned, in which nature doesnot give her assistance to man, and give it too generously and gratuitously.

(Ricardo 1951, I, 76n)

Differential rent (reflecting productivity differentials) is simply a special case ofthe genus, scarcity rent: ‘If all land had the same properties, if it were all unlimitedin quantity, and uniform in quality, no charge could be made for its use, unless itpossesses peculiar advantages of situation’ (I, 69). Similarly: ‘[if] air, water, the elasticityof steam, and the pressure of the atmosphere, were of various qualities; if they couldbe appropriated, and each quality existed only in moderate abundance, they, as well

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as the land, would afford a rent, as the successive qualities were brought into use’ (I,75). Differential rent is not to be understood as falling outside the general demand–supply framework.

Secondly, Ricardo stated clearly the conditions under which rent would appeareven on marginal units of output (absolute rent) – namely, where scarcity manifestsitself in an extreme form, the supply curve of agricultural produce becoming, as itwere, vertical (the functional relation between output and costs terminating); and hetraced through some of the analytical consequences:

The corn and raw produce of a country may, indeed, for a time sell at amonopoly price; but they can do so permanently only when no more capitalcan be profitably employed on the lands, and when, therefore, their producecannot be increased. At such time, every portion of land in cultivation, andevery portion of capital employed on the land will yield a rent, differing,indeed, in proportion to the difference in the return. At such time too, anytax which may be imposed on the farmer, will fall on rent, not on theconsumer. He cannot raise the price of his corn, because by the supposition,it is already at the highest price at which the purchasers will or can buy it.He will not be satisfied with a lower rate of profits, than that obtained byother capitalists, and, therefore, his only alternative will be to obtain a reductionof rent or to quit his employment.

(Ricardo 1951, I, 250–1)12

I spell this out in order to emphasize Ricardo’s comprehension of the generalprinciple of scarcity price both where land differentials exist and where they do not;he went along with Buchanan’s statement that ‘rent is the effect of high price. ... It is... from the price which the produce is sold, that the rent is derived; and this priceis got not because nature assists in the production, but because it is the price whichsuits the consumption to the supply’ (I, 77n).

To my knowledge Ricardo nowhere explicitly states that rent cannot be excludedfrom cost, notwithstanding the fact that the aggregate supply conditions of landdiffer from those of capital and labour, in the case of multi-use land. Yet I believethat he appreciated the logic. Consider in particular the generalization of the rentconcept from land to capital – the very explicit recognition that once the assumptionof capital mobility between uses is abandoned it is the rent analysis that becomesappropriate:

As a part of this capital, when once expended in the improvement of a farm,is inseparably amalgamated with the land, and tends to increase its productivepowers, the remuneration paid to the landlord for its use is strictly of thenature of rent, and is subject to all the laws of rent. Whether the improvement


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be made at the expense of the landlord or the tenant, it will not be undertakenin the first instance, unless there is a strong probability that the return willat least be equal to the profit that can be made by the disposition of anyother equal capital, but when once made, the return obtained will ever afterbe wholly of the nature of rent, and will be subject to all the variations ofrent.

(Ricardo 1951, I, 262)

This principle was in fact utilized in an argument against those who opposed freercorn importation on grounds of capital immobility: ‘Suppose’, Ricardo reasoned,‘that the fact be as stated and that no part of the capital could be withdrawn; thefarmer would continue to raise corn, and precisely the same quantity too, at whateverprice it might sell; for it could not be his interest to produce less, and if he did notso employ his capital, he would obtain from it no return whatever’ (I, 269).

There are also the similar effects of a tax on rent (I, 257) and a tax on profits-in-general – in neither case (even allowing capital mobility) can the tax be escaped byway of allocative readjustments. Of course, a fall in the (net) profit rate maysubsequently play on the rate of capital accumulation and thus the wage rate, butthis is a matter relating to long-run aggregate supply conditions.

Also relevant is the recognition in the context of foreign trade that once thepossibility of resource mobility between uses is ruled out, the general rules of costprice break down. Even assuming uniform capital–labour ratios, commodities willno longer exchange in proportion to relative labour inputs: ‘The difference in thisrespect, between a single country and many, is easily accounted for, by consideringthe difficulty with which capital moves from one country to another, to seek a moreprofitable employment, and the activity with which it invariably passes from oneprovince to another in the same country’ (I, 135–6).

We return now to the passage cited above from J.B. Say, which Ricardo applauded:the doctrine of productive services. This passage explicitly spells out the principle ofopportunity costs and the closely related argument that the source of factor returns(and the motive for the use of factors) in any use is final demand. While the finaldemand dimension leaps to the eye in the case of (single-use) land, it is no lesspertinent in the case of those returns that enter into cost price. 13 For to refer to costprice is merely to say that demand in any sector is sufficient to meet the competitionof demand elsewhere for the use of resources. There should be no surprise at Ricardo’sacceptance of the Say formulation.

What, however, are we to make of Ricardo’s subscription to the wages fundtheory and its corollary, as expressed by Mill’s fourth proposition on capital, that‘demand for commodities is not demand for labour’? For it was Jevons’s complaint

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precisely that according to this proposition (which he rightly observed originatedwith Ricardo), capitalists ‘maintain and pay for labour whether or not there is ademand for the commodities produced’ and ‘production goes on independently ofthe use to which the produce is to be put’ (Jevons 1905, 127).

This complaint is unjustified. Nothing in the fourth proposition conflicts withderived demand, since it relates in no way to the individual capitalist’s motivationin offering employment. It is a description of the manner in which the aggregatedemand for labour and thus the aggregate wage bill (reflecting either higher averageearnings or higher employment or both) is expanded. Thus it is that for thereabsorption of labour displaced by machinery Ricardo relied in part upon increaseddemand for service labour out of net revenue and in part upon net accumulation.That a transfer by capitalists from consumption expenditure to investment raiseslabour demand is easily demonstrable (Hollander 1979, 326f). That the same holdstrue of a transfer from consumption to expenditure on services is clarified in Ricardo’schapter ‘On Machinery’. The altered pattern of consumption from commodities toservices encourages an expansion of the agricultural sector; labourers displaced inthe consumer-goods sector are not, as it were, simply reabsorbed in the servicesector but are reabsorbed in expanding agricultural production to meet theconsumption requirements of the (additional) service labour, a sequence of eventscorresponding to that entailed by ‘savings from revenue to add to capital’ (Hollander1979, 373f).

Similarly, it can be shown that Ricardo’s discussion of the demand for labour inno way precludes an approach to economic organization in terms of ‘synchronized’activity as some writers during the 1870s believed. 14 Ricardo firmly rejected thenotion of a literal pre-accumulation of stocks of wage goods advanced by employersand constituting the demand for labour. Workers, he insisted, are paid in moneythat is disbursed by them directly at retail in the manner of all consumers, thequantity and character of the commodities produced reflecting that demand: ‘Idispute your position’, he wrote to Malthus, ‘that a demand for labour is the samething as a supply of necessaries’ (1951, VIII, 258). What was involved, rather, was adirection of activity towards wage-goods production in appropriate response to thevolume and pattern of labourers’ consumption – the volume alone governed bycapitalists’ savings decisions.

J .S . MILL ON ECONOMIC ORGANIZATION

On all these matters J.S. Mill was entirely at one with Ricardo. The theory of costswas treated from a micro-economic perspective involving relative value and themotives underlying resource allocation; indeed, his appreciation of the relativity ofexchange value is nowhere expressed more clearly than in the context of costs of


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production. ‘Value is a relative term’, he wrote in his chapter on the ‘UltimateAnalysis of Cost of Production’, ‘not a name for an inherent and substantive qualityof the thing itself’ (Mill 1965, 479). Accordingly, he defended the emphasis uponlabour in Ricardo’s treatment of value – despite the fact that the primary costs to bemet by the capitalist–employer are wage costs – on the grounds that ‘in considering... the causes of variations in value, quantity of labour is the thing of chief importance,for when that varies, it is generally in one or a few commodities at a time, but thevariations of wages (except passing fluctuations) are usually general, and have noconsiderable effect on value’ (481). None the less, wage differentials will be reflectedin the price structure, as well as relative labour inputs, and changes in wage differentialswill generate changes in the price structure: ‘Although, however, general wages, whetherhigh or low, do not affect values, yet if wages are higher in one employment thananother, or if they rise and fall permanently in one employment without doing soin others, these inequalities do really operate on values’ (480; also 692).

The same principles applied to profits: ‘Values ... being purely relative, cannotdepend upon absolute profits, no more than upon absolute wages, but upon relativeprofits only. ... Insofar as profits enter into the cost of production of all things[equally] they cannot affect the value of any. It is only by entering in a greater degreeinto the cost of production of some things than of others, that they can have anyinfluence on value’ (482). By this latter allowance Mill had in mind more than theconsequence for the price structure of profit-rate differentials reflecting unequal riskand so forth. The allowance covered compensation for differential time periods ofproduction from industry to industry: ‘one commodity may be called upon toyield profit during a longer period than the other’.

In consequence of differential factor proportions it followed that ‘commoditiesdo not exchange in the ratio simply of the quantities of labour required to producethem’ (484), and this quite apart from the complication created by partial wagechanges. Even general wage changes might influence the structure of prices: ‘even ageneral rise of wages, when it involves a real increase in the cost of labour, does insome degree influence values. It does not affect them in the manner vulgarly supposed,by raising them universally. But an increase in the cost of labour lowers profits; andtherefore lowers in natural value the things into which profits enter in a greaterproportion than the average, and raises those into which they enter in a lessproportion than the average’ (485).

We must here have in mind Mill’s repeated insistence, always following Ricardo,that changes in production costs exert their influence by way of supply variation.Let us recall the opinion, expressed by Malthus in 1824 (and repeated ever since),that Ricardo had limited demand–supply analysis solely to the market period andcases of monopoly, treating long-run cost price quite independently; the two theorieswere mutually exclusive (Malthus 1963, 181–2). Mill rejected Malthus’s attribution as

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soon as it appeared, insisting that in the opinion of the Ricardo school long-runcost prices were arrived at by way of supply variation (Mill 1967, 33–4). In thechapter in the Principles, ‘Of Demand and Supply, in their Relation to Value’, referenceis indeed made to ‘another law [than that of demand and supply] for that muchlarger class of things, which admit of indefinite multiplication’; but immediatelythereafter we find a caution that in dealing with production costs, ‘it is not lessnecessary to conceive distinctly and grasp firmly the theory of this exceptional case’(that of given supplies), which ‘will be found to be of great assistance in renderingthe more common case intelligible’ (Mill 1965, 468). The point is clear enough: ‘Thevalue at any particular time is the result of supply and demand’, but ‘unless thatvalue is sufficient to repay the Cost of Production, and to afford, besides, theordinary expectation of profit, the commodity will not continue to be produced’.Necessary price, in brief, includes a return on capital ‘as great ... as can be hoped forin any other occupation at that time and place’, and in the event of a return inexcess of the going rate ‘capital rushes to share in this extra gain, and by increasingthe supply of the article, reduces its value’; conversely, in the reverse case output isrestricted (471–2). And it is in this sense that one may easily appreciate the famousreference to ‘a law of value anterior to cost of production, and more fundamental,the law of demand and supply’ (583). Here Mill did not intend to deny, any morethan Ricardo, that cost of production works its influence by way of supply variations.His point was that demand–supply analysis applied to all cases, even where costanalysis was irrelevant – an appropriate perspective in a chapter dealing with ‘SomePeculiar Cases of Value’.

The general conclusion regarding the central role of supply variation in theestablishment of cost price is scarcely surprising in the light of Mill’s observationthat the pertinent perspective in cost-price analysis is one involving ‘the motives bywhich the exchange of commodities against one another is immediately determined’. 15

Numerous explicit allusions to relative supply variation will be found precisely inthis context; the higher value of commodities produced in industries entailing arelatively high degree of unpleasantness or a relatively longer period of production,or a differential tax are all explained in terms of appropriate supply restraints (482f).It is indeed in the ‘general-equilibrium’ context that the dependency of cost priceupon demand–supply can be seen most comprehensively. Cost of production, wehave already observed, includes normal profit; the equilibrium price structure willthus be one that yields the going return on capital in all sectors. Mill described atgreat length (407) the institutional arrangements whereby returns, or expectation ofreturns, are equalized (‘the method of accommodating production to demand’)leaving no doubt of the conspicuous role accorded supply variation in theestablishment of equilibrium prices, following exactly the lines laid down in Ricardo’sPrinciples.


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Also in line with Ricardo, Mill used the principles of allocation theory in therationalization of the inverse wage–profit relation. Thus, in contrast to a wage increaseaffecting one sector, where price will rise to assure equality of profit rates across theboard, there exists no mechanism whereby general prices would be forced upwards inthe event of an economy-wide wage increase, when all firms throughout the systemare affected equally by the change. From this perspective the fundamental theoremon distribution is founded squarely upon the theory of allocation:

a general rise of wages would not raise prices but would be taken out of theprofits of the employers; always supposing that those profits were sufficientto bear the reduction.

The case is different with a rise of wages confined to a single or a smallnumber of employments. That rise if taken out of profits, would place aparticular class of employers at a disadvantage compared with otheremployers: & as soon as they ceased to hope that the loss would be onlytemporary, they would withdraw part of their capital, or at all events, allnew capital would avoid those trades & go into others. Consequently thesupply of these particular articles would fall short, and their prices wouldrise so as to indemnify the employers for the rise of wages. But this wouldnot happen in case of a rise of all wages, for as all capitalists would beaffected nearly alike they could not as a body relieve themselves by turningtheir capital into another employment.

(Mill 1972, 1735)

Expenses which affect all commodities equally, have no influence on prices.If the maker of broadcloth or cutlery, and nobody else, had to pay higherwages, the price of his commodity would rise, just as it would if he had toemploy more labour; because otherwise he would gain less profit than otherproducers, and nobody would engage in the employment. But if everybodyhas to pay higher wages, or everybody to employ more labour, the loss mustbe submitted to; as it affects everybody alike, no one can hope to get rid ofit by a change of employment, each therefore resigns himself to a diminutionof profits and prices remain as they were. In like manner, general low wages,or a general increase in the productiveness of labour, does not make priceslow, but profits high. If wages fall, (meaning here by wages the cost oflabour), why, on that account, should the producer lower his price? He willbe forced, it may be said, by the competition of other capitalists who willcrowd into his employment. But other capitalists are also paying lower wages,and by entering into competition with him they would gain nothing butwhat they are gaining already.

(Mill 1965, 692)

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A statement of this position will also be found in the context of Mill’s discussionof the nature of costs when focusing upon the distinction between costs from anaggregative and industry perspective. It is indeed precisely in the course of expoundingthe principles of allocation theory that Mill insisted on the inverse wage–profitrelation: ‘There is no mode in which capitalists can compensate themselves for ahigh cost of labour, through any action, on values or prices. It cannot be preventedfrom taking its place on low profits’ (479). It is significant, too, that in hiscorrespondence with Cairnes regarding the nature of costs Mill immediately saw theimplications of the argument for the Ricardian inverse wage–profit relationship:

Your discussion of the question whether wages ought in any sense to beconsidered as cost of production, or whether that term should be exclusivelypredicated of labour and abstinence, was always likely to be scientificallyinstructive, but I now perceive that it will have a special value de circonstance.You must have been struck as I have been, by the thoroughly confused anderroneous ideas respecting the relation of wages to prices, which have shewnthemselves to be almost universal in the discussions of the recent strikes. Thenotion that a general rise of wages must produce a general rise of prices, ispreached universally. ... Certainly no one who knows, even imperfectly, whatthe Ricardo political economy is ... can suppose this to be it.

(Mill 1972, 1909–10)

The appreciation of the equilibrating function of price, the extension of demand–supply analysis from the ‘market’ to the ‘long-run’ period involving the process ofprofit-rate equalization, and the application of these principles to the basic theoremof distribution were all part and parcel of Ricardian analysis. In some respects,doubtless, Mill’s formulations constituted an improvement in rigour – particularlythe formal statement of an equation of demand and supply and the distinction betweendisplacements of the demand schedules and movements from one position to anotheron the same schedule (1965, 466). But their merit lies less in substantive content thanin their location at a conspicuous juncture among the basic theoretical principles;for Ricardo made many of his statements regarding the theory of allocation invarious informal contexts relating to applied problems. No good purpose is served,however, by invidious comparisons regarding ‘quality’ of analysis. And that is notmy concern. The point is simply that Mill’s theory of allocation does not constitute a breakawayfrom Ricardian doctrine, but is a reiteration thereof. 16

I follow the pattern of the previous section by considering Mill’s approach to rent.In the aggregate, rent (‘the price paid for the use of an appropriated natural agent’)differed from the other factor returns in consequence of the conditions of landsupply. The agent is ‘as indispensable (and even more so) as any implement: but the


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having to pay a price for it, is not. In the case of the implement (a thing producedby labour) a price of some sort is the necessary condition for its existence: but theland exists by nature. The payment for it, therefore, is not one of the expenses ofproduction’ (Mill 1965, 58). Allowing for differentials complicated the issue onlyslightly – ‘the real expenses of production are those incurred on the worst land, orby the capital employed in the least favourable circumstances’ (429). It should benoted also that Mill, following Ricardo, realized that differential rent entails a specialcase of scarcity value, and that rent might be generated even in the absence of differentialsin the event of an absolute constraint on farm output: ‘It is also distinctly a portionof Ricardo’s doctrine, that ... the land of a country supposed to be of uniformfertility would, all of it, on a certain supposition, pay rent: namely, if the demand ofthe community required that it should all be cultivated, and cultivated beyond thepoint at which a further application of capital begins to be attended with a smallerproportionate return’ (428). 17

When Mill focused upon individual sectors – and here Mill made explicit whatwas only implicit in Ricardo – the picture is a very different one:

The question ... respecting the influence which the appropriation of naturalagents produces on values, is often stated in this form: Does Rent enter intoCost of Production? and the answer of the best political economists is in thenegative. The temptation is strong to the adoption of these sweepingexpressions, even by those who are aware of the restrictions with which theymust be taken, for there is no denying that they stamp a general principlemore firmly on the mind, than if they were hedged round in theory with allits practical limitations. But they also puzzle and mislead, and create animpression unfavourable to political economy, as if it disregarded the evidenceof facts. No one can deny that rent sometimes enters into cost of production.If I buy or rent a piece of ground, and build a cloth manufactory on it, theground-rent forms legitimately a part of my expenses of production, whichmust be repaid by the product. And since all factories are built on ground,and most of them in places where ground is peculiarly valuable, the rent forit must, on the average be compensated in the values of all things made infactories.

(Mill 1965, 487)

The consequence of multi-use land for cost pricing is laid down clearly in the ‘summaryof the theory of value’, namely, that ‘when land capable of yielding rent in agricultureis applied to some other purpose, the rent which it would have yielded is an elementin the cost of production of the commodity which it is employed to produce’ (498;cf. 484).

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Consistent with Mill’s ‘Ricardian’ approach to cost price is the Say conception oforganization, which emphasizes that the ultimate source of factor remuneration isin sales proceeds and the motive for factor employment in the revenue product. Weencounter the relationship in question in reference to ‘the present system of industriallife, in which employments are minutely subdivided, and all concerned in productiondepend for their remuneration on the price of a particular commodity’ (Mill 1965,455).

The principle is elaborated in a chapter dealing with indirect inputs of labour inlengthy processes of production: ‘All these people ultimately derive the remunerationof their labour from the bread, or its price: the ploughmaker as much as the rest; forsince ploughs are of no use except for tilling the soil, no one would make or useploughs for any other reason than because the increased returns thereby obtainedfrom the ground, afforded a source from which an adequate equivalent could beassigned for the labour of the ploughmaker. If the produce is to be used or consumedin the form of bread, it is from the bread that this equivalent must come’ (31; it ispresumably the expectation of future yield that provides the motive for the use of theinput). 18 This perspective completely confounds Jevons’s reading of his predecessors.And there is no need to repeat what was said above regarding the fourth propositionon capital; Mill was crystal clear about its intended application to aggregate wagesand employment alone (87). Finally, Mill’s pronouncements on the wages fund yielda vision of capitalist organization far removed from one wherein workers consumea distinct class of commodities produced in annual jets – a vision fully in line withthat of Ricardo elaborated above (cf. Hollander 1984).

WALRAS’S CLASSICAL COST-PRICE ANALYSIS

It is not difficult to show that Walras subscribed to a cost-price analysis of theclassical order.19 In fact, it is the so-called ‘Marshallian’ adjustment mechanism entailingcomparisons of demand and supply prices – the Smith–Ricardo–Mill tradition andalso formulated so clearly by Say, as we have seen – rather than the so-called ‘Walrasian’adjustment mechanism entailing comparisons of demand and supply quantities(pertinent in the simple exchange model) that he adopted in the production context:

under free competition, if the selling price of a product exceeds the cost ofthe productive services for certain firms and a profit results, entrepreneurswill flow towards this branch of production or expand their output, so thatthe quantity of the product [on the market] will increase, its price will fall,and the difference between price and cost will be reduced; and, if [on thecontrary], the cost of the productive services exceeds the selling price forcertain firms, so that a loss results, entrepreneurs will leave this branch ofproduction, or curtail their output, so that the quantity of the product [on


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the market] will decrease, its price will rise and the difference between priceand cost will again be reduced.

(Walras 1954, 225)20

This process involves not merely the transfer of services between sectors withoutalteration in the supplies of factors from which they derive, although doubtless tosome extent this may be involved. For such transfer would be almost instantaneous,whereas Walras emphasized the slowness of adjustment to disturbance.

We consider first remarks made regarding labour that imply the possibility ofaltering the types of personal capital in response to market pressures, in the long run;that is, upon retraining (or even perhaps with the renewal of the population stock).The case of ‘unspecialized productive services’ was ‘the most frequent case’, Walrasconceded to the classics, particularly in the market for labour:

Apart from certain individuals naturally gifted with the voice of a greattenor, the limbs of an acrobat, the eye of a painter or the ear of a musician,the great mass of men are capable of performing a wide variety of tasks, justbecause they are not especially qualified for the performance of any one ofthem. A man educated to be a lawyer might often just as well have been amanager; and certainly a person trained as a carpenter could have been alocksmith. What do most men inquire into when they come to choose theiroccupation? Surely, it is the wages they can earn in it, in other words, thevalue of their productive services in that occupation. The unspecializedproductive services, in contradistinction to specific services have competitionto fear.

(Walras 1954, 401)

Clearly there is a long-run tendency towards wage-rate equalization, contingent upontraining and education, very much like that of Adam Smith who, of course, had alsominimized innate differences of character and ability.

The same conception appears in the famous chapter on the ‘Continuous Market’,where we find in effect a more general description of the ‘tendency’ of market tonatural price mediated by credit – an account that would have been at home in anyclassical text. The emphasis is upon the slowness of adjustment to changes in data –including patterns of final demand and technology – having in mind the differentialrates of replacement of circulating capital, personal capital and capital goods proper.But that such a ‘tendency’ is at work, albeit ever disturbed, is quite clear:

Every hour, nay, every minute, portions of [the] different classes of circulatingcapital are disappearing and reappearing. Personal capital, capital goods properand money also disappear and reappear, in a similar manner, but much

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more slowly. Only landed capital escapes this process of renewal. Such is thecontinuous market, which is perpetually tending towards equilibrium withoutever actually attaining it, because the market has no other way of approachingequilibrium except by groping, and, before the goal is reached, it has torenew its efforts and start over again, all the basic data of the problem, e.g.the initial quantities possessed, the utilities of goods and services, the technicalcoefficients, the excess of income over consumption, the working capitalrequirements, etc., having changed in the meantime. Viewed in this way, themarket is like a lake agitated by the wind, where the water is incessantlyseeking its level without ever reaching it. But whereas there are days whenthe surface of a lake is almost smooth, there never is a day when the effectivedemand for products and services equals their effective supply and when theselling price of products equals the cost of productive services used in makingthem. The diversion of productive services from enterprises that are losingmoney to profitable enterprises takes place in various ways, the most importantbeing through credit operations, but at best these are slow.

(Walras 1954, 380)

It will be instructive to consider briefly at this point the formal model itself. Afeature of Walras’s theory of capital is the determination of the rate of net revenuein terms of the exchange of net savings (incomes exceeding consumption and allowancefor depreciation) for new additions to the stock of capital goods, the quantities ofthe different types of capital goods satisfying the condition of equality betweentheir demand and supply prices. 21 This condition also reflects the principle ofuniformity of net return on the new investments; for if the condition of uniformity‘is not fulfilled with respect to any two capital goods, it will be advantageous toproduce less of the capital good for which the ratio is smaller, and more of thecapital good for which this ratio is larger’ (Walras 1954, 276; cf. 305). The emphasisis thus upon uniformity of return on new investments; but it would be difficult toappreciate the exclusion of the possibility that a change in the structure of finaldemand patterns or in technology such as Walras emphasizes, as we have seen, mightlower the rentals on certain types of existing capital goods and thus require a contractionin their quantities by the non-investment of available depreciation allowances. Inshort, the principle of uniformity of the return on capital extends to investmentdecisions in general – to replacement demand as well as the net demand for newcapital goods – although at any particular moment of time it is highly unlikely thatuniformity across-the-board will be satisfied in the light of the disturbances inquestion: ‘In an economy like the one we have imagined, which establishes its economicequilibrium ab ovo, it is probable that there would be no equality of rates of net


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income. Nor would such an equality be likely to exist in an economy which had justbeen disrupted by a war, a revolution or a business crisis’ (308). As we concluded, weare dealing only with a tendency to uniformity on capital-in-general.

It is clear that equality of net interest is treated by Walras as a ‘point of reference’only. It is in the course of adding to and replacing capital goods that decisions aremade with an eye on prospective earnings – as we have seen to be the case also in thelabour market – but expectations are continually disappointed, so that actual yieldsdiverge from those expected when the investments are undertaken. This was Marshall’sposition, too. He maintained that interest is earned on ‘free’ or ‘floating’ capital,and the phrase ‘rate of interest is applicable to old investments of capital only in avery limited sense’; given complexes earn quasi-rents, and in the polar extreme caseof permanent investments the term interest on capital is totally inapplicable (Marshall1920, 592–3; also 411–12, 418–19, 533). Nonetheless, the tendency to equalization iscontinually at play to the extent that complexes do wear out more or less rapidly.Indeed Marshall estimated that as much as 25 per cent of existing capital goods isreplaced annually ‘even in a country in which the prevailing forms of capital are asdurable as in England’, and he was prepared for some analytical purposes (particularlyin the context of accumulation) to assume ‘that the owners of capital in general havebeen able in the main to adapt its forms to the normal conditions of the time, so asto derive as good a net income from their investments in one way as another’ (592).

This has been termed a ‘sort of development of Walrasian theory’ – that there isuniformity of the rate of profits on ‘free capital’, which points ‘not towards long-run equilibrium analysis (in its stationary state, growth theory sense)’ but to ‘a sortof long-run equilibrium – in its proper sense of new capital gradually and actuallyflowing towards where quasi-rents have turned out best’ (Harcourt 1975, 351). 22

Surely this is the Walras–Marshall line itself?Now I can discern no difference between this line and that of Ricardo. For some

analytical purposes Ricardo certainly presumed across-the-board equality of the returnon capital. Thus, to investigate the consequences of a change in demand patterns orin technology he would set off from an assumed state of equilibrium in the sensethat we ‘suppose that all commodities are at their natural price, and consequentlythat the profits of capital in all employments are exactly at the same rate’ (Ricardo1951, I, 90). But he was perfectly well aware, first, that what matters in the (practical)profitability calculations that govern allocation is the return on new investments;for once investments are embodied in an actual capital structure, we are dealing withrentals. And secondly that in the polar case of permanent embodiments it is nolonger pertinent to talk of a return on capital at all (I, 262; see above, p. 148). Finally,like both Walras and Marshall, Ricardo appreciated that adjustments are never

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instantaneous even where the ‘withdrawal of capital’ is physically possible: ‘it alwaysbecomes a matter of calculation, whether these [capital goods] shall continue to beemployed on the land, notwithstanding the low [the unexpectedly low] price ofcorn, or whether they shall be sold, and their value transferred to another employment’(I, 269) – a calculation that is characterized by ‘the prejudices and obstinacy withwhich men persevere in their old employments’; for ‘they expect daily a change forthe better, and therefore continue to produce commodities for which there is noadequate demand’ (VIII, 277).

S O M E I M P L I C A T I O N F O R T H E ‘ M A R G I N A LREVOLUTION’

A major implication of the foregoing analysis is that the neo-classical developmentsof the 1870s involved pre-eminently an altered weighting in the selection of axioms,and in that sense a changed ‘focus of attention’ as well as a sharpening of analyticaltools, but not a paradigmatic displacement. Thus, the principle of marginal utilitymerely added ‘very important explanations’ (Marshall, see above, p. 136) for thenegative slope of the demand curve; and the marginal productivity principle addedto the better understanding of factor demand in particular uses – elaborations requiredas much by Say as by Ricardo and Mill.

To assert that recognition of a multiplicity of primary factors required a newtheory based upon the principles of demand (Arrow and Starrett, see above, p. 137)or that classical theory could not solve ‘the logical problem of explaining the relativewages of heterogeneous types of labour’ (Arrow; cited in Hutchison 1978, 69) ishistorically unjustified. 23 The wage structure had long been analysed in terms ofdemand–supply with recognition of a productivity dimension on the demand side;and while value productivity is more conspicuous the more specialized to a particularuse individual factors are, those same considerations are no less relevant when allowanceis made for factor mobility between uses, although now strict limits are placed onthe extent returns in different uses can diverge. In any event, although factor specificityis indeed a neo-classical preoccupation, both Ricardo and Mill carried this verymatter far in their generalizations of the rent doctrine.

If we take into account foreign trade and classical analysis in that case – theconspicuous role accorded demand considerations where the mobility axioms areabandoned – it becomes yet clearer that the notion of a paradigmatic transformationin the 1870s is not helpful. And while Mill was largely responsible for the analysis, itmust be remembered that Ricardo had left the door open by his formulation (seeabove, p. 148) so that the elaborations, brilliant as they were, were consistent withexisting doctrines.


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Thus far we have considered the neo-classical ‘relaxation’ of the general (but farfrom universal) classical assumptions regarding factor mobility between uses. Thereis also the reverse of the medal to consider – the Ricardian assumption of single-useland. By adopting this assumption Ricardo indicates a preoccupation with the macrodimension; yet the ‘class’ relationship that concerned him, pre-eminently the inversewage–profit relationship, could not be understood except in terms of allocationtheory. He insisted, as Mill did, upon a micro-foundation for macro-analysis whichseems eminently sensible if capitalist-exchange institutions are taken seriously. Totrace through the consequences of a variation in the general wage in the case where(marginal) cost price incorporates land rent in the Smith– Say manner would havebeen technically impossible, given the state of the science. This is also true of J.S.Mill. (It is doubtful whether a specific outcome could be generated in the presentday and age, for which reason so much analysis proceeds on the basis of two-factorsand two-products.) For all that, the severe problems created for Ricardo’s theoremby allowance for multi-use land derive from an analytical model of allocation withwhich Ricardo himself was familiar. That he did not apply the assumptions of themodel universally can be easily appreciated.

That there was indeed no paradigmatic displacement is also quite evident fromour investigation of Walras. For when he set aside his own restrictive assumption offactor immobility between uses, he was led to formulations of cost price identical tothose of Ricardo and Mill.

This theme can be extended. The appropriate axiomatic base depends in part onthe context. The early and later nineteenth-century economists were concerned (aswas Adam Smith) with both growth and allocation, although the weighting of theirpreoccupations certainly differed. Depending upon the context, it was appropriateto emphasize factor ‘scarcity’ or factor ‘reproducibility’ or various combinations.Thus Ricardo frequently dealt with disturbances (demand changes, innovation,taxation) within a static framework, although there is no question of his predominantconcern with a broad range of analytical issues relating to the growth process – theaggregate factors (capital and labour) treated as variables. And conversely, Walrasextended his own analysis in the Elements to the ‘Conditions and Consequences ofEconomic Progress’, which deals with the distributional implications of growth inlabour and capital supplies (given land): ‘What does need to be discussed ... in viewof its extremely weighty consequences, is the fact ... that the quantity of land cannotpossibly increase though it is possible to increase the number of persons and thequantity of capital goods proper in an economy that saves and converts its savingsinto capital’ (Walras 1954, 382). 24 Similarly, he recognized the ‘excess of income overconsumption in the aggregate’ – the matter of surplus and accumulation – as thecondition of progress (264). Clearly, the classical growth model was not superannuatedby the marginalists.

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J.S. Mill’s continued preoccupation with growth issues (and with the generalprofit rate) despite his sharp awareness of the problem of factor immobility, alsorequires consideration from this perspective. For it is not obviously true that concernwith the general wage and profit rates dissipates with recognition of the phenomenonof non-competing groups. There may yet be disturbances affecting all types of labourmore or less equally, and for analysis of the growth process the standard classicalmobility axiom (subject to the qualifications made regarding speed of adjustment)may be most appropriate.

A NOTE ON SOURCES OF MISINTERPRETATION

Professor Samuelson has written of the ‘sophisticated-anthropomorphic sin’ of notrecognizing the equivalent content in older writers, because they did not use thesame terminology and symbols as we do (Samuelson 1949, 373). This certainly explainsto a large extent the general failure to recognize a key allocative dimension to Britishclassicism. (To some extent this error was invited by Ricardo’s sometimes opaqueformulations; since Ricardo was perhaps the first formally to contrast disturbancesthat have allocative implications and those that exert influence only at the aggregatelevel, this is scarcely surprising.)

But there is also a matter of theoretical misunderstanding. It is sometimes presumedthat since, in Ricardian theory, ‘profits are generated in production’, the kind ofperspective we have adopted in this paper must be erroneous (Roncaglia 1982). Thisis a non sequitur. Ricardo’s achievement was to correct Smith’s ‘adding-up’ approachto cost, whereby a change in either wages or profits (or rents) simply generates acorresponding change in general prices: a wage increase must imply reduced profitssince the total is constrained in real terms. Nothing that we have said regardingRicardo’s acceptance of J.B. Say’s circular-flow conception of economic organizationwith its allowance for final demand controverts this point. For the volume of finaldemand itself, of course, is governed by the income flow, which in turn is generatedin production.

NOTES

*The Harold A. Innis lecture given at the meetings of the Canadian Economics Association,June 1982, University of Ottawa.For their comments and advice thanks are due J.K. Whitaker (University of Virginia) and

Irene M. Spry (University of Ottawa). I owe a special debt to Tom Kompas (WesternOntario) for most helpful criticism of the various drafts, particularly the discussion onWalrasian pricing.

1. Cf. Stigler (1965, 304): ‘[J.B.] Say’s approach was fundamentally much more modern thanthat of his English contemporaries’; for an elaboration of this position, see Hutchison1978, 84f.


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2. See also the emphasis upon given endowments of resources as the peculiar characteristicof ‘neo-classical’ theory, in Walsh and Gram (1980, 152). Here, too, Walrasian economicsis represented as an exchange system extended to allow for production, capital formation,and money, but isomorphically, remaining faithful always to catallactics (123). And asharp analytical distinction is made between a classical economics concerned with thecreation, extraction, and division of the surplus between accumulation and luxuryconsumption by the capitalist class, and a neo-classical economics, wherein social class isirrelevant, focusing upon the allocation of given resources among alternative uses bymeans of competitive prices (9–10, 125–6).

3. Cf. Pasinetti (1974, 12) on the absence of a demand theory in the context of profit-rateequalization: ‘[Ricardo] does not find it useful to enter into complicated details (and inhis case they would have been very complicated indeed for him, who did not possess ademand theory).’

4. As far as Ricardo is concerned, my argument here is an elaboration of that given inHollander 1979, ch. 6. I shall take for granted throughout the demonstration there givenof Ricardo’s appreciation of the ‘demand schedule’ – and the variability of the wage rate– although his position in this regard will be apparent in the citations below.

5. In the sense of forgone products alone, and excluding forgone leisure (cf. Robbins 1970, 18). 6. That J.S. Mill in his Principles had turned or was in the process of turning his back on

Ricardianism is a widespread belief; cf. for example Schumpeter (1954, 529): ‘theeconomics of [Mill’s] Principles are no longer Ricardian. ... From Marshall’s PrinciplesRicardianism can be removed without being missed at all. From Mill’s Principles, it couldbe dropped without being missed very greatly.’

7. It is pertinent to refer also to the opinion that Thomas De Quincey corrected Ricardian valuetheory by stressing the mutual determination of exchange value by ‘intrinsic utility’ and‘difficulty of attainment’, a ‘correction’ which ‘greatly influenced J.S. Mill’s treatment ofvalue in the Principles and which is in the Hutcheson–Smith tradition of value theory’(Groenewegen 1974, 193) This is not to my mind a convincing evaluation. The ‘mutualdetermination’ of exchange value by demand and cost considerations was a thoroughlycentral aspect of Ricardian doctrine. De Quincey may have believed he was ‘correcting’Ricardo, but it is unlikely that Mill was convinced.It must be stated that Mill studies are in a state of confusion. For the literature also provides

assertions to the effect that Mill ‘put the clock back’ by subscribing to cost of productiontheories (Hutchison 1978, 64–5n, citing Sowell 1972), a view qualified by admiration forMill’s contribution to the theory of international trade with its evident demand dimension(Sowell 1972, 159–60).

8. See also Say’s (1820, 12f) doctrine of productive services, regarding which Ricardo wrote toMalthus: ‘if he would give up rent, he and I should not differ very materially on that subject’(1951, VIII, 277) and to Say: ‘In your doctrine of productive services I almost fully agree, butI submit to you, whether, as rent is the effect of high price, and not the cause of it, it shouldnot be rejected when we estimate the comparative value of commodities’ (VIII, 279).

9. Although a good case can be made whereby Ricardo allowed that the profit rate contains areward for abstinence and thus acts upon accumulation; Hollander 1979, ch. 7.

10. This is sometimes conceded by Knight (1956, 41–2n, 63) and Schumpeter (1954, 590),despite their generally critical approaches to Ricardian economics from a neo-classicalperspective.

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11. And Ricardo himself referred to the relation between wages and profits in terms of‘equilibrium’ (1951, I, 226).

12. Cf. Ricardo 1951, I, 252: ‘I hope I have made it sufficiently clear, that until a country iscultivated in every part’ (an allusion to the extensive margin) ‘and up to the highest degree’(an allusion to the intensive margin), ‘there is always a portion of capital employed on theland which yields no rent, and that it is this portion of capital, the result of which, as inmanufactures, is divided between profits and wages that regulates the price of corn.’

13. This point is frequently neglected. See below, p. 161.14. ‘It is not necessary to the production of things that cannot be used as subsistence or cannot

be immediately utilized, that there should have been a previous production of the wealthrequired for the maintenance of the labourers while the production is going on. It is onlynecessary that there should be, somewhere within the circle of exchange, a contemporaneousproduction of sufficient subsistence for the labourers, and a willingness to exchange thissubsistence for the thing on which the labour is being bestowed’ (George 1879, 24).

15. In his Leading Principles (1874, 48–9) J.E. Cairnes criticized Mill’s inclusion of wages andprofits within costs, although that position was ‘generally accepted by economists’. Wagesand profits, he argued, were not ‘costs’ in the legitimate sense of that term – namely,‘sacrifices incurred by man in productive industry’ – but, on the contrary, they constituted‘the return made by nature to man upon that sacrifice’; ‘labour’ and ‘abstinence’ were thetrue costs of production. Mill (who already had some idea of the nature of the criticism)observed to his friend that both forms were legitimate depending on context – whether itinvolved the economic system as a whole or the motives of the individual participants inactivity: ‘the cost to society, as a whole, of any production, consists in the labour andabstinence required for it. But, as concerns individuals and their mutual transactions,wages and profits are the measure of that labour and abstinence, and constitute themotives by which the exchange of commodities against one another is immediatelydetermined’ (Mill 1972, 1894–5).

16. It must at the same time be remembered that in introducing his account of the ‘equationof demand and supply’ Mill did insist upon his own priority, with the exception of J.B. Say,regarding the solution to the ‘paradox of two things, each depending upon the other’. Butwhat we know of Mill’s general reaction to Ricardianism suggests that he regarded – andrightly so – this analysis as a clarification of sometimes obscure or ambiguous or incompleteformulations in the original statements of 1817.

17. Pertinent, too, is Mill’s early defence of the differential rent theory against the strictures ofSenior and others ‘who affect to suppose that Sir Edward West, Mr. Malthus, and Mr.Ricardo, considered the cultivation of inferior land as the cause of a high price of corn’. Thereverse was the case, Mill insisted in 1828; that ‘the cultivation of inferior soils’ was the effectof high price ‘itself the effect of demand’ was a doctrine ‘explicitly laid down by thedistinguished authors previously referred to, and particularly by Mr. Ricardo’ (Mill 1967,174) – a perfectly justified defence of the Ricardian position.

18. Cf. Mill 1965, 32: the labourers producing fixed capital ‘do not depend for theirremuneration upon the bread made from the produce of a single harvest, but upon thatmade from the produce of all the harvests which are successively gathered until the plough,or the buildings and fences, are worn out’.

19. I have found Milgate (1979) most helpful.


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20. I understand ‘profit’ as super-normal profit in excess of the normal return earned oncapital goods proper; cf. Walras 1954, 267.

21. ‘New capital goods are exchanged against the excess of income over consumption; andthe condition of equality between the value of the new capital goods and the value of theexcess gives us the equation required for the determination of the rate of net income andconsequently for the determination of the prices of capital goods. Moreover, new capitalgoods are products; and the condition of equality between their selling price and theircost of production gives us the equations required for the determination of the quantitiesmanufactured’ (Walras 1954, 269–70).

22. See also Hicks 1973, 340–1: ‘it is quite unnecessary, because we use terms like “capital-intensive” and “rate of profit”, to trouble ourselves about the valuation of the capitalstock as a whole (as we appeared to have to do in the production function method). Whatmatters is not the average rate of profit on the whole capital stock (which cannot bedetermined without such valuation); what matters is the rate of profit on new investment.When the new investment is undertaken, that profit is no more than an expected profit,and what is realized may not be the same as what is expected’.

23. It may be agreed that the neo-classics ‘took as an expository point of departure a modelwhich was the polar opposite of the classical, the model of pure exchange’ (Arrow andStarrett 1973, 133). Clear exposition may require extreme assumptions, as Ricardorepeatedly insisted.

24. Professor Morishima indeed goes so far as to consider this dynamic part as the capstone ofthe entire general-equilibrium structure, from which perspective he regards the Elementsas a whole ‘as providing a general equilibrium foundation for the Ricardian neo-classicalmacroeconomics’ (Morishima 1980, 558).Even W. Jaffé, who denied that Part VII was intended as ‘an integral part of Walras’s general

equilibrium edifice’, conceded that Walras’s intentions were to show ‘how the relationsanalyzed in the static theory could be used to elucidate such dynamic tendencies as the rise inland-rent, and the fall in the rate of profit in an expanding economy’ (Jaffé 1980, 546–7).

REFERENCES

Arrow, K.J. and Starrett, D.A. (1973) ‘Cost- and Demand-Theoretical Approaches to theTheory of Price Determination’, in J.R. Hicks and W. Weber, Carl Menger and the AustrianSchool of Economics, Oxford: Oxford University Press.

Bharadwaj, D. (1978) ‘The Subversion of Classical Analysis: Alfred Marshall’s Early Writingon Value’, Cambridge Journal of Economics, 253–71.

Cairnes, J.E. (1874) Some Leading Principles of Political Economy, London: Macmillan.Dobb, M. (1973) Theories of Value and Distribution, Cambridge: Cambridge University Press.Frisch, R. (1981) ‘From Utopian Theory to Practical Application: the Case of Econometrics’,

American Economic Review LXXI (June): 1–16.Garegnani, P. (1972) ‘Heterogeneous Capital, the Production Function and the Theory of

Distribution’, in E.K. Hunt and J.G. Schwartz (eds) A Critique of Economic Theory,Harmondsworth: Penguin.

— (1976) ‘On a Change in the Notion of Equilibrium in Recent Work on Value andDistribution’, in M. Brown, K. Sato and P. Zarembka (eds) Essays in Modern Capital Theory,Amsterdam: North-Holland.

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George, H. (1879) Progress and Poverty, San Francisco: W.M. Hinton.Groenewegen, P. (1974) Review, Economic Journal LXXXIII (March): 192–3.Harcourt, G.C. (1975) ‘Decline and Rise: the Revival of (Classical) Political Economy’, Economic

Record LI: 339–55.Hicks, John (1973) ‘The Mainspring of Economic Growth’, Swedish Journal of Economics

LXXV: 336–48.—— (1976) ‘ “Revolutions” in Economics’, in S. Latsis, Method and Appraisal in Economics,

Cambridge: Cambridge University Press.Hollander, S. (1976) ‘Ricardianism, J.S. Mill, and the Neo-Classical Challenge’, in J.M.

Robson and M. Laine (eds) James and John Stuart Mill: Papers on the Centenary Conference,Toronto: University of Toronto Press.

—— (1979) The Economics of David Ricardo, Toronto: University of Toronto Press.—— (1984) ‘J.S. Mill on “Derived Demand” and the Wage-Fund Theory Recantation’, Eastern

Economic Journal IX,1: 87–98.Hutchison, T.W. (1978) On Revolutions and Progress in Economic Knowledge, Cambridge:

Cambridge University Press.Jaffé, W. (1980) ‘Walras’s Economics as Others See It’, Journal of Economic Literature XVIII:

528–49.Jevons, W.S. (1905) Principles of Economics, London: Macmillan.—— (1924) Theory of Political Economy, 4th edn, London: Macmillan.Knight, F.H. (1956) On the History and Method of Economics, Chicago: University of Chicago

Press.Malthus, T.R. (1963) [1824] ‘Political Economy’, in B. Semmel (ed.) Occasional Papers, New

York: Burt Franklin.Marshall, Alfred (1920) Principles of Economics, 8th edn, London: Macmillan.Milgate, M. (1979) ‘On the Origin of the Notion of “Intertemporal” Equilibrium’, Economica

XLVI: 1–10.Mill, J.S. (1965) Principles of Political Economy, Collected Works, vols II, III, Toronto: University

of Toronto Press.—— (1967) Essays on Economics and Society, Collected Works, vols IV, V, Toronto: University of

Toronto Press.—— (1972) The Later Letters, Collected Works, vols XIV, XV, Toronto: University of Toronto

Press.Morishima, M. (1980) ‘W. Jaffé on Léon Walras’, Journal of Economic Literature XV: 550–8.Pasinetti, L.L. (1974) Growth and Income Distribution, Cambridge: Cambridge University Press.Ricardo, David (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 vols)

Cambridge: Cambridge University Press.Robbins, L.C. (1970) The Evolution of Modern Economic Theory, London: Macmillan.Robinson, Joan (1961) ‘Prelude to a Critique of Economic Theory’, Oxford Economic Papers

XII: 53–8.Roncaglia, A. (1978) Sraffa and the Theory of Prices, Chichester and New York: John Wiley.—— (1982) ‘Hollander’s Ricardo’, Journal of Post-Keynesian Economics IV: 339–59. Samuelson,

P.A. (1949) Review, Economica XV: 373–4.Say, J.B. (1820) Lettres à M. Malthus sur différens sujets d’économie politique, Paris: Bossange.Schumpeter, J.A. (1954) History of Economic Analysis, New York: Oxford University Press.Shove, G. (1960) [1942] ‘The Place of Marshall’s Principles in the Development of Economic


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Theory’, in J.J. Spengler and W.R. Allen, Essays in Economic Thought, Chicago: RandMcNally.

Sowell, T. (1972) Say’s Law, Princeton: Princeton University Press.Sraffa, P. (1960) Production of Commodities by Means of Commodities, Cambridge: Cambridge

University Press.Stigler, G.J. (1965) Essays in the History of Economics, Chicago: University of Chicago Press.Walras, Léon (1954) Elements of Pure Economics, ed. W. Jaffé, 4th definitive edn (1926) London:

George Allen and Unwin.Walsh, V. and Gram, H. (1980) Classical and Neo-classical Theories of General Equilibrium, New

York: Oxford University Press.

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I . INTRODUCTION

I propose to demonstrate in this lecture the validity of Alfred Marshall’s defence ofRicardo against the ‘marginalist’ reaction of the 1870s. In my view Marshall waswholly right as far as he went in his defence, but perhaps did not go far enough. Forhe stayed rather too much within a partial equilibrium framework, whereas Ricardo’seconomics reflect pre-eminently general equilibrium. By this I intend appreciationof the information conveying and signalling role of prices, the notion of alternativecosts, the principle of maximizing net returns and market interaction of goods andservices – in brief the theory of the coordination of decentralized economic activities. 1

Here I should specify a distinction between concern with allocative problems basedon market mechanisms, and concern with individual choice. We are conditioned nowadaysto think of rigorous individual choice theory as necessary to a theory of resourceallocation. 2 Ricardo, on the other hand, was less concerned with the problem ofindividual choice than with market process analysis. Still, it would be misleading todraw the contrast too sharply. Thus even Schumpeter, who was foremost incondemning Ricardo for failing to appreciate the production–distribution processas a web of exchanges, was obliged to concede that ‘the “classics” sensed the existenceof what we now call economic equilibrium and if they did not try to prove itsexistence, they made it, as it were, plausible, embodying their intuition in certainempirical rules, such as the tendency of “profits” to be roughly equal in differentbut similarly conditioned lines of business. We derive a similar proposition fromthe principle of maximizing net returns and associate it with the principle ofsubstitution’ (Schumpeter 1954, 590). 3

A second preparatory clarification relates to the fact that Ricardo’s primary concernwas the time path of the average returns to labour and capital in conditions ofincreasing land scarcity. Allocation theory was not his preeminent interest. Yet the

10

WHY MARSHALL WAS RIGHTABOUT RICARDO*


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growth process is driven from the side of demand. When he lets the marginal cost offood production rise under pressure of population, it is the increased demand forfood which forces the extension of cultivation, and there is much of interest in thiscontext regarding budget allocations by the individual with income increase.Moreover, by conceiving the average factor returns as endogenous variables andelaborating upon the conditions of demand and supply in the labour market heopened the door to the interdependence of income distribution and final expenditurepatterns, thus confuting current ‘Italo-Cambridge’ and sundry other critics of hisgeneral Marshallian perspective.

This paper, then, argues the case that Ricardian economics comprises an exchangesystem consistent with later ‘neo-classical’ or ‘general-equilibrium’ or ‘marginalist’elaborations – that Marshall’s position on nineteenth-century historiography issubstantially accurate. 4 In the course of my demonstration, and with Marshall’s validprotest against fixed-wage interpretations of Ricardo in mind, I shall take up therelation between distribution and final expenditure patterns.

I I . T H E ‘ M A R G I N A L I S T ’ A N D T H E ‘ C A M B R I D G E ’POSITIONS

Distribution was envisaged by W.S. Jevons as (ideally) a matter of service pricing,‘entirely subject to the principles of value and the laws of supply and demand’ (1924,xlvi), with input prices ‘the effect not the cause of the value of the produce’ (1) – ‘Ihold labour to be essentially variable, so that its value must be determined by the value of theproduce, not the value of the produce by that of the labour ’ (166) – and cost of productiona reflection of opportunities forgone (xlviii–l). He accordingly directed his criticismsat the wage fund and subsistence approaches to wage-rate determination and the costapproach to value – as he understood them – paying tribute to the French traditionof J.B. Say and others: ‘the only hope of attaining a true system of Economics is tofling aside, once and for ever, the mazy and preposterous assumptions of the RicardianSchool. Our English Economists have been living in a fool’s paradise. The truth iswith the French School’ (xliv–xlv).

Léon Walras, whose intellectual origins include J.B. Say, similarly objected to theclassical pricing and distribution model (again, as he understood it), particularly thecost orientation and the natural wage approach. By neglecting a final demanddimension and accordingly derived demand, so he charged, the English hadconstructed an under-determined system: ‘It is clear that the English economists arecompletely baffled by the problem of price determination; for it is impossible for I[interest] to determine P [price] at the same time that P determines I. In the languageof mathematics one equation cannot be used to determine two unknowns’ (Walras1954 [1874] 424–5).

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WAY MARSHALL WAS RIGHT ABOUT RICARDO

In more recent times we have the famous criticism of classicism by Schumpeterand Knight, already mentioned. From their perspective prices depend on the relativesubjective appeal to consumers, the flow of goods and thus their marginal utilitiesgoverned by cost considerations, where ‘costs’ reflect alternatives surrendered ratherthan the ‘pain’ of labour or abstinence. On this view, the economizing principleinvolves maximizing the total return from any resource by equalizing the incrementsof return at the margin to the scarce resource in alternative uses. Taking thisperspective, the developments of the 1870s are, obviously, ‘revolutionary’. But for apristine formulation of the supposedly revolutionary status of the developments ofthe 1870s – especially respecting the role of final demand – the following statementby Frisch is difficult to improve upon:

The classical theory of value – as we find it streamlined in Stuart Mill – wasessentially a theory of production costs based on the thinking of the privateentrepreneur. ...

This theory contains, of course, an irrefutable element of truth. But it istoo simple to give even a crude presentation of the forces of play. Theeconomic process is an equilibrium affair where both technological andsubjective forces are at play. The subjective element was nearly left out by theclassicists.

On this point economic theory was completely renewed, in the yearsbetween 1870 and 1890 when a number of Austrian economists headed byCarl Menger (1840–1921) undertook a systematic study of the human wantsand their place in a theory of prices. Similar thoughts were expressed also bythe Swiss Léon Walras (1834–1910) and the Englishman Stanley Jevons (1835–1882). This was the first break-through since Stuart Mill.

The Englishman, Alfred Marshall (1842–1924) subsequently did much tocombine the subjective viewpoint and the cost of production viewpoint.This led to what we now speak of as the neo-classical theory.

(Frisch 1981, 5)

It has also been suggested (Arrow and Starrett 1973, 132–3) that Mill’s recognitionof non-competing groups implied a multiplicity of primary factors which ‘requireda new theory’. The founders of the neo-classical school ‘understood the glaringomission of demand from the classical model’. Classical theory, runs the argument,could not solve the logical problem of explaining the relative wages of heterogeneoustypes of labour.

This summary should suffice to set the stage for Marshall’s own, very different,reading of nineteenth-century economic thought. But before proceeding we takethe occasion to spell out the ‘Italo-Cambridge’ or ‘neo-Ricardian’ tradition which


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ascribes to Ricardo many of the features just outlined, but by way of mirror image– where neo-classical critics find error or lacunae Cambridge finds merit. Thecharacteristic of this tradition is its championship of models entailing a priority ofdistribution over pricing in which one or other of the key distributive variables –either the wage or the profit rate – is exogenously given to the economic system; andin which demand–supply analysis in factor and commodity markets is to all interestsand purposes precluded. Under certain precisely defined conditions a given realwage will dictate the return on capital and the set of cost prices. Maurice Dobb hasphrased it thus:

It should be fairly clear ... that a system which determines distribution interms of exchange and its emergent prices must, in one way or another, withpossibility of varying emphasis, be cast in terms of supply and demand; butau contraire, the Ricardian system, which explains exchange in terms ofdistribution, and distribution itself in terms of productivity and conditionsof production in one industry or sector of industry (given the real-wage),has no place for the relation of supply and demand – at least, until it comesto movements in relative prices, and in particular of Smithian market prices.

(Dobb 1973, 118–19)

Similarly: ‘The nature of [Marx’s] approach required him to start from the postula-tion of a certain rate of exploitation or of surplus-value (or profit– wage ratio inRicardo’s terms); since this was prior to the formation of exchange-values or pricesand was not derived from them. In other words, this needed to be expressed interms of production, before bringing in circulation or exchange’ (148). For a veryrecent statement of the Cambridge view, we have the contribution on ‘Ricardo’ forthe New Palgrave Dictionary of Economics (1987). G. de Vivo, the contributor, hereasserts that Marshall’s position on Ricardo – his attribution to him of a variablewage doctrine and a generalized cost theory of value – was based on ‘flimsy evi-dence’, and proceeds to maintain (on the basis of no evidence at all) that Ricardiantheory ‘basically conflicted with marginalism’: ‘given the rate of wages and produc-tive techniques (and assuming no rent), the rate of profits would be wholly deter-mined, and therefore the cost of production and the price of the product. No rolewould be left to play for the marginalist mechanism of supply and demand: theproportions in which goods are demanded become irrelevant to the determinationof value and distribution, and there would not be any mechanism to bring thesupply and demand of factors to equality’ (de Vivo 1987, 197).

In what follows I shall provide the answer to both the early or marginalist criticsof Ricardo and the self-styled ‘neo-Ricardians’. The textual evidence fully supportsMarshall’s reading of Ricardo, though as already mentioned, that line extends yetfurther than Marshall indicated.

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I I I . M A R S H A L L O N R I C A R D O ’ S V A L U E T H E O R Y

Marshall’s famous Appendix I to his Principles of Economics addresses the criticisms byJevons of Ricardo (and J.S. Mill) on value theory. ‘Though obscurely expressed, itanticipated more of the modern doctrine of the relations between cost, utility andvalue, than has been recognized by Jevons and some other critics’ (1920, xxxiii). Hebelieved that Jevons had judged Ricardo and Mill harshly, attributing to them‘doctrines narrower and less scientific than those which they really held’ (817). Ricardo’sPrinciples of Political Economy was admittedly an unsystematic work, deliberatelyincomplete with much taken for granted from his readers, necessitating reference toother parts of his work (including correspondence) to settle ambiguities (813). Ricardoalso ‘delighted in short phrases, and he thought his readers would always supply forthemselves the explanations of which he had given them a hint’ (816). But whenRicardo’s text is approached in an effort to ‘ascertain what he really meant’, itemerges that ‘his doctrines, though very far from complete, are free from many ofthe errors that are commonly attributed to him’ (813). In fact, Ricardo’s positionon value ‘though unsystematic and open to many objections, seems to be morephilosophic in principle and closer to the actual facts of life’ than that of Jevons(819).5

Here Marshall had in mind the famous catena or chain of causation which he sawto be Jevons’s ‘central position’:

Cost of production determines supply;Supply determines final degree of utility;Final degree of utility determines value.

(Jevons 1924 [1871], 165)6

Marshall objected first to the ambiguity of ‘cost’ and ‘supply’ for which there waslittle excuse since Jevons had the technical apparatus required to deal with thatmatter. Secondly, and more serious, was the notion that marginal utility ‘determinesvalue’: ‘For the price which the various purchasers in a market will pay for a thing,is determined not solely by the final degrees of its utility to them, but by these inconjunction with the amounts of purchasing power severally at their disposal. Theexchange value of a thing is the same all over a market; but the final degrees of utilityto which it corresponds are not equal at any two parts’ (1920, 818). Marginal demandprice was the appropriate concept. And he proceeds subsequently: ‘Perhaps Jevons’santagonism to Ricardo and Mill would have been less if he had not himself falleninto the habit of speaking of relations which really exist only between demand priceand value as though they held between utility and value’ (820). Thirdly, and mostserious of all, was the failure to convey the notion of mutual causation : ‘But thegreatest objection of all to his formal statement of his central doctrine is that it does


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not represent supply price, demand price and amount produced as mutuallydetermining one another (subject to certain other conditions), but as determinedone by another in a series’ (818). In fact, if a catena is insisted upon, a reversed orderwould be ‘rather less untrue’ than that of Jevons, namely

Utility determines the amount that has to be supplied,The amount that has to be supplied determines cost of production, Cost ofproduction determines value, because cost determines the supply price whichis required to make the producers keep to their work.

(Marshall 1920, 818–19)

Jevons had failed to convey what Cournot long before had emphasized and as theuse of mathematics should have suggested, namely ‘that fundamental symmetry ofthe general relations in which demand and supply stand to value’ (820). 7

Marshall admitted that Ricardo ‘does not state clearly, and in some cases perhapsdid not fully and clearly perceive how, in the problem of normal value, the variouselements govern one another mutually not successively in a long chain of causation’(816). But, as mentioned, he found Ricardo’s formulations to be ‘more philosophicin principle’ than those of Jevons. The dependence of value on costs reflected ‘carelessbrevity’, not principle, and was ‘part of a larger doctrine, the rest of which he hadtried to explain’ (817). In particular, Jevons had erroneously assumed that Ricardothought of value as governed by cost of production without reference to demand(821n).

As for the details of Ricardo’s position regarding the supply side, Marshalllambasted the fallaciousness of attributions to him of a simple-minded labour theory:‘it seems difficult to imagine how he could have more strongly emphasized the factthat Time or Waiting as well as Labour is an element of cost of production’ (816). Atmost, it was a strategic error of judgment on Ricardo’s part not to continuallyrepeat his position that prices are proportionate to labour values only under restrictiveconditions – all of which he laid down in the first chapter of the Principles. 8

A second matter relates to the demand side. Ricardo had far less to say on demandthan costs in the analysis of value; the misunderstandings he sought to correctrelated largely to costs (814). Still, in his first chapter he specified that utility was‘absolutely necessary’ to normal value if not its measure; and more important, in hischapter ‘Value and Riches’ he sought to convey the contrast between marginal andtotal utility and the differential impact on them of a reduction in supply:

Again, in a profound, though very incomplete, discussion of the differencebetween ‘Value and Riches’ he seems to be feeling his way towards thedistinction between marginal and total utility. For by Riches he means total

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utility, and he seems to be always on the point of stating that value correspondsto the increment of riches which results from that part of the commoditywhich it is only just worth the while of purchasers to buy; and that when thesupply runs short, whether temporarily in consequence of a passing accident,or permanently in consequence of an increase in cost of production, there isa rise in that marginal increment of riches which is measured by value, at thesame time that there is a diminution in the aggregate riches, the total utility,derived from the commodity. Throughout the whole discussion he is tryingto say, though (being ignorant of the terse language of the differential calculus)he did not get hold of the right words in which to say it neatly, that marginalutility is raised and total utility is lessened by any check to supply.

(Marshall 1920, 814)

In the body of Marshall’s Principles the same point emerges in the course of animportant claim regarding the continuity of nineteenth-century doctrine:

A great change in the manner of economic thought has been brought aboutduring the present generation by the general adoption of semi-mathematicallanguage for expressing the relation between small increments of a commodityon the one hand, and on the other hand small increments in the aggregateprice that will be paid for it: and by formally describing these small incrementsof price as measuring corresponding small increments of pleasure. The former,and by far the most important, step was taken by Cournot (1838); the latterby Dupuit (1844), and by Gossen (1854). But their work was forgotten; partof it was done over again, developed and published almost simultaneouslyby Jevons and by Carl Menger in 1871, and by Walras a little later. Jevonsalmost at once arrested public attention by his brilliant lucidity and interestingstyle. He applied the new name final utility so ingeniously as to enable peoplewho knew nothing of mathematical science to get clear ideas of the generalrelations between the small increments of two things that are graduallychanging in causal connection with one another. His success was aided evenby his faults. For under the honest belief that Ricardo and his followers hadrendered their account of the causes that determine value hopelessly wrongby omitting to lay stress on the law of satiable wants, he led many to think hewas correcting great errors; where he was really only adding very importantexplanations.

(Marshall 1920, 101n)

Marshall readily conceded that at the time Jevons wrote ‘the demand side of thetheory of value has been much neglected; and that [Jevons] did excellent service by


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calling attention to it and developing it’ (820). But while Ricardo took the operationof demand ‘too much for granted’ (525), the reaction had gone too far in the otherdirection and in some cases had encouraged an approach to distribution theoryimplying that inputs are specific to particular products, i.e. had no alternative uses,so that their returns are in the nature of rent or demand-determined surpluses, withinadequate attention given to conditions of factor supply:

In the reaction, too much insistence has been laid on the fact that the earningsof every agent of production come from, and are for the time mainly governedby the value of the product which it takes part in producing; its earningsbeing so far governed on the same principle as the rent of land; and some haveeven thought it possible to constitute a complete theory of Distribution outof multifold applications of the law of rent. But they will not reach to thatend. Ricardo and his followers seem to have been rightly guided by theirintuitions, when they silently determined that the forces of supply were those,the study of which is the more urgent and involves the greater difficulty.

Marshall was too harsh. Jevons’s catena should also be seen as ‘part of a largerdoctrine’. Consider the section ‘Relation of the Theories of Labour and Exchange’: ‘Itmay tend to give the reader confidence in the preceding theories when he finds thatthey lead directly to the well-known law, as stated in the ordinary language of economists,that value is proportional to the cost of production’ (Jevons 1924, 186). Or again: ‘Itis not easy to express in words how the ratios of exchange are finally determined. Theydepend upon a general balance of producing power and of demand as measured bythe final degree of utility. Every additional supply tends to lower the degree of utility;but whether that supply will be forthcoming from any country depends on itscomparative powers of producing different commodities’ (188). H. Stanley Jevons(1911) defended his father against Marshall’s charge (in the context of interest ratedetermination) in terms of Jevons’s habit – his Ricardian habit one might add – ofdeliberate simplification in conveying particular propositions (H.S. Jevons 1911, 280).

But my concern is Marshall on Ricardo. I shall show that Marshall was right inwhat he said but could have gone yet further in allowing for Ricardo’s appreciationof the demand side and in emphasizing the general-equilibrium implications ofRicardo’s demand–supply orientation.

I V . R I C A R D O A N D T H E T H E O R Y O F D E M A N D

Nothing could be further from the truth than the tradition that demand theoryplayed a small part, if any at all, in Ricardian analysis. Ricardo went to some lengthsto make the point ‘that the production of no commodity, except from miscalculation,precedes the demand or anticipated demand for it’ (Ricardo 1951, VIII, 273–4). This

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apparently obvious point had to be made, since in T.R. Malthus’s opinion increasedfood production preceded increased population: ‘The point in dispute is this, Doesthe supply of corn precede the demand for it, or does it follow such demand? ... I[am] of the latter opinion’ (255). But much more is involved than recognition ofdemand as a necessary condition for exchange value.

The responsiveness of quantity demanded to price variation was clearly recognizedby Ricardo in the Principles, although there would perhaps be ranges of inelasticity:‘Whatever habit has rendered delightful, will be relinquished with reluctance, andwill continue to be consumed notwithstanding a very heavy tax; but this reluctancehas it limits, and experience every day demonstrates that an increase in the nominalamount of taxation, often diminishes the produce’ (I, 241). Ricardo recognizedelsewhere that price elasticity – defined in terms of the proportionate response ofquantity demanded to price and consequential changes in total expenditure – variesover the range of prices, exceeding unity at high levels and declining to values lessthan unity at lower levels; thus ‘if he went on in this way increasing the quantity ofthe cloth, until it came within the reach of the purchase of every class in the country,from that time any addition to its quantity would diminish the aggregate value’(speech, 1822; V, 171). Ricardo’s logic turns on the notion that at low prices theopportunities to attract additional purchasers by further price reductions are limited– a clear notion of marginal demand price. This rationalization of the inelastic rangeappeared also in early correspondence of 1813 involving the differential characteristicsof regular commodities and of the monetary metals:

Coffee, Sugar, and Indigo, are commodities for which, although there wouldbe an increased use, if they were to sink much in value, still as they are notapplicable to a great variety of new purposes, the demand would necessarilybe limited; not so with gold and silver. These metals exist in a degree ofscarcity, and are applicable to a great variety of new uses – the fall of theirprice, in consequence of augmented quantity, would always be checked, notonly by an increased demand for those purposes to which they had beforebeen applied, but to the want of them for entirely new employment.

(Ricardo 1951, VI, 91–2)

It does not seem that Ricardo appreciated the modern ‘substitution effect’, theresponse of quantity demanded to relative price changes assuming unchangedpurchasing power (J.S. Mill did; cf. Hollander 1987a, 123). Variation of quantitydemanded upon price change he attributed to our ‘income effect’. The incomeelasticity of demand for corn he presumed to be very low and sometimes zero forsimplicity; and he maintained with pellucid clarity in the Principles that it is the zeroincome elasticity of demand which accounts for zero price elasticity: ‘An increase inthe cost of production of a commodity, if it be an article of the first necessity, will


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not necessarily diminish its consumption; for although the general power of thepurchasers to consume, is diminished by the rise of any one commodity, yet theymay relinquish the consumption of some other commodity whose cost of productionhas not risen’ (Ricardo 1951, I, 343–4).

That Ricardo lacked the formal conception of marginal utility is clear from anobservation regarding ‘value-in-use’ and ‘value-in-exchange’: ‘If by an improvedmachine I can with the same quantity of labour, make two pair of stockings insteadof one, I in no way impair the utility of one pair of stockings, though I diminishtheir value’ (I, 208n). In this passage the emphasis is on the physiological propertiesof commodities, which suggests a hierarchical ranking of utility, and rules out theincremental dimension. It is, however, true that Ricardo also adopted the psychologicaldimension, or a notion of utility in terms of satisfaction or ‘gratification’ (e.g. I,11). His slipping into physiology cannot explain everything.

At the same time, it must not be forgotten that Say too did not spell out theincremental dimension (see letter of 19 July, 1821, IX, 31f; cf. Hollander 1979, 277n19). Moreover, it is a conspicuous fact that, notwithstanding the neglect of theincremental dimension to utility, Ricardo (like Adam Smith before him) skilfullyapplied the scarcity property of valuable goods to a wide variety of cases. Considerfirst his reply (in a letter to Malthus) to a charge that the British economists neglectedthe scarcity property of valuable goods:

[J.B. Say’s brother] Louis Say has published a thick volume of remarks uponAdam Smith’s, his brother’s, Your and my opinions. He is not satisfied withany of us. His principle object is to shew that wealth consists in the abundanceof enjoyable commodities, – he accuses us all of wishing to heap up what wecall valuable commodities, without any regard to quantity, about which onlythe Polit. Economist should be anxious. I do not believe that any of us willplead guilty to this charge. I feel fully assured that I do not merit it shouldbe made against me.

(Ricardo 1951, IX, 248–9)

Quite evidently, Ricardo placed himself with Smith, Malthus and Say amongst thosewho adopted the consumer’s concept of wealth with all that it implies from thescarcity perspective.9

It is hardly surprising then that Ricardo was perfectly well equipped to solve theso-called ‘paradox of value’, an application of which solution is made in the contextof land rent:

On the first settling of a country, in which there is an abundance of rich andfertile land ... there will be no rent; ...

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On the common principles of supply and demand, no rent could be paidfor such land, for the reason stated why nothing is given for the use of airand water, or for any other of the gifts of nature which exist in boundlessquantity ... [no] charge is made for the use of these natural aids [inproduction], because they are inexhaustible, and at every man’s disposal. Inthe same manner the brewer, the distiller, the dyer, make incessant use of theair and water for the production of their commodities; but as the supply isboundless, they bear no price.

(Ricardo 1951, I, 69)

The paradox is resolved elsewhere in a particularly clear manner: ‘Why is water[though ‘abundantly useful’ as explained on the opening page of the Principles ] with-out value [in exchange], but because of its abundance? If corn were equally plenty[sic] it would have no greater value, whatever quantity of labour might have beenbestowed on its production’ (IV, 221).10

Significantly, the scarcity principle is used to defend Adam Smith against a chargeby Say that Smith has neglected ‘the value which is given to commodities by naturalagents, and by machinery’ by relating value to labour:

it does not appear to me, that this charge is made out; for Adam Smith nowhere undervalues the services which these natural agents and machineryperform for us, but he very justly distinguishes the nature of the valuewhich they add to commodities – they are serviceable to us, by increasingthe abundance of productions, by making men richer, by adding to value inuse; but as they perform their work gratuitously, as nothing is paid for theuse of air, of heat, and of water, the assistance which they afforded us, addsnothing to value in exchange.

(Ricardo 1951, IV, 286–7)

A sufficient contraction in the supply of a natural agent would generate a positiveprice for the service, which evidently would be passed on in turn to consumers byway of output contraction. All this provides a splendid illustration of the fact thatscarce labour – in contrast to free natural agents – is relevant to cost price only byway of its impact on commodity supply.

We come now (using Marshall’s terms, above, p. 172), to the ‘profound, thoughvery incomplete, discussion, of the difference between Value and Riches’, in whichRicardo ‘seems to be feeling his way towards the distinction between marginal andtotal utility’:

A man is rich or poor, according to the abundance of necessaries and luxurieswhich he can command; and whether the exchangeable value of these formoney, for corn, or for labour, be high or low, they will equally contribute


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to the enjoyment of their possessor. It is through confounding the ideas ofvalue and wealth, or riches [,] that it has been asserted, that by diminishingthe quantity of commodities, that is to say of the necessaries, conveniences,and enjoyments of human life, riches may be increased. If value were themeasure of riches, this could not be denied, because by scarcity the value ofcommodities is raised; but if Adam Smith be correct, if riches consist innecessaries and enjoyments, then they cannot be increased by a diminutionof quantity.

(Ricardo 1951, IV, 275–6)11

This passage asserts unmistakably (1) that total utility is lessened by a reduction insupply, i.e. by increased scarcity, and (2) that ‘value’ per unit is raised by thisincreased scarcity; it follows immediately that the increase in value corresponds to thereduction in total utility, i.e. value measures ‘riches’ – at the margin. Ricardo did notstate this definition in so many words. But Marshall’s very careful formulationcaptures to perfection what is entailed.

I conclude with Marshall that if ‘the terse language of the differential calculus’ hadbeen pointed out to Ricardo – had Say recognized the incremental dimension toutility and formulated it in the debate – a place was available in Ricardo’s model for itsabsorption. The notion of marginal utility did not require a new ‘paradigm’ or logicalstructure.12 This evaluation turns on Ricardo’s appreciation and widespread applicationof the scarcity principle; it does not stand or fall with Marshall’s interpretation of thepassage regarding Value and Riches, valid though it appears to be.

V. SUPPLY–DEMAND ANALYSIS AND COST PRICE

Ricardo is frequently said to have rejected the demand–supply analysis of natural orlong-run competitive price (cf. Schumpeter 1954, 220, 482, 569– 70, 604, 611, 684,921). From the above discussion, this is obviously a total misconception. What heactually complained of was ‘the opinion that the price of commodities depends solelyon the proportion of supply to demand, or demand to supply’ (1951, I, 382; empha-sis added), a complaint alluding to those formulations which appeared to exclude arole for cost conditions in the mechanism. As Marshall pointed out, his chief con-cern was with costs and the supply side of the market. Thus his observation to Say:‘You say demand and supply regulates the price of bread; that is true, but whatregulates supply? the cost of production’ (IX, 172). The essence of the matter is alsocaptured in a letter to Malthus: ‘You say demand and supply regulates value – this Ithink is saying nothing ... – it is supply which regulates value – and supply is itselfcontrolled by comparative cost of production’ (VIII, 279). 13

It is worth noting that Robert Torrens (1790–1864) regarded all of this as receiveddoctrine: ‘Political Economists seem on all hands agreed, that the quantity in which

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commodities exchange for one another depends, in any given instance, upon theproportion of demand and supply. It is also on all hands agreed, that with respect toall commodities which industry can indefinitely increase, the cost of production isthe circumstance which, by limiting the quantity of them brought to market, regulatesthe proportion of supply to demand, and ultimately determines the exchangeablevalue’ (Torrens 1936 [1822], 9). In fact Ricardo himself said the same in commentingon a statement by Malthus to the effect that ‘the relation of the supply to thedemand ... is the dominant principle in the determination of prices whether marketor natural, and that the cost of production can do nothing but in subordination toit, that is, merely as this cost affects ... the relation which the supply bears to thedemand’ (in Ricardo 1951, II, 47). On this Ricardo remarked that it is ‘not that Iknow of disputed by any body’. 14

We turn now to the precise nature of the Ricardian supply adjustments. If one’sconcern is capital accumulation or the growth of population, it is often sensible toassume as a first approximation that profit-rate and wage-rate uniformity have bothbeen achieved, i.e. that the various sectors of the economy are throughout inequilibrium. If allocation is the issue we must look at the motivation for the use offactors in one sector rather than another. That hinges on differential wages anddifferential profits – the fact that capitalists (labourers) have an eye on what theircapital (labour) can yield elsewhere. To talk of ‘costs’ is to take account of preciselythis aspect of the economic problem. The classical notions of wages and interest ascompensation for effort and abstinence respectively, are pertinent at the macro-economic level where the determinants of aggregate factor supplies are underinvestigation; in the micro-economic context ‘costs’ reflect alternative opportunities.The cost price analysis of Ricardo is pre-eminently an analysis of the allocation ofscarce resources proceeding in terms of general equilibrium.

To demonstrate this position let us consider Ricardo’s reaction to a statement byJ.B. Say, in his Traité d’économie politique (4th edition, 1819) of mutual interdependencebetween product and factor markets. This statement incorporates the principle ofopportunity cost and also that of imputing the values of factors from the values oftheir products (or derived demand) – in broad terms only because of the absence ofa formal marginal conception whereby the physical contributions of individualfactors can be isolated or, indeed, whereby to specify marginal utility:

It is utility which determines the demand for a commodity, but it is the costof its production which limits the extent of its demand. When its utilitydoes not elevate its value to the level of the cost of production, the thing isnot worth what it costs; it is a proof that the productive services might beemployed to create a commodity of a superior value. The possessors of


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productive funds, that is to say, those who have the disposal of labour, ofcapital or land, are perpetually occupied in comparing the cost of productionwith the value of the things produced, or which comes to the same thing, incomparing the value of different commodities with each other; because thecost of production is nothing else but the value of productive services, consumedin forming a production; and the value of a productive service is nothing elsethan the value of the commodity, which is the result. The value of a commodity,the value of a productive service, the value of the cost of production are all,then, similar values when every thing is left to its natural course.

(Say; cited in Ricardo 1951, I, 282–3)

Léon Walras (1874), who developed the algebraic formulation of general-equilib-rium relations, believed Say to have been on the right path by this formulation ofgeneral interdependency (1954, 425). 15 But so did Ricardo, who commented on thepassage: ‘M. Say maintains with scarcely any variation, the doctrine which I holdconcerning value’ (1951, I, 283). He objected only to Say’s treatment of the servicesof land on a par with those of capital and labour, given his own presumption thatrent must be excluded from marginal cost (cf. IX, 172); 16 and to the various otherstatements by Say which, by relating value solely to utility, seemed to exclude anyrole for costs: ‘I think more may be said in defence of this doctrine’, he wrote toMalthus regarding Say on services: ‘[They] are I think the regulators of value, and ifhe would give up rent, he and I should not differ very materially on that subject. Inwhat he says of services he is quite inconsistent with his other doctrine about utility’(VIII, 277).17

The perception of factor demand as entailing a productivity dimension emergesalso, independently of the Say exchanges, in Ricardo’s observations regarding thereturn to permanent land improvement: ‘a portion only of the money annually tobe paid for the improved farm, would be given for the original and indestructiblepowers of the soil; the other portion would be paid for the use of capital which had beenemployed in ameliorating the quality of the land, and in erecting such buildings aswere necessary to secure and preserve the product’ (I, 67; emphasis added); a littlelater rent is again defined as ‘that compensation, which is paid to the owner of landfor the use of its original and indestructible powers’ (I, 69). 18 A productivity dimensionis thus clearly implied in the return to capital as well as to land.

V I . O N F A C T O R S U B S T I T U T I O N A N D M A R G I N A LPRODUCTIVITY

Jevons phrased the ‘Economic Problem’ thus in his Concluding Remarks to theTheory of Political Economy : ‘Given, a certain population, with various needs and powers of

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production, in possession of certain lands and other sources of material: required, the mode ofemploying that labour which will maximise the utility of the product’ (1924, 266–7).

It is certainly true that the chief preoccupation of the classics did not turn on thecase of given aggregate amounts of the factors and their optimal allocation. But thisis equally the case of Marshall. And in any event the economic problem as stated byJevons constitutes a subset of the much broader concerns of the classics – concernswith growth – which generate complex allocative questions. 19

We can, however, go further. The absence of the formal conception of incrementalvariation of factor proportions whereby the physical contribution of individualfactors may be isolated does not preclude the applicability of Ricardian theory tostandard neo-classical problems, particularly allocative and the pricing implicationsfor factors and products of disturbances to demand or to costs within the contextof given aggregate factors supplies. Substitution between capital and labour isincorporated by Ricardo by way of variation in the commodity mix, even whenruled out at the technical level. Moreover, we obtain a distorted picture if we forget(1) that the first generation of ‘marginalists’ also lacked the principle of factorsubstitution or technical variation – though Menger went further, the notion ofdiminishing marginal product eluded him – and (2) that later neoclassicists were obligedto recognize the limited status of the principle in analysing the properties of general-equilibrium systems. Classical inter-industry substitution was never superannuated. 20

V I I . T H E L A B O U R T H E O R Y O F V A L U E A N DALLOCATION ANALYSIS

Ricardo’s subscription to Say’s general-equilibrium perspective is no mere formal-ity. The notion of opportunity costs pervades Ricardo’s work, including the labourtheory of value.

‘Cost of production’ or ‘natural price’ includes profits as well as wages, each at itsaverage or ordinary rate (Ricardo 1951, I, 291). Assuming uniform factor proportions,a state of general equilibrium such that prices reflect costs throughout the system,will satisfy both profit-rate uniformity and proportionality of prices to labourinputs. More accurately, under the stated circumstances, uniformity of profit ratesrequires that proportionality. The following passage (drawn from a discussion ofsubsidized labour for some firms in a manufacturing industry) summarizes thepoint beautifully, and does so in a context expressing that what is relevant is marginallabour input: ‘The manufacturer enjoying none of these facilities might indeed bedriven altogether from the market, if the supply afforded by these favoured workmenwere equal to all the wants of the community; but if he continued in the trade, itwould be only on condition that he should derive from it the usual and general rate


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of profits on stock. and that could only happen when his commodity sold for aprice proportional to the quantity of labour bestowed on its production’ (I, 73n).

It is the possibility of capital and labour movement between uses, i.e. commodity-supply adjustment, which assures the tendency to cost price and proportionality ofprices to labour input. This can be illustrated from the discussion of an exogenouschange in tastes, starting out from equilibrium with ‘all commodities ... at theirnatural price’, implying by this (1) that ‘the profits of capital in all employments areexactly at the same rate’ and (2) that prices are proportionate to labour input (I, 90).Market and natural prices diverge temporarily following the disturbance, but thecorrective mechanism of ‘competition’, i.e. supply adjustment, re-establishesequilibrium:

It is ... the desire, which every capitalist has, of diverting his funds from aless to a more profitable employment, that prevents the market price ofcommodities from continuing for any length of time either much above, ormuch below their natural price. It is this competition, which so adjusts theexchangeable value of commodities, that after paying the wages necessary totheir production, and all other expenses required to put the capital employedin its original state of efficiency, the remaining value or overplus will in eachtrade be in proportion to the value of the capital employed.

(Ricardo 1951, I, 91).

It is supply adjustment, given the pattern of demand, that assures re-establishment ofuniformity of surplus to capital across industries, and proportionality of prices tolabour values.

Whether or not costs are proportional to labour inputs – this depends on theuniformity or otherwise of factor proportions – only the returns to factors thathave alternative uses are allowed for. In circumstances of differential factor proportions,the assumption of factor mobility dictates a divergence of equilibrium cost pricesfrom labour inputs, some prices rising and some falling (by way of appropriatesupply adjustments) relative to a commodity produced with mean factor proportions.Ricardo’s potent contribution to allocation theory is reflected in his recognitionthat an increase in the wage will generate supply expansions (and thus generate lowerrelative prices) in the case of commodities produced with above-average capital–labour ratios. 21 Here in effect he warns against the myopia engendered by excessiveconcentration on partial or industry analysis which threatens to yield false results inthe case even of the simplest disturbance such as an experimental wage increase.

More generally, since ‘it is through the inequality of profits, that capital is movedfrom one employment to another’ (I, 119), an economy-wide change in labourproductivity or any other disturbance impinging equally on all commodities, has

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no differential effects on profitability at the initial longrun cost prices and thereforewill generate no changes in supply, leaving those prices unchanged. Evidentlyembodiment of labour (or pain cost of some sort) as such is not the relevant micro-economic consideration. By contrast, a disturbance limited to a single industry,such as a change in input coefficients or a tax or subsidy, will generate an alterationin output and consequent alteration in price, to re-establish the original return oncapital in that industry. Applications of the distinction in question extend far andwide, one of the most important bearing upon the fundamental nature of trade: ‘Ifany cause should raise the price of a few manufactured commodities, it wouldprevent or check their exportation; but if the same cause operated generally on all,the effect would be merely nominal, and would neither interfere with their relative[cost] value, nor in any degree diminish the stimulus to a trade of barter, which allcommerce, both foreign and domestic really is’ (I, 228).

In all this Ricardo appreciated the contrast – with an eye to motivation – betweenallocation theory and the determinants of aggregate factor supply: ‘When profits areuniversally high, the temptation to produce an increased quantity of commoditiesis very different from that which a high market price of a particular commodityaffords, for the production of that particular commodity’ (II, 372). It is profit-ratedifferentials that govern resource allocation; the general rate governs accumulation.

V I I I . C O S T A N D R E N T

We can sharpen our understanding of Ricardo’s position on cost price by consideringthe contrast between cost and rent. I shall first establish Ricardo’s awareness that thephenomenon of differential rent, which plays so large a role in his system, is but aspecial case of a more general phenomenon, namely land scarcity.

Rent is provisionally defined as payment to the landlord ‘for the use of theoriginal and indestructible powers of the soil’ (I, 67), a productivity phenomenon.But in that passage already cited alluding to the solution of the ‘paradox of value’in terms of demand–supply (I, 69; see above, p. 177), the ultimate rationale is morespecifically expressed in terms both of productivity and scarcity. And using theseprinciples Ricardo rejected a physiocratic residue in the Wealth of Nations, namelySmith’s assertion that in manufactures ‘ nature does nothing, man does all ; and thereproduction must always be in proportion to the strength of the agents thatoccasion it’ (cited I, 76n). Factor productivity, Ricardo insisted, is a necessary butinsufficient condition for a positive return: ‘Does nature nothing for man inmanufactures? ... There is not a manufacture which can be mentioned, in whichnature does not give her assistance to man, and give it too, generously andgratuitously.’


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Now differential rent is simply a special case of scarcity rent, falling within the generaldemand–supply framework: ‘If all land had the same properties, if it were all unlimited inquantity, and uniform in quality, no charge could be made for its use, unless it possessespeculiar advantages of situation’ (I, 69); conversely, ‘[if] air, water, the elasticity of steam,and the pressure of the atmosphere, were of various qualities; if they could be appropriated,and each quality existed only in moderate abundance, they, as well as the land, wouldafford a rent as the successive qualities were brought into use’ (I, 75).

Ricardo also understood that rent would be generated even on marginal units ofoutput where scarcity manifests itself in an extreme form – the functional relationbetween output and costs terminating, i.e. the supply curve becoming vertical; andhe traced through some of the analytical consequences – typically ‘Marshallian’consequences – for taxation:

The corn and raw produce of a country may, indeed, for a time sell at amonopoly price; but they can do so permanently only when no more capitalcan be profitably employed on the lands, and when, therefore, their producecannot be increased. At such time, every portion of land in cultivation, andevery portion of capital employed on the land will yield a rent, differing,indeed, in proportion to the difference in the return. At such time too, anytax which may be imposed on the farmer, will fall on rent, not on theconsumer. He cannot raise the price of his corn because by the supposition,it is already at the highest price at which the purchasers will or can buy it.He will not be satisfied with a lower rate of profits, than that obtained byother capitalists, and, therefore, his only alternative will be to obtain a reductionof rent or to quit his employment.

(Ricardo 1951, I, 250–1)

This analysis presumes throughout a negatively sloped demand curve. It is scarcelysurprising, in the light of all this, to find Ricardo maintaining that it is ‘from theprice at which the produce is sold, that rent is derived; and this price is got notbecause nature assists in the production, but because it is the price which suits theconsumption to the supply’ (I, 77n). Rent appears even in the price covering the lastunit, if the demand curve is high enough, as a pure demand-determined surplus. Inthe usual, less extreme, cases rent emerges entirely as producer’s surplus, dependentupon the location of the demand curve and is not paid on marginal units. (Rentalso appears within cost price if alternative land uses are recognized; see note 16.)

IX . FURTHER APPLICATIONS

The tools of allocation theory outlined above, it can be shown, govern Ricardo’s so-called ‘fundamental theorem of distribution’, or inverse wage–profit relation. (This

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applies also to Marxian economics.) They are used by Ricardo to analyse the processof reabsorption into the economic system of factors displaced by various disturbancesincluding new technology and taxation; and conversely, the impact of disturbanceswhich attract factors into particular sectors. In these applications we find incorporatedthe law of markets, as part of the full-fledged general-equilibrium system. And, ofcourse, there is the comparative-cost approach to trade which is pre-eminently anexercise in allocation theory. (On these matters, see Hollander 1987a, ch. 5.) But mypurpose will have been satisfied if I have been able to convey the elementary essentialsof these applications.

X . W A G E V A R I A B I L I T Y A N D ‘ S U R P L U S ’

A principal issue that arises in discussions of Ricardian growth theory is the variabilityor fixity of the average wage. Marshall insisted on the former. 22 And so do I, forRicardo’s model, involving population and capital expansion given land, requires avariable wage (Hollander 1987a, ch. 8). This issue has the most profound implicationsfor nineteenth-century historiography, having in mind the Italo-Cambridge perspectiveoutlined earlier.

That perspective I find to be almost entirely based on wishful thinking. Demand–supply analysis is the basis for Ricardian cost prices (this I have demonstrated above)and also for the average returns to labour and capital (see preceding reference). Butto take this view undermines the whole concept of interest as ‘surplus’ and pointstowards the Marshallian position according to which ‘in the long run, the earningsof each agent are, as a rule, sufficient only to recompense at their marginal rates thesum total of the efforts and sacrifices required to produce them’ (Marshall 1920,832).

All this must be placed in appropriate context. The formal conception of thesource of profits in surplus – actually surplus labour time – is adopted by J.S. Mill(not only Marx):

the reason why capital yields a profit, is because food, clothing, materials,and tools, last longer than the time which was required to produce them; sothat if a capitalist supplies a party of labourers with these things, on conditionof receiving all they produce, they will, in addition to reproducing theirown necessaries and instruments, have a portion of their time remaining, towork for the capitalist. We thus see that profit arises, not from the incidentof exchange, but from the productive power of labour; and the generalprofit of the country is always what the productive power of labour makesit, whether any exchange takes place or not. If there were no division ofemployments, there would be no buying or selling, but there would still beprofit. If the labourers of the country collectively produce twenty percent


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more than their wages, profits will be twenty per cent, whatever prices mayor may not be. The accidents of price may for a time make one set ofproducers get more than the twenty per cent, and another less, the onecommodity being rated above the natural value in relation to othercommodities, and the other below, until prices have again adjusted themselves;but there will always be just twenty per cent divided among them all.

(Mill 1965, II, 411; first introduced into the 4th edn, 1857)

This passage conveys the notion that productivity must be sufficiently high to leavepart of labour’s time free for the production of commodities other than wagegoods. Ricardo broaches the same issue but indirectly in formulating the inversewage–profit relation – the notion that the profit rate turns on the wage only, insofaras the latter reflects the share of labour in the product to be distributed betweenlabour and capital. Under ideal conditions relating to the invariable measure thistheorem can be specified in terms of the fraction of the work day devoted to the productionof wage goods (Hollander 1987a, 111), though Ricardo (and Mill) stood by the theoremeven if expressed in terms of real national income, i.e. income of constant purchasingpower (114).23

Assume now that the real wage and thus the cost of producing labour is a variable.The notion of surplus then breaks down, for we can say nothing about the ‘surplus’until the ‘necessary’ labour time (the commodity wage corrected for productivitychange) is specified. But the rate of capital accumulation (and thus of labour demand)can vary, and with it the commodity wage. It will vary, according to Ricardo, withvariation in the return on capital: ‘The motive for accumulation will diminish withevery diminution of profits’ (Ricardo I, 111), a perspective fully consistent with thetheory of abstinence formally expressed by Senior, Mill, and later Marshall. To thisMarx reacted harshly, for he realized the implication:

It is incomprehensible how economists like John Stuart Mill, who areRicardians and even express the principle that profit is equal to surplus-value, surplus labour, in the form that the rate of profit and wages stand ininverse ratio to one another and that the rate of wages determines the rate ofprofit (which is incorrect when put in this form), suddenly convert industrialprofit into the individual labour of the capitalist instead of into the surpluslabour of the worker, unless the function of exploitation of other people’slabour is called labour by them.

(Marx 1971, [1862–3] III, 506)

To isolate the source of profit in surplus labour time does not ( pace Marx) ruleout the conception of interest as a necessary reward. That productivity assures anexcess over the output consumed by labour is the basis for investment demand;

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while abstinence relates to capital-supply conditions. However, since the wage rate isa variable partly governed by capitalsupply conditions, it follows that the ‘necessary’part of the work day is as much a consequence as a determinant of the ‘surplus’ part.As Ricardo put the matter, there is a ‘natural equilibrium between profits and wages’(1951, I, 226). We are in a Marshallian world.

The undermining of any meaningful notion of surplus is compounded if weallow interdependence between distribution and final expenditure patterns. Ricardorecognized such a two-way relation: an impact of distribution on expenditure patternsand a reverse impact of expenditure patterns on distribution (see Hollander 1989[below, Chapter 11]); so for that matter did Marx, who indeed insisted that expenditurepatterns are governed by income distribution (Hollander 1987a, 370–1). In this caseit is misleading to assert – as Marx and Cambridge writers do assert – that knowledgeof the wage allows the ‘prediction’ of the profit-rate and the set of equilibrium costprices; for the wage cannot be ‘fixed’ independently of the pattern of final demand.The notion of the allocation of a ‘pre-existing’ surplus across industries by a processof ‘circulation’ such as Marx purports to undertake in his ‘transformation of valuesinto prices’ is invalid. 24

In brief, to allow that a market process is involved merely in the equalization ofreturns on capital, while the average profit rate is pre-established requires that thestrategic variables be given exogenously – pre-eminently the commodity wage perunit of time (and productivity) thereby fixing the ‘cost of producing labour’. Thisrequirement is ruled out by Ricardo’s (and also Marx’s) assumption of variablewages dependent (a) on the rate of capital accumulation and therefore on the returnon capital, and (b) on the pattern of expenditure. Our demonstration in this sectionthus reinforces the notion that Ricardian theory cannot be represented in terms ofCambridge one-way causal relations.

XI . SUMMARY AND CONCLUSION

It is unjustified to say of Ricardo that he had little comprehension of the waymarkets work and relative prices operate in allocating resources. Neither can it besaid that there is a crucial sense in which distribution is ‘prior to’ exchange; theRicardian system is one of mutual dependence between distribution and pricing.

Marshall was then right to reject the Jevonian (and Walrasian) call for a post-classical ‘reconstruction’ of economic theory, on the grounds that ‘the foundationsof the theory as they were left by Ricardo remain intact; that much has been addedto them, and that very much has been built upon them, but that little has been takenfrom them’ (1920, 503). As I see it, there occurred after 1870 a narrowing of focusfrom economic growth to exchange and allocation in their own right, and morepositively, the elaboration of mathematical theories of the maximizing consumer


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(and ultimately the firm) and general-equilibrium relations. The marginalists madespurious analytical distinctions failing to recognize how much the classics hadcontributed to the theory of allocation; and thus they also failed to represent theirown distinctive contribution to individual choice analysis as a sup-plement to orstrengthening of that theory. 25

As for the matter of marginal utility, Marshall put it accurately in his commentthat Jevons added very important ‘explanations’ but no more. These explanationswere, I would add, as much pertinent to Say’s account as to Ricardo’s. What of themarginal productivity principle, adopted a generation after the so-called ‘marginalrevolution’ itself? This certainly clarified the understanding of factor demand by thefirm (and thus the industry) in particular uses. But again the elaboration was requiredas much by Say as by Ricardo and Mill. Moreover, it is historically unjustified toassert that recognition of a multiplicity of primary factors required a new theorybased upon the principles of demand, or that classical theory could not explain therelative wages of heterogeneous types of labour (see above, p. 169). Since Smith’stime and before the wage structure had been analysed in demand– supply terms.Smith and his successors had all recognized a productivity dimension on the demandside of the labour market, although in dealing with the wage structure they typicallychose to focus on the supply side; and while value productivity is more conspicuousthe more specialized to a particular use are individual factors, those same considerationsare equally relevant when allowance is made for factor mobility between uses – thecharacteristic classical allowance – although now strict limits are placed on the extentto which returns in different uses can diverge. Marshall, we have seen, protestedagainst that over-reaction from Ricardo which involves a wholly generalizedapplication of rent theory – what some call today ‘neo-neo-classicism’. At the sametime, it remains true that Ricardo (and Mill) appreciated the technical implicationsof factor specificity, as is clear from the various applications of the rent doctrinediscussed above.26

NOTES

*Public lecture given at Tinbergen Institute, Erasmus University, Rotterdam, Holland, April11, 1989. This paper was published in a Spanish translation ‘Mercados precios y distribucion:por que Marshall estaba en lo correcto con respecto a Ricardo’, Economia (PontificiaUniversidad Catolica del Peru), 13 (June 1990): 9–46. An abbreviated version appears as‘Alfred Marshall in Historical Perspective: Why Marshall was Right about Ricardo’, EuropeanEconomic Review 35 (May 1991): 313–22.

1. Schumpeter took precisely the opposite view to mine: ‘No unbiased reader can fail toperceive ... that Marshall’s theoretical structure, barring its technical superiority andvarious developments of detail, is fundamentally the same as that of Jevons, Menger andespecially Walras, but that the rooms in this new house are unnecessarily cluttered up with

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Ricardian heirlooms, which receive emphasis out of proportion to their operationalimportance’ (1954, 837).

2. The contrast was suggested to me by Professor David Laidler who sought to understand themutual incomprehension of protagonists in the debates of the past decade regarding ‘classical’economics.

3. Frank Knight, the arch-critic of Ricardo, had high praise for Adam Smith’s adjustmentprocess involving the transfer of resources ‘from less to more remunerative uses until theremuneration in all competing fields is equalized’ (1956, 64). The force of his hostilityblinded Knight to the fact that Ricardo readily adopted Smith’s analysis.

4. Sir John Hicks has argued for the replacement of the term ‘marginalism’ by ‘catallactics’,admitting that ‘Ricardo himself could be quite marginalist at times’ (1974, 212). My case isthat Ricardo was both ‘marginalist’ and ‘catallactician’, envisaging the economic system asa system of interrelated markets. (Hicks contrasts ‘catallactics’ with ‘plutology’ or the scienceof wealth, drawing a line between neo-classicism and classicism in these terms; but thisneglects that Walras, for one, identified pure economics with the theory of social wealth on thegrounds that ‘the sum total of all things, material or immaterial, on which a price can be setbecause they are scarce (i.e. both useful and limited in quantity ) constitutes social wealth’ (1954,40).

My position seems close to that of Blaug (1976) though I would wish to avoid linkingMenger too closely with Jevons and Walras: ‘the innovations of Menger, Jevons and Walrasare more suitably described, not as a new SRP [scientific research programme], but as a“progressive problem-shift” in the older research programme of classical political economy’(165; see also p. 161 regarding a common ‘hard core’). I have been unable to pin down withabsolute assurance Blaug’s position from his numerous other statements regarding thenature of the ‘marginal revolution’, although I have the impression that he continues tomaintain that it amounted to a ‘shift of emphasis’. (On this issue see Hollander 1987b.)

A recent volume devoted to demonstrating the opposing view (Fisher 1986) is vitiated bythe conspicuous neglect of the nature of classicism.

5. Marshall cited the German historicist Roscher to the same effect: ‘As Roscher says ( PoliticalEconomy, Sect. CLV), “In judging Ricardo, it must not be forgotten that it was not hisintention to write a text-book on the science of Political Economy, but only to communicateto those versed in it the result of his researches in as brief a manner as possible. Hence hewrites so frequently making certain assumptions, and his words are to be extended to othercases only after due consideration, or rather re-written to suit the changed case” ’ (1920,163n).

See also Marshall’s comment regarding Ricardo’s misleading modes of expression (503,761n, 834).

6. On the opening page of the Theory of Political Economy Jevons asserted: ‘Repeated reflectionand inquiry have led me to the somewhat novel opinion, that value depends entirely uponutility ’ (1924, 5).

7. Similar charges appear in Marshall’s famous Academy review (1872) of The Theory of PoliticalEconomy : Jevons ‘was so encumbered by his mathematics in his central argument, that hetried to draw nature’s actions out into a long queue’ (1925, 99).

On Jevons’s position that ‘the wages of a working man are ultimately coincident withwhat he produces after the deduction of rent, taxes and the interest on capital’, Marshallnotes: ‘He does not see that, since rent, taxes, etc. are not paid in kind, we must havebefore us a complete theory of value in order that we may perform this subtraction. He


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does not speak of the amount of the wages, and the exchange value of the products asvarying elements, the variations of each of which affect those of the other’ (94) .

8. Marshall lists the assumptions of equal skill, equal capital–labour ratios including theperiod of production and equal profit rates. This latter is problematic, since Ricardonever allows differential profit rates as a source of deviation of prices from values (see alsoMarshall 1920, 814–15).

9. The Ricardian perspective points directly away from ‘old-style’ Soviet doctrine. T.W.Hutchison mistakenly found the source of that doctrine in Ricardian classicism: ‘It was, ofcourse, in Marxist economic theorizing that some of the old ideas and concepts of English“classical” orthodoxy continued a form of existence. Certainly, in the economic regimes ofEastern Europe, claiming somewhat questionably to be following out the economic theoriesof Marx, the neglect of consumer demand, utility, and choice of the earlier English theorieshad a twentieth-century practical, political counterpart’ (1972, 468).

10. The failure to specify an incremental dimension to utility, varying in magnitude withquantity, may be partly explained in definitional terms. For if total utility is identified with‘riches’ – and thus linked in a one-to-one relationship – the isolation of a (variable) marginalutility is precluded. This seeming ‘identification’ emerges, for example, in discussion of anindividual who, with his resources, commands twice the amount of corn upon a halving ofcost price: ‘If two sacks be of the value that one was before, he evidently obtains the samevalue and no more, – he gets, indeed, double the quantity of riches – double the quantity ofutility – double the quantity of what Adam Smith calls value in use, but not double thequantity of value, and therefore M. Say cannot be right in considering value, riches, andutility to be synonymous’ (Ricardo 1951, I, 281). But a one-to-one relation is precluded byRicardo’s own solution to the paradox of value – should corn increase sufficiently some ofit (like water) will be actually discarded as useless.

11. Cf. Ricardo 1951, IX, 169: ‘I ... do not estimate riches by value, but by the whole quantityof utility which the commodities which constitute riches possess.’

12. I have phrased this with deliberation. It is impossible to say whether Ricardo would havewished to formulate a law of demand based on diminishing marginal utility. To do sowould, of course, have entailed all the later problems of relating marginal utility todemand price. Moreover, Ricardo himself pointed out that ‘Every man has some standardin his own mind by which he estimates the value of his enjoyments, but that standard isas various as the human character’ (1951, I, 241); ‘value in use cannot be measured byany known standard; it is differently estimated by different persons’ (I, 429).

Although Jevons objected that Cournot ‘does not recede to any theory of utility, butcommences with the phenomenal laws of supply and demand’ (1924, xxxi), he himselfadmitted: ‘I hesitate to say that man will ever have the means of measuring directly thefeelings of the human heart. A unit of pleasure or of pain is difficult even to conceive’(11). And it was, ‘in practice’, an average or representative individual which concernedhim – an important point casting doubt on Stigler’s representation of the ‘law of utility’in the form: ‘the marginal utility of every commodity diminishes for every man, and thisphenomenon underlies his demand curve for each commodity’ (1972, 579; emphasisadded). Jevons wrote as follows:

I must here point out that, though the theory presumes to investigate the condition of amind, and bases upon this investigation the whole of Economics, practically it is anaggregate of individuals which will be treated. The general forms of the laws of Economicsare the same in the case of individuals and nations; and, in reality, it is a law operating in

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the case of multitudes of individuals which gives rise to the aggregate represented in thetransactions of a nation. Practically, however, it is quite impossible to detect the operationof general laws of this kind in the actions of one or a few individuals. The motives andconditions are so numerous and complicated, that the resulting actions have the appearanceof caprice, and are beyond the analytic powers of science. ... It would be by examining theaverage consumption of sugar in a large population that we might detect a continuousvariation, connected with the variation of price by a constant law. (Jevons 1924, 14–15)This perspective lends support for the opinion that Jevons’s representation of economics as

a science of pleasures and pains was a ‘façon de parler’; his concern was the mathematical logicof the maximization process not the psychological assumptions of hedonism as such (seeBlack 1972, 372–4). Similarly, Jaffé emphasizes Walras’s concern with marketplace satisfactionsthereby avoiding the need for a true theory of consumption (cf. Jaffé 1972, 384–5).

Apart from this sort of complexity – perhaps because of it – Ricardo might have beenhappy enough to stay with an empirical law of market demand reflecting the principle ofsatiety and generating a theory of scarcity value into which even the cost perspective isincorporated. There was no burning need to go further.

That to my mind is one reason why J.S. Mill ‘failed’ to enunciate the principle ofdiminishing marginal utility. In Mill’s case there is also evidence of revealed-preferencereasoning which avoids many of the difficult psychological issues raised by a formalutility approach.

13. Against Schumpeter’s position, Viner makes the following point:In using demand-and-supply terminology for the determination of ‘market price’, that is,actual price, or temporary price, or instantaneous price, but rejecting it in his explanationof ‘natural price’, Ricardo was not innovating. This practice goes back to the seventeenthcentury at least. It can be justified on the ground that it was semantically unfortunate thatit later on became common to use the same term ‘demand’ (and correspondingly for‘supply’) both for the quantity that would actually be taken in a given historical marketat a given actual price in a given actual moment of time and for ‘that highly abstractcreation of the observer’s mind’, the long-run normal demand function. (Viner 1958, 357)

14. Viner has this to say on this episode:Terminology aside, there did not exist that dual line of price analysis, Ricardian andMalthusian, which Schumpeter insists upon. If there was any significant difference betweenthe two, it was that Ricardo’s concentration on constant-cost cases kept him inadvertentlyfrom working out an adequate apparatus for explaining the determination of long-runprice where both quantity demanded and quantity offered were variables dependent onprice. It does not follow, in the absence of supporting evidence, that if such a case werepresented to Ricardo, or to any one of his followers, he would have handled it anydifferently than Malthus. (Viner 1958, 358)

15. Walras was nonetheless critical; Say traced the origin of value to utility which wasinsufficiently precise – scarcity was the key (1954, 201). This was to be Ricardo’s complaintagainst Say as we shall shortly see.

16. Ricardo’s exclusion of rent from costs turns on an implicit assumption of one-use land.Where he abandons this assumption rent enters into costs – as for Smith – with an eye toalternative opportunities (1951, I, 252). I am grateful to my undergraduate studentSusan Ecclestone for reminding me of this particular text.

17. In his posthumously published paper ‘Absolute and Exchangeable Value’ Ricardo expressesthe source of the returns to the factors labour and capital very clearly: ‘One class gives itslabour only to assist towards the production of the commodity and must be paid out ofits value the compensation to which it is entitled, the other class makes the advances


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required in the shape of capital and must receive remuneration from the same source’(1951, IV, 365).

18. Cf. Essays on Profits, Ricardo 1951, IV, 18n: ‘If either the landlord expends capital on hisown land, or the capital of a preceding tenant is left upon it at the expiration of his lease,he may obtain what is indeed called a larger rent, but a portion of this is evidently paidfor the use of capital. The other portion only is paid for the use of the original power ofthe land.’

19. The point has been nicely made by Jacob Viner in his answer to Schumpeter’s negativeoverview of Ricardo’s economics:

Many of Schumpeter’s ... critical comments on Ricardo’s analysis lose their point ifRicardo’s major concern in his value theorising was not the explanation of how a givenstructure of prices had come to be what it was but the explanation of (a) the effect on agiven structure of prices of divergent changes in the amounts of the respective factors, and(b) the effect on the relative amounts of the factors of changes in the structure of prices.This interpretation of Ricardo involves the question of the role of the supply functions ofthe factors in ‘Ricardian’ as contrasted with ‘Austrian’ theory.

(Viner 1958, 358; see also 361–2)Bearing in mind our demonstration that changes in the price structure for Ricardo

turn on output adjustments, what we have here is recognition of the interdependence inRicardo’s system between distribution and expenditure patterns, namely, (a) the effecton the structure of outputs of alternative changes in aggregate factor supply; and (b) theeffect on the relative amounts of the factors – and therefore the average returns to thefactors – of changes in the output structure.

20. We may add to this that Ricardo did, in fact, recognize technical capital–laboursubstitution in the growth context: ‘every rise of wages will have a tendency to determinethe saved capital in a greater proportion than before to the employment of machinery.Machinery and labour are in constant competition, and the former can frequently notbe employed until labour rises’ (1951, I, 395; cf. 266).

21. Lord Robbins refers to the demonstration as reflecting ‘the insight of genius’ and ‘oneof the intellectual triumphs of his system’ (1970, 20).

This mechanism assures that even in the absence of factor substitution the economy-wide demand for labour will have a negative slope.

22. ‘The persistency with which many writers continue to attribute to him a belief in the“iron law” can be accounted for only by his delight “in imagining strong cases”, and hishabit of not repeating a hint, which he had once given, that he was omitting for the sakeof simplicity the conditions and limitations that was needed to make his results applicableto real life’ (Marshall 1920, 509).

23. The intention of Mill’s formulation given above (p. 185) was to escape the ‘mercantilist’notion that profits could be accounted for by reference to ‘the incident of exchange’ or anexcess of sales price over costs – profits on alienation as Marx called it. National income isconstrained in real terms and the profit rate is governed by the wage insofar as that wagereflects the proportionate share of output going to labour. From this perspective the sourceof profits is not in surplus labour time as such ; but rather in surplus output or real income. Andin the case of a single-product world there could be no need to bring in labour, i.e. theclassical themes can be specified, in elementary forms, in commodity terms.

24. Marx’s procedures in Capital are totally misleading. Identification of the industries in thevalue scheme of Capital, Volume I, requires information derived from the ‘sphere of

193


circulation’. The problem is further aggravated by the impossibility even of defining thelabour input without having recourse to a market process for the reduction of differentqualities of labour to some base unit.

25. There is the further point that when Jevons and Walras approached the ‘long run’problems of cost price and growth they reverted to the classical solutions; see Hollander1987a, 430–4. It is interesting to find that Ronald Meek, writing from a (post-Stalinist)Marxian perspective, retracted some earlier views on this matter: ‘The idea that economicsmust always necessarily be confined to the economics of scarcity was not really aninherent part of the new [post 1870] philosophy’ (1972, 505). For a new study of Jevonsas growth theorist, see Peart 1990.

26. According to a famous interpretation of Ricardo by Knut Wicksell, there is discerniblein the Principles a conception of the greater productivity of longer ‘construction periods’– extensions of which are determined by money-wage movements – wherein the rate ofinterest is governed by the declining (marginal) product of capital. According to thisview, an increase in the wage rate encourages extensions of capital investment which inturn brings about a fall in the rate of return. (On Wicksell’s interpretation, see Stigler1941, 284.) It is in this causal sense, runs the contention, that Ricardo’s dependency ofprofits upon wages must be understood. On this view the general profit rate is determinedin the Ricardian structure by marginal productivity considerations.

There is something to be said for Wicksell’s interpretation. For Ricardo, a new, lower,equilibrium profit rate comes into effect after a reallocation of resources set in motionby an initial rise in the wage rate. This reallocation entails an increase in the averagecapital–labour ratio which may, following Ricardo’s own practice, be identified with anextension of the period of production: ‘all the questions of fixed capital come under thesecond rule’ – alluding to ‘the relative times that must elapse before the result of ... labourcan be brought to market’ (letter to McCulloch, Ricardo 1951, VIII, 180; cf. 193).

A word of caution is, however, in order. Ricardo nowhere formulated a specificstatement of the effects on output of extensions in the time-period of production. Andthere is certainly no specific statement of a declining (marginal) product of such extensions.My point is that here is an instance where one leading ‘neo-classical’ considered hisapproach to interest rate determination as falling on a line of approach originating withRicardo.

REFERENCES

Arrow, K.J. and D.A. Starrett (1973) ‘Cost and Demand Theoretical Approaches to theTheory of Price Determination’ in J.R. Hicks and W. Weber (eds) Carl Menger and theAustrian School of Economics, Oxford: Oxford University Press, 129–48.

Black, R.D.C. (1972) ‘W.S. Jevons and the Foundation of Modern Economics’, History ofPolitical Economy 4: 364–78.

Blaug, M. (1976) ‘Kuhn versus Lakatos or Paradigms versus Research Programmes in theHistory of Economics’, in S.J. Latsis (ed.) Method and Appraisal in Economics, Cambridge:Cambridge University Press, 149–80.

de Vivo, G. (1987) ‘Ricardo’, The New Palgrave: A Dictionary of Economics, London andBasingstoke: Macmillan, 4, 183–98.

Dobb, M. (1973) Theories of Value and Distribution since Adam Smith, Cambridge: CambridgeUniversity Press.


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Fisher, R.M. (1986) The Logic of Economic Discovery: Neoclassical Economics and the MarginalRevolution, New York: New York University Press.

Frisch, R. (1981) ‘From Utopian Theory to Practical Applications: the Case of Econometrics’,American Economic Review 71: 1–16.

Hicks, John (1974) ‘ “Revolutions” in Economics’, in S.J. Latsis (ed.) Method and Appraisal inEconomics, Cambridge: Cambridge University Press, 207–18.

Hollander, S. (1979) The Economics of David Ricardo, Toronto and London: University ofToronto Press.

—— (1987a) Classical Economics, Oxford: Basil Blackwell.—— (1987b) ‘On a Severe Case of Schizophrenia in the History of Economic Thought’, History

of Economic Thought Newsletter 38: 17–19.—— (1989) ‘On Composition of Demand and Income Distribution in Classical Economics’,

History of Economics Society Bulletin 11 (Fall): 216–21.Hutchison, T.W. (1972) ‘The “Marginal Revolution” and the Decline and Fall of English

Classical Political Economy’, History of Political Economy 4: 442–68.Jaffé, W. (1972) ‘Léon Walras’s Role in the “Marginal Revolution” of the 1870s’, History of

Political Economy 4: 379–405.Jevons, H.S. (1911) Appendix I to W.S. Jevons (1924).Jevons. W.S. (1924) [1871] The Theory of Political Economy, 4th edn, London: Macmillan.Knight, F.H. (1956) On the History and Method of Economics, Chicago: University of Chicago

Press.Marshall, A. (1920) Principles of Economics, 8th edn, London: Macmillan.—— (1925) Memories of Alfred Marshall, ed. A.C. Pigou, London: Macmillan.Marx, K. (1971) [1862–3] Theories of Surplus Value, III, Moscow: Progress Publishers.Meek, R.L. (1972) ‘Marginalism and Marxism’, History of Political Economy 4: 499– 511.Mill, J.S. (1965) Principles of Political Economy, Collected Works, vols II, III, Toronto: University

of Toronto Press.Peart, S. (1990) ‘The Population Mechanism in W.S. Jevons’s Applied Economics’, The

Manchester School of Economic and Social Studies 58: 32–53.Ricardo, D. (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 vols),

Cambridge: Cambridge University Press.Robbins, L.C. (1970) The Evolution of Modern Economic Theory, London: Macmillan.Schumpeter, J.A. (1954) History of Economic Analysis, Oxford: Oxford University Press.Stigler, G.J. (1941) Production and Distribution Theories: The Formative Years, New York: Macmillan.—— (1972) ‘The Adoption of the Marginal Utility Theory’, History of Political Economy 4: 570–

86.Torrens, R, (1936) [1822] ‘Three Editorial Notes on Value, Contributed to The Traveller in

December 1822’, in Jacob Hollander (ed.) Two Letters on the Measure of Value by Jhons StuartMill. A Reprint of Economic Tracts, Baltimore: The Johns Hopkins Press.

Viner, J. (1958) The Long View and the Short, Glencoe, Ill.: Free Press.Walras, L. (1954) [1874] Elements of Pure Economics, ed. W. Jaffé, 4th definitive edn (1926),

London: George Allen and Unwin.

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I.

In several reviews of my Classical Economics (1987; henceforth CE) a criticism recursrelating to my proposition that distribution in Ricardian economics is dependentupon the pattern of final demand. Anthony Brewer, who is convinced by thedemonstration in the book of ‘a fundamentally important core of general equilibriumeconomics accounting for resource allocation in terms of the rationing function ofrelative prices’, has stated the objection fairly and his formulation invites and deservesa response:

[Hollander] does overstate his case at times. For example, he claims that, inRicardo’s theory, changes in the pattern of demand should react on thedemand for labour, and thus on wages, while admitting that ‘Ricardo himselfnever formally made’ this extension [ CE, 104]. He later uses exactly thisinteraction of demand and wages to support his interpretation of Ricardoagainst Dobb [CE, 360]. Surely, the fact that Ricardo did not ‘formally make’this point (i.e., did not make it at all) is an argument against Hollander’sreading, not for it.

(Brewer 1988, 555)

In approaching this criticism I must lay out the context of my claim. That relatesto the impact of various disturbances on distribution by way of the effect onaggregate labour demand. Ricardo in his 1821 chapter ‘On Machinery’ clarifies thataggregate labour demand cannot be taken as proportional to total capital accumulationconsidering variations of the ‘fixed– circulating’ breakdown, variations which maybe either exogenous (Ricardo 1951, I, 386–90),1 or endogenous: ‘every rise of wageswill have a tendency to determine the saved capital in a greater proportion than

11

ON COMPOSITION OF DEMANDAND INCOME DISTRIBUTION IN

CLASSICAL ECONOMICS


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before to the employment of machinery. Machinery and labour are in constantcompe-tition, and the former can frequently not be employed until labour rises’ (I,395). The ‘extension’ I refer to (CE, 104) relates to an exogenous change in the fixed–circulating capital ratio reflecting not technology but altered tastes assuming non-uniform factor proportions. The point in CE is that Ricardo himself, by introducingthe impact on distribution of variation in the components of total capital in oneapplication, opened the door for his readers to undertake further applications of asimilar order within the framework of his own ‘system’.

This concern with ‘systems’ is brought out in the penultimate paragraph of thebook: ‘There is nothing “anti-classical” in adding that changes in the structure ofindustry ... may play back on the wage by influencing labour market conditions inso far as such changes affect the breakdown between constant and variable capital’(CE, 439). And it lies behind my statement that ‘there is nothing in Ricardian logicto preclude a playback from the pattern of activity upon distribution’ ( CE, 360–1).

But is it true that Ricardo never addressed the issue of the impact of expenditurepatterns on distribution? The fact is that he did – though not in dealing with ‘achange of fashion [which] should increase the demand for silks and lessen that forwoollens’ (CE, 95 regarding Ricardo 1951, I, 90–1). That analysis proceeds in Smithianfashion on the assumption that the general levels of wages and profits are unaffectedby the adjustment of market to cost prices. The impact of expenditure patterns ondistribution emerges rather in two other (closely related) contexts.

The first involves the positive effect on aggregate labour demand of a switch inexpenditure from ‘luxury’ goods to services and conversely in the reverse case:

If my revenue were 10,000 l., the same quantity nearly of productive labourwould be employed, whether I realised it in fine clothes and costly furniture,&c.&c. or in a quantity of food and clothing of the same value. If, however,I realised my revenue in the first set of commodities, no more labour wouldbe consequently employed: – I should enjoy my furniture and my clothes, andthere would be an end of them; but if I realised my revenue in food andclothing, and my desire was to employ menial servants, all those whom Icould so employ with my revenue of 10,000 l., or with the food and clothing,which it would purchase, would be added to the former demand for labourers,and this addition would take place only because I chose this mode of expendingmy revenue. As the labourers, then, are interested in the demand for labour,they must naturally desire that as much of the revenue as possible should bediverted from expenditure on luxuries, to be expended in the support ofmenial servants.

(Ricardo 1951, I, 393) 2

The proposition is applied by Ricardo to wartime expansion of employment and

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ON COMPOSITION OF DEMAND

also to postwar contraction of employment and reduced wages: ‘At the terminationof the war, when part of my revenue reverts to me, and is employed as before in thepurchase of wine, furniture, or other luxuries, the population which it beforesupported, and which the war called into existence, will become redundant, and byits effect on the rest of the population, and its competition with it for employment,will sink the value of wages, and very materially deteriorate the condition of thelabouring classes’ (I, 393–4). From this it followed that ‘the labouring class have nosmall interest in the manner in which the net income of the country is expended’ (I,392); ‘they must naturally desire that as much of the revenue as possible should bediverted from expenditure on luxuries, to be expended in the support of menialservants’ (I, 393).

A recent article in this Bulletin by Professor Paul Samuelson has a pretty footnoteon this issue: ‘Good Whig History also refuses to whitewash an author just becausehe has momentarily lapsed into good sense. Ricardo recognized in his famous newchapter on machinery that composition of demand can alter the distribution ofincome – as when the Napoleonic wars shifted demand from civilian goods to morelabor-intensive warfare. Cheers. That perception does not extenuate but rather rebutsthe fallacious classical and neo-Ricardian attempt to separate the distribution of incomefrom the process of value and demand ’ (1988, 164n). Ricardo’s recognition thatcomposition of demand can alter income distribution is here treated as an instanceof ‘momentary good sense’. To my mind Professor Samuelson is trapped by a habit– fortunately not incurable – of confounding Ricardo with the appallingly misnamed‘neo-Ricardians’. I see the allowance as lending very considerable support to myargument that ‘there is nothing in Ricardian logic to preclude a playback from thepattern of activity upon distribution’. 3

The second case relates to alternative capital compositions induced by alternativetaste patterns, and provides an extraordinarily clear statement of the impact of suchpatterns on labour demand. It is, in fact, what I thought was my ‘extension’ precisely.The analysis is found in the posthumously published Notes on Malthus and supplementsthe case mentioned above of induced variation in capital composition recognizedin the Principles :

The effective demand for labour must depend upon the increase of that partof capital, in which the wages of labour are paid. If I have a revenue of £2000– in the expenditure of that revenue I necessarily employ labour. If I turnthis revenue into capital, I at first employ the same labour as before, butproductively instead of unproductively. This labour may be employed inmaking a machine, the machine becomes a capital, and all that it produces isthe revenue derived from that capital. Or this labour may be employed onthe land, and the corn which it produces may be a capital to enable me to


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employ an additional quantity of labour. A society does one or the other inproportion to the demand for either the objects of men’s work; or for objects which arealmost exclusively produced by machinery : – in general the capital accumulated willconsist of a mixture of both, of fixed and of circulating capital ... [To] thecapitalist it can be of no importance whether his capital consists of fixed orof circulating capital, but it is of the greatest importance to those who liveby the wages of labour; they are greatly interested in increasing the grossrevenue, as it is on the gross revenue that must depend the means of providingfor the population. If capital is realized in machinery, there will be littledemand for an increased quantity of labour, – if it create an additionaldemand for labour it will necessarily be realized in those things which areconsumed by the labourer.

(Ricardo 1951, II, 234–6; emphasis added)

So explicit is the role of final expenditure patterns in determining aggregatelabour demand that I have to explain why I did not reinforce my argument in thebook itself at least by reference to the case noted by Professor Samuelson. The simpleresponse is that I should have done so. I was excessively cautious, concentratingunduly upon the fact that in the discussion of the tendency of market to cost pricesthe wage and profit rates are assumed unchanged throughout. To attribute to Ricardoexplicit appreciation of an impact on distribution of altered expenditure betweencommodities did not seem justified solely on the basis of the case entailing reallocationof demand between commodities and services. I now see that such caution was unnecessary,considering Ricardo’s own confirmation in the Notes on Malthus that capitalcomposition and thus aggregate labour demand can be affected by the pattern offinal demand for commodities. 4 Ricardo himself has, from the grave, confirmed myinterpretation and the validity of my ‘extension’.

The principle of valid extensions remains intact. I would, therefore, like to suggestanother. Consider Ricardo’s recognition in correspondence of a possible impact ofvariations in distribution on the pattern of demand: ‘if in the division of the grossproduce, the labourers commanded a great proportion, the demand would be forone set of commodities – if the masters had more than a usual share, the demandwould be for another set’ (VIII, 272–3; see on this issue CE, 97, 439). Evidently,should such (endogenous) changes in demand involve commodities with differentfactor ratios, there will be a playback on distribution. Ricardo himself did notspecifically combine his two relationships to obtain a mutual linkage betweendistribution and final demand, but for us to do so is to remain faithful to Ricardosince he specified each relationship apart and provided a framework for the treatmentof their interdependence. 5

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II.

A word is in order regarding J.S. Mill, for the fact is that Ricardo’s analysis, under therubric of Mill’s fourth proposition on capital ‘demand for commodities is not demandfor labour’ has been read by Dobb and others deliberately to exclude the impact ofdemand composition on distribution. 6 The proposition is elaborated thus:

The demand for commodities determines in what particular branch ofproduction the labour and capital shall be employed; it determines the directionof the labour: but not the more or less of the labour itself, or the maintenanceor payment of the labour. These depend on the amount of capital, or otherfunds directly devoted to the sustenance and remuneration of labour.

(Mill 1965, II, 78)

if by the demand for labour be meant the demand by which wages are raised,or the number of labourers in employment increased, demand for commoditiesdoes not constitute demand for labour. I conceive that a person who buyscommodities and consumes them himself, does no good to the labouringclasses; and that it is only by what he abstains from consuming, and expends indirect payments to labourers in exchange for labour, that he benefits thelabouring classes, or adds anything to the amount of their employment.

(Mill 1965, II, 80)

These formulations reflect Mill’s concern to convey the determinants of aggregatelabour demand with special reference to the positive impact on the wages fund ofcapital accumulation–and direct expenditure on services even of a consumption type(‘other funds directly devoted to ... labour’) – as against consumption or ‘demand forcommodities’. In conveying this notion, Mill drew the contrast between investmentand consumption sharply and excluded variation in the wages fund component inany given aggregate capital such as would result from changed taste patterns in the eventof differential factor ratios. But the fact is that there is also no mention in the chapterat hand, ‘Fundamental Propositions Regarding Capital’, of the impact of ‘machinery’on the wages fund component of a given amount of capital, despite the fact that thenext chapter, ‘On Circulating and Fixed Capital’, adopts Ricardo’s position (93–4).Mill’s attention in the former chapter was evidently diverted from the entire issue offactor proportions. However, once the principle is allowed that aggregate labourdemand is not proportional to total capital because of possible variation in capitalcomposition, there is no technical reason – that is, one flowing from the structure ofthe model – to preclude any other application of that principle even if Mill himselfneglected to carry out the exercise. 7 But this is merely to repeat what was said earlier –and confirmed – of Ricardo.


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NOTES

1. The analysis designed to show that ‘the employment of machinery is frequently deterimentalto [labour’s] interests’ (Ricardo 1951, I, 392) implicitly takes the real wage as given so thatthe impact is on employment. But the purpose of the analysis is satisfied should thenegative impact be entirely or partly on wages. This is made clear in correspondence:‘Labour will fall because there will be a diminished demand for it’ (VIII, 399). Moreover,in the Principles itself, in the discussion of alternative expenditure patterns between servicesand luxury goods, flexible wages are explicitly assumed.

2. The altered pattern of expenditure from commodities to services generates an expansionof the wage-goods sector: labourers displaced in the consumer-goods sector are not simplyreabsorbed in the service sector but are reabsorbed in expanding wage-goods production tomeet the consumption requirements of the (additional) service labour.

3. I have dealt with the problem of recognizing when an author’s statement is ‘unintegratedknowledge’ with special reference to Ricardo’s wage theory, in Hollander 1988 [below,Chapter 15].

4. Even the discussion of services suggests my excessive caution. Consider the opening of themain statement cited above: ‘If my revenue were 10,000 l., the same quantity nearly ofproductive labour would be employed whether I realised it in fine clothes and costlyfurniture, &c.&c. or in a quantity of food and clothing of the same value.’ This assertionrelates to alternative commodity expenditure patterns and the impression is that Ricardodoes allow a differential impact on labour demand but considers it too small empiricallyto merit attention – at least in a context concerning the contrasting impact on labourdemand of expenditure on services versus expenditure on final goods.

5. The impact of changing distribution on the configuration of demand alluded to hereinvolves shifting demand curves. There is also an impact on supply conditions, and thereforeon commodity outputs and prices, given the pattern of demand. This matter, central tothe Principles, needs no elaboration since my reviewer has been convinced by my reading(Brewer 1988, 554–5).

6. Cf. Dobb 1940, 44–5: ‘[Mill] apparently intended to imply ... that a demand for someparticular commodity as compared with another exerted no appreciable influence on thelevel of wages ... a repetition of the familiar classical doctrine that the configuration ofdemand was irrelevant to the distribution of the product between profit and wages .... Likeso much of Ricardian reasoning, it rested on a particular assumption: namely, that theproportions between capital and labour were equal in all industries. Without thisassumption, the statement would no longer be valid.’

7. Allowance for differential factor ratios is in fact suggested at the close of the discussion ofCirculating and Fixed Capital, though unfortunately without an explicit application:‘With the proceeds of his finished goods, a manufacturer will partly pay his work-people,partly replenish his stock of the materials of his manufacturer, and partly provide newbuildings and machinery, or repair the old; but how much will be devoted to one purpose,and how much to another, depends on the nature of the manufacturer, and the requirement ofthe particular moment’ (Mill 1965, 99; emphasis added). Note that ‘the portion of capitalconsumed in the form of ... material ... stands yet in the same relation to the employmentof labour, as fixed capital does’ .

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REFERENCES

Brewer, A. (1988) Review, Economica 55: 554–5.Dobb, M.H. (1940) Political Economy and Capitalism, revised edn, London: Routledge and

Kegan Paul.Hollander, S. (1987) Classical Economics, Oxford: Basil Blackwell.—— (1988) ‘Principles of Textual Interpretation: Illustrated by Ricardian Growth Theory’.

(Unpublished manuscript prepared for H.E.S. meeting, Richmond, Virginia.)Mill, J.S. (1965) Principles of Political Economy, Collected Works, vols II and III, Toronto: University

of Toronto Press.Ricardo, D. (1951–73) The Works and Correspondence of David Ricarrdo, ed. P. Sraffa (11 vols),

Cambridge: Cambridge University Press.Samuelson, P.A. (1988) ‘Keeping Whig History Honest’, History of Economic Society Bulletin 10

(Fall) 161–7.

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I . INTRODUCTION

As Kenneth Arrow has pointed out in a recent paper, ‘David Ricardo was a peacefulman’ (Arrow 1991, 70). Indeed he was – during his lifetime. I am not so sure he isresting peacefully given the further assertion that his system was ‘a bold attempt todetermine values independent of demand considerations’ (75). Arrow adds, by wayof qualification, that he does ‘not think, as some neo-Ricardians seem to, that therewas in any sense an intended repudiation of the demand schedule’; rather Ricardodid not conceive of such a schedule even though ‘some of [his] analysis can only bemade sensible on the basis of such a concept’.

Fortuitously, at precisely the same time, there has appeared much the sameperspective on Ricardo from Paul Samuelson’s pen. Professor Samuelson condemnsRicardo, along with Sraffa, for working with ‘one-legged’ pricing models, pricesemerging ‘autonomously in terms of technology and costs alone’ (Samuelson 1991,570). Ricardo ‘positively fails to understand that where the extensive margin falls (andthe intensive) is an endogenous unknown in the classical system ’ (571n). In Samuelson’sopinion Smith had done better; Ricardo put back the analytic clock; and Sraffaought to have taken advice long available in Wicksell’s Lectures in this regard. AsSamuelson expresses matters,

Ricardo (1951, p. 78) scolds, erroneously scolds, Smith for believing thatrecourse to scarce land alters the validity of the embodied-labour theory ofvalue. Ricardo wrongly supposes that recourse to external-margin zero-rentland exorcises deviations from the labour theory of value occasioned byenhanced consumer demand for land-intensive goods. He foolishly fails tounderstand that, where the extensive margin falls (and the intensive), is an

12

ON THE ENDOGENEITY OF THEMARGIN AND RELATED ISSUES

IN RICARDIAN ECONOMICS*

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ON THE ENDOGENEITY OF THE MARGIN

endogenous unknown of the classical system ! Had Sraffa reflected on Knut Wicksell’sLectures (1913), he would have been alerted to Ricardo’s fatal misunderstandingof his own model.

(Samuelson 1991, 571n)

Failure to recognize the endogeneity of the margin had indeed been regarded byWicksell as ‘the fundamental error’ of Ricardo’s theory of value; Ricardo had failedto appreciate the demand dimension and the ‘mutual conditioning’ of prices bydemand as well as supply factors (Wicksell 1934 [1913], I, 24–6). Wicksell does notactually criticize Ricardo for maintaining (on his assumptions) that relative pricesin equilibrium will reflect marginal labour costs, but only with failing to recognizethat the magnitude of that ratio is dependent on the pattern of demand. This,Wicksell suggests, the classics failed to realize because ‘in the case of one of the mostimportant groups of commodities, the means of subsistence, they regarded demand,or consumption (and therefore also the extension of the margin of production), asgiven by the size of the population ’ (26).1

Paul Samuelson seems to go much beyond Wicksell. As his note cited aboveindicates, he also charges Ricardo with error in defending the labour theory byrecourse to his differential rent doctrine. 2 Moreover, the passage I have cited continueswith the observation that ‘the example of one homogeneous land, in limited supplyand used along with labour for only one of two goods, could have alerted Sraffa tothe fallacy sans any knowledge of Wicksell’, which suggests that in such a case equilibriumprices would no longer be proportionate to marginal labour inputs. Similarly,other of his remarks point to this conclusion: ‘I was dumbfounded to read thatPiero Sraffa evidently believed that Ricardo could succeed in getting rid of land andrent as a complication to the (labour) theory of value. ... How nonsensical is thevulgar belief that zero-rent marginal land can be employed to get rid of land’s effectson the relative prices of newly-produced land-intensive goods’ (Samuelson 1991,571) If I understand Samuelson correctly, he charges Ricardo with two sins: a failureto recognize the endogeneity of the margin with respect to demand and a failure torealize that the marginal labour theory must be abandoned in the presence of scarceland.3

There are then two issues: First, can Ricardian rent theory legitimately be used tosupport the labour theory? This matter should be treated in terms of the logic of thecase, and Ricardo’s understanding of that logic, since conceivably Ricardo did notappreciate all aspects of his own model as Samuelson and Arrow suggest is the case.Secondly, does Ricardian theory deny the endogeneity of the margin with respect todemand. Here, too, we should also address Ricardo’s own perceptions of the matter.To summarize my conclusions in this paper: Ricardian rent theory may be shownlogically to support the labour theory as Sraffa apparently maintained (Ricardo


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1951, I, xxiii), at least on Ricardo’s usual assumption of one-use land; 4 on the otherhand – and this is my primary concern – market circumstances govern the relevantlabour cost margins and consequently the structure of equilibrium prices. In short,the labour theory as used by Ricardo incorporates allowance for land scarcity. But theendogeneity of the cost margin with respect to demand patterns is central not onlyto Ricardian theory in the abstract, but also to Ricardo’s policy applications. Hewell understood its practical significance. 5

The historiographical issue at stake can be easily stated. The Sraffians, Arrow andSamuelson all persist in the belief that Ricardo’s labour theory goes counter to theprinciples (the so-called ‘neo-classical’ principles) of the allocation of scarce resources– a formal rejection of those principles for the Sraffians, a failure to appreciate themfor Arrow and Samuelson (following in Wicksell’s footsteps). In point of fact, Ricardo’slabour theory and the doctrine of rent used in support are part and parcel of thatbody of analysis. 6 At the same time, Ricardo’s success as allocation theorist is subjectto the constraint that land cannot vary optimally – the only technological possibilityis variable labour on fixed land, not the reverse. 7

II. RICARDIAN RENT THEORY

Ricardo’s rent doctrine, of course, makes use of both the extensive and intensivemargins and perhaps more often than not the former. But the general principle isinsisted upon where only the more intensive use of given land is involved:

It often, and, indeed, commonly happens, that before No. 2, 3, 4, or 5, orthe inferior lands are cultivated, capital can be employed more productivelyon those lands which are already in cultivation. It may perhaps be found,that by doubling the original capital employed on No. 1, though the producewill not be doubled, will not be increased by 100 quarters, it may be increasedby eighty-five quarters, and that this quantity exceeds what could be obtainedby employing the same capital, on land No. 3.

In such case, capital will be preferably employed on the old land, and willequally create a rent; for rent is always the difference between the produceobtained by the employment of two equal quantities of capital and labour.

(Ricardo 1951, I, 71–2)8

In what follows I assume solely the possibility of expanding output by the moreintensive farming of scarce land, and also single-use land since this is usually Ricardo’simplicit assumption. This amounts to Samuelson’s example of ‘one homogeneousland, in limited supply and used along with labour for only one of two goods’. Inthis case a switch of demand between manufactures (which is assumed to require noland) and corn will alter the corn-manufacturing exchange rate as given land is used

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more or less intensively, but still it will be true that the new price ratio is proportionateto marginal labour cost. 9 P

c/P

m is certainly dependent on the composition of final

demand, but still the ratio is proportional to relative marginal labour inputs (just asWicksell has it). The essence of the Ricardian doctrine is that the magnitude oflabour costs is determined (partly) by the degree of land scarcity. Accordingly,should pressure on land be relaxed in consequence of a fall in the demand for corn,or an increase in land supply (literally or effectively in consequence of technicalprogress), marginal labour costs would be lower than they actually are. It is desirableto establish that this perspective is not a modern and anachronistic reading into anearly nineteenth-century text. It is Ricardo’s perception of his own model in thePrinciples.

The scarcity property of land rent is stated thus at the outset of the rent chapter:‘If all land had the same properties, if it were all unlimited in quantity, and uniformin quality, no charge could be made for its use, unless it possesses peculiar advantagesof situation’ (I, 69). And though the price of corn equals marginal labour cost – it ismore accurate to express this in terms of the proportionality of the corn:goldexchange ratio to the ratio of respective marginal labour costs 10 – that price yields arent and satisfies the condition that the market for corn clears. The corn price andland rent are as much demand as supply determined: ‘It is ... from the price at whichthe produce is sold, that rent is derived; and this price is got ... because it is theprice which suits the consumption to the supply’ (I, 77n). Accordingly, a relaxationof land scarcity dictates a fall in price and in rent and it does so via a fall in marginal(labour) costs. Reduced demand for corn is specifically mentioned: ‘Any circumstancesin the society which should make it unnecessary to employ the same amount ofcapital on the land, and which should therefore make the portion last employedmore productive, would lower rent. ... Every reduction of capital is ... necessarilyfollowed by a less effective demand for corn, by a fall of price, and by diminishedcultivation’ (I, 78). 11

Evidently, and happily, Ricardo was at least as competent as any ‘beginning studentof economics’ in his appreciation that the transformation terms between labour-intensive manufactures and land-intensive corn varies with demand – and withtechnology. But on his assumptions the new set of equilibrium prices will beproportional to the new ratio of relative marginal labour costs. That is all he insistedupon. That his main question at the outset of the rent chapter – ‘whether theappropriation of land and the consequent creation of rent, will occasion any variationin the relative value of commodities, independently of the quantity of labour necessaryto production’ (I, 67) – is answered in the negative, does not mean that the requirementto pay for scarce land has no effect on relative values. It has an effect, by playing onrelative marginal labour costs.


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So much for the theory in the simplest case. But the principles at issue areapplied to policy in an analysis which explicitly points to the dependency of the priceratio on the composition of the consumer’s final demand. Consider a net increasein the demand for domestic corn due to the granting of a corn export subsidy. Ifagriculture is a constant-cost industry (as Ricardo here provisionally assumes), theadjustment proceeds until the corn price, initially raised above costs, falls to itsoriginal level:

A bounty then, which should lower the price of British corn in the foreigncountry, below the cost of producing corn in that country, would naturallyextend the demand for British, and diminish the demand for their own corn. Thisextension of demand for British corn could not fail to raise its price for a time inthe home market. ... But the causes which would thus operate on the marketprice of corn in England would produce no effect whatever on its naturalprice, or its real cost of production. ... By raising the profits of the farmer’sstock, the bounty will operate as an encouragement to agriculture, and capitalwill be withdrawn from manufactures to be employed on the land, till theenlarged demand for the foreign market has been supplied, when the price of cornwill again fall in the home market to its natural and necessary price, andprofits will be again at their ordinary and accustomed level.


In the more usual case, of course, the equilibrium outcome reflects a higher marginallabour cost and corn price:

I have already attempted to show, that the market price of corn would,under an increased demand from the effects of a bounty, exceed its naturalprice, till the requisite additional supply was obtained, and that then itwould again fall to its natural price. But the natural price of corn is not sofixed as the natural price of commodities; because, with any great additionaldemand for corn, land of a worse quality must be taken into cultivation, on whichmore labour will be required to produce a given quantity, and the natural price of cornwill be raised.

(Ricardo 1951, I, 312; emphasis added)

Here Pc/Pm rises with a switch in the policy-induced pattern of demand favouringagriculture. 12

A further indication of the role Ricardo accorded demand in determining themargin, and the relevant marginal labour costs, is provided by the analysis of acontemporary case where certain firms in an industry had their labour costssubsidized, thus generating a (discrete) increasing-cost supply schedule. The appropriate

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margin and corresponding marginal labour cost are explicitly assumed to be governedby ‘the quantity of produce required’, i.e. by demand considerations. Should thelevel of demand be sufficiently low for the output of the subsidized firms alone tobe ‘equal to all the wants of the community’, the unsubsidized firms would beexcluded and the equilibrium will be determined by the low cost conditions; at ahigher demand the higher marginal cost becomes pertinent (I, 73).

I I I . A S P E C I A L C A S E : C A P A C I T Y O U T P U T

The distinctive treatment accorded rent – its so-called ‘exclusion’ from marginalcosts – reflects the assumption that land is subject to more or less intensive use bylabour (labour-cum-capital), whereas the reverse relation involving a marginal productto variable land given labour-and-capital does not hold. Within this frameworkexchange ratios, proportionate to relative marginal labour costs, nonetheless assurerents per acre which reflect the degree of land scarcity dictated by final demandpressures.

Ricardo takes for granted that a positive marginal labour product can be defined:‘Is it possible ... seriously [to] assert, that the produce of the land cannot be increased,if the demand increases?’ (I, 252n). But what if capacity output has been achieved?Here the more intensive use of land is ruled out, so that the marginal principlebreaks down and rent emerges as a demand-determined surplus on every unit ofcorn produced including the last. 13 In this case the incidence of a tax on corn,Ricardo observes, is borne entirely by producers, which suggests ( pace Arrow) thatwe must attribute to Ricardo himself appreciation of a negatively-sloped ‘demandcurve’ cutting across the vertical supply. 14 Thus although he usually assumes zeroprice elasticity of demand for corn this is not his practice when a negative slope isrequired for stability of equilibrium:

The corn and raw produce of a country may, indeed, for a time sell at amonopoly price; but they can do so permanently only when no more capitalcan be profitably employed on the lands, and when, therefore, their producecannot be increased. At such time, every portion of land in cultivation, andevery portion of capital employed on the land will yield a rent, differing,indeed, in proportion to the differences in the return. At such a time too,any tax which may be imposed on the farmer, will fall on rent, and not onthe consumer. He cannot raise the price of his corn, because, by the supposition, it isalready at the highest price at which the purchasers will or can buy it. He will not besatisfied with a lower rate of profits, than that obtained by other capitalists,and, therefore, his only alternative will be to obtain a reduction of rent, orto quit his employment.



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I V . G R O W T H A N D T H E D E M A N D - D E T E R M I N E DM A R G I N

My demonstration that the endogeneity of the margin with respect to demand wasa central part not only of Ricardo’s model but of his own understanding of thatmodel has deliberately concentrated on cases involving alterations in the structureof activity, population given. But the role of demand in determining the margin andmarginal labour cost emerges equally clearly in the analysis of population expansion.This is worthwhile demonstrating because of high authority to the contrary, SirJohn Hicks going beyond Wicksell or Arrow or Samuelson in denying a role fordemand even in the growth process:

Ricardo was no Marshallian. He maintained consistently that prices aredetermined by cost; demand has nothing to do with them. It may indeed beobjected that when he lets the (marginal) cost for food production rise,under pressure of population, he is admitting demand, it is increased demandfor food which forces the extension of cultivation. I do not believe thatRicardo looked at the matter like that. It is not a change in demand whichmarks the transition from one equilibrium to its successor; it is the increasein population itself.

(Hicks 1985, 317)

That Ricardo in fact insisted on the role of demand in dictating the extent of agriculturalexpansion is clear, for example, from objections he made to Malthus’s frequent linkage ofpopulation growth to preceding accumulations of food. Only if improved livingconditions with higher demand for labour should generate higher marriage and birthrates will there be an increased demand for food – in place of workers’ demand forluxuries – and in that case the agricultural margin is extended in response:

When a high price of corn is the effect of an increasing demand, it is always preceded byan increase of wages, for demand cannot increase, without an increase of means in thepeople to pay for that which they desire. An accumulation of capital naturallyproduces an increased competition among the employers of labour, and aconsequent rise in its price. The increased wages are not [‘not always’ in thethird edition] immediately expended on food, but are first made to contributeto the other enjoyments of the labourer. His improved condition howeverinduces, and enables him to marry, and then the demand for food for the supportof his family naturally supersedes that of those other enjoyments on which his wageswere temporarily expended. Corn rises then because the demand for it increases, becausethere are those in the society who have improved means of paying for it ; and theprofits of the farmer will be raised above the general level of profits, till therequisite quantity of capital has been employed on its production. Whether,

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after this has taken place, corn shall again fall to its former price, or shallcontinue permanently higher, will depend on the quality of the land fromwhich the increased quantity of corn has been supplied. If it be obtainedfrom land of the same fertility, as that which was last in cultivation, and withno greater cost of labour, the price will fall to its former state; if frompoorer land, it will continue permanently higher.


Merely to accumulate food would be disastrous precisely because of neglect of thedemand principle. This was a matter of fundamental concern from the perspectiveof the law of markets (I, 293).

Although evidence for my case might be drawn from the entire corpus of Ricardo’swork, I have deliberately stayed within the confines of the Principles of Political Economy.But one particular letter, dated 26 September 1820, should be noted because itprovides especially striking confirmation. In this letter Ricardo again objects to thesequence of increased food supply prior to population growth (the Malthusianposition as expressed by Hutches Trower). Only in a control-economy can demandconsiderations be dispensed with; in a market-economy expansion of food supplies,like that of any commodity, turns on ‘an actual or expected demand’ for food:

It is undoubtedly true that if production were wholly under the control ofone individual, whose object it was to increase population, he could not bettereffect his object than by growing more corn in the country than the existingcommunity could consume – it would in that case be at a low price, and thegreatest stimulus would be given to population. [But] ... what we want to knowis, whether, in the present distribution of property, and under the influenceof the motives which invite to production, corn is produced for any otherreason than that iron, silk, wine &c. &c. are produced – whether they are notall produced on account of an actual or expected demand for them.

(Ricardo 1951, VIII, 255–6)

In this letter too, as in the Principles, the role of demand is explicitly elucidated inthe analysis of the impact of net capital accumulation. It is only to the extent that suchaccumulation generates increased demand for food by labour that corn output expands:‘The aggregate capitals will be increased! If labour cannot be procured no more workwill be done with the additional capital, but wages will rise, and the distribution of theproduce will be favourable to the workmen. In this case no more food will be producedif the workmen were well fed before, their demand will be for conveniences, andluxuries. But the number of labourers are increased, or the children of labourers!Then indeed the demand for food will increase, and food will be produced in consequence ofsuch demand ’ (VIII, 258). The italics here, for once, are Ricardo’s, not mine.


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Finally, there will be found explicit insistence on the demand factor in Ricardo’sNotes on a Malthusian account of agricultural expansion during the growth process:

Note 77: This is correct provided there is a demand for the produce – that isabsolutely essential to increased cultivation. Mere quantity of produce willnot compensate the producer.Note 78: Here expences of producing are compared with the price of produce– this supposes an adequate demand for the produce. The question in disputeis taken for granted.

(Ricardo 1951, II, 139)

A word of caution may be in order. Ricardo frequently engaged in comparative-static exercises tracing out the consequences of once-and-for-all increases in capitalfrom initial full equilibrium states. Several of the foregoing extracts illustrate theprocedure. But the full-fledged growth model involves ongoing capital accumulationand population growth until stationariness is achieved, attributed to an excess ofthe returns to capital and labour above their respective minima (Ricardo 1951, I,101–2). The principles derived from the exercises must, therefore, be applied to themore complex case; for to say that the real wage exceeds ‘subsistence’ assuringpopulation growth and agricultural extension is merely a shorthand expression forthe full process. That process entails ongoing net capital accumulation such that thereal wage suffices, period after period, to provide a continuous (though decelerating)stimulus for population expansion, and therefore for the increase in demand forfood required to motivate continuous extension of the agricultural margin untilthe stationary state.

V. RENT AND THE INVERSE WAGE-PROFIT RELATION

Wicksell suggested that by assuming the demand for corn to be a function of populationsize alone, Ricardo was blinded to the impact of alternative patterns of final demandon the margin. We have shown how Ricardo did deal with that specific issue, evengiven population, in the course of his treatment of policy-induced changes in activity.A change in favour of land-biased products raises rent, and conversely, even thoughlong-run equilibrium prices reflect relative marginal labour inputs; scarcity of landplays on relative prices, but indirectly by affecting the location of the margin.

I can see no cause for complaint here. The demand for corn has multipledeterminants. For the specific purposes of his analysis Ricardo had no need to spellthem all out, for it sufficed to make the simplest assumption holding all else constantin the background. But when he did address the issue it emerges explicitly thatprices are determined by both demand and supply factors as we have shown.

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But is the labour theory essential to Ricardo’s main purposes? The answer mustbe positive if it is required for the inverse wage–profit relation. Otherwise it servesonly as a convenient simplification. Now we know that Ricardo stood by hisfundamental theorem even in the event of non-uniform capital–labour ratios. Anincrease in the wage rate then disturbs the price structure, but still generates anacross-the-board decline in the profit rate. To that extent a labour theory is notrequired. But this procedure does call for the treatment of rent as residual to allowa focus specifically on the wage–profit relation.

Does the latter device adequately serve the purpose? It has been my argument thatRicardo’s rent theory does not exclude land scarcity relative to the pattern of finaldemand from exerting an influence on the price structure, but it does so indirectlyby determining the locus of the agricultural margin. The question can therefore bemade more specific: What happens to the inverse wage–profit relation should a wageincrease, by raising the demand for landusing products, affect the locus of themargin?

One of the passages cited earlier (p. 208) directly addresses this possibility, thoughRicardo set it aside – there is some swaying here in the third edition – by assumingthat (until population rises) demand will increase for ‘other enjoyments’, i.e. thatthe labourer’s demand for food has zero income elasticity: ‘The increased wages arenot [‘not always’ in 1821] immediately expended on food.’ Nevertheless, this particulardisturbance would not have been ruinous since the margin shifts out raising rentper acre and reducing the profit rate more sharply than if the margin is fixed. Buteven in the unlikely case that the wage increase results in a reduced demand foragricultural products – those products being inferior goods – and allowing also thatthe profit rate rises with a contraction of the margin, the inverse relation holdsfirm. For we must not forget that it refers specifically to proportionate shares in theproduct to be divided between labour and capital, not to absolute quantities; thatboth the real wage and the profit rate may rise with an increase in the marginalproduct does not compromise the fundamental theorem on distribution. 15

V I . T H E P R I M A C Y O F S U P P L Y

Faulty though the tradition is that Ricardo neglected consumer-demand factors, it isnot entirely based on thin air. One of his chief concerns was the long-run equilibriumpattern of competitive exchange rates and the determinants of changes in that pattern.Within this frame of reference supply conditions are as it were ‘primary’ since nomatter what the absolute magnitude of demand for a product may be its price willsettle at a level reflecting the relevant cost conditions, unless we posit the special caseof capacity output strictly defined (above, p. 207). That, after all, is the implication


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of an equilibrium price structure characterized by uniformity of wage and profitrates. Unfortunately, the primacy accorded supply conditions has been misreadeither as a deliberate attempt to construct a system solely in terms of supply factors ora failure to perceive the need to consider the role of demand factors.

The primacy of supply emerges throughout the Principles, but a summary exchangewith Malthus reveals the matter particularly effectively since it directly addresses ourmain issue. Malthus at one stage explicitly raised the matter of the endogeneity ofthe margin: ‘when you reject the consideration of demand and supply in the priceof commodities and refer only to the means of supply, you appear to me to lookonly at the half of your subject. No wealth can exist unless the demand, or theestimation in which the commodity is held exceeds the cost of production: andwith regard to a vast mass of commodities does not demand actually determine thecost? How is the price of corn, and the quality of the last land taken into cultivationdetermined but by the state of the population and the demand’ (Ricardo 1951, VIII,286). Ricardo disputed none of this but still insisted on the primacy of supply: ‘I donot dispute ... the influence of demand on the price of corn and on the price of allother things, but supply follows close at its heels, and soon takes the power ofregulating price in his own hands, and in regulating it he is determined by cost ofproduction’ (VIII, 302).16 Following an increase in demand for a product the pricewould settle at a level determined by the appropriate cost conditions. 17

The concern to convey the primacy of supply emerges also in international pricecomparisons. For conceivably a ‘great’ demand might be accompanied by a ‘low’price in equilibrium; for example, though the French demand for domestic cornwas greater than the British, British corn prices were higher: ‘It is admitted byeverybody that demand and supply govern market price, but what is it that determinessupply at a particular price? cost of production. Why is corn almost invariablyhigher here than in France? not on account of the greater demand for it, but onaccount of its superior cost of production in this country’ (II, 45). A careless readingof this passage, especially of the last sentence, might suggest that the level of demandin Britain (or in France) is irrelevant in determining the margin of cultivation,whereas the message in fact is simply that since long-run supply is governed by costconditions, it follows that even if demand should be ‘high’ the price might be ‘low’.

VII . SUMMARY AND CONCLUSION

As Wicksell suggested, it may well be Ricardo’s usual practice of relating the demandfor food to population size alone that diverted him from formally examining theimpact of changing patterns of demand, population assumed to be constant, on themargin of cultivation. I have argued here that to conclude from this either that hedenied in principle or that he failed to appreciate such impact is unjustified; one

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distinctly sees the impact of demand patterns on the margin in policy applications.Secondly, I have confirmed that Ricardo assigned the demand factor an essentialcausal role in the analysis of population expansion. Finally, I have demonstrated thatthe Ricardian inverse wage–profit relation is quite able to incorporate distribution-induced changes in demand patterns.

The erroneous perspective taken of Ricardo reflects to some extentmisunderstanding of the primacy he accorded supply factors. This is compoundedin our day by the unfortunate habit of confounding Ricardo with the self-styledCambridge ‘Ricardians’ who are one-legged on principle, and who use Ricardo ‘as abludgeon against neo-classical economics’ (Arrow 1991, 72). A primary aspect of theSraffian version of Ricardianism is the proposition that income distribution isindependent of the pattern of consumer demand, a proposition which (I think)Samuelson also attributes to Ricardo. 18 But this does less than justice to Ricardo. Aswe have shown above, an altered pattern of demand between agriculture andmanufactures causes changes in rent relative to profits-cum-wages notwithstandingthat equilibrium prices are proportional to marginal labour inputs. It is surprisingthat any such failure as we are discussing could have been attributed to Ricardoconsidering his contribution to the Corn Law debate. 19

Arrow for his part conjectures that the Cambridge use of Ricardo ‘derives at leastthe aura of respectability and legitimacy from Marshall’s emotional pro-Ricardianbias’ – having in mind the ‘supreme authority of Marshall at Cambridge well beyondhis active career’. On the grounds intimated in this paper, I cannot accept thatMarshall’s bias was ‘emotional’ and without substance; and I doubt whether hisauthority could extend as far as Arrow suggests, considering Marshall’s attributionof an appreciation of the demand side to Ricardo. 20

NOTES

* For comments and criticism I am grateful to W.J. Baumol, M. Bronfenbrenner, T. Kompas,J.I. McDonald, P.L. Porta and P.A. Samuelson.

1. Later in the Lectures Wicksell gave his famous demonstration that the conception of anincrease of labour applied to fixed land to derive the marginal product of labour (andrent as a residual surplus) can be reversed such that rent is determined by the marginalproductivity of land (and wages as a residual) (Wicksell 1934 [1913], I, 124–33). But hedraws no implications from this generalization in the course of his earlier criticism ofRicardo on value theory.

2. Arrow is apparently satisfied with Ricardo’s use of the rent doctrine as a way of supportinga labour theory (Arrow 1991, 75–6).

3. In his ‘Modern Treatment of the Ricardian Economy’ Samuelson also asserts that inequilibrium relative prices would diverge from relative marginal labour inputs. For hecomplains that whereas ‘beginning students of economics today learn in their first weekthat the transformation terms between a labour-intensive and a land-intensive good varywith demand ... yet in reading a thousand pages on the labour theory of value, I can


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remember but one author who comes close to emphasizing that land – and not merelycapital – vitiates a simple labour theory and that no tricks with no-rent marginal land canchange this’ (Samuelson 1966 [1959], 380n). But some Samuelsonian objections toRicardo can perhaps be read simply as a criticism of the usefulness of a theory of value interms of marginal labour costs, if the location of the margin is governed by taste patterns:‘He also blunders if he thinks that he can “get rid of land and rent as a complication forpricing” by concentrating on the external margin of no-rent land: where that externalmargin falls is an endogenous variable that shifts with tastes and demand patterns so as tovitiate a hoped-for labour theory of value or a wage- cum -profit rate theory of value’(Samuelson 1978, 1420)

4. In the multi-use land case, the proportionality of prices to marginal labour costs may stillhold good, but as a formality.

5. Morishima comes to the same conclusion by a formal mathematical route: ‘It is especiallyimportant to observe that labour values [for Ricardo] are not constants determinedsolely by technology: they fluctuate economically according to whether the circumstancesof the market require the intensity of cultivation to change’ (Morishima 1989, 33).

6. I ask myself why I am writing this paper, having already set out my view of Ricardo as a‘demand–supply’ value theorist on several occasions (most recently 1991). I follow theadvice given to Neville Chamberlain by his father (which, regrettably, he took at Munich):‘If at first you don’t succeed, try, try, try again.’ More seriously, the present papercorrects certain misconceptions regarding the labour theory and explores further theimplications of Ricardian rent doctrine for the inverse wage–profit relation.

7. Wicksell merely noted the presumed lack of symmetry, whereas Walras asked ‘why theEnglish School determines rent by the quantities of labour and capital-services employed,rather than wages and interest by the quantities of land-services employed; or why thisschool does not try to formulate a unified general theory to determine the prices of allproductive services in the same way’ (Walras 1954, 416). I suggest the lack of symmetryreflected the presumption of one-use land. With multi-use land, the notion of land fixitybreaks down as soon as it concerns particular industries.

8. Ricardian rent theory can dispense with the extensive margin, but not with the intensivemargin.

9. Of course we assume uniform capital–labour ratios to focus on the primary issue.10. See Ricardo’s clarificatory observation in the profits chapter: ‘The reader is desired to

bear in mind, that for the purpose of making the subject more clear, I consider moneyto be invariable in value [i.e. in its supply conditions], and therefore every variation ofprice to be referable to an alteration in the value [labour input] of the commodity’(Ricardo 1951, I, 110n).

11. A similar relaxation of land scarcity may be generated by technical progress: ‘The sameeffects may however be produced, when the wealth and population of a country areincreased, if that increase is accompanied by such marked improvements in agriculture,as shall have the same effect of diminishing the necessity of cultivating the poorer lands,or of expending the same amount of capital on the cultivation of the more fertileportions’ (Ricardo 1951, I, 79).

12. Ricardo explains why the manufacturing price is not pulled up as resources flow toagriculture: ‘Manufactures would not rise, because fewer would be manufactured, for asupply of them would be obtained in exchange for the exported corn’ (Ricardo 1951, I,307).

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The relaxation of corn-import restrictions amounts in effect to a contraction ofdemand for home corn, and here the reverse result emerges, namely a reduction in Pc/Pm: ‘If corn, in consequence of permanent abundance, fell to 3l.10s., the capital employedon No. 6 [land] would cease to be employed; for it was only when corn was at 4l. that itcould obtain the general profits, even without paying rent; it would, therefore, bewithdrawn to manufacture those commodities with which all the corn grown on No. 6would be purchased and imported’ (I, 268).

13. The classicists called this a case of ‘monopoly’. As Viner pointed out, ‘in Ricardo’s timethe term was widely used to cover (1) ownership of a scarce commodity by a single holder;(2) ownership by a few; and (3) scarcity of a commodity, which because of zero-elasticityof supply, a rise in price would not ameliorate’ (Viner 1958, 360).

14. Where Ricardo does assume zero demand elasticity problems are created for the adjustmentof price to cost. On these complexities, and Ricardo’s solutions, see Hollander 1979, 291–3.

15. The threat to Ricardian theory comes from another quarter. In the event that materialsare required in all sectors of the economy, a rise in their supply price would depress thegeneral profit rate independently of wages.

16. As mentioned above, Malthus frequently insisted on increased corn production prior toincreased population and demand. Ricardo, by contrast, had always insisted on thedemand requirement as we have also seen. His reply is, therefore, a very restrained one.

17. Ricardo evidently feared that the impact of costs on long-run price was clouded, evendenied, by some demand–supply formulations (1951, VII, 250–1).

18. ‘[Any] classicist who thinks he can separate “value” from “distribution” commits alogical blunder’ (Samuelson 1978, 1420).

19. I go further and attribute to Ricardo appreciation of an impact exerted by demandpatterns on the profits/wages breakdown (Hollander 1989 [above, Chapter 11]).

20. More promising is a conjecture by Bronfenbrenner, that Sraffa’s attributions reflect hisMarxism: ‘Sraffa was a Marxist, a refuge from Mussolini’s Fascist regime .... Since Marxprofessed himself an admirer of Ricardo – as nearly a disciple as Marx could ever admitbeing of any predecessor – it may have seemed natural to attribute the same system ... toRicardo’ (Bronfenbrenner 1989, 40–1). For a more detailed argument that the Sraffareading of Ricardo (especially the corn-ratio theory of profits) involves reading intoRicardo a perspective derived from developing Marx’s surplus doctrine, see Porta 1986.A defence of Sraffa is given in Groenewegen 1986.

REFERENCES

Arrow, K.J. (1991) ‘Ricardo’s Works as Viewed by Later Economists’, Journal of the History ofEconomic Thought 13 (Spring): 70–7.

Bronfenbrenner, M. (1989) ‘A Rehabilitation of Classical Economics’, Aoyama Kokusai SeikeiRonshu 13 (June): 35–41.

Groenewegen, P. (1986) ‘Porta on Sraffa: A Comment’, History of Political Economy 18: 455–62.

Hicks, J. (1985) ‘Sraffa and Ricardo: A Critical View’, in G. Caravale (ed.) The Legacy of Ricardo,Oxford: Basil Blackwell, 305–19.

Hicks, J. and Hollander, S. (1977) ‘Mr. Ricardo and the Moderns’, Quarterly Journal ofEconomics 91 (August): 351–69.


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Hollander, S. (1979) The Economics of David Ricardo, Toronto: University of Toronto Press.——(1989) ‘On Composition of Demand and Income Distribution in Classical Economics’,

History of Economics Society Bulletin 11 (Fall): 216–21.——(1991) ‘Alfred Marshall in Historical Perspective: Why Marshall was Right about Ricardo’,

European Economic Review 35: 313–22.Morishima, M. (1989) Ricardo’s Economics. A General Equilibrium Theory of Distribution and

Growth, Cambridge: Cambridge University Press.Porta, P.L. (1986) ‘Understanding the Significance of Piero Sraffa’s Standard Commodity: A

Note on the Marxian Notion of Surplus’, History of Political Economy 18: 443–54.Ricardo, D. (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 vols),

Cambridge: Cambridge University Press.Samuelson, P.A. (1966) [1959] ‘A Modern Treatment of the Ricardian Economy’, Collected

Scientific Papers, I, Cambridge, Mass.: MIT Press, 373–422.– -(1978) ‘The Canonical Classical Model of Political Economy’, Journal of Economic Literature

16: 1415–78.– -(1991) ‘Sraffa’s Other Leg’, Economic Journal 101 (May): 570–4.Viner, J. (1958) The Long View and the Short, Glencoe, Illinois: Free Press.Walras, L. (1954) Elements of Pure Economics, ed. William Jaffé, 4th definitive edn (1926),

London: George Allen and Unwin.Wicksell, K. (1934) [1913] Lectures on Political Economy, ed. L.C. Robbins, London: Routledge .

Part IV

THE RICARDIANGROWTH MODEL

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Some thirty years ago, George Stigler published what was to become a standard referencefor students of the classical period – ‘The Ricardian Theory of Value and Distribution’.A key feature of the theoretical system developed in the Principles of Political Economy isthere said to be the subsistence wage theory, which (together with the measure of value)was added to those elements already present in the earlier Essay on Profits, namely, thetheory of rent and the dominant influence of diminishing returns in agricultureupon the rate of profit (1965a, 187). From these elements there followed the ‘greatconclusion’ of the model: ‘With the growth of population, the rate of wages rises’(reflecting the increasing real cost of producing the given basket), ‘the rate of profitfalls, and aggregate rents rise – all in terms of the measure of value’ (190).

In a review of my recent study of David Ricardo (1979), Stigler reiterates byimplication this evaluation of the nature of Ricardo’s contribution and explicitlyrepeats the attribution to Ricardo of the subsistence wage assumption. It remains hisbelief that the logic of Ricardo’s argument requires the assumption: ‘I am amazed tobe told that “all the evidence” points to Ricardo believing that the wage will fallsecularly’; similarly, ‘without this assumption [Ricardo’s] fundamental theorem ondistribution (only a rise in wages will lower profits) is not rigorously true’; and ‘hischapter on gross and net revenue and his repeated proposition that only net revenue(which excludes wages) can be taxed or saved are wrong’ (1981, 101).

Much depends on the precise assumption made regarding wages; the subsistencewage attribution, for example, has distorted the entire body of ‘Cambridge’historiographical doctrine relating to classical economics. Stigler is right to focuson this issue. But I believe it can be shown that his version of Ricardianism isinvalid. If we are ever to do justice to the historical Ricardo and to the course ofnineteenth-century economics we must by all means abandon the fixed-wageattribution.

13

ON THE INTERPRETATION OFRICARDIAN ECONOMICS: THE

ASSUMPTION REGARDINGWAGES


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I.

I shall proceed by drawing upon another well-known contribution by Stigler. In hispaper on ‘Textual Exegesis as a Scientific Problem’ (1965b), he observes that inseeking an accurate interpretation ‘we should not be so literal-minded as to countthe passages in a book to decide an author’s general position because the passages arenot of equal importance’ (448). Where there exists a clash of texts the solution is toinvestigate the dependency of a writer’s main analytical conclusions upon the alternativereadings: ‘We increase our confidence in the interpretation of an author by increasingthe number of his main theoretical conclusions which we can deduce from (ourinterpretation of) his analytical system’ (448). This procedure Stigler refers to as‘scientific exegesis ’, and it is designed to isolate the ‘net scientific contribution’ of thewriter. If, however, the historian is concerned with what the author in question‘really believed’, then the criterion should be which of the various alternativeinterpretations best suits what is known of the man’s style – ‘ personal exegesis ’.

Let us accept that the inverse wage–profit relation and the falling secular profitrate are amongst Ricardo’s ‘main analytical conclusions’. How does the notion ofscientific exegesis help us? Were Stigler correct that these results require the constantwage assumption, the answer would be selfevident. But he is mistaken. A model canbe devised, incorporating the fundamental theorem and generating the falling returnon capital, wherein the wage rate is a variable. The model in question is a genuinegrowth model in the sense that until stationariness is achieved, the wage rate and theprofit rate are both above their respective ‘minima’ encouraging net capitalaccumulation and population growth; and both will ultimately decline from whatevertheir ‘present’ values may be to those respective minima in consequence of thepressures increasingly exercised by land scarcity. Only in the stationary state itself isthe wage at subsistence and the profit rate at its minimum. Versions of this modelwere developed independently by inter alia John Hicks and myself (1977), CarloCasarosa (1978), and Paul Samuelson (1978).

Not only is a variable-wage growth model technically meaningful, it is preciselywhat Ricardo himself specified to be his own. Ricardo explicitly describes the fallingcommodity wage of the secular path:

In the natural advance of society, the wages of labour will have a tendency tofall, as far as they are regulated by supply and demand; for the supply oflabourers will continue to increase at the same rate, whilst the demand forthem will increase at a slower rate. If, for instance, wages were regulated by ayearly increase of capital, at the rate of 2 per cent., they would fall when itaccumulated only at the rate of 1-1/2 per cent. They would fall still lowerwhen it increased only at the rate of 1, or 1/2 per cent., and would continueto do so until the capital became stationary, when wages also would become

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THE ASSUMPTION REGARDING WAGES

stationary, and be only sufficient to keep up the numbers of the actualpopulation.

(Ricardo 1951, I, 101)

The complication deriving from the rising prices of wage goods is then allowed for;although the commodity wage falls the money wage will rise:

As population increases, these necessaries will be constantly rising in price,because more labour will be necessary to produce them. If, then the moneywages of labour should fall, whilst every commodity on which the wages oflabour were expended rose, the labourer would be doubly affected, andwould be soon totally deprived of subsistence. Instead, therefore, of themoney wages of labour falling, they would rise; but they would not risesufficiently to enable the labourer to purchase as many comforts and necessariesas he did before the rise in the price of those commodities.

(Ricardo 1951, I, 101)

It is precisely this rise in the money wage that causes the profit rate to fall despite thedecline in the commodity wage.

The model can also easily incorporate an initial section of rising commoditywages; and Ricardo thought that it should (see my 1979 book, 395ff; also my paperwith Hicks, 1977, 365). Stigler is unaware of the declining path of wages, but in 1952he did allude to Ricardo’s references to rising wages. But these, he says, ‘must simplybe recorded as correct views which Ricardo did not know how to incorporate intohis theoretical system’ (1965a, 172).

Poetic justice indeed! To attribute the fix-wage model to Ricardo is illegitimatein terms of Stigler’s own criterion of scientific exegesis. For what Ricardo insistedupon was a secular fall in the profit rate along with an initial stage of increasing wagesand a final stage of declining wages and Stigler’s version simply cannot accommodatethis complexity.

I do not intend to suggest that Ricardo’s account is faultless. It would be remarkablewere that the case. In fact, it is probable that there are two Ricardo models – thosecharacterized by the versions offered by Hicks and myself, and by Samuelson orCasarosa. On the first view, secular variations in real wages are the outcome ofdifferential growth rates of capital and labour – the upward trend a result of capitalgrowth outpacing labour growth at an early stage of development and the downwardtrend a result of the reverse relationship (see the citation above from Ricardo). Thisversion does not, in short, portray a ‘dynamic equilibrium’ or balanced growthpath of wages.

Such a path is expounded in Samuelson’s ‘canonical classical model’. It traces outthe unique values of the wage, given the general labour and capital supply functions,


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which assure balanced factor growth subject always to the constraint imposed byland scarcity; the wage falls although labour supply decelerates in line with capital.There is much evidence to suggest that this version too is a valid attribution toRicardo (see section IV below), although the clearest exposition, which Ricardoaccepted, is by Malthus (1820; see Ricardo 1951, II, 255–6).

II.

What is the source of Stigler’s misunderstanding? His own notion of personal exegesisprovides the key.

That Ricardo’s Principles and his Essay are replete with references to the constantwages assumption has never been denied. The growth model in the Essay on Profits isexpounded on the basis of a constant wage though not at the subsistence level (seeHollander 1979, 136). But Ricardo himself tells us precisely why he so proceeds; hewas no methodological neophyte: ‘We will, however, suppose that no improvementstake place in agriculture, and that capital and population advance in the properproportion, so that the real wages of labour continue uniformly the same; – that wemay know what peculiar effects are to be ascribed to the growth of capital, theincrease of population, and the extension of cultivation, to the more remote, andless fertile lands’ (Ricardo 1951, IV, 12). All that he intended was a simplifyingassumption for the sake of clear exposition – to allow him to focus upon one causalvariable at a time playing on profits. There is no reason to believe that any more wasat stake when he devised the famous numerical illustration of the Principles (chapter5 and chapter 6) which incorporates the constant wage assumption. Stigler has, itseems, mistaken Ricardo’s typical ‘first approximations’ for a full growth model –the man’s style for the substance.

III.

The same conclusion follows in the wage taxation context. As I explain in my book(1979, 383) Ricardo’s taxation theorems can be interpreted as applying to the casewhere a subsistence wage rules. I provide textual evidence from the chapter ‘OnWages’ and elsewhere to show this. But I then demonstrate that the wage taxationtheorems do not stand or fall with the subsistence assumption (386). Stigler is mis-taken when he cites passages in Ricardo (1951, I, 215, 219) purportedly indicatingadherence to a subsistence wage, for it is a constant wage above subsistence to whichRicardo there alluded. A word of explanation.

During the course of his discussion (in the chapter ‘Taxes on Raw Produce’) ofthe effect upon the money-wage rate induced by the taxation of necessaries, Ricardointroduced the qualification that the ‘rate of progression’ of the economy isthroughout taken for granted, clearly implying that the analysis was intended to

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apply whether or not wages are initially at ‘subsistence’: ‘Those who maintain that itis the price of necessaries which regulates the price of labour, always allowing for theparticular state of progression in which the society may be, seem to have conceded tooreadily, that a rise or fall in the price of necessaries will be very slowly succeeded bya rise or fall of wages’ (I, 161; emphasis added). If this statement were the only one ofits kind, it might perhaps be dismissed as unrepresentative. But the fact is that thechapter ‘On Taxation of Wages’ itself is formally contingent upon it.

The chapter ‘On Taxation of Wages’ unlike that ‘On Wages’ is based upon AdamSmith’s proposition that ‘the demand for labour, according as it happens to beeither increasing, stationary, or declining, or to require an increasing, stationary, ordeclining population, regulates the subsistence of the labourer, and determines towhat degree it shall be either liberal, moderate, or scanty’ (I, 215). And the generalapplicability of the taxation theorems is much emphasized:

‘The price of labour will express, clearly, the wants of the society respectingpopulation’ [Malthus]; it will be just sufficient to support the population,which at that time the state of the funds for the maintenance of labourers,requires. ... Suppose the circumstances of the country to be such, that thelowest labourers are not only called upon to continue their race, but toincrease it; their wages would be regulated accordingly. Can they multiply inthe degree required, if a tax has taken from them a part of their wages, andreduces them to bare necessaries?

(Ricardo 1951, I, 219–20)

That Ricardo should have proceeded in the chapter ‘On Wages’ and in othercontexts on the assumption of a subsistence wage despite his acceptance of theSmithian position according to which the equilibrium wage is that wage whichassures an appropriate positive rather than a zero growth rate of labour supply, isnot difficult to appreciate. It is characteristic of his general method to simplify theanalysis wherever this can be done without loss. The broader application of thetaxation theorems means simply that the mechanism of population adjustment towages above or below a given ‘subsistence’ rate must now be applied to wage variationsabout a long-run labour supply curve relating the wage rate to the growth rate ofpopulation. Once again Stigler has mistaken a strong-case simplifying assumptionfor the entire analysis.

IV.

Ricardo’s full position as formulated in the taxation context – that of Smith andMalthus – has broad implications for growth in general. The rate of capital accumu-lation acts, in the first instance, as an independent variable which determines what


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the commodity wage rate must be to guarantee an equivalent growth rate of popu-lation. Any disturbance which raises the price of wage goods – the effects say ofincreasing land scarcity and not merely taxation – necessitates an appropriate mon-etary compensation to assure that the growth rate of population is not impeded.The ‘natural’ wage – albeit ‘unnatural’ because a limiting case (1951, II, 227–8) – isthen the wage which assures a constant population and will correspond to zero netaccumulation, while to each positive growth rate of capital there will correspond ahigher real wage rate to assure the equivalent growth rate of labour supply. (A ‘high’but constant, rate of accumulation according to this analysis entails a high real wagerate; while an increase (decrease) in the rate of accumulation generates an increase(decrease) in the real wage rate.) But the assumption that the rate of capital accumu-lation is an independent variable – totally unaffected by the reduction in profitscorresponding to the increase in money wages – is, however, no more than a firstapproximation. A reduction in profits would, it is conceded, probably have someeffect on accumulation so that the compensatory increase in money wages would notentirely prevent a fall in real wages in consequence of taxation (I, 221–2, 225–6). Ineffect, the ‘dynamic equilibrium’ path of the system has been altered to entail re-duced (net) factor returns and factor growth rates.

The full analysis of wage taxation thus allows for a decline in the real wage andflies in the face of a fixed wage interpretation. All the ingredients of the canonicalgrowth model – and as remarked earlier Ricardo approved of that version formulatedby Malthus – come into play in the wage taxation context.

V.

There remains Ricardo’s conception of net revenue to which Stigler also alludes insupport of his case. Malthus had made the same erroneous attribution in his Prin-ciples (Ricardo 1951, II, 381). His position, Ricardo complained, had been misunder-stood by Malthus (and by Say). The inclusion, within net income, of profit and rentalone was merely a simplifying assumption without substantive intent: ‘Mr. Malthussays “the additional two millions of men would some of them unquestionably havea part of their wages disposable”. Then they would have a part of the neat revenue.I do not deny that wages may be such as to give to the labourers a part of the neatrevenue – I limited my proposition to the case when wages were too low to affordhim any surplus beyond absolute necessaries’ (1951, II, 380– 1). Similarly regardingprofits and rent as the source of accumulation and taxation: ‘Perhaps this is ex-pressed too strongly, as more is generally allotted to the labourer under the name ofwages, than the absolutely necessary expenses of production. In that case a part of thenet produce of the country is received by the labourer, and may be saved or ex-

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pended by him; or it may enable him to contribute to the defence of the country’(I, 348 fn).

V I .

In another of his seminal articles (1976), Stigler makes the point that if we seek tounderstand the scientific role played by a figure in the history of economic theorythen what is relevant is how his work ‘appeared to his contemporaries’, for science‘consists of the arguments and the evidence that lead other men to accept or rejectscientific views’ (60). The ideas they may have intended to express are not relevantfrom this perspective. This is very true and it is a perspective that casts much lighton a number of issues in scientific history. But we must also allow for erroneousinterpretations. While the variable-wage model was an open book – the above ac-count is not based on correspondence or other unpublished and not easily acces-sible items – from the very outset readers have often misunderstood Ricardo. Erro-neous readings bedevil the problem of his legacy.

REFERENCES

Casarosa, Carlo (1978) ‘A New Formulation of the Ricardian System’, Oxford Economic Papers30,1 (March): 38–63.

Hicks, John and Hollander, S. (1977) ‘Mr. Ricardo and the Moderns’, Quarterly Journal ofEconomics 91,3 (August): 351–69.

Hollander, Samuel (1979) The Economics of David Ricardo, Toronto: University of TorontoPress.

Ricardo, David (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 Vols),Vol. I: Principles of Political Economy (1821), Vol. II: Notes on Malthus’s Principles of PoliticalEconomy (1820), Vol. IV: Pamphlets, 1815–1821, Cambridge: Cambridge University Press.

Samuelson, Paul A. (1978) ‘The Canonical Classical Model of Political Economy’, Journal ofEconomic Literature 16,4: 1415–34.

Stigler, George J. (1965a) ‘The Ricardian Theory of Value and Distribution’, Journal of PoliticalEconomy June 1952; reprinted in Essays in the History of Economics, Chicago: University ofChicago Press, 165–98.

——(1965b) ‘Textual Exegesis as a Scientific Problem’, Economica 32 (November): 447–50.——(1976) ‘The Scientific Uses of Scientific Biography, with Special Reference to J.S. Mill’, in

J.M. Robson and M. Laine (eds) James and John Stuart Mill: Papers on the Centenary Conference,Toronto: University of Toronto Press, 54–66.

——(1981) ‘Review’, Journal of Economic Literature 19 (March): 100–2.

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One general growth model encapsulates a variety of classical perspectives on thesecular path of wages. The common features of the model utilized by Ricardo,Malthus and Mill are land scarcity manifested in diminishing agricultural returns atleast beyond a certain labour–land ratio, and a positive functional relation betweenthe return on capital ( r) and the capital growth rate ( gK). There are minor differencesonly between Ricardo and Malthus concerning the relation between the labourgrowth rate (gL) and the wage (w ). For Ricardo gL is irresponsive to wage reductionsexcept at levels close to subsistence, whereas Malthus allowed a regular (positive) gL-wrelationship. But this difference is not a substantive one, and in each version theoutcome of the growth process is a downward path of wages until the subsistence level(w s) where gL (as well as gK) has fallen to zero. A substantive difference between thetwo is that for Ricardo wage movements result from deviations between the factorgrowth rates, while Malthus posits a declining wage path notwithstanding equality ofthe factor growth rates – i.e. his constitutes a ‘dynamic equilibrium’ path.

Mill’s concern was with the implications of ‘prudential’ behaviour on the part oflabour. In principle, ‘prudence’ can be incorporated within the labour-supplyfunction itself in which case it is manifested in a wage floor at some conventionalwage (w c) or as exogenous upward shifts in a regular, positively sloping, gL function.The outcome is the same in both cases, namely constancy of the wage on the path to thestationary state despite the pressures deriving from land scarcity.

In his Autobiography Mill paid tribute to Malthusianism as a reform doctrine:‘This great doctrine, originally brought forward as an argument against the indefiniteimprovability of human affairs, we [the Philosophical Radicals] took up with ardentzeal in the contrary sense, as indicating the sole means of realizing that improvabilityby securing full employment at high wages to the whole labouring populationthrough a voluntary restriction of the increase of their numbers’ (Mill 1981, 107–8).

14

THE WAGE PATH IN CLASSICALGROWTH MODELS: RICARDO,

MALTHUS AND MILL

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THE WAGE PATH

Now Malthus himself formulated briefly but precisely the ‘constant wage’ model inthe Essay on Population. To do justice to the historiographical record we must refer tothe Malthus–Mill Prudential Wage Path, and distinguish between the ‘basic’ Malthusianmodel and its modification.

That Ricardo would also have subscribed to this analysis is clear from his famouspronouncement that ‘the friends of humanity cannot but wish that in all countriesthe labouring classes should have a taste for comforts and enjoyments. ... Therecannot be a better security against a superabundant population’ (Ricardo 1951, I,100).

The wage theories of Malthus, Ricardo and Mill can in fact be set out with thehelp of the same basic diagram. In this, wages are measured in commodity and notin value terms; and throughout the article we proceed as if wage goods are a singlegood.

Panel A in each diagram portrays the marginal product curve generated by variablelabour on given land ( HH’) (see Figure I). HH’ corresponds to the roof in Hicksand Hollander (1977), and it depicts the maximum wage, w max, that is obtainablewhen the minimum feasible return on capital (the return that reduces gK, the rate ofgrowth of capital, to zero) is itself zero. If this minimum return on capital is labelledr*, w = w max

when r = r* = 0, and w max is depicted by HH’ in panel A.

In formal terms, the wage per worker, w, plus profits per worker, wr (in circulatingcapital models where wages are paid one period in advance of the sale of the product),exhausts the marginal product of labour, F’(L), so that:

w + wr = F’ (L)

and therefore:

and if w max is the wage where r = r* = 0, then:

w max = F’(L).

In each diagram, panel B portrays the wage on the vertical axis and gK and gL, therates of growth of capital and labour, on the horizontal axis, and the gK -w relationshipit depicts is derived from panel A. For any (absolute) labour supply, the marginalproduct of labour on HH’ indicates the maximum wage ( w max) that reduces r to r*and therefore gK to zero. A lower wage at that same marginal product of labour will beassociated with a higher r and therefore a higher gK : thus at any given marginalproduct, the lower the wage the higher the rate of profit and the higher the rate ofgrowth of capital, and this generates a negative gK -W relationship, the curve emanatingfrom the y axis at the appropriate level given by the height of HH’. At the same

w = F’(L)1+r


228

time, at any given w, a declining marginal product along HH’ implies a decline in rand thus in gK , and this effect of a declining marginal product at a given wage willbe reflected by a continual inward shift of the gK-w function in panel B.

This diagram will now be used to help to set out the wage theories of Ricardo,Malthus and Mill, so that the differences and the similarities between them can beclearly seen.

HH’ corresponds to the marginal product curve where r* = 0. For each L read offvalue of MP on HH’. This yields intercept in B such that gK = 0. For each given MPvalue gK rises as w falls. For each w in B the relevant gK is read off the family ofcurves, gK falling as MP declines along HH’.Note: The diagrams contain the same information as in Samuelson (1978) with thefollowing formal differences:1) Samuelson utilizes the gK = g(r) directly whereas we relate gK to w, consistently withgK = g(r) having in mind that2) Samuelson allows r* > 0, so that the ‘roof’ (HH’) then lies within the MP curve.

Figure I The derivation of gK -w

RICARDO

In the growth context Ricardo asserted that ‘the motive for accumulation will diminishwith every diminution of profit, and will cease altogether when [capitalists’] profitsare so low as not to afford them an adequate compensation for their trouble, andthe risk which they must necessarily encounter in employing their capital productively’(Ricardo 1951, I, 122). Similarly, ‘savings may be so rapid and profits so low inconsequence as to diminish the motive for accumulation, and finally to destroy italtogether’ (II, 8). We take it then that gK is related positively to r and negatively tow.

r = F’(L)w

1

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THE WAGE PATH

Ricardo postulates a secular increase in the wage rate followed by a secular declineuntil w = w s when gL = 0. These movements are generated by deviations betweenconstant gL and gK with gK > gL to begin with and gK < gL subsequently. (The presumedconstancy of gL is subject to a qualification to be examined presently; it is notrequired by the logic of the argument.) There may be an intermediate period of‘steady-state’ equilibrium with constant wages during which gK = gL.

Agricultural productivity is said to be constant at early periods, diminishingreturns setting in only after a particular labour–land ratio has been passed. Theupward wage trend, over the range of constant marginal product is expressed in thefollowing passage:

In different stages of society, the accumulation of capital, or of the means ofemploying labour, is more or less rapid, and must in all cases depend on theproductive powers of labour. The productive powers of labour are generallygreatest when there is an abundance of fertile land: at such periods accumulationis often so rapid, that labourers cannot be supplied with the same rapidity ascapital.

It has been calculated, that under favourable circumstances populationmay be doubled in twenty-five years; but under the same favourablecircumstances, the whole capital of a country might possibly be doubled ina shorter period. In that case, wages during the whole period would have atendency to rise, because the demand for labour would increase still fasterthan the supply.

(Ricardo 1951, I, 98)

The marginal (average) product curve is likely to be peculiarly high in new settle-ments which can rely on advanced foreign technology: ‘In new settlements, wherethe arts and knowledge of countries far advanced in refinement are introduced, it isprobable that capital has a tendency to increase faster than mankind: and if thedeficiency of labourers were not supplied by more populous countries, this ten-dency would very much raise the price of labour’ (98).

What can be said of the initial wage ( w0)? Assuming constant marginal product

and given capital-supply and labour-supply conditions there will be no motive forcegenerating the upward wage movement if, at w

0, gK =gL.It must be presumed, therefore,

that at w0, gK >gL.As the wage rises so the deviation between gL and gK narrows until

wage constancy is achieved. This process is consistent with ‘static’ or short-runequilibrium such that the labour market is regularly cleared which seems indeedalways to be Ricardo’s presumption (Figure II).

Once the equality of gL and gK has been achieved, there will be no furthermotive for a change in the wage, which will proceed at a steady level abovesubsistence: ‘Notwithstanding the tendency of wages to conform to their natural


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Figure II Ricardo: the increasing wage trend: initial gK > gL

rate [thesubsistence wage, ws, at which gL = 0], their market rate may, in an improving

society, for an indefinite period, be constantly above it; for no sooner may theimpulse, which an increased capital gives to a new demand for labour be obeyed,than another increase in capital may produce the same effect; and thus, if the increasein capital be gradual and constant, the demand for labour may give a continuedstimulus to an increase of people’ (I, 94–5).

It may be remarked – although Ricardo does not refer to the possibility – that anincreasing wage trend may be generated even if gK = gL at the initial position w

0, in

the event of increasing returns. For a deviation between the growth rates will becontinually generated as population and productivity rise putting continuous upwardpressure on gK . In this case too the shortrun labour market is in equilibrium whilethe factor growth rates differ. Balanced factor growth is only achieved when increasingreturns peter out (Figure III).

Each position on the upwardstretch of w is one of short-run (static) equilibrium; notl o n g - r u n ( d y n a m i c )equilibrium. Each positionon the horizontal stretch ofw is one both of static anddynamic equilibrium.

The Market Periodequilibrium wage:Period by period Lshifts rightward by agiven percentage amount(i.e.: an increasingabsolute amount).Capital increases initiallyat a greater percentageamount, subsequently atsame percentage amount.

The intercept of gK onyaxis is determined by theheight of HH’; its slopereflects the inverse w-rrelation since gK = g(r)whereAt w

0, gK > gL generating

upward pressure until wm.Thereafter the wageremains steady at wm. gL isassumed vertical althoughthis is not essential for thelogic.

r = F’(L)w

1.

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THE WAGE PATH

Figure III Ricardo: the increasing wage trend: initial gK = gL

We turn next to the downward stretch of wages, Ricardo’s main concern (FigureIV). In the following passages reference is made to the role of diminishing returns indepressing gK the constancy of gL, and the downward trend of wages as gK falls steadilyrelatively to gL:

Although, then, it is probable, that under the most favourable circumstances,the power of production is still greater than that of population, it will notlong continue so; for the land being limited in quantity, and differing inquality, with every increased portion of capital employed on it, there will bea decreased rate of production, whilst the power of population continuesalways the same.

(Ricardo 1951, I, 98)

In the natural advance of society, the wages of labour will have a tendency tofall, as far as they are regulated by supply and demand; for the supply oflabourers will continue to increase at the same rate, whilst the demand forthem will increase at a slower rate. If, for instance, wages were regulated by ayearly increase of capital, at the rate of 2 per cent., they would fall when itaccumulated only at the rate of 1 ½ per cent. They would fall still lower whenit increased only at the rate of 1, or ½ per cent., and would continue to do so

The upward path is the locus ofshort-run equilibria and does notrepresent dynamic equilibrium.

Because of rising HH’, gK shiftscontinuously rightwards. The wagerises because of excess gK > gL. But asthe wage rises so the excess is recreated.gK = gL at w0

by construction and atwm only.


232

until the capital became stationary, when wages would also become stationary,and be only sufficient to keep up the numbers of the actual population.

(Ricardo 1951, I, 101)

The notion that wages are ‘regulated by [the] yearly increase of capital’ conflictswith the notion in the same paragraph that they are ‘regulated by supply and demand’unless the labour growth rate is taken to be a constant, which indeed is Ricardo’spresumption (with one qualification to be taken up presently).

The wage falls because workers ‘[find] it more difficult to maintain the marketrate of wages above their natural [subsistence] rate’ (102). But as in the upward trendgenerated by increasing returns (or a steadily shifting marginal product curve) so inthe reverse trend the labour market may be cleared in the short run notwithstandingthe deviations between gK andgL.

Ricardo’s presumption that ‘the supply of labourers will continue to increase at

Steady-state equilibriumapplies over the rangeL1 → L3 where MP isassumed constant; and atE where gL = gK = 0.The downward path isthe locus of short-runequilibria and does notrepresent dynamic equil-ibrium.

As gK shifts continuallyinwards, the wage falls. But atno time is gK = gL except at Band C; the gL curve does nottrace out long-run equilibria.As the wage falls in responseto gK< gL so the divergence isrecreated. The entiremovement from wm to ws

isa response to divergence gK gL.The gL curve can be gene-ralized to avoid the ‘bend’with no alteration in thebasic logic.

The Market Period equiibriumwage:Period by period the right-ward shift in L is greater thanthat in C so that w declines.

Figure IV Ricardo: the decreasing wage trend: initial gK = gL (continuation of FigureII or III)

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THE WAGE PATH

the same rate’ notwithstanding reduced wages, implies a precipitous fall in gL fromsome positive constant to zero when the wage reaches subsistence. There is, however,reason to believe that allowance was made for some response in gL to wage reductionsfrom levels above but close to subsistence. For Ricardo (I, 101) seems to have beenaware of the fact that otherwise ‘the labourer ... would be soon totally deprived ofsubsistence’, and saw some deceleration in the decline as realistic, a deceleration thatcan only be assured by a reduction in gL. A generalized positively sloping gL-wrelationship might have been utilized throughout without changing the substanceof the general argument.

M A L T H U S : T H E B A S I C M O D E L

A clear statement of a ‘dynamic equilibrium’ or balanced growth wage path – a pathsatisfying the conditions gK = gL – will be found in Malthus’s Principles (1820). Thereare four propositions in the relevant passage: (1) that in a system entailing populationgrowth the real wage must exceed w s; (2) that in consequence of land scarcity(diminishing returns) the excess w > w s must fall to zero; (3) that the profit ratedeclines steadily, as proportional wages rise, to r*; and (4) that assuming gK = gL atall times, this common growth rate must decline:

the supposition ... of a constant uniformity in the real wage of labour is notonly contrary to the actual state of things, but involves a contradiction.

The progress of population is almost exclusively regulated by the quantityof the necessaries of life actually awarded to the labourer; and if from thefirst he has no more than sufficient to keep up the actual population, thelabouring classes could not increase, nor would there be any occasion for theprogressive cultivation of poorer land. On the other hand, if the real wagesof labour were such as to admit of and encourage an increase of population,and yet were always to remain the same, it would involve the contradictionof a continued increase of population after the accumulation of capital, andthe means of supporting such an increase had entirely ceased.

We cannot then make the supposition of a natural and constant price oflabour, at least if we mean by such a price, an unvarying quantity of thenecessaries of life. And if we cannot fix the real price of labour, it mustevidently vary with the progress of capital and revenue, and the demand forlabour compared with the supply.

We may however, if we please, suppose a uniform progress of capital andpopulation by which is not meant in the present case the same rate of progresspermanently, which is impossible, but a uniform progress towards the greatestpracticable amount, without temporary accelerations or retardations . . .


234

. . . if poorer lands which required more labour were successively takeninto cultivation, it would not be possible for the corn wages of each individuallabourer to be diminished in proportion to the diminished produce; agreater proportion of the whole would necessarily go to labour; and the rateof profits would continue regularly falling till the accumulation of capitalhad ceased.

Such would be the necessary course of profits and wages in the progressiveaccumulation of capital, as applied to the progressive cultivation of new andless fertile land, or the further improvement of what had before been cultivated;and on the supposition here made, the rates both of profits and of realwages would be highest at first, and would regularly and gradually diminishtogether, till they both came to a stand at the same period, and the demandfor an increase of produce ceased to be effective.

(Malthus 1951, 255f)

Figure V Malthus: the decreasing wage trend: gK = gL

Wage movements due to divergencies of gL and gK are distinctly contrasted withthose reflecting balanced growth and treated in a separate section (285f).

The wage corresponds to gK = gL atall times. There is no competitivemechanism to assure this result sothat the wage path is purely areference path. Note: Samuelson(1978) posits constant K/L ratiotechnologically.

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Malthus presents the dynamic equilibrium path as a ‘supposition’, implying therebya hypothetical reference path. And indeed this path cannot (assuming regular capital-and labour-supply growth functions) be achieved in a competitive world wherecapitalists and labourers act independently. For since ( r moves inverselyto proportional not absolute wages) it follows that, in an expanding system, theinitial impact of diminishing returns at the going wage is on capitalists alone inducinga fall in gK relative to gL; and assuming a regular decline in the marginal product theexcess gL > gK is continually reconstituted notwithstanding the wage decline. This wasRicardo’s insight. The dynamic-equilibrium path can only be, therefore, a constructof the mind derived by asking what the wage path would be if it is assumed that gL = gK

under conditions of diminishing returns. Evidently the return to the ‘joint’ factor declines;but the share of the incidence of declining productivity can be calculated by referenceto the capital-supply and labour-supply growth functions, namely the gK - r and thegL - w relationships. There is a unique wage rate for each marginal product which isconsistent with balanced factor growth as is illustrated by Figure V.

T H E M A L T H U S – M I L L P R U D E N T I A L W A G E P A T H

In the Essay on Population Malthus investigated the implications for wages of ‘prudence’.In the following passage we have a contrast between that check to population growthexercised by falling ‘corn’ wages and that check exercised by deliberate constraintdesigned precisely to avoid the deterioration of living standards. That the populationgrowth rate must in one way or the other decline is a necessary implication of landscarcity. Correspondingly, two categories of ‘stationary state’ are defined – the oneentailing a ‘low’ corn wage and the other a ‘high’ corn wage:

A diminished power of supporting children is an absolutely unavoidableconsequence of the progress of a country towards the utmost limits of itspopulation. If we allow that the power of a given quantity of territory toproduce food has some limit, we must allow that as this limit is approached,and the increase of population becomes slower and slower, the power ofsupporting children will be less and less, till finally, when the increase ofproduce stops, it becomes only sufficient to maintain, on an average, familiesof such a size as will not allow of a further addition of numbers. This state ofthings is generally accompanied by a fall in the corn price of labour; butshould this effect be prevented by the prevalence of prudential habits amongthe lower classes of society, still the result just described must take place; andthough, from the powerful operation of the preventive check to increase,the wages of labour estimated even in corn might not be low, yet it isobvious that, in this case, the power of supporting children would rather be

r = F’(L)w 1


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nominal than real; and the moment this power began to be exercised to itsapparent extent, it would cease to exist.

(Malthus 1890, 420; first introduced in 5th edn, 1817)

The two Malthusian versions were effectively utilized in response to a proposalby Arthur Young ‘so to adjust the wages of day-labour as to make them at all timesequivalent to the purchase of a peck of wheat’ (Appendix, 1890 [1817] 583). Thisproposal ‘in its general operation, and supposing no change of habits among thelabouring classes’, Malthus objected, ‘would be tantamount to saying that, under allcircumstances, whether the affairs of the country were prosperous or adverse; whetherits resources in land were still great, or nearly exhausted; the population ought toincrease exactly at the same rate – a conclusion which involves an impossibility’.Here we have an application of the ‘standard’ model – the wage path must fall toassure the appropriate deceleration in the population growth rate. But allow forprudence and the picture is transformed, as Malthus proceeds to show: ‘If, however,this adjustment, instead of being enforced by law, were produced by the increasingoperation of the prudential check to marriage, the effect would be totally different,and in the highest degree beneficial to society. A gradual change in the habits of thelabouring classes would then effect the necessary retardation in the rate of increase,and would proportion the supply of labour to the effective demand, as societycontinued to advance ... without the pressure of a diminishing quantity of food’(583).

We turn now to J.S. Mill. Mill is explicit that ‘the greater the profit that can bemade from capital, the stronger is the motive to its accumulation’ (1965, 161) andthat it is ‘an almost infallible consequence of any reduction of profits, to retard therate of accumulation’ (843). Moreover, when the minimum profit rate has beenreached ‘no further increase of capital can for the present take place’ (738).

In early states of society marginal product is high and constant and gK proceedsat the same rate as the maximum physiological capacity of population growth gL(and may possibly exceed it):

In countries like North America and the Australian colonies, where theknowledge and arts of civilized life, and a high effective desire of accumulation,co-exist with a boundless extent of unoccupied land, the growth of capitaleasily keeps pace with the utmost possible increase of population, and ischiefly retarded by the impracticability of obtaining labourers enough. All,therefore, who can possibly be born, can find employment, withoutoverstocking the market: every labouring family enjoys in abundance thenecessaries, many of the comforts, and some of the luxuries of life ...

(Mill 1965, 343–4)

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In the absence of this special confluence of circumstances it would be impossible forpopulation to expand at its maximum capacity without downward pressure on thewage, and this because of impediments to gK emanating from land scarcity: ‘Theincrease of capital is checked, because there is not fresh land to be resorted to, of asgood quality as that already occupied.’

All this was ‘standard’ Ricardian analysis. But Mill also allowed for a case wherepopulation and capital proceed at the same rate implying a constant commoditywage: ‘We shall suppose them ... to increase with equal rapidity; the test of equalitybeing, that each labourer obtains the same commodities as before, and the samequantity of those commodities’ (723). This is the case of dynamic equilibrium atconstant wages already recognized by Malthus. The consequence of such expansionin conditions of land scarcity is necessarily a fall in the profit rate: ‘The labourerobtaining the same amount of necessaries, money wages have risen; and as the rise iscommon to all branches of production, the capitalist cannot indemnify himself bychanging his employment, and the loss must be borne by profits.’ But we know thata fall in profits generates a decline in gK so that it must be presumed that gL too isdeclining. Ongoing population growth is possible at constant wages even in conditionsof land scarcity provided gL declines simultaneously with gK.

The downward trend in wages – inevitable if population grows at the maximumphysiological rate characterizing the unskilled labouring class of contemporary Britain– could only be avoided by population control, i.e. ‘prudence’. The foregoingconstant wage path reflects the adoption of such behaviour (for details see Hollander1984).

In principle, ‘prudence’ can take two forms in the Mill–Malthus model:a) Endogenous: In this case workers deliberately constrain the population growth

rate to prevent the wage falling below some designated ‘conventional’ level. In effect,the labour supply function becomes horizontal at w

c, and this wage traces out the

‘dynamic equilibrium’ path. For population growth to fall and prevent any wagedecline implies ascribing to labour prescience of the steady decline in gK. Since themodel was designed to portray the effect of an instillation of responsible habits thisstrict assumption makes considerable sense at least as a limiting case. If, however,allowance is made for a lag in the response of gL the actual path will sag below thehorizontal; and will not be one of ‘dynamic equilibrium’.

The notion of a subsistence wage as that wage at which gL = 0 is no longer relevantsince the conventional wage is consistent both with gL= 0 andgL> 0. But if subsistenceis defined as that wage below which gL< 0 it can be given independent status (ws

< wc)(see Figure VI).

b) Exogenous: Here population control is reflected in shifts of the positively slopedgL-w function generated by ongoing educational propaganda programmes. Whereasin case a) prudence is embodied in labour’s given reaction pattern, now changes in


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habits are required. The outcome is as before – a ‘dynamic equilibrium’ constantwage path – but now the notion of a subsistence wage at which gL= 0 retains itsvalidity for each given labour-supply relationship. Unlike Malthus’s ‘standard’ casewhere the wage path declines towards the constant subsistence level, the subsistencelevel rises towards the constant wage path which it meets at E, the ‘stationary state’(see Figure VII).

CONCLUSION

An often repeated opinion has it that ‘hard-line’ Malthusianism constitutes the coreof the classical theory of distribution: ‘their distribution model only had content tothe extent that it could derive this from a “hard” empirical Malthusian proposition’(Hutchison 1978, 71 and references there cited). This is a questionable view. J.S. Mill,and before him Malthus, based policy conclusions on a growth model which allowedfor the effects of ‘prudential’ population control on wages, and was specificallydesigned to serve an exhortatory purpose, namely to show how wages might bemaintained (even increased) despite land scarcity by recognition of the alternatives– uncontrolled population growth and the depression of wages to some ‘subsistence’minimum, or their maintenance at some ‘cultural’ level. The model yields twocategories of Stationary State – one consistent with ‘low’ and the other with ‘high’wages. The theory of distribution turns out to be a powerful one indeed, capable ofdealing with ‘hard’ and ‘soft’ Malthusianism.

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Figure VI Malthus–Mill: the constant wage trend; ‘prudence’ endogenous

Figure VII Malthus–Mill: the constant wage trend: ‘prudence’ exogenous

An initial phase of constant MP isallowed generating steady-statewages. The declining stretch L1→L2

reflects the positively sloped sectionof gL. The Mill–Malthuscontribution relates to the constantdynamic equilibrium path L2 → L4.

From B to E, gK = g L if laggedpopulation growth is assumed away.The dashed line represents theoriginal gLfunction with [ w

s] the

subsistence wage prior to theadoption of prudential habits.

Steady state wage, L0 ? L1 reflectsconstant MP. Thereafter wageconstancy is due to shifting gL in linewith gK. It is assumed that theoriginal subsistence wage appliesuntil L1. Unlike Hicks and Hollanderwhere

the wage path declines to subsistence,now the subsistence wage ‘rises’ toE. If gL shifts leftwards more rapidlythen gK a rising wage trend will begenerated (as Malthus recognized).


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REFERENCES

Hicks, J.R. and Hollander, S. (1977) ‘Mr. Ricardo and the Moderns’, Quarterly Journal ofEconomics 91, 3 (August): 351–69.

Hollander, S. (1984) ‘Dynamic Equilibrium with Constant Wages: J.S. Mill’s Analysis of theSecular Wage Path’, Kyklos 37: 247–65.

Hutchison, T.W. (1978) On Revolutions and Progress in Economics, Cambridge: CambridgeUniversity Press.

Malthus, T.R. (1890) Essay on the Principle of Population. Reprinted from the Last EditionRevised by the Author (1826), London: Ward, Lock.

—— (1951) Principles of Political Economy (1820) in Works and Correspondence of David Ricardo,Vol. II, Cambridge: Cambridge University Press.

Mill, J.S. (1965) Principles of Political Economy in Collected Works, vols II, III, Toronto: Universityof Toronto Press.

—— (1981) Autobiography in Collected Works, vol. I, Toronto: University of Toronto Press.Ricardo, David (1951–73) Principles of Political Economy in The Works and Correspondence of

David Ricardo, Vol. I, and Notes on Malthus’s Principles of Political Economy in Vol. II, Cambridge:Cambridge University Press.

Samuelson, P.A. (1978) ‘The Canonical Classical Model of Political Economy’, Journal ofEconomic Literature XVI (December): 1415–34.

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My concern in this paper is to confirm the validity of the attribution to Ricardo ofa growth model entailing secularly declining real wages. In this model both the real-wage and profit rates are above their respective minima during the course of expansion;and both decline to those minima in consequence of the pressures exerted byincreasing land scarcity (e.g. Tucker 1960, 110–16; Casarosa 1985; Hollander 1987).This interpretation – the so-called ‘New View’ – has been rejected by variouscommentators in favour of a subsistence-wage growth model (cf. Pasinetti 1960;Stigler 1981; Peach 1988). There is a danger that the protagonists will speak past eachother, and fail to bring the issue to a conclusion. This would be unfortunate, forthere is strong evidence – not yet all taken into account – pointing to the variable-wage interpretation. That interpretation is preferable (1) because, unlike the alternative,it satisfies certain minimum, common sense, requirements of textual exegesis, and(2) because the alternative is subject to serious analytical error.

I . ON TEXTUAL EXEGESIS

A word first regarding the celebrated rule of ‘scientific exegesis’ recommended inStigler’s paper ‘Textual Exegesis as a Scientific Problem’:

We should not be so literal-minded as to count the passages in a book todecide an author’s general position because the passages are not of equalimportance. We increase our confidence in the interpretation of an authorby increasing the number of his main theoretical conclusions which we candeduce from (our interpretation of) his analytical system.

The test of an interpretation is its consistency with the main analytical

15

RICARDIAN GROWTH THEORY:A RESOLUTION OF SOMEPROBLEMS IN TEXTUAL

INTERPRETATION*


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conclusions of the system of thought under consideration. If the mainconclusions of a man’s thought do not survive under one interpretation,but do under another, the latter interpretation must be preferred. (Theanalogy to maximum likelihood is evident.)

(Stigler 1982 [1965], 69)

Here Stigler adds that the interpretation must reveal ‘the main concepts in the man’swork, and the major functional relationships between them’, but ‘need not accountfor careless writing or unintegrated knowledge’. For Stigler (1981), Ricardo’s argu-ment regarding the growth process requires the assumption of constant secular wages,since ‘without this assumption the fundamental theorem on distribution (only arise in wages will lower profits) is not rigorously true’. Stigler recognizes ‘a consid-erable number of passages ... in which the assumption, of constant long-run wages isqualified or ignored’, but he treats them as ‘inconsistent views’.

Stigler’s approach – its insistence on ‘rigour’ – is potentially dangerous at leastfrom a purely historiographical perspective. For it implies that we are not strictlyconcerned with what Ricardo himself maintained. This implication of Stigler’s ruleof scientific exegesis is confirmed by a contrast drawn with ‘personal exegesis’:

This rule of interpretation is designed to maximize the value of a theory tothe science. The man’s central theoretical position is isolated and stated in astrong form capable of contradiction by the facts. The net scientific contribution,if any, of the man’s work is thus identified, amended if necessary, and renderedcapable of evaluation and possible acceptance. This rule of consistency withthe main conclusions may be called the principle of scientific exegesis.

Of course men make logical errors or slip into tautologies and otherwiseblemish their work. One may seek to determine what the man really believed,although this search has no direct relevance to scientific progress. One willthen invoke a different criterion to choose between conflicting passages: thatinterpretation which fits best the style of the man’s thought becomes decisive.This may be called the principle of personal exegesis.

(Stigler 1982 [1965], 69; emphasis added)

Evidently, ‘scientific exegesis’ is not necessarily concerned with what the subject‘really believed’, but in a theoretical statement formulated ‘in a strong form’ and‘amended if necessary’.

Now it is surely conceivable that an author may have deliberately adopted a‘weakened’ theorem. In the case that now concerns us – realwage movements in aprogressive economy – the impact on profits of increasing land scarcity is lessened ifthe real wage declines, although the declining profit rate cannot be prevented as Ishall explain presently. But in fact, in this case, much more is involved: the constant-

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RICARDIAN GROWTH THEORY

wage growth model makes no analytical sense except under special conditions relatingto ‘prudential’ population control, conditions which Ricardo did not specify; withoutthese conditions a declining real wage is a necessary feature of the growth process inthe presence of increasing land scarcity. As for the inverse wage– profit relation (the‘wage’ in this context is the ‘gold’ or ‘proportional’ wage), it is continuously at playand indeed accounts for the fall in the profit rate: the fundamental theorem isrigorously true despite falling real wages.

The ‘scientific rule of exegesis’ is, however, acceptable provided it is limited to atest of interpretation understood simply as consistency with the main analyticalconclusions. We must isolate the central theoretical position from the texts withoutamendment – even if logical error should be involved, and a fortiori if logical error isnot involved. Where we are faced by apparently conflicting passages, we select as theauthor’s ‘true’ position that formulation which reflects him ‘at his best’, and set itup as standard for the evaluation of other of his statements whether earlier, later, orcontemporaneous relating to the same issue. It is then possible, by reference to theauthor’s own best considered terms, to recognize partial formulations and specialcases and also error, backslidings and other infractions. The hallmark of a goodinterpretation is its convincing rationalization of all such ‘residual’ passages.

Stigler is, of course, right that ‘passages are not of equal importance’, but thatcannot justify jettisoning as ‘unintegrated knowledge’ those that do not conformwith the main analytical conclusions and yet cannot be classed as obvious error. Forthose who maintain the variable-wage interpretation the indubitable existence atvarious junctures of the constant-wage assumption constitutes the ‘residual’ that wemust account for convincingly. Here what Stigler calls ‘personal exegesis’ helps: ‘Thesimplifying assumption was Ricardo’s trademark’ (1982, 70). So indeed it was. Butthis fact does not conflict with the equally factual circumstance that his generalmodel of growth involves wage variability. The simplifying constant-wage assumptionis adopted for various specific reasons depending on context (which we outline below)but not when wage variability is a central and logically necessary feature of theargument. That Ricardo’s style involves ‘the simplifying assumption’ is no excusefor reading out substantial parts of his main text. ‘Scientific’ and ‘personal’ exegesismust complement each other.

Dr Terry Peach, in a recent ‘Review of Some Interpretative Issues’ relating toRicardo, also concludes that ‘the new view cannot stand as a representation of Ricardo’strue position’ (1988, 114). Like Stigler, he recognizes that texts pointing to the NewView interpretation do exist in the Principles : ‘there are undoubtedly passages in thechapter “On Wages” which lend it superficial credibility’; in that chapter Ricardo‘maps out a trajectory for wages that points directly in the new-view direction’ (111–12). But he suggests ‘that the principal new-view passages may have been an attemptto show, on Malthus ’ premises, that a declining real wage need not compensate for


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rising corn prices’ (114), implying that the concept of a declining real wage itself isnot Ricardo’s at all. It is also allowed, again as ‘a possibility’, that Ricardo ‘had at onetime [in pre-Principles correspondence, see below, p. 257] accepted Malthus’s visionof the accumulation process although, to borrow an expression from Stigler (1965),it could only ever have been “unintegrated knowledge”, irreconcilable with thenatural wage doctrine’. So the falling-wage version, we are asked to believe, thoughformulated by Ricardo is not Ricardo’s, while to the extent he may ‘at one time’ haveaccepted it he was unable to deal with it analytically.

As noted, Peach concludes unambiguously that ‘the new view cannot stand as arepresentation of Ricardo’s true position’. His substantive case turns on the viewthat Ricardo was concerned ‘with “permanent” movements in profitability’ reflectingthe higher real cost of producing food (107), where the ‘natural wage’ is treated ‘asan active center of gravity with an unrestricted domain of influence’ rather than aninfluence exerted solely in stationary state conditions (112). ‘The picture is one ofmarket wages oscillating around the natural level’ though not necessarily or alwayswith near-instantaneous adjustment of population. The main point is that ‘permanentmovements in profitability’ cannot be caused by real-wage variation; ‘the impact ofreal-wage variations on profitability is ... relegated to a temporary status’ (113). Andin summary:

There is nothing baffling about this as long as we stick with the traditionalinterpretation, suitably qualified to allow for cases of tardy populationadjustment. However, if the natural wage is not a potent center of gravity atall times – Ricardo’s position according to the new view – his general thesis,that permanent movements in profitability are given exclusively by changedconditions of producing wage-goods, loses the significance it was evidentlythought to possess: temporary influences on profitability from real-wagevariations would be of equal importance with permanent ones.

We must turn then to the texts used by Peach in favour of the ‘old view’formulated rigorously by Pasinetti (1960). I shall show that his treatment (like Stigler’s)fails to satisfy the primary requisite of exegesis which is to get the model right onthe author’s own terms. His error involves the identification of the falling wagetrend in Ricardian theory with wage fluctuations about the trend as far as concernsprofit-rate determination. That Ricardo, interested as he was with secular movements,often set aside fluctuations – or insisted on the speedy adjustment of population todisturbances – in no way implies subscription to a subsistence wage (or even aconstant wage) growth model. Similarly, the New View has no difficulty at all inmaking sense of unambiguous declarations that the profit rate depends solely on thecost of producing wage goods.

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II. THE PRINCIPLES OF POLITICAL ECONOMY

We begin with the celebrated statement in the Principles that ‘However much themarket price of labour may deviate from its natural price, it has, like commodities,a tendency to conform to it’ (Ricardo 1951, I, 94; emphasis added). Dr Peach takes thenatural wage presented here to be ‘the active center of gravity with an unrestricteddomain of influence’ (1988, 112); oscillations of the real wage occur around the‘natural’ (in the sense of the subsistence) level. The New View by contrast has the realwage drawn down to the subsistence wage in the stationary state but remainingabove it during the course of growth.

Doubtless in some cases the term ‘tendency’ should be understood in Peach’ssense. In establishing categories and definitions and in undertaking expository exercisesthe subsistence wage is taken (on a par with the natural price of goods) as a convenientpoint of departure. For it is the simplest. We have such categories in the followingstatement which relate to alternative initial states, one where the real wage exceedssubsistence and one when it falls short of subsistence – the correction occurring byway of absolute population increase and decrease respectively:

It is when the market price of labour exceeds its natural price, that thecondition of the labourer is flourishing and happy, that he has it in hispower to command a greater proportion of the necessaries and enjoymentsof life, and therefore to rear a healthy and numerous family. When, however,by the encouragement which high wages give to the increase of population,the number of labourers is increased, wages again fall to their natural price,and indeed from a re-action sometimes fall below it.

When the market price of labour is below its natural price, the conditionof the labourers is most wretched: then poverty deprives them of thosecomforts which custom renders absolute necessaries. It is only after theirprivations have reduced their number, or the demand for labour has increased,that the market price of labour will rise to its natural price, and that thelabourer will have the moderate comforts which the natural rate of wages willafford.

(Ricardo 1951, I, 94) 1

Similarly, the materials given on I, 95–6 which describe the value of the given‘natural price of labour’ rising, remaining stationary, or falling depending on whatoccurs upon expansion to the real cost of producing wage goods are a matter ofclassification.

Classification and expository exercises involving static comparisons however, donot constitute a general account of growth. It is the existence of a carefully specified,genuine growth model – i.e. one accounting for on-going capital accumulation and


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population expansion – that permits us to recognize, by way of contrast, the limitedstatus of the foregoing formulations. The argument specified in the analysis of ‘animproving country’, commences thus: ‘Notwithstanding the tendency of wages toconform to their natural rate, their market rate may, in an improving society, for anindefinite period, be constantly above it; for no sooner may the impulse, which anincreased capital gives to a new demand for labour be obeyed, than another increaseof capital may produce the same effect; and thus, if the increase of capital be gradualand constant, the demand for labour may give a continued stimulus to an increaseof people’ (I, 94–5). The real wage might thus remain indefinitely above subsistence.But once deceleration of capital growth sets in (with increasing land scarcity) thereal wage declines from above subsistence levels to subsistence – the level attained inthe stationary state when the profit rate too will have fallen to its minimum with netaccumulation reduced to zero:

In the natural advance of society, the wages of labour will have a tendency tofall, as far as they are regulated by supply and demand; for the supply oflabourers will continue to increase at the same rate, whilst the demand forthem will increase at a slower rate. If, for instance, wages were regulated by ayearly increase of capital, at the rate of 2 per cent., they would fall when itaccumulated only at the rate of 1 ½ per cent. They would fall still lower whenit increased only at the rate of 1, or ½ per cent., and would continue to do sountil the capital became stationary, when wages also would become stationary,and be only sufficient to keep up the numbers of the actual population.

(Ricardo 1951, I, 101)

Thus far Ricardo has been, provisionally, assuming that the decline in the realwage is accompanied by a decline in the ‘money’ wage. But this cannot be so; thedownward trend in the real wage is necessarily accompanied by a money-wage increaseand therefore a profit–rate fall – the inverse wage– profit relation is at play. We see veryclearly that the secular fall in the real wage is not of that order to which can beascribed a rise in the profit rate:

I say that under these circumstances, [money] wages would fall, if they wereregulated only by the supply and demand of labourers; but we must notforget, that wages are also regulated by the prices of the commodities onwhich they are expended.

As population increases, these necessaries will be constantly rising in price,because more labour will be necessary to produce them. If, then, the moneywages of labour should fall, whilst every commodity on which the wages oflabour were expended rose, the labourer would be doubly affected, and wouldbe soon totally deprived of subsistence. Instead, therefore, of the money wages of

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labour falling, they would rise, but they would not rise sufficiently to enable thelabourer to purchase as many comforts and necessaries as he did before the risein the price of those commodities ... he would ... receive an addition to hismoney wages, though with that addition he would be unable to furnish himselfwith the same quantity of corn and other commodities, which he had beforeconsumed in his family.

Notwithstanding, then, that the labourer would be really worse paid, yet thisincrease in his wages would necessarily diminish the profits of the manufacturer;for his goods would sell at no higher price, and yet the expense of producingthem would be increased. This, however, will be considered in our examinationinto the principles which regulate profits. ... The fate of the labourer will be lesshappy [than that of the landlord]; he will receive more money wages, it is true,but his corn wages will be reduced; and not only his command of corn, but hisgeneral condition will be deteriorated, by his finding it more difficult to maintainthe market rate of wages above their natural rate.

(Ricardo 1951, I, 101–2)

It is a process involving labour market pressures that dictates the rate of decline ofthe real wage and profit rates. Those pressures assure that money wages rise sufficientlyto prevent the real wage falling to subsistence prematurely. The statement that ‘thesupply of labourers will continue to increase at the same rate’ is evidently a firstapproximation since population growth is responsive to declining real wages; it isprecisely such responsiveness that assures that the real wage does not collapseprematurely to subsistence.

Ricardo’s full analysis of growth is an impressive achievement. His object was todemonstrate that with real wages initially above the stationary state level and withscope for a decline, the profit rate must still fall with increasing land scarcity. Forsince the corn wage initially falls short of the marginal product, but ultimatelyabsorbs the marginal product entirely – subject possibly to a positive profit-rateminimum – the proportionate share of wages in the marginal product necessarily rises,and on this share depends the profit rate. Thus the burden of diminishing returnscannot fall entirely on labourers. Moreover, a rise in the proportionate share ofwages is reflected in a higher ‘money’ wage provided money satisfies certain Specificconditions. Diminishing returns is necessarily reflected in rising money wages (andthus a falling profit rate) despite a declining corn wage. 2

Despite his unambiguous statement of the falling wage path, when Ricardo proceedsto devise a set of data to illustrate his propositions we find him assuming a constantwage basket – money wages are always such as ‘to enable [the worker] to live just aswell, and no better, than before’ (I, 103). His corn wage falls with the rise in the cornprice but his full (fixedproportions) basket is constant: ‘In proportion as corn


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became dear, he would receive less corn wages, but his money wages would alwaysincrease, whilst his enjoyments ... would be precisely the same’ (I, 103–4). Are wejustified in describing Ricardo as ‘inconsistent’ because of this procedure? I thinknot. He has chosen to provide a limited set of data to demonstrate the rise of themoney wage with the rise of corn – the simplest he could easily devise. Doubtless alittle more effort to make up a full set entailing a falling basket would have beendesirable since some readers tend to be more struck by figures than words; but thefact remains that nothing substantive would have been gained (apart from anopportunity to avoid misunderstanding). For the data were designed to show thatmoney wages rise with the corn price. But we know his position, stated a paragraphbefore, that this is so – this must be so – notwithstanding a fall in the commoditywage. Readers should be able to make up their own data to illustrate the general case.

The same set of simplified data is reproduced in the next chapter ‘On Profits’ todemonstrate that the higher money wage is paid out of a marginal product ofconstant value, necessarily raising labour’s proportion of that constant value andlowering the profit rate. Again Ricardo would have done well to make the effort todevise a more complex set of data to allow for a falling commodity wage, but thereis no reason to believe that more than deliberate simplification (or at the worse‘laziness’) was involved. For in this chapter Ricardo again alludes to the falling real-wage trend established earlier: ‘We have shewn that in early stages of society, boththe landlord’s and the labourer’s share of the value of the produce of the earth,would be but small; and that it would increase in proportion to the progress ofwealth, and the difficulty of procuring food. We have shewn, too, that although thevalue of the labourer’s portion will be increased by the high value of food, his realshare will be diminished ; whilst that of the landlord will not only be raised in value,but will also be increased in quantity’ (I, 112; second italics added).

There is one allusion in the chapter to falling real wages that requires specialattention:

It may be said that I have taken it for granted, that money wages would risewith a rise in the price of raw produce, but that this is by no means anecessary consequence, as the labourer may be contented with fewerenjoyments. It is true that the wages of labour may previously have been at ahigh level, and that they may bear some reduction. If so, the fall of profitswill be checked; but it is impossible to conceive that the money price ofwages should fall, or remain stationary with a gradually increasing price ofnecessaries; and therefore it may be taken for granted that, under ordinarycircumstances, no permanent rise takes place in the price of necessaries, withoutoccasioning, or having been preceded by a rise in wages.

(Ricardo 1951, I, 118)

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This latter statement refers to the possibility that real wages fall in the event that theyhappen to be ‘previously at a high level’. This formulation is unnecessarily conciliatoryto hypothetical critics if contrasted with those statements which refer to the certaintyof a declining real wage. Still, the main analytical result is insisted upon as always: themoney wage rises notwithstanding a declining commodity wage so the profit ratenecessarily falls. One notes too the remark that the falling commodity wage ‘checks’the fall in the profit rate; the profit rate will always be higher than it otherwisewould be were the commodity wage held constant. Still the profit-rate trend isdownward.

Again it emerges that the falling commodity wage of the growth model cannot beclassified with wage reductions which reflect exogenous changes or cyclical movementsor random movements. Such wage reductions might, if severe enough, actually raise(temporarily) the profit rate. To exclude variations of the latter kind, as Ricardousually does, is not to exclude the secular decline of the real wage reflecting theimpact of diminishing returns; that decline cannot prevent the falling profit rate.When Ricardo states his objective at the outset of the chapter ‘On Profits’ to be ‘thecause of the permanent variations in the rate of profit’ (I, 110), his object is toexclude fluctuations in the profit rate (which would evidently reflect fluctuations inthe money wage for whatever reason), but not to exclude the falling wage trend.

After citing Ricardo’s concern in the chapter ‘On Profits’ with ‘permanentvariations in the rate of profit’ Dr Peach proceeds to another quote to prove thatsuch variations could not be caused by real-wage variation: ‘From the account whichhas been given of the profits of stock, it will appear that no accumulation of capitalwill permanently lower profits, unless there be some permanent cause for the rise ofwages. ... If the necessaries of the workman could be constantly increased with the same facility,there would be no permanent alteration in the rate of profits or wages, to whatever amountcapital might be accumulated ’ (I, 289, italicized by Peach 1988, 113). Peach concludesthat here and on other occasions in the Principles (cf. I, 132, 296) ‘the impact of real-wage variations on profitability is implicitly relegated to a temporary status’. Andhe elsewhere challenges advocates of the New View to ‘confront’ this fact (1986, 117).

The challenge falls flat. The foregoing statement by Ricardo asserts that in theabsence of diminishing agricultural returns, there are no forces at play depressingthe profit rate. What specifically concerned Ricardo in this context was the exclusionof downward pressure on the profit rate due (1) to rising real wages reflecting labourscarcity, and (2) to inadequate aggregate demand. This is precisely what is capturedby the New View. The falling real wage reflects the impact of diminishing agriculturalreturns; with constant returns there will be steady real-wage and profit rates. Torepeat: the falling commodity wage, in the case that real corn costs are rising, is not


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to be identified with temporary or short-run fluctuations in the wage; the secularfall is itself a ‘permanent’ variation generated by the impact of rising agriculturalcosts on the rate of accumulation. Nothing that is said by adherents of the NewView points away from, or minimizes the significance of, agricultural conditions inprofit-rate determination.

Dr Peach (1988, 111–12) admits to the evidence given above in favour of theNew View in the Principles, I, 94–5 (and also 101–2) though he asserts that the textsoffer ‘superficial credibility’ only. But those same pages are said also to containmaterial suggesting the subsistence wage to be a true centre of gravity with thesecular path following that wage (above, p. 244). If this were so, we would have toascribe to Ricardo two conflicting growth models within the passage of only a fewparagraphs. I suggest the explanation I have given rings truer. We must distinguishthe statement of categories or classificatory matter from the full general growthmodel; and in the case of the texts on pages 101f, distinguish the simplifiedhypothetical data from the full model.

I shall proceed with the exegesis. Dr Peach (1988, 112) cites the following passagefrom ‘Taxes on Raw Produce’ as evidence of rapid wage adjustment to the subsistencelevel, and therefore favouring the Pasinetti interpretation:

A tax ... on raw produce, and on the necessaries of the labourer would ...raise wages. From the effect of the principle of population on the increase ofmankind, wages of the lowest kind never continue much above that ratewhich nature and habit demand for the support of the labourers. This classis never able to bear any considerable proportion of taxation; and,consequently, if they had to pay 8s. per quarter in addition for wheat and insome smaller proportion for other necessaries, they would not be able tosubsist on the same wages as before, and to keep up the race of labourers.

(Ricardo 1951, I, 159)

This view is unconvincing. In the first place, only two pages later we find Ricardogeneralizing, indicating that the subsistence wage of the page 159 passage is a specialcase. The constant real wage is not necessarily the subsistence wage: ‘Those who maintainthat it is the price of necessaries which regulates the price of labour, always allowingfor the particular state of progression in which the society may be, seem to have conceded tooreadily, that a rise or fall in the price of necessaries will be very slowly succeeded bya rise or fall of wages’ (I, 161; emphasis added). 3 Moreover, in the context of thegrowth process – involving a ‘gradually increasing demand [for produce], whichmay be ultimately attended with an increased cost of production’ 4 – Ricardo alsointroduces the notion of real-wage fluctuations about what is termed the ‘naturallevel’, in consequence of excessive labour-supply adjustments: ‘It generally happens

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indeed, that when a stimulus has been given to population, an effort is producedbeyond what the case requires; the population may be, and generally is so muchincreased as, notwithstanding the increased demand for labour, to bear a greaterproportion to the funds for maintaining labourers than before the increase ofcapital. In this case a re-action will take place, wages will be below their natural level,and will continue so, till the usual proportion between the supply and demand hasbeen restored’ (I, 164). On this passage Peach writes that the ‘natural wage is treatedas an active center of gravity with an unrestricted domain of influence’ (1988, 112),though he accepts the passage on page 161 as supporting the New View (his note 12).Again we are asked to envisage the chaotic adoption of two distinct models withRicardo switching from Pasinetti’s view to the New View and back again within thespace of five pages.

There is no need to take this unlikely route. There is a more convincing explanation.The passage on page 161 assumes constant real wages assured by a ‘particular state ofprogression’; the capital growth rate (positive, negative, or zero) is thus assumed tobe given. Ricardo here neglects the deceleration of accumulation outlined earlier in thePrinciples (see above, p. 246) which generates the secular decline in the real wage.Conceivably he had simply forgotten that complexity; alternatively, he had introduceda deliberate simplification. And this latter possibility would not be surprising. Assumethe case of positive growth. Here the real wage exceeds subsistence. The wage variationdescribed on page 164 then occurs around this level, with an initial speeding up ofaccumulation rather than an absolute increase in capital. This is sufficiently complex.But add to it the complexity of a positive but decelerating growth rate and one canappreciate why it might have been set aside. It is for the reader to make the necessaryamplification as is always the case with any ‘textbook’. Whatever the reason for theneglect of decelerating accumulation, such neglect indicates that the analysis of taxationis not undertaken within the confines of a full-fledged growth model.

This episode provides a further lesson: it warns us to avoid word-mindedness.The ‘natural rate’ often refers to the subsistence wage. But positively not here (on p.164); here it is the rate which assures population growth in line with the specifiedcapital growth rate. The fluctuations are not about ‘subsistence’.

I turn now to the chapter ‘Taxes on Wages’ to consider a passage also admitted byDr Peach (his note 12) to support the New View: ‘The demand for labour, accordingas it happens to be either increasing, stationary, or declining, or to require anincreasing, stationary, or declining population, regulates the subsistence of thelabourer, and determines in what degree it shall be either liberal, moderate, orscanty’ (1951, I, 215). Here Ricardo cites Adam Smith, and as on page 161 takes threediscrete categories of cases – positive, zero, or negative accumulation – thus avoiding


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the full growth model with its deceleration of growth. Once again he simplifies theanalysis of wage taxation to avoid the complexity of a falling real wage. It is for thereader to do a little work of their own.

Certain passages are said by Dr Peach (1988, 112) to support the traditional orPasinetti view by their emphasis on speedy adjustment of the wage to the ‘natural’(read: subsistence) wage. Ricardo 1951, I, 159 (above, p. 250) is one such. In fact thatpassage says nothing about the speed of adjustment. But consider a reference to thetext on page 125: ‘Whilst the land yields abundantly, wages may temporarily rise,and the producers may consume more than their accustomed proportion; but thestimulus which will thus be given to population, will speedily reduce the labourersto their usual consumption.’ Certainly there is reference here to speedy adjustment.But it is not to the subsistence wage, but rather to ‘the usual’ or ‘accustomed’ level.One notes that the case assumes a state of society not subject yet to land scarcity,reinforcing the impression of a real wage initially above subsistence. Ricardo thenelaborates for the general case – with the onset of diminishing returns:

But when poor lands are taken into cultivation, or when more capital andlabour are expended on the old land, with a less return of produce, the effectmust be permanent. A greater proportion of that part of the produce whichremains to be divided, after paying rent, between the owners of stock andthe labourers, will be apportioned to the latter. Each man may, and probablywill, have a less absolute quantity ; but as more labourers are employed inproportion to the whole produce retained by the farmer, the value of agreater proportion of the whole produce will be absorbed by wages, andconsequently the value of a smaller proportion will be devoted to profits.This will necessarily be rendered permanent by the laws of nature, whichhave limited the productive powers of the land.


Peach’s exegesis takes the passage from page 125 as evidence for the old view becauseof its allusions to speedy adjustment. But on page 126 we have an explicit statement offalling real wages (and a falling profit rate) due to diminishing returns. The NewView is supported directly; and it is clear that the fluctuations issue – whether speedyor slow – is irrelevant for the trend of the wage path.

Finally, we turn to Ricardo I, 16 and an allusion to a reduction in the real costsof producing wage goods, taken by Dr Peach (1988, 112) as proof of rapid adjustmentand the subsistence wage path: ‘it is probable his wages would in no long time beadjusted by the effects of competition, and the stimulus to population, to the newvalue of the necessaries on which they were expended. If these improvements extended

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to all the objects of the labourer’s consumption, we should find him probably at theend of a very few years in possession of only a small, if any, addition to his enjoyments.’Dr Peach is mistaken. The rapid adjustment relates to some constant real wage butnot necessarily at the subsistence level. But again the matter of fluctuations hasnothing to do with the trend path.

Much has been made by commentators of a statement by Ricardo to Malthus regardingtheir respective methods. It is important for us to have it in mind in consideringthe Principles :

It appears to me that one great cause of our difference in opinion, on thesubjects we have so often discussed, is that you have always in mind theimmediate and temporary effects of particular changes – whereas I put theseimmediate and temporary effects quite aside, and fix my whole attention onthe permanent state of things which will result from them. Perhaps youestimate these temporary effects too highly, whilst I am too much disposedto undervalue them. To manage the subject quite right they should be carefullydistinguished and mentioned, and the due effects ascribed to each.

(24 January 1817; Ricardo 1951, VII, 120)

Dr Peach illustrates Ricardo’s representation of the ideal procedure by his allowancefor cases where ‘wages are above or below the natural level, with oscillations andtime-consuming population adjustments’ (1988, 114). But this is unconvincing.Ricardo is alluding rather to the short-run and the long-run impacts of given changesin conditions (say new technology), his own preference being for the investigation ofthe latter, though conceding that ideally he should deal with both categories ofeffects.

While it is not clear to me that he had in mind the need to deal with ‘oscillations’,that is how Malthus understood him, apparently confusing causes with effects; atleast he took the opportunity to state his own preferences in terms of an interest in‘irregular movements’: ‘I really think that the progress of society consists of irregularmovements, and that to omit the consideration of causes which for eight or tenyears will give a great stimulus to production and population, or a great check tothem, is to omit the causes of the wealth and poverty of nations – the grand objectof all enquiries in Political Economy’ (26 January 1817; Malthus, in Ricardo 1951,VII, 122). And he alluded by way of illustration to Ricardo’s fixed-wage assumptionin the Essay on Profits :

A writer may, to be sure, make any hypothesis he pleases; but if he supposeswhat is not at all true practically, he precludes himself from drawing anypractical inference from his hypothesis. In your essay on profits you suppose


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the real wages of labour constant; but as they vary with every alteration inthe price of commodities, (while they remain nominally the same) and inreality are as variable as profits, there is no chance of your inferences beingjust as applied to the actual state of things. We see in all the countries aroundus, and in our own particularly, periods of greater or less prosperity, andsometimes of adversity, but never the uniform progress which you seemalone to contemplate.

(26 January 1817; Malthus, in Ricardo 1951, VII, 122)

This criticism of Ricardo does not make a case for a falling secular real wage incontrast to Ricardo’s fixed wage, but only for concern with fluctuations in the realwage (brought about by fluctuations in the corn price relative to a stable moneywage). In the Principles Ricardo continues in his own fashion to ignore such consid-erations in his analysis of profits: ‘The reader is aware, that we are leaving out of ourconsideration the accidental variations arising from bad and good seasons, or fromthe demand increasing or diminishing by any sudden effect on the state of popula-tion. We are speaking of the natural and constant, not of the accidental and fluctu-ating price of corn’ (I, 115n). That, in effect, was Ricardo’s reply to Malthus. Bychoice, his concern remained with the upward secular pressures on the price ofcorn, and the implications thereof, pre-eminently the falling paths of the real-wageand profit rates. He made no ‘concessions’ to Malthus.

I I I . ‘ O N G R O S S A N D N E T R E V E N U E ’

Stigler’s case for a fixed-wage interpretation (above, pp. 241–2) includes the argu-ment that without that assumption Ricardo’s chapter ‘On Gross and Net Revenue’and his proposition that the disposable surplus excludes wages are ‘wrong’ (1981,101).

Surely ‘wrong’ is not the right word. Ricardo indeed sets out in this chapter withthe resounding theme that ‘It is from the two last portions only [profits and rent],that any deductions can be made for taxes, or for savings’ (Ricardo 1951, I, 347–8).But we must consider the context. His object was to controvert what he read to beAdam Smith’s inclusion within disposable surplus of the entire national income. Hepointed out the need to correct for ‘necessary expenses’. And following his predilectionfor strong cases (here ‘personal exegesis’ is certainly in order) he did so in the mostforcible fashion. But nothing was lost – except perhaps effect – by generalizing, as hehimself pointed out in the Principles, to cases where wages contained part of thedisposable surplus: ‘Perhaps this is expressed too strongly, as more is generally allottedto the labourer under the name of wages, than the absolutely necessary expenses ofproduction. In that case a part of the net produce of the country is received by the

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labourer, and may be saved or expended by him; or it may enable him to contributeto the defence of the country’ (I, 348n). Similarly, in refutation of Malthus’smisunderstanding: ‘I do not deny that wages may be such as to give to the labourersa part of the net revenue – I limited my proposition to the case when wages were toolow to afford him [sic] any surplus beyond absolute necessaries’ (II, 381).

Allowing for wages in excess of the subsistence wage rules out the identificationof the disposable surplus with the returns to property owners. But then, so what?The collapse of a ‘rigorous’ notion of surplus does not, as Stigler apparently believes,preclude the growth model involving abovesubsistence, though declining, wages.

IV . THE EARLY CORRESPONDENCE

Malthus allowed early on for falling wages during secular growth. He refers forexample, to ‘the constant tendency to a fall in the wages of labour’ (23 November1814, Ricardo 1951, VI, 152); but he does so in the context of a denial that the stateof cultivation ‘ regulates ’ the profit rate. In reply Ricardo gave his own position. Heis explicit that his falling profit rate presumes falling real wages per capita :

Accumulation of capital has a tendency to lower profits. Why? because everyaccumulation is attended with increased difficulty in obtaining food, unlessit is accompanied with improvements in agriculture; in which case it has notendency to diminish profits. If there were no increased difficulty, profitswould never fall, because there are no other limits to the profitable productionof manufactures but the rise of [money] wages. If with every accumulation ofcapital we could tack a piece of fresh fertile land to our Island, profits wouldnever fall. ...

A diminution of the proportion of produce, in consequence of theaccumulation of capital, does not fall wholly on the owner of stock, but isshared with him by the labourers. The whole amount of wages paid will begreater, but the portion paid to each man, will in all probability, be somewhat diminished.

(18 December 1814; Ricardo 1951, VI, 162–3; emphasis added)

Here then in late 1814 we already have what was to be the full argument of thePrinciples : a falling profit rate due to rising money wages (the inverse wage–profitrelation) accompanied by declining real wages – the burden of diminishing returnsis shared between capital and labour.

I turn now to an earlier passage from the correspondence cited by Dr Peach insupport of his rejection of the New View. ‘Nothing’, wrote Ricardo on 8 March1814, ‘can increase the profits permanently on trade ... but a really cheaper mode ofobtaining food’ (VI, 104; cited by Peach 1986, 107). On Peach’s reading this statement


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indicates that ‘permanent movements must be defined relative to the subsistencewage’. This is going too far: by its neglect of real-wage variability the statement mayimply a constant real wage, though a real wage above subsistence might be intended.But even if we assume that early in 1814 Ricardo had adopted the falling real-wagesecular trend recognized in December that year, it would not be surprising to findhim neglecting that matter in dealing with the profit rate. For, as explained above,that secular trend does not act to raise the profit rate, but reflects the same force bywhich profits are forced down – diminishing returns. Furthermore, neglect of short-run wage fluctuations in this specific context is also not surprising, for the positionRicardo contested was the Smithian case held by Malthus regarding the positiveimpact on profits of new markets, the passage cited continuing thus: ‘A cheapermode of obtaining food will undoubtedly increase profits says Mr. Malthus butthere are other circumstances which may also increase profits with an increase ofcapital. The discovery of a new market where there will be a great demand for ourmanufactures is one’ (VI, 104–5). Why complicate the case by introducing extraneousmatter? One is obliged to read the texts in context.

However, we cannot be certain that Ricardo had adopted his falling realwagetrend before the explicit statement of 18 December. That letter – coinciding as itdoes with the full-fledged statement of the Principles – provides us with a standard bywhich to evaluate Ricardo’s intellectual development in the earlier letter of 1814.

Taking the standard as reference point, we encounter various ‘concessions’ byRicardo to Malthus that go too far. For example: ‘You infer that my doctrine[‘facility of obtaining food’ as determinant of the profit rate] is not correct becauseimprovements may take place in agriculture or manufactures, because new leases maynot be granted at the time of the rise in the price of raw produce, and because theprice of labour may not rise without delay in the same proportion’ (VI, 145).Ricardo then conceded that a failure of the money wage to rise in proportion willtemporarily raise the profit rate. Now this is somewhat misleading in terms of thelater formulation whereby even in the long run there is no proportional adjustmentand yet the profit rate declines.

A more significant concession by Ricardo to Malthus implies that a decline inthe secular wage path might prevent a falling profit rate:

You observe [p. 141] that in rich countries [large absolute population andcapital] profits are often much higher, and in poor countries much lowerthan according to my theory, to which I reply that profits are very muchreduced in the poor country by enormous wages; – the wages themselves maybe considered as part of the profits of stock, – and are frequently thefoundation of new capital. In rich countries wages are low, too low for the

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comforts of the labourers; – too large a portion of the gross produce isretained by the owner of stock, and is reckoned as profit.

(23 October 1814; Ricardo 1951, VI, 147)

Here we encounter a notion of falling secular wages with the transition from alow- to a high-density population, thwarting any clear trend to profits. But if despitefalling corn wages the profit rate declines (the mature view), this concession isuncalled for, though it will be noted that Ricardo is emphasizing a situation wherethe real wage is initially enormously high, which might suggest a special case; in theevent of a lesser initial value the profit-rate decline would not perhaps be thwarted.Even so, the passage provides an instance where ultimately Ricardo was to refine hisposition to indicate that, with increasing land scarcity, the profit rate falls alongwith falling real wages no matter what the initial value of the latter might be. Theincreasing incidence of diminishing returns, he was to show, is necessarily shared byboth capitalists and labourers.

I turn next to a passage from a letter by Ricardo of 10 January 1816 that causes DrPeach some difficulty, pointing as it does to the New View. It is after citing thisparticular passage that he draws his strikingly original inference that ‘the principalnew-view passages may have been an attempt to show, on Malthus ’ premises, that adeclining real wage need not compensate for rising corn prices’ (above, pp. 243–4).

I cannot think it inconsistent to suppose that the money price of labourmay rise when it is necessary to cultivate poorer land, whilst the real pricemay at the same time fall. Two opposite causes are influencing the price oflabour[:] one the enhanced price of some of the things on which wages areexpended – the other the few enjoyments which the labourer will have thepower to command, – you think they may balance each then, or rather thatthe latter will prevail. I on the contrary think the former the more powerfulin its effects. I must write a book to convince you.

(Ricardo 1951, VII, 10; cited in Peach 1988, 114) 5

Dr Peach’s reading of the text seems to be invalid. Apart from the fact that both inthis letter of 10 January 1816 and in the Principles he ultimately did write, Ricardoargued not that ‘a declining real wage need not compensate for rising corn prices’but that it cannot compensate for them (rising corn prices are ‘the more powerful’),there is no suggestion in the passage that Ricardo was merely making a logical casefor argument’s sake, i.e. on Malthus’s terms. And why should there be, since he hadin late 1814 stated as his own position that the profit rate falls with higher cornprices despite a reduced wage basket.


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Dr Peach’s reading also flies in the face of the Ricardo–Malthus correspondenceimmediately preceding the letter of 10 January 1816. On 22 December 1815 Malthushad laid out the issues, following a personal encounter, thus:

I think the principal difference between us relating to the subjects we lastdiscussed, is, your opinion that General Profits never fall from a general fallof prices compared with labour, but from a general rise of labour comparedwith prices. I own, I can see no reason for this opinion. ...

I believe I assented in par[ting] to the proposition that in the successivecultivation of poorer land, the price of labour would rise as well as the priceof corn. When however the rise in the price of corn is occasioned solely andexclusively by the necessity of cultivating poorer land I am now convincedthat the rise must be very small, and as the real price of labour must fall, I seeno reason why the nominal price of labour should rise. How can such acountry purchase the precious metals so as to occasion a general rise in theprice of labour?

(Malthus; in Ricardo 1951, VI, 341–2; see editorial comment p. 342n)

In his reply Ricardo insisted that general prices are constant, corn and money wagesonly rising. He protested at Malthus’s representation of his (Ricardo’s) position interms suggesting that money wages rise relative to general prices, a formulation whichallows for the latter rising to some degree:

As for the difference between us on Profits of which you speak in yourletter, – you have not I think, stated it correctly. You say that my opinion is‘that General Profits never fall from a general fall of prices compared withlabour, but from a general rise of labour compared with prices’. I will notacknowledge this to be my proposition. I think that corn and labour are thevariable commodities, and that other things neither rise nor fall but fromdifficulty or facility of production, or from some cause particularly affectingthe value of money, – and that no alteration of price proceeding from thesecauses affect general profits; – allowing always some effect for cheapness ofthe raw material.

(2 January 1816; Ricardo 1951, VII, 3)

In replying to this letter Malthus insisted: ‘Can you give me a good reason whythe money price of labour should rise because it is necessary to cultivate poorerland, and the real price of labour must fall’ (8 January 1816; VII, 8). ClearlyMalthus here takes for granted that Ricardo accepted that the real wage declines.He is not asking for a rationale on his own terms, but challenging Ricardo to

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justify Ricardo’s own position that despite a fall in the real wage there necessarilyoccurs a rise in the money wage with rising corn prices. Malthus himself maintainedthat the money wage is more or less unchanged: ‘In the progress of cultivation ...the money price of labour [will] remain stationary nearly, and the money price ofmanufactured good[s] fall from the fall of profits’ (VII, 9). And precisely at thispoint we have Ricardo’s answer that it is quite consistent ‘to suppose that themoney price of labour may rise when it is necessary to cultivate poorer land,whilst the real price may at the same time fall’ (above, p. 257); and his aside that toprove fully that this is so – that Malthus was in error for supposing that the realwage decline can ‘balance’ the impact on the money wage of higher corn prices –would require a book.

There is, I conclude, not a shadow of a doubt that the falling wage path reflectsRicardo’s own considered position from at least December 1814, and was taken upin the Principles as a leading feature of the general theory of growth.

V. THE ‘E S S A Y ON PROFITS ’

I turn now to the Essay on Profits (1815). This pamphlet poses interesting interpretativeproblems, providing an important instance where Ricardo fell into error on hisown terms.

Let us have at hand a statement in the essay of the inverse wage–profit relation:‘The sole effect then of the progress of wealth on prices, independently of allimprovements, either in agriculture or manufactures, appears to be to raise theprice of raw produce and of labour, leaving all other commodities at their originalprices, and to lower general profits in consequence of the general rise of wages’(Ricardo 1951, IV, 20). Here the money wage upon which general profits depend issaid to be governed by the price on corn. Similarly: ‘If by foreign commerce, or thediscovery of machinery, the commodities consumed by the labourer should becomemuch cheaper, wages would fall; and this, as we have before observed, would raisethe profits of the farmer, and therefore, all other profits’ (IV, 26n).

With this relation in mind we can better appreciate an important summarypassage regarding forces that might raise the profit rate:

If then, the principles here stated as governing rent and profit be correct,general profits on capital can only be raised by a fall in the exchangeablevalue of food, and which fall can only arise from three causes:1st. The fall of the real wages of labour, which shall enable the farmer tobring a greater excess of produce to market.2d. Improvements in agriculture, or in the implements of husbandry, whichshall also increase the excess of produce.


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3dly. The discovery of new markets, from whence corn may be imported ata cheaper price than it can be grown for at home.

(Ricardo 1951, IV, 22)

In one central respect the line taken here differs from that ultimately adopted inthe Principles. The main relationships above are, first, general profits will fall shouldmoney wages rise in consequence of higher corn prices; conversely, they would risein the event of reduced corn prices. Secondly, the reasons for reduced corn pricesinclude a fall in the real wage. It has this latter effect by allowing a ‘greater excess ofproduce’ to reach the market, i.e. by generating an increase in supply; similarly inthe case of new agricultural technology. But in the Principles a fall in the real wage ofeither a cyclical or a casual kind – a wage fluctuation – acts on profits directly via themoney wage not through the intermediary of the corn price; a real-wage fall leavesthe price of corn unchanged, raising the profit rate by depressing the money wage.On the other hand, a decline in the real wage of the secular sort, since it is anoutcome of the growth process and incorporates the impact of land scarcity is not(according to the Principles ) accompanied by a falling money wage but by a risingmoney wage, and does not raise the profit rate at all.

But the question now is: what is the nature of the secular real-wage path accordingto the Essay? Our passage continues thus regarding forces acting on (raising) theprofit rate: ‘The first of these causes [the fall in the real wage] is more or less permanent,according as the price from which wages fall, is more or less near the remunerationfor labour which is necessary to the actual subsistence of the labourer’ (IV, 22).Taking the word ‘permanent’ literally, we should read Ricardo as stating that thefurther the initial real wage is from subsistence, the greater the likelihood a real-wagereduction will be subsequently reversed. This would seem to imply a downwardtrend in the real wage – at least a statistical trend reflecting the circumstance that wagereductions are compensated for to an increasingly small degree by reverse movements.Dr Peach, however, reads Ricardo here as defining permanent movements in the realwage ‘relative to the subsistence wage’ (1988, 107), and takes it as proof that thesecular real wage follows a subsistence path. I do not see that this is justified by thetext. At the same time what follows denies a declining wage trend, though certainlywithout implying a subsistence-wage path:

The rise or fall of wages is common to all states of society, whether it be thestationary, the advancing, or the retrograde state. In the stationary state, it isregulated wholly by the increase or falling off of the population. In theadvancing state, it depends on whether the capital or the population advance,at the more rapid course. In the retrograde state, it depends on whetherpopulation or capital decrease with the greater rapidity.

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As experience demonstrates that capital and population alternately take thelead, and wages in consequence are liberal or scanty, nothing can be positively laiddown, respecting profits, as far as wages are concerned.

But I think it may be most satisfactorily proved, that in every society advancingin wealth and population, independently of the effect produced by liberal orscanty wages, general profits must fall, unless there be improvements in agriculture,or corn can be imported at a cheaper price.

(Ricardo 1951, IV, 22–3)

Having implied a downward trend of the real wage – a statistical if not ananalytical trend – Ricardo now seems to deny any trend pattern at all, or at least heabandons any attempts to define a secular pattern. This, of course, contrasts withthe Principles. In point of fact Ricardo earlier in his Essay had justified the assumptionof constant secular wages following an allowance that profits might increase ‘becausethe population increasing, at a more rapid rate than capital, wages might fall’ orbecause of new technology: ‘We will, however, suppose that no improvements takeplace in agriculture, and that capital and population advance in the properproportion, so that the real wages of labour, continue uniformly the same; – thatwe may know what peculiar effects are to be ascribed to the growth of capital, theincrease of population, and the extension of cultivation, to the more remote, andless fertile land’ (IV, 12). Quite clearly Ricardo has failed to take account of the fact– upon which he himself insisted before the Essay in the 1814 correspondence andlater in the Principles – that the secular process involving diminishing returnsentails falling real wages. To remove wage fluctuations would not, on his ownterms before and after the Essay, leave a constant secular wage path.

A characteristic of the Essay is thus its partial treatment of the secular problem.Ricardo describes the stationary and advancing states; presumably wages are at orabove the subsistence level respectively, and so must necessarily fall in the approachto a stationary state. Yet this latter implication, rationalized at length in the Principles,is neglected. The argument in the Essay constitutes an incompletely formulatedanalysis. 6

V I . T H E ‘ N O T E S O N M A L T H U S ’

There is one further substantive matter which ought alone to be decisive. In hisPrinciples (1820) Malthus expressly adopts the view – Ricardo’s view we have shownfrom 1814 – that the profit and real-wage rates decline simultaneously. He providesa brilliant account which sets aside the complexity of fluctuations and explainswhy secular wage constancy is an impossibility:


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the supposition ... of a constant uniformity in the real wage of labour is notonly contrary to the actual state of things, but involves a contradiction.

The progress of population is almost exclusively regulated by the quantityof the necessaries of life actually awarded to the labourer; and if from thefirst he had no more than sufficient to keep up the actual population, thelabouring classes could not increase, nor would there be any occasion for theprogressive cultivation of poorer land. On the other hand, if the real wagesof labour were such as to admit of and encourage an increase of population,and yet were always to remain the same, it would involve the contradictionof a continued increase of population after the accumulation of capital, andthe means of supporting such an increase had entirely ceased.

We cannot then make the supposition of a natural and constant price oflabour, at least if we mean by such a price, an unvarying quantity of thenecessaries of life. And if we cannot fix the real price of labour, it mustevidently vary with the progress of capital and revenue, and the demand forlabour compared with the supply.

We may however, if we please, suppose a uniform progress of capital andpopulation by which is not meant in the present case the same rate of progresspermanently, which is impossible, but a uniform progress towards the greatestpracticable amount without temporary accelerations or retardations ...

... [If] poorer lands which required more labour were successively takeninto cultivation, it would not be possible for the corn wages of each individuallabourer to be diminished in proportion to the diminished produce; agreater proportion of the whole would necessarily go to labour; and the rateof profits would continue regularly falling till the accumulation of capitalhad ceased.

Such would be the necessary course of profits and wages in the progressiveaccumulation of capital, as applied to the progressive cultivation of new andless fertile land, or the further improvement of what had before been cultivated;and on the supposition here made, the rates both of profits and of realwages would be highest at first, and would regularly and gradually diminishtogether, till they both came to a stand at the same period, and the demandfor an increase of produce ceased to be effective.

(Malthus 1820; in Ricardo 1951, II, 255f) 7

Now Ricardo stated explicitly in his Notes his agreement with this formulation: ‘Iagree throughout this section with Mr. Malthus in principle, we only differ in ourideas of what constitutes a real measure of value’ (II, 258). Elsewhere in the NotesRicardo responds to Malthus’s criticism of his rent doctrine thus: ‘I do not see thatMr. Malthus’s language is very different from my own; in page 152 [ Principles, 1820]

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he says “The fall of profits and wages which practically takes place, undoubtedlytransfers a portion of the produce to the landlord”’ (II, 119); and again he applaudsMalthus’s reference to ‘the transfer from profits and wages’. These posthumouslypublished statements alone should suffice to settle the debate as to Ricardo’s ‘true’view.

VII . SUMMARY AND CONCLUSION

To return to the main issue. No one questions that the permanent decline in theprofit-rate is given exclusively by changed conditions of producing wage goods.This fact in no way points away from the New View. The assertion that the ‘tradi-tional interpretation’ of Ricardo (the fixed-wage interpretation) has the merit of‘leav[ing] intact Ricardo’s thesis on permanent movement in profitability’, so that‘its distortion factor is markedly lower than that of its main rival’ (Peach 1988, 114)is without merit. The New View captures the permanent movement in profitability.The impact of diminishing agricultural returns is on both the real wage and theprofit rate.

That the declining real-wage trend is not to be identified with real-wage fluctuationsis scarcely surprising. Apart from diminishing returns acting on the price of wagegoods the only other cause which, for Ricardo, could account for the falling profitrate is a rising, not a falling, real wage. Moreover, to exclude wage fluctuations in theaccount of secular profit decline makes good analytic sense. It amounts to the exclusionof wage increases due to fortuitous movements away from trend in the relativegrowth rates of capital and population. We must avoid identifying the impact onprofits of fluctuations in the real wage with that of the downward trend – they havequite different analytical statuses.

NOTES

*A version of this paper was read at the History of Economics Society annual meeting,Richmond, Va., June 1989. I thank A.M.C. Waterman, Sue Golding, and D. Pokorny fortheir helpful comments.

1. See also the discussion of accumulation in the face of labour scarcity (Ricardo 1951, I,165). For this exercise, the ‘natural wage’ is taken as starting point of the analysis.

2. Without a full appreciation of the characteristics of the growth model many of Ricardo’sobservations lose their meaningfulness. For one might wonder why so much effort was putinto proving that proportionate wages rise with diminishing returns if the real wage isconstant; it is then self-evidently the case. The issue only becomes truly meaningfulshould the real wage be falling. Ricardo’s proposition is then that the marginal productdeclines faster than the real wage, raising labour’s proportionate share and lowering theprofit rate.

3. Peach himself accepts, in his note 12, that the qualification in question supports the NewView.


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4. In the growth process, a high corn price is the effect of an increasing demand [and] alwayspreceded by an increase of wages’ (Ricardo 1951, I, 163; emphasis added), so that there isno question of a slow adjustment of the wage.

5. The passage is cited by Peach only from ‘Two opposite causes ...’.6. For these reasons it is unlikely that Ricardo was deliberately describing a ‘dynamic

equilibrium’ path with wages above subsistence at a constant level. This would requiredeceleration of population growth, without the inducement of a wage decline, along with(at the same rate as) that of capital (Caravale 1985).

7. The entire argument assumes an absence of ‘prudential’ population control, that wouldallow a constant real wage (above subsistence) on the path to the stationary state.

REFERENCES

Caravale, G.A. (1985) ‘Diminishing Returns and Accumulation in Ricardo’, in G.A. Caravale(ed.) The Legacy of Ricardo, Oxford: Basil Blackwell, 127–88.

Casarosa, C. (1985) ‘The “New View” of the Ricardian Theory of Distribution and EconomicGrowth’, in G.A. Caravale (ed.) The Legacy of Ricardo, Oxford: Basil Blackwell, 45–58.

Hollander, S. (1987) Classical Economics, Oxford: Basil Blackwell.Pasinetti, L.L. (1960) ‘A Mathematical Formulation of the Ricardian System’, Review of

Economic Studies 27: 78–98.Peach, T. (1986) ‘David Ricardo’s Treatment of Wages’, in R.D.C. Black (ed.) Ideas in Economics,

London: Macmillan, 104–28.——(1988) ‘David Ricardo: A Review of Some Interpretative Issues’, in W.O. Thweatt (ed.)

Classical Political Economy: A Survey of Recent Literature, Boston: Kluwer Academic Publishers,103–31.

Ricardo, David (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 vols),Cambridge: Cambridge University Press.

Stigler, G.J. (1981) ‘Review’, Journal of Economic Literature 19 (March): 100–2.——(1982) The Economist as Preacher and Other Essays, Chicago: University of Chicago Press.Tucker, G.S.L. (1960) Progress and Profits in British Economic Thought, Cambridge: Cambridge

University Press.

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I am happy to let readers work through the textual evidence as presented in thispaper [above, Chapter 15] and Dr Peach’s reaction and decide for themselves as to‘the timing and extent’ of Ricardo’s adoption of the falling wage growth model(Peach 1990, 764). Since I allow that between Ricardo’s first statement of thatmodel in late 1814 and the Principles in 1817 there are instances of erroneous orpartial formulation (as in the Essay on Profits ) there is less of a difference betweenPeach and myself than Peach suggests. As for the Principles, perhaps the mainsubstantive issue is simply this: was Ricardo inherently inconsistent, as Peach believes;or did he adhere to the falling wage growth model and make use of the ‘discrete’analysis when attempting to expound specific parts of the full model, as I believe?Readers can also come to their own conclusion regarding the specific feature ofthe ‘continuous’ model I maintain is so essential to an understanding of Ricardo’sposition – that it accounts simultaneously for both a falling wage and a fallingprofit rate in terms of diminishing agricultural returns.

I shall, therefore, devote what small space is available to me to Professor Stigler’schallenging observations. My critic believes that I am interested ‘only in Ricardo’sinner convictions’ (Stigler 1990, 765). In fact he is mistaken. I pretend to knownothing of Ricardo’s inner convictions; only the extant written word is availableto me – at least in this world – and this I read in an attempt to discern whatmessage Ricardo apparently wished to convey to his readers.

It is also unclear to me why Professor Stigler should think that the only questionworth investigation is that of interpretations by contemporaries. Certainly that isan important question. But another question is: were the contemporaryinterpretations accurate or were they distortions? To approach that question we areobliged to have some conception of the apparent intentions – not, I repeat, in thesense of ‘inner convictions’ – of the original author. And that was the sole purposeof my exercise. If an interpretation turns out to be inaccurate then a further question

16A REPLY TO PROFESSOR

STIGLER AND DR PEACH*


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arises relating to the source of error. This I should think is a most worthwhile issue, butone excluded from consideration by Stigler’s recommendations.

On numerous occasions Ricardo protested at Malthus’s misreadings; his Notesand correspondence are filled with protestations. Thus, for example, Malthusmaintained that ‘in his very ingenious chapter on profits’, Ricardo had dwelt on noother cause of falling secular profits ‘than the increasing difficulty of procuringfood’, precluding an impact of fluctuating wages (in Ricardo 1951, II, 263–4). Ricardoreacted with feeling and at length against this misinterpretation (II, 264–8).

I am not sure why Professor Stigler provides the citations from James Mill andMcCulloch since there is no express attribution in either of them to Ricardo. Moreimportant, Mill had a penchant for using ‘strong cases’ for political ends, and asWinch has put it: ‘Unlike Smith and Ricardo, Mill makes no allowance for thepossibility that real wages may remain above the psychological or physical minimumfor what amounts to a lengthy short run’ (1966, 193). Why saddle Ricardo withJames Mill’s extremism? As for J.S. Mill, I have myself noted elsewhere that he attributeda constant wage model to Ricardo (1987, 235–6). ‘It is regrettable’, I write there, ‘thatMill failed to record Ricardo’s full argument which recognized conspicuously thefalling-wage possibility, and he must be held partly responsible for thereby misleadingcommentators ever after.’

But there is one contemporary – Mountifort Longfield – who did understandthe orthodox growth model as entailing a necessary excess of the real wage over itsfinal equilibrium level in a growing economy, although he could not appreciatewhy in that case labour could not bear the entire brunt of diminishing returns:

Before I proceed to give what I consider a more accurate system of profits ...I shall briefly point out the fallacies in the two arguments of which I havejust given you a sketch. In the argument used to prove that the decreasingfertility of the soil is the great and necessary cause of a decline of profits, itis, I conceive, unwarrantably assumed, that the effect cannot be entirely borneby the labourer, and that therefore of necessity some part of it must fallupon capital. This necessity I cannot perceive. As population was advancing,the wages of labour must have been more than what would be necessary tothe subsistence of the labourers, with such families as would keep up anunvarying population; they may sustain some reduction, and why not theentire amount of the reduction that has taken place in the returns made tolabour and capital?

(Longfield 1971 [1834], 184–5)

This latter criticism happens to be technically unwarranted. Nevertheless, here is acase where a correct reading coupled with technical error led to analytical ‘progress’,

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A REPLY TO PROFESSOR STIGLER AND DR PEACH

for Longfield was stimulated to seek an alternative approach to profit-ratedetermination. I am not sure what Stigler would make of this case. But neither of usshould be allowed to get away with selective citation.

In his second section Professor Stigler raises an irrelevant issue for the purposesof my paper – the quality of Ricardo’s growth theorizing. (In my opinion, thefalling wage model happens to be more impressive than the alternative which entails,as Stigler admits, only ‘a routine exercise in comparative statics’ (1990, 768).) Someof his comments apparently reflect misunderstandings: ‘This “theory” does not tellus when (and under what conditions) an (unexplained) act of saving will launch aperiod of wages exceeding equilibrium’ (767). But the theory does not involve‘unexplained acts’ or (elsewhere in his paper) ‘periodic bursts’ of saving, or ‘initialdisplacements’, or an ‘ ad hoc cause’; the initial conditions are such as to generatecontinuous, albeit decelerating, growth rates of capital and population. As for the linkwith Smith, certainly there was some development of a growth model of the Ricardiankind in the Wealth of Nations – as it happens including invocation of diminishingreturns. (This is precisely the point insisted on by Paul Samuelson 1978.) All themore reason not to be so taken aback to find the model re-emerging and strengthenedat some of its weak points by Ricardo. It was in the air when Ricardo came on to thescene.

NOTE

* My thanks to Elizabeth Allgoewer for helpful comments.

REFERENCES

Hollander, S. (1987) Classical Economics, Oxford: Basil Blackwell.Longfield, Mountifort (1971) [1834] ‘Lectures on Political Economy’, in The Economic Writings

of Mountifort Longfield, New York: Augustus M. Kelley.Peach, T. (1990) ‘Samuel Hollander’s “Ricardian Growth Theory”: A Critique’, Oxford Economic

Papers 42: 751–64.Ricardo, David (1951–73), The Works and Correspondence of David Ricardo, ed. P. Sraffa (11

Vols), Cambridge: Cambridge University Press.Samuelson, P.A. (1978) ‘The Canonical Classical Model of Political Economy’, Journal of

Economic Literature 16: 1415–34.Stigler, G.J. (1990) ‘Ricardo or Hollander?’, Oxford Economic Papers 42: 765–68.Winch, D. (ed.) (1966) James Mill: Selected Economic Writings, Edinburgh: Oliver and Boyd.

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I . INTRODUCTION

In Chapter V of his Principles (1951, I, 103) Ricardo devised an arithmetic exampledemonstrating the impact on the profit rate of expansion under conditions ofdiminishing agricultural returns assuming the wage basket to be constant. Eachworker receives initially £24 annually permitting expenditure of £12 on manufacturedwage goods and £12 on food amounting to 3 quarters of corn with the corn priceat £4 per quarter. When the corn price rises to £4.4.8 (a 5.8 per cent rise) the moneywage is assumed to rise sufficiently to assure unchanged purchasing power over theoriginal basket, on which assumption the corn wage falls from

In various publications over the past two decades, I have argued that these datarepresent a simplified case devised for illustrative purposes since in full-fledgedaccounts of the course of growth, before and after composition of the Principles andin the Principles itself, we find Ricardo has the real wage declining, in the sense of adeclining basket, under pressure of decelerating capital accumulation.

Keith Gibbard denies that there is any validity to this interpretation, and takesone vocal critic to task for conceding some small merit to my interpretation ofRicardo’s early writings and indeed of the Principles itself. He maintains that Ricardothroughout operated with a constant basket, any decline of the corn wage emergingonly in the arithmetical sense outlined above (the ‘price effect’). From the

17

ON THE TEXTUALINTERPRETATION OF

RICARDIAN GROWTH THEORY:THE ‘NEW VIEW’ CONFIRMED

(AGAIN)

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THE ‘NEW VIEW’ COMFIRMED (AGAIN)

correspondence of 1814 to the Notes on Malthus (1820) the point at issue is ‘thevaluation of a heterogeneous wage basket’; the capital–population mechanism, andits corollary of a secularly declining real wage under conditions of diminishingagricultural returns, ‘played no central role in Ricardo’s work’ (Gibbard 1994, 483).

Gibbard refers to a ‘certain irony’ in that the New View critics of Sraffa’s readingof Ricardo ‘have explicitly based their interpretation upon the assumption of ahomogeneous or corn-only wage’ and thereby ‘placed Ricardo’s work in an unnaturaland misleading light’ (483). This is not the case. The New View of Ricardo claimsthat where the wage basket consists of corn alone, the corn wage declines underpressure of decelerating labour demand because of diminishing returns; and wherethe model is complicated by allowance for a mixed wage basket the commoditybasket falls under the same pressure. There is nothing ironic in sometimes workingwith a simple and sometimes with a complex model and to convey essentials by theformer if nothing for the purpose at hand is lost thereby.

Adherents to the Old View – if I may use the term for convenience – used toinsist on a constant corn wage in making the ‘corn-profit’ interpretation of the earlyRicardo on profits. Their goal was to preclude labour-market pressures generated bydecelerating accumulation from playing on the trend path of the real wage. A fall inthe corn wage is apparently no longer disputed; but Gibbard seeks to achieve thesame objective by representing any fall in the corn wage as nothing but an arithmeticreflection of a constant fixed-proportions mixed wage basket due to the increase in theprice of the food item. This latest rescue mission is no more successful than earlierefforts.

I I . T H E E A R L Y C O R R E S P O N D E N C E

Gibbard sets out to prove that Ricardo used the so-called ‘price effect’ as early as 25July 1814. He asserts first that Ricardo allowed for a heterogeneous wage basket in anearlier letter of 26 June and ‘was thus aware of the question of relative valuation at anearly stage’, having in mind Ricardo’s statement that ‘the rise in the price of corn .. . without any augmentation of capital must necessarily diminish the demand forother things even if the prices of those commodities did not rise with the price ofcorn, which they would (tho’ slowly) certainly do’ (1994, 467–8). Gibbard gives afalse impression by asserting that Ricardo’s concern in the June letter was with‘relative valuation’, for this term suggests the ‘price effects’ defined earlier, a readingsubsequently used to reinforce the fixed real-wage interpretation (below, p. 272). Infact, this passage contains at most an implicit reference to a mixed wage basket butnot a word about ‘price effects’, the point at issue being unrelated to the wage path. 1

In any event, Gibbard himself allows that the mechanism he perceives could only beat play temporarily – Ricardo ‘possibly regards it as a secondary issue of timing’ –


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considering the ultimate increase of manufacturing prices and the fact that (as Gibbardsees the matter) ‘price effects’ require the manufacturing price to be constant; 2 andhe passes on quickly to the letter of 25 July, in which (following Garegnani) he findsa fall in the corn wage ‘due entirely to the presence in the wage basket of non-wheatelements, unchanging in price, resulting in ... a “price effect”, with the real wage(basket) constant’ (468–9).

This reading of the July letter is unsatisfactory. The text used in support is thesecond sentence in the following passage – the first is omitted:

The capitalist ‘who may find it necessary to employ a hundred days labourinstead of fifty in order to produce a certain quantity of corn’ [Malthus; inRicardo 1951, VI, 111] cannot retain the same share for himself unless thelabourers who are employed for a hundred days will be satisfied with thesame quantity of corn for their subsistence that the labourers employed forfifty had before. If you suppose the price of corn doubled, the capital to beemployed estimated in money will probably be also nearly doubled, – or at any ratewill be greatly augmented and if his monied income is to rise from the saleof the corn which remains to him after defraying the charges of productionhow is it possible to conceive that the rate of his profits will not be diminished.

(Ricardo 1951, VI, 115, emphasis added)

The reference to a capital ‘nearly doubled’ alludes, according to Gibbard – herebasing himself on Garegnani – to ‘the unchanged price of the non-wheat elements inthe farmers’ costs’ (1994, 468). Even were this so his case would not follow, since thematter in dispute between us entails manufactured wage goods not other non-cornitems in the farmer’s costs. But assuming Gibbard intended to write ‘the unchangedprices of manufactured wage-goods’, his interpretation would be no stronger thanthat of the June letter; if Ricardo assumed not only a mixed wage basket but constantprices of manufactured wage goods, he must have abandoned – some time between26 June and 25 July – his Smithian position whereby a rise in the corn price acts onmanufactures, whereas the letter of 25 July is explicit that ‘the prices of all commodi-ties must increase if the price of corn be increased’ (cited, note 1).

For my part, I find that the passage, especially when the first sentence is kept inmind, suggests a corn-only wage basket; there is no need to bring in non-corncapital to understand it. 3 At this juncture, incidentally, Ricardo does not positivelyinsist upon a fall in the corn wage, but merely observes that any such fall would haveto be at least as great as the fall in productivity to prevent a profit-rate decline; nordoes he explain the mechanism at play dictating whether or how far the corn wagewould fall. On the other hand, he does insist on working in money terms as is clearfrom the sentence Gibbard himself cites. Gibbard asks in his note 4 why if the realwage consists only of corn and if the money wage does not rise sufficiently to

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compensate for the increased corn price thus depressing the corn wage, Ricardo wasso confident that the profit rate falls. The answer is obvious. The reduction in thecorn wage would have to be of unlikely magnitude (halved in fact) to insulate theprofit rate.

We come now to the reduction in the corn wage alluded to in the letter of 18December which, according to Gibbard, ‘does not, as Hollander suggests, imply areduced wage basket but results from the impact of the price effect on the non-cornwage goods’ (469). In that letter Ricardo concedes to Malthus, who had criticized hisemphasis on the agricultural sector as ‘regulator’ of the profit rate, that the profitrate would be affected by changes in the prices of non-agricultural wage goods:

I have been endeavoring to get you to admit that the profits on stockemployed in Manufactures and commerce are seldom permanently loweredor raised by any other cause than by the cheapness or dearness of necessaries,or of those objects on which the wages of labour are expended. Accumulationof capital has a tendency to lower profits. Why? because every accumulationis attended with increased difficulty in obtaining food, unless it isaccompanied with improvement in agriculture; in which case it has no tendencyto diminish profits. If there were no increased difficulty, profits wouldnever fall, because there are no other limits to the profitable production ofmanufactures but the rise of wages. If with every accumulation of capital wecould tack a piece of fresh fertile land to our Island, profits would never fall.I admit at the same time that commerce, or machinery, may produce anabundance and cheapness of commodities, and if they affect the prices ofthose commodities on which the wages of labour are expended they will sofar raise profits; but then it will be true that less capital will be employed onthe land, for the wages paid for labour form a part of that capital.

(Ricardo 1951, VI, 162)

So Ricardo does not insist on a corn wage basket, his point being that changes in theprices of wage goods of any kind will, by playing on the money wage, affect theprofit rate. He then returns to his main agricultural theme: ‘A diminution of theproportion of produce, in consequence of the accumulation of capital does not fallwholly on the owner of stock, but is shared with him by the labourers. The wholeamount of wages paid will be greater, but the portion paid to each man, will in allprobability, be somewhat diminished’ (VI, 162–3). I have always read this as refer-ring to the corn wage. And – notwithstanding Gibbard’s doubts (1994, 469) – I findit perfectly conceivable that Ricardo here does indeed switch his assumptions in thecourse of one letter, the preceding reference to manufactured wage goods being in


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the nature of an aside (his ‘I admit at the same time’ suggests just this). Even so, thiswould not necessarily mean that in the event of a mixed wage basket he denied ageneral real wage fall, merely that he was not focusing upon it. Alternatively, it cannotbe excluded that his reference to a falling wage does in fact indicate the generalbasket. Gibbard recalls ‘the argument pressed upon [Ricardo] by Malthus and ac-knowledged in his own letters of 26 June and 25 July’, and insists that since Ricardocould not have forgotten them in December he must be using the ‘price effect’argument to assure his falling corn wage but a constant basket. This is unconvincing.Ricardo had acknowledged nothing in June and July regarding the ‘price effect’ case.In any event, what ‘price effects’ could Gibbard – who defines the ‘price effect’ interms of constant manufacturing prices – be attributing to Ricardo? Ricardo at thistime did not yet hold the prices of manufactures to be constant when the corn pricerises. And finally, there is an evident response to Gibbard’s complaint: ‘What Hol-lander does not explain is how a rise in the money wage relative to the price ofmanufactures, led Ricardo to conclude by 18 December 1814 that the real commod-ity wage would fall’ (470). The answer again is self-evident. Consider the extreme casewhere the prices of manufactures are in fact constant, having in mind for conve-nience Ricardo’s data in the Principles (above, p. 268). The money wage rises with thecorn price, the extent depending on labour market pressures. Should the rise in themoney wage be less than 14s. the worker could no longer buy the original basket. Hemight choose to maintain his manufacturing purchases and his corn consumptionor take the same amount of corn and fewer manufactures, though the simplest casewould be a reduction of the full range of his purchases. In all cases one would saythat the real basket is reduced. ‘A rise in the money wage relative to the price ofmanufactures’ does not therefore, preclude a fall in the basket, a lesson that can beapplied to the case at hand. Gibbard has taken us not a step further to show thatRicardo in the early correspondence used the ‘price effect’ argument.

I I I . T H E ‘ E S S A Y O N P R O F I T S ’ A N D I T S A F T E R M A T H

In his next Section Gibbard observes that ‘Had Ricardo indeed adopted New Viewreasoning by December 1814, as Hollander maintains, we might have expected it topermeate the argument of the Essay’ (471). He points out that I adduce just onepassage in support of a downward trend in the real wage. Gibbard might do me theservice of reading what I actually wrote. I did not claim in my account that thepassage in question implies a downward trend in the real wage commensurate withthe ‘continuous’ model (1990, 747–8 [above, Chapter 15, pp. 261–2]). I said to thecontrary (a) that there is a possible implication of a downward statistical trend – notof an analytical trend, and (b) that even this is followed immediately by a denial of

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any trend variation, in line with Ricardo’s assumption at the outset of the Essay thathe was going to ‘suppose ... that capital and population advance in the properproportion, so that the real wages of labour continue uniformly the same’. I empha-sized that Ricardo ‘had failed to take account of the fact ... that the secular processinvolving diminishing returns entails falling real wages’. How clear could one be?

But why not turn Gibbard’s own question on himself thus: ‘Had Ricardo indeedadopted the “price effect” argument in the 1814 correspondence, as Gibbard maintains,we might have expected it to permeate the argument of the Essay.’ Yet Gibbard isexplicit that the price effect is applied in the Essay ‘not to the question of wages butagainst the landlord’ (emphasis added), with ‘the impact on the labourer ... relegatedalmost to the status of an afterthought towards the end of the essay’ (I would pointout in a reference to what ‘Mr. Malthus thinks’). And after all those confidentassurances that the ‘price effect’ was applied by Ricardo in the 1814 correspondenceit is difficult not to be taken aback to read that ‘It was not until the post- Essay debatewith Malthus in the Spring of 1815 that Ricardo was to realize its full significance’(Gibbard 1994, 471).

As Gibbard points out regarding those post- Essay materials (474), in my Economicsof David Ricardo I myself discuss an illustration by Ricardo which assumes ‘the wagebasket to be composed of a fixed-proportions mix of corn and (manufactured)necessaries, the commodity wage to be constant, and per capita corn wages to fall inthe course of development as the relative price of food rises’ (1979, 157). He asks:‘Are we then to believe, that there were in fact two “thoroughly Ricardianfoundations”4 for wage movements at this time?’ My answer is yes. I take theillustration based on the assumptions just mentioned to be just that, an illustrationto get across a particular point but not to describe a full growth process; and it is‘thoroughly Ricardian’ since this is what appears in the Principles (above, p. 268). Asfor the growth process, Gibbard has somehow managed to miss Ricardo’s letter toMalthus of 10 January 1816 which confirms all that I have been maintaining, namelya fall in the real wage understood as the basket – not the corn wage due to ‘priceeffects’ – under pressure of diminishing returns:

I cannot think it inconsistent to suppose that the money price of labourmay rise when it is necessary to cultivate poorer land, whilst the real pricemay at the same time fall. Two opposite causes are influencing the price oflabour[:] one the enhanced price of some of the things on which wages areexpended, – the other the fewer enjoyments which the labourer will have thepower to command, – you think they may balance each then, or rather thatthe latter will prevail. I on the contrary think the former the more powerfulin its effects. I must write a book to convince you.

(Ricardo 1951, VII, 10)


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Gibbard and other opponents of the New View would do well to mull over thispassage carefully – including its closing sentence.

IV . THE ‘PRINCIPLES OF POLITICAL ECONOMY’

Gibbard (1994, 476) takes up my ‘challenge’ to confront the passage in the Principleson the downward impact on wages of decelerating capital accumulation (I, 101–2[above, pp. 246–7]). He concedes that it is ‘apparently a convincing passage in supportof the New View. ... Supply and demand it seems have become an integral part ofRicardo’s distribution mechanism in the Principles ’ (1994, 477); but he immediatelywithdraws his concession (478): ‘It is clearly something of a special case’, supportingthis by reference to a statement in the passage indicating that ‘every commodity onwhich the wages of labour were expanded rose’, whereas we know Ricardo at thistime held prices of manufactures constant, a position actually restated a few lineslater, namely that the manufactures ‘sell at no higher price’. Gibbard does well tobring this complexity to our attention, but he avoids the obvious conclusion.

First, we have Gibbard’s suggested rationalization for Ricardo’s assumption that‘every commodity on which the wages of labour were expended rose’ – the specialcase: ‘Possibly Ricardo chose this simplifying assumption to avoid the complexitiesof analyzing the impact of a falling rate of capital accumulation on a wage basketwhere relative values were changing’ (478). Now a couple of paragraphs later he asksrhetorically in the manner of an earlier reaction: ‘Had Ricardo truly been wedded tothe idea of a secularly declining real wage since December 1814, as Hollander insists,we might have expected him to insist on the prevailing strength of labour marketpressures’ (479). Does he not see that one can reverse the question: ‘Had Ricardotruly been wedded to the idea of “price effects” since December 1814 (actually sinceJune/July), as Gibbard insists, one might have expected him to insist on them indealing with the impact of a falling rate of capital accumulation’ – unless, that is, weare to take it that Gibbard and other critics deny deceleration of accumulation to bea principal Ricardian concern. To offer Gibbard’s rationale is simply to admit thatRicardo does not use ‘price effects’ in the analysis of that standard problem.

Gibbard then asserts that Ricardo’s assumption that all wage-goods’ prices rise isin effect ‘to treat the wage as though it consisted only of corn’ (478). This implies aproportionate increase of all wage goods’ prices – a matter I take up shortly; but itshould have been obvious to Gibbard that he has destroyed his own case by allowingthat in this case ‘with capital accumulation lagging behind population growth ... thecorn wage and real wage must both fall’ – since this recognizes the market mechanism actingto depress the real wage which I insist upon, and undermines the notion of a constant real wageduring the course of growth characterized by decelerating accumulation.

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Gibbard’s presumption that where Ricardo allows the prices of manufactures torise it is a proportionate rise that was intended is unjustified. Any increase inmanufacturing prices reflects specifically an increase in the real costs of producingraw materials as in the passage cited by Gibbard himself (479, from Ricardo 1951, I,104) and elsewhere in the chapter ‘On Profits’: ‘There are few commodities whichare not more or less affected in their price by the rise of raw produce, because someraw material from the land enters into the composition of most commodities. Cottongoods, linen, and cloth will all rise in price with the rise of wheat; but they rise onaccount of the greater quantity of labour expended on the raw material from whichthey are made, and not because more was paid by the manufacturer to the labourerswhom he employed on those commodities’ (I, 117–18). But there can surely be nodoubt that Ricardo never relinquished the notion that the corn price rises relative tothe prices of manufactures during the course of growth. Since that is so, nothingneed have prevented him from incorporating the ‘price effect’ formally to derive afalling corn wage and a constant wage basket in the growth analysis had that been hisintention. Notice that he does incorporate it informally when he reverts to hisillustrative data (above, p. 268) leaving it to his readers to provide a numerical example:‘In all these calculations I have been obvious only to elucidate the principle. ... Myobject has been to simplify the subject, and I have therefore made no allowance forthe increasing prices of the other necessaries, besides food, of the labourer; anincrease which would be the consequence of the increased value of the raw materialsfrom which they were made, and would of course further increase wages, and lowerprofits’ (I, 121–2).

Assume, therefore, that while the corn price rises by 5.8 per cent, that ofmanufactured wage goods also rises but by half as much, namely by 2.9 per cent; inthis case the money wage must rise from £24.00 to £25.05 (rather than to £24.70) toassure a constant wage basket, the corn wage falling to 2.36 (rather than to 5.83)quarters. So the ‘price effect’ emerges when manufacturing prices rise as far as theillustration is concerned. Yet Ricardo insists on a falling commodity wage when dealingwith genuine growth, i.e. with decelerating accumulation, maintaining that thelabourers ‘will receive more money wages but his corn wage will be reduced; and notonly his command of corn, but his general condition will be deteriorated, by his findingit more difficult to maintain the market rate of wages above their natural rate’ (I,102; emphasis added).

It is also necessary to correct an analytical error on Gibbard’s part. He asserts that‘Ricardo’s theoretical dilemma is acute’, since should the ‘prices of all wage goods,including manufactures ... rise, then the clear-cut conclusion that manufacturingprofits will fall with the onset of diminishing agricultural returns, is lost’ (Gibbard1994, 478). This, of course, is not so since the rise in manufacturing prices reflectsspecifically and solely the increased real cost of producing raw materials not the increase


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in the (money) wage as the passages I cite above make clear; the inverse wage– profitrelation holds good, and there is no ‘acute dilemma’ in accounting for the fall in themanufacturing profit rate. And since Ricardo’s general conclusion regarding a fallingreal wage (general basket) holds good whether or not manufacturing prices rise, we mayunderstand better his rather cavalier switching between assumptions on this matter.

V. RICARDO’S ‘NOTES ON MALTHUS’

Gibbard’s remarks on the Notes on Malthus are largely irrelevant. The quote givenfrom Ricardo 1951, II, 98 does not assert a constant basket; it is beyond me on whathe bases the assertion that this passage indicates that ‘As capital and populationadvance, the rise in the price of corn, consequent upon increasing difficulty ofproduction, induces a rise in the money wage sufficient to sustain the real wage at its“natural” level’ (1994, 481). Gibbard seems to think that a mixed wage basket, a risein the corn price relative to the price of manufactures and a rise in the money wagerelative to manufactures necessarily imply a constant basket. They do not (above, p.272).

Ricardo did certainly sometimes revert implicitly in his Notes on Malthus to theillustrative data of the Principles, as for example II, 78 where the reason given for themoney wage rising less than the corn price is that ‘corn is not the only thingconsumed by the labourer’ rather than because of market pressures, but this is notindicative of the full growth process entailing deceleration of accumulation. Heresorted to simplification as usual when his concern – in this case the measurementof value – did not require a full account. Even so, one finds instances of unambiguousdecline in the basket in the measurement context as, for example, in a letter toMcCulloch (written at the time of composing the Notes) where Ricardo adopts forargument’s sake Malthus’s special silver measure:

If produced by labour only – if half an ounce of silver could be picked upon the sea shore by a day’s labour, the natural price of labour would bealways half an ounce of silver, it could neither rise nor fall. Corn mighthowever be produced with more difficulty, and by the rise of its price, thewages of the labourer would be less adequate to procure him comforts and conveniences.In this case I should say wages would rise, because I always measure the rise ofevery thing by the quantity of labour necessary to produce it, and the wagesthough less in quantity would require more labour to produce them.

(2 May 1820; Ricardo 1951, VIII, 179; emphasis added)

As for the full account, that is intimated in Ricardo’s acceptance of Malthus’sstatement of a falling wage trend involving market pressure. Gibbard admits all Iwould ask for: ‘It is, it seems, a highly significant concession, providing clear evidence

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that, by 1820, Ricardo had come to accept Malthus’s position on this central question’(1994, 482). But Gibbard will still have none of it, pointing to revisions made byMalthus in manuscript notes to his own Principles (first published in 1989) involvingthe substitution of corn wages for real wages in the extract in question. Am I expectedto take this seriously? These are Malthus’s revisions not Ricardo’s and of no relevancefor the issue of Ricardo’s position. In any event, Malthus’s modification does notaffect his insistence on labour market pressures on the corn wage due to deceleratingaccumulation; all that is retained. Gibbard’s claim to the contrary results from theerroneous belief that a fall in the corn wage can only reflect ‘price effects’.

VI. CONCLUSION

Why the contortions on the part of critics of the New View to avoid facing theevidence that Ricardo has market processes at play in his growth model and theinsistence that growth proceeds in his model at a constant real wage despite all theillogicalities created by that constraint? And why the panic when a critic slackens inhis opposition? I suggest that any answer should take into account the followingconsideration. Gibbard apparently accepts that Ricardo addressed the issue of adecelerating rate of accumulation under pressure of land scarcity (above, p. 274).That is the cause of downward pressure on the real wage, though for Gibbard this isa ‘special case’ which reduces to corn only. He is wrong on this as I have shown, buttaking him at his word he still has not been able to remove the market pressures inquestion. He cannot make them disappear at a wish. And there is the rest of theelaborate Ricardo text involving market pressures in the reverse direction forcingreal wages up over the long period:

In different stages of society, the accumulation of capital, or of the means ofemploying labour, is more or less rapid, and must in all cases depend on theproductive powers of labour. The productive powers of labour are generallygreatest when there is an abundance of fertile land: at such periods accumulationis often so rapid, that labourers cannot be supplied with the same rapidity ascapital.

It has been calculated, that under favourable circumstances population maybe doubled in twenty-five years; but under the same favourable circumstances,the whole capital of a country might possibly be doubled in a shorter period.In that case, wages during the whole period would have a tendency to rise,because the demand for labour would increase still faster than the supply.

(Ricardo 1951, I, 98)

All this must be meaningless to Gibbard. In fact, only if the growth problem iserased from the agenda is it possible to argue for a constant real wage. I would not


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be surprised were the source of much of the hostility to the New View to be foundjust here, since secular variability of the wage basket undermines the entire conceptof surplus.

NOTES

1. Ricardo was opposing Malthus’s position that agricultural protection reduces aggregateoutput more than aggregate demand thereby raising the return on capital, since thisposition neglected the negative impact of a higher corn price on the demand formanufactured goods. How would such an impact work? Since it operates even withmanufacturing prices unchanged Ricardo must be assuming some kind of income effectdue to the corn-price increase. A mixed wage basket is then implied unless this economizingbehaviour refers specifically to non-wage earners assumed to purchase food as well asmanufactures, as in the treatment of corn taxation in the Principles : ‘it is not necessarythat my demand for corn should diminish as I may prefer to pay £100 per annum morefor my corn, and to the same amount abate in my demand for wine, furniture, or anyother luxury’ (1951, I, 237). There is a fortiori a contraction in the demand for manufacturesshould their prices rise with the price of corn, which they will do we are told. (This is clearerstill on July 25: ‘It appears to me that the difficulty and expense of growing corn willnecessarily regulate the demand for the products of capital, for the demand [our quantitydemanded] must essentially depend on the price at which they can be afforded, and theprices of all commodities must increase if the price of corn be increased’ (VI, 114).) Thislatter would certainly include demand for manufactures by non-wage earners.

2. In fact, the ‘price effect’ might operate even when manufacturing prices rise provided therelative corn price rises [see below, p. 275]. A belated correction in this respect will not savethe paper considering its remaining deficiencies.

3. I once believed the passage contained an error [above, p. 38, n.13]. It does not as thefollowing example shows. I apologize to Ricardo; but it becomes even clearer now, that heprobably had in mind in this instance a capital consisting only of corn wage goods.The first line indicates the initial situation; the second, the new situation assuming thatthe corn wage per man falls in proportion to the productivity decline; the third, the newsituation with a decline of only 25 per cent; and the fourth, the new situation with a yetsmaller decline of 10 per cent such that ‘the capital to be employed estimated in moneywill probably be also nearly doubled’. This formulation is correct if line 4 is compared withline 2 rather than line 1.

1 2 3 4 5 6 7 8 9Corn Labour Corn Total Corn ‘Capital Gross Net Profit

output (men) wage corn price estimated sales sales rate(qs) per man wages $ in money Rev. $ Rev. $ (8/6)

(4 x 5) (1 x 5) (7 - 6)

1. 100 50 1.0 50 5 250 500 250 100%2. 100 100 0.5 50 10 500 1000 500 100%3. 100 100 0.75 75 10 750 1000 250 33%4. 100 100 0.9 90 10 900 1000 100 11%

4. This from Hollander 1975, 197, in my account there of the illustration [above, p. 53].

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REFERENCES

Gibbard, K. (1994) ‘Hollander’s Textual Interpretation of Ricardian Growth Theory: AReconsideration’, History of Political Economy 26: 464–85.

Hollander, S. (1975) ‘Ricardo and the Corn Profit Model: Reply to Eatwell’, Economica 42:188–202.

—— (1979) The Economics of David Ricardo, Toronto: University of Toronto Press.—— (1990) ‘Ricardian Growth Theory: A Resolution of Some Problems in Textual

Interpretation’, Oxford Economic Papers 42: 730–50.Ricardo, D. (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 vols),

Cambridge: Cambridge University Press.

Part V

FURTHERINTELLECTUAL

LINKAGES

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I am concerned in this paper with two central themes of the modern literature onclassical economics: the supposed early demise of ‘Ricardianism’, and the relatednotion of a ‘dual’ development of nineteenth-century theory entailing, on the onehand, typically Ricardian procedures and on the other embryonic neo-classicalprocedures. My investigation reveals an impressive resilience of the fundamentalRicardian theorem on distribution, and its derivation in terms of the standardmeasure of value, amongst the so-called ‘dissenters’ as well as those traditionallyclassified as members of Ricardo’s school; and it casts doubt on the historical accuracyof a welldefined duality of analytical development. An introductory word is inorder regarding the secondary interpretations, and the precise scope of the presentarticle.

The key features of the Ricardian theory of distribution, as it is now generallyexpounded, are its conception of real wages as a social or institutional datum, andthat of profits as a form of residual. (In the more complex models attributed toRicardo – in contrast to the simple singlesector models – distribution is said to havelogical priority over exchange values in the sense that the price structure is knownonly after the prior and independent determination of the wage and profit rates.) 1

Ricardian procedure is sharply contrasted with that of the neo-classical (generalequilibrium) economists either to its advantage or to its disadvantage. Thus fromone perspective it is said that scientific economics requires the treatment of productiveorganization within a general-equilibrium context wherein the returns to theproductive factors are envisaged as the competitively determined prices of services;Ricardian procedure thus appears to constitute the arbitrary reduction of the numberof variables in the system leaving one variable (profits) to be determined residually(Schumpeter 1954, 568f; Knight 1956, 37–88). But from another perspective it is thegeneral-equilibrium approach that is defective; the function of the economist is seento consist precisely in the specifications of ‘causal’ or one-way relations whereappropriate (Pasinetti 1974, 44), and great merit is attached in particular to the

18

THE RECEPTION OFRICARDIAN ECONOMICS*


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specification of the real wage in cultural or institutional terms and the treatment ofprofits as residual.

The notion of a dual development of nineteenth-century analysis is shared by moderncommentators from whichever of the diametrically opposed perspectives they mayview the early literature. One stream of nineteenth-century doctrine – the non-Ricardian stream – is said to originate in Adam Smith’s ‘adding-up-components’theory whereby competition, through the operation of supply and demand, assuresthat market prices gravitate towards ‘natural’ prices defined as the sum of unit wage,profit and rent costs; in this scheme the factors themselves are paid at their naturalrates determined, in their turn, by the general conditions of demand and supply infactor markets. The embryonic neo-classical approach of Smith is identified in thework of Turgot, J.B. Say, Lauderdale and Malthus, and in the later writings of theLongfield–Senior group of ‘dissenters’ from Ricardianism, J.S. Mill, Jevons andMarshall (Schumpeter 1954, 465, 474, 568, 673n; Dobb 1973, 44f, 112f).

The second or Ricardian line, runs the argument, was short-lived although revitalizeddecades later by Marx. According to the reading of the record by Schumpeter theRicardian system ‘failed from the start to gain the assent of the majority of Englisheconomists’, and by the early 1830s ‘was no longer a living force’ (1954, 478). 2 Thisposition is much the same as that of Marx, although for Schumpeter Ricardo’s poorfortune was a welcome sign while for Marx the (supposed) early demise was a symptomof the degeneration of economic science; 1830 was for Marx the dividing line between‘scientific’ and ‘apologetic’ economics. 3

It was in fact Schumpeter’s belief that J.S. Mill must be excluded from that groupwhich constitutes Ricardo’s ‘school’. 4 This evaluation is equally characteristic ofMarxist interpreters. Marx himself speaks of Mill’s work as an example of the ‘eclectic,syncretistic compendia’ which characterized the period after the collapse of ‘scientific’political economy in 1830 (1973, 883). Along these lines Maurice Dobb has observedof Mill: ‘when looking back on him from a distance one can see quite clearly that inmajor respects his own work was much nearer to Marshall than it was to Ricardo;and that so far as his theory of value was concerned, on the contrary to continuingand improving on Ricardo, in essentials he took his stand on the position of Smithwhere Ricardo had been opposing him’ (1973, 122). 5

In his volume on J.R. McCulloch, Professor O’Brien has added his authority tothe view that the central Ricardian model suffered a serious decline soon after Ricardo’sdeath. For it is the general theme of this work that while McCulloch ‘did much topopularize economics ... it was not Ricardo’s economics that he was popularizing’(1970, 402–3).6 McCulloch, runs the argument, must be considered as full square inthe Smithian tradition. A similar revisionist interpretation has recently been putforward regarding De Quincey (Groenewegen 1974, 193).

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THE RECEPTION OF RICARDIAN ECONOMICS

We shall be concerned with the two issues raised in the preceding account: thesupposed early demise of Ricardianism and the related notion of a dual developmentin nineteenth-century economics. Needless to say it is impossible to approach thesematters without a rather precise specification of the Ricardian paradigm, extendingbeyond the general questions of doctrinal position and archetypal method.Investigation not only of the content but also of the origins of Ricardo’s Principles –particularly the process whereby Ricardo, in Spring 1813, commenced to discernwhat he considered to be a number of logical errors in the Smithian position –suggests that what is characteristically ‘Ricardian’ is the use of a special theory of valueinvolving an absolute standard in the derivation of the inverse relationship betweenwages and profits – the famous fundamental theorem on distribution. 7

In the Ricardian structure, an increase in the proportionate share of wages appearsas an increase in wages, expressed in terms of the measure of value – a commodityproduced with constant labour input and thus constituting a labour-embodiedunit. An increase in per capita ‘gold’ wages implies a rise in the labourer’s share in percapita output which is necessarily of constant ‘value’. The entire Ricardian scheme isthus designed to relate the rate of return on capital to the ‘value’ of per capita wages(Ricardian ‘real’ wages) – which in effect amounts simply to the proportion of thework day devoted to the production of wages – and variations in the rate of returnto (inverse) variations in the ‘real’ wage rate.

It follows from the basic analysis that – assuming unchanged input coefficients inthe production of the monetary metal, or ruling out nominal changes in moneyvalues – wage-rate increases are non-inflationary and at most generate an alteration inrelative prices within limited bounds; capitalists are unable to pass on increasedwage costs in the form of generally higher prices. This fundamental conception, itmust be emphasized, was initially formulated as a direct challenge to received doctrinebased upon Adam Smith’s analysis whereby wage-rate increases are passed on bycapitalists in the form of higher prices in manufacturing industries and lower rentsin agriculture. Here lies the essence of the Ricardian contribution. The significance– indeed the objective – of Ricardo’s work cannot be accurately evaluated unlessplaced in this historical context. 8

It is my primary conclusion that the Ricardian theorem on distribution – theinverse wage–profit relationship – left a firm and positive impression on the workof a number of authors normally regarded as ‘dissenters’ par excellence – includingMalthus, Bailey, Torrens and Longfield – and this despite their frequent formalcriticisms of Ricardo and his followers and their declared objective to break newground or at least to refute the merit of Ricardo’s divergencies from the Wealth ofNations. 9 Although I shall only briefly consider the status of McCulloch, J.S. Mill and


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Thomas De Quincey, it is my belief that to play down their adherence to Ricardianismand place them in Smith’s camp as far as concerns the theory of value and distributionis unjustified. 10

A demonstration of the resilience in the works of the dissenters of the Ricardiandistribution theorem raises some serious questions regarding the legitimacy of thenotion of a dual development in the course of nineteenth-century economic analysis.These doubts are reinforced by two further circumstances. My investigation revealsa very considerable degree of disagreement within the group of dissenters. The fact isthat there occurred no concerted attack on Ricardo. Of particular significance foran accurate perspective is the weight of objection directed by various ‘dissenting’writers against Bailey, frequently regarded as the head of the line of Ricardo critics.Secondly, it becomes clear that in many cases the criticisms constitute amisunderstanding of Ricardo’s position, while in others the contributions of thedissenters would not have been considered objectionable by Ricardo. I have inmind particularly in this latter category the emphasis upon the relativity dimensionof exchange value (Bailey); the scarcity theory of rent (Thompson, Senior); theinsistence that the cost determination of price operates by way of demand–supplyvariation (Malthus); the principle of diminishing marginal utility (Lloyd); and theabstinence approach towards interest (Longfield, Scrope, Read, Senior). But ofoutstanding significance is the application of market demand–supply analysis tolong-run wage determination (Malthus, Longfield, Torrens, Read, Scrope, Senior).Ricardo I believe stood squarely in the Smithian tradition regarding wage theory.The notion of a subsistence wage as central feature of his system, the key theme inmodern representations of Ricardian economics, has been seriously exaggerated. 11

I . T H E D I S S E N T I N G C R I T I C S

I shall give some indication in this section of the extent of adherence to the inverseprofit–wage relationship amongst several of the main writers usually classified asdissenters. As already indicated, the acceptance of Ricardo’s position implies – andthis implication was usually well understood by nineteenth-century economists – therejection of key features of Smithian analysis.

I wish first to emphasize that Malthus himself, who is commonly taken for grantedto be a severe critic of the Ricardian theory in fact accepted much of its substance.It is a serious error to neglect the extent of his accord with the inverse theorem.Thus in his famous Quarterly Review article for 1824 treating McCulloch’s EncyclopaediaBritannica contribution of the previous year Malthus wrote: ‘Of all the truths whichMr Ricardo has established, one of the most useful and important is, that profits aredetermined by the proportion of the whole produce which goes to labour. It is,indeed, a direct corollary from the proposition, that the value of commodities is

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resolvable into wages and profits; but its simplicity and apparent obviousness donot detract from its utility’ (1963, 189). Similarly: ‘We fully agree with the author ofthe present treatise, that when it is said that profits depend on wages, they must notbe understood to depend on wages estimated in money, in corn, or in any othercommodity, but on proportional wages, that is, on the share of the commoditiesproduced by the labourer, or of their value, which is given to the labourer’ (199).His only substantive criticism is of the unsatisfactory manner in which the divisionis actually determined by Ricardo. The inverse profit-wage relationship, he insisted,is ‘only one important step in the theory of profits, which of course cannot becomplete till we have ascertained the cause, which under all circumstances, regulatesthis proportion of the whole produce which goes to labour immediately andaccumulated’ (189). Malthus also believed that his own doctrine relating to the roleof aggregate demand stood up empirically better than the Ricardian emphasis uponthe difficulty of production on the land in accounting for the (supposed) historicaldecline in the profit rate, but at the same time insisted that the evidence accorded‘most perfectly with the more general proposition of Mr Ricardo respecting profits,namely that they are determined by the proportion of the whole produce whichgoes to labour’ (198). 12

That Malthus accepted the substance of Ricardo’s position is also confirmed by anote of fundamental import attached to his Measure of Value (1823). Malthus hadobserved in the text that ‘it may be laid down ... as a general proposition, liable tono exception, that when the value of any produce can be resolved into labour andprofits, then as the proportion of such produce which goes to labour increases, theproportion which goes to profits must decrease in the same degree, and as theproportion which goes to labour decreases, the proportion which goes to profits mustincrease in the same degree’ (1957, 28–9).13 To this he added:

This proposition is essentially the same as that which is very clearly and ablyexpressed by Mr Ricardo in his chapter On Profits in the following terms:‘in all countries and at all times profits depend on the quantity of labourrequisite to provide necessaries for the labourers on that land, or with thatcapital which yields no rent’; a proposition which though incomplete inreference to the ultimate causes of the variations of profits, contains a mostimportant truth. From this truth the legitimate deduction appears to me tobe, the constant value of labour; but Mr Ricardo has formed his system ona deduction exactly opposite to it. He has, however, in my opinion, amplycompensated for the errors into which he may have fallen, by furnishing us,at the same time, not only with the means of their refutation, but the meansof improving the science of Political Economy.

(Malthus 1957, 29)


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The criticisms alluded to briefly in the foregoing passage relate to Ricardo’s(supposed) failure to deal satisfactorily with real (basket) wage-rate determinationand to the tortuous issue of the measure of value. Communications virtually brokedown between the correspondents on the latter issue. But from our present perspectiveone outstanding fact remains; namely, Malthus’s insistence that by the relationshipwhich he envisaged between the constancy of the value of a given command overlabour and the proportionate shares, he was attempting to convey precisely the sameconcept as Ricardo himself.

Schumpeter gave the central place to Samuel Bailey amongst those who reactedagainst orthodoxy: ‘Bailey’, he maintained, ‘attacked the Ricardo– [James] Mill–McCulloch analysis on a broad front and with complete success. His Dissertation,which said, as far as fundamentals are concerned, practically all that can be said, mustrank among the masterpieces of criticism in our field, and it should suffice to secureto its author a place in or near the front rank in the history of scientific economics’(Schumpeter 1954, 486). More specifically, he showed convincingly ‘the defects ofthe concept of real value and of the Ricardian theory of profit’ (599).

Let us consider this evaluation. While Bailey maintained that the notion of aninvariable standard ‘amidst universal fluctuations’ involves an inherent contradiction,it is quite clear that this follows from his own definition of value as price, orexchange value. His case turns out to be a purely terminological one:

The specific error of Mr Ricardo on the subject of invariable value consists... in supposing, that if the causes of value affecting one commodity remainedthe same, the value of that commodity could not vary, overlooking thecircumstance that value denotes a relation between two objects, which mustnecessarily alter with an alteration in the causes affecting either of them. Heincessantly identifies constancy in the quantity of producing labour withconstancy of value. Hence he maintains, that if we could find any commodityinvariable in the circumstances of its production, it would be in the firstplace invariable in value; and, 2ndly, it would indicate, or would enable usto ascertain, the variations in value of other commodities.

(Bailey 1825, 121)

In point of fact a commodity produced with a constant labour input, Bailey ob-served, ‘would enable us to ascertain, not the fluctuations in value between two ormore commodities (for these are facts to be gathered from appropriate evidence),but the fluctuations in the quantity of labour which produced them’ (124). Alterna-tively expressed, we would be enabled to establish in which commodity ‘those [ob-served] fluctuations had originated’ (121). Now this renders precisely the purpose of Ricardo’smeasure, and the critique amounts to no more than an unwillingness to use the term ‘value’ in

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the Ricardian fashion. Bailey himself seems to concede as much: ‘Many of the stric-tures, which have been made on Mr Ricardo’s writings ... would be in some degreeobviated if two things were conceded, namely, if we assumed that he was constantlyspeaking of real value, and if we were to grant him the absurdity which we haveshown this expression to imply; or, in other words, if we were to consider it asimporting [ sic] cost of production, without relation to the power of commandingin exchange’ (253). 14

The terminological penchant of the book is also evident from Bailey’s commentsupon Ricardo’s identification of a change in the ‘value’ of wages – wages in terms of theinvariable measure – with a change in the proportion of wages in aggregate output,that is the representation of labour as rising or falling in value ‘only when a largeror smaller proportion of the commodity produced goes to the labourer’. For Baileysimply altered the sense of the term ‘value’ to refer to exchange-value; from which itfollowed that a change in the proportion of wages in total output was only oneamong several possible causes of variation in the ‘value of labour’, that is Bailey’sterm for commodity wages (46). On this terminological usage, when allowance is madefor changes in aggregate output generated by increased labour productivity, andneglecting rent, wages and profit may both vary in the same direction. 15 As Baileypointed out towards the close of his work his contention was simply ‘that in casesofi mproved productive power, the product might be so divided, that the rate ofprofits [identified with the profit share in output] should be increased while thevalue of labour [the commodity wage] was enhanced’ (241).

This conclusion, however, is totally in accord with Ricardian analysis. Bailey’scriticisms of the inverse profit–wage relation were evidently not directed at Ricardo’sposition as Ricardo understood it. When Bailey actually considered this matter heconceded frankly enough the legitimacy of Ricardo’s case:

Mr Ricardo’s inference is a legitimate deduction from his premises, if weconcede certain postulates. Grant him the kind of value called real, which hasno relation to the quantity of commodities commanded, but solely to thequantity of producing labour, and it inevitably follows, that there could beno alteration in the real value of labour, but from an alteration in theproportion of the product which went to the labourer. Neither, if moneywere always produced by a uniform quantity of labour, could there be anyalteration in the money-value of labour.

(Bailey 1825, 58n)

Indeed, Bailey’s recognition that the profit rate falls when commodity wages rise(given labour productivity) runs along strictly Ricardian lines, involving as it doesthe proposition, which conflicts with that of Adam Smith, that capitalists cannot


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pass on the higher wage costs to consumers in the form of higher prices, since theprices, that is the exchange values, of all commodities cannot logically be raisedsimultaneously:

If labour rises while [its] productive powers remain the same, profits willinevitably fall. This may be easily proved from the principles already advanced;for if labour rises in value, whoever purchases labour must give a greaterquantity of other things for it, and as the capitalist purchases labour, hemust pay more for it. It will be said, perhaps, that he may raise the value ofhis goods, that is, he may require a greater quantity of other commoditiesthan before, in exchange for his own. But the capitalist who produces theseother commodities is in the same predicament, and they cannot both raisetheir goods ... it is a contradiction to maintain, that a universal rise in thevalue of labour can increase the value of commodities.

(Bailey 1825, 64–7)

Bailey’s acceptance of this basic Ricardian objection to Smith cannot be ignored.It follows that Schumpeter’s high praise for Bailey on the grounds that he showed

convincingly the ‘defects of the concept of real value and of the Ricardian theory ofprofit’ is scarcely justified. Bailey failed on the whole to analyse Ricardo’s objectivesin devising his measure, concentrating as he did upon terminology, but he nonethelessaccepted the accuracy of Ricardo’s position regarding the profit–wage relationshipon Ricardo’s use of terms and rejected Smith’s view of the relation between wages,profits and prices. The entire Bailey episode has been overdone as an indication ofrevolt against Ricardo.

It is also pertinent that Bailey himself presented no alternative model, 16 althoughhe did show a preference for far greater ‘generality’ than was apparent among theRicardians, and in his conclusion he emphasized the oversimplification characteristicof Ricardian method. Even in this regard he made allowances, conceding that Ricardohimself had recognized increasing costs and therefore elements of ‘scarcity’ or of‘partial monopoly’ – utilizing the early nineteenth-century term for less than infinitelyelastic supply – at least in the case of corn and gold. He took issue with Ricardo’sformal position that ‘commodities can be classified according to the “source” oftheir exchangeable value’ – namely ‘scarcity’ and the quantity of labour embodied –and attention focused upon the latter since this group is quantitatively the mostsignificant; and in dealing with price formation he talked of the role of ‘considerationsacting on the human mind’ (227–8). Yet at the same time the ‘main considerations’in this context are said by Bailey himself to be production costs (199).

In fact, insofar as concerns matters involving the so-called ‘causes of value’ – thatis the theory of price – there is no divergence of substance between Ricardo and Bailey.

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Bailey generalized the conception of differential rent to apply to labour but alsoadopted the position that rent is not a ‘cause’ of value (197), while his insistence thatrent may be generated even in the absence of differential land qualities, by dint ofland scarcity, was conceded also by Ricardo. Bailey forcefully rejected statements ofthe labour theory by James Mill, De Quincey and McCulloch (207–8), but was lessharsh with respect to Ricardo himself who, he recognized, qualified the theory (213–14).17

C.F. Cotterill’s famous comment that there are ‘some Ricardians still remaining’ ledProfessor Schumpeter to conclude that ‘the decay of the Ricardian school must havebecame patent’ shortly after Bailey’s contribution (1954, 478). It is not, however,difficult to show that it is unjustified to draw such broad implications from what inany event is a most ambiguous statement, for the fact is that Cotterill also refers tovariations of exchange value proportionate to alterations in relative labour input asa proposition which ‘most economists maintain’ – in contrast to Smith’s positionrelating increases in prices ‘to the rise in wages’ (1831, 107).

Space limitation precludes a full demonstration of the fact that much of Cotterill’scriticism of Ricardo was misplaced. We wish, however, to emphasize Cotterill’srecognition of the need for an ‘invariable standard’, and his belief in the possibility ofits construction. Amongst the most important features of his pamphlet Cotterill himselfcounted the statement of ‘the conditions necessary to a standard of value’ and therefutation of ‘the erroneous doctrine that the supposition of such a standard involvescontradictory conditions’ (v). And it was Bailey (as well as Torrens) whom he largelyhad in mind by this latter statement (99). 18 His main objection as far as concernedRicardo himself was to the specific character of Ricardian ‘money’ as an invariablestandard – in his estimate it was impossible to talk meaningfully of exchange value interms of such a medium – but not to the principle of the matter. In fact Cotterillhimself provided illustrations of the ‘correct’ procedure designed to guarantee thataggregate money value remains unchanged in the face of an alteration in distribution(76). And he candidly recognized Ricardo’s contribution to the proposed solution:‘The conditions, however, essential to an invariable standard, do appear to me sovery obvious, especially upon Mr Ricardo’s own principles in opposition to AdamSmith’ (75n).

H. Merivale’s single adverse comment on Ricardian rent theory – ‘a lapsis offensionis,startling and offending many’ – cannot safely be regarded as indicative of a generallyhostile position as is sometimes maintained (Gordon 1969, 378). The review inquestion considered in its entirety is not hostile. On the contrary, Merivale supportedRicardian method which he talked of as the method of the ‘modern English school’(1837, 77, 79–80), and was very favourably disposed to McCulloch’s edition of the


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Wealth of Nations since it indicated ‘the principal notions of an erroneous characterwhich pervades the whole of the great work of Dr Smith’. By contrast, ‘Mr Ricardoinvestigated the fundamental truths of the science with singular profoundness; histheories, while they have led many followers astray, have nevertheless penetratedthoroughly into all subsequent lucubrations on the subject and he may be regarded,more justly than any other, as the real founder of the school which at present existsin England’ (1840, 429).

We turn now to Longfield. Mountifort Longfield probably represents for historiansof economic thought the most original of that group of writers known variouslyas ‘the Dissenters’, ‘the Men who Wrote above Their Time’, and ‘Voices in theWilderness’. Professor Seligman referred to him in his celebrated paper ‘On SomeNeglected British Economists’ as ‘in some respects the most remarkable of all’(1903, 525), and Professor Schumpeter wrote of Longfield that ‘he overhauled thewhole of economic theory and produced a system that would have stood up wellin 1890’ (1954, 466). Professor Blaug has maintained that ‘of all the treatises onpolitical economy which appeared in the 1830’s the most original was Longfield’sLectures’ (1958, 159), and Professor Bowley awards Longfield ‘the title of the firstof the Victorian economists, or perhaps the first of the neo-classics’ (1973, 217).We may also refer to the following evaluation by Professor Black in his Introductionto the recently published Economic Writings of Mountifort Longfield : ‘It would certainlybe wrong to represent Longfield’s analysis as a complete anticipation of neo-classical pricing and distribution theory. Yet whatever limitations it may have,whatever classical elements may be left, incompletely integrated, within it, the factremains that it is a fundamentally and systematically different analysis from theRicardian one .... Only Longfield, amongst those who wrote in English at thisperiod, offered his readers a theory of value which was complete – and completelyoriginal’ (1971, 15–16).

In our view the flavour of much of the discussion of the Lectures is unmistakably‘Ricardian’. We have in mind the emphasis upon long-run cost price, the choice ofa labour measure of value, the rationale given for such choice in terms of theoverwhelming role played in price determination by alterations in labour input,and the exclusion of alterations in relative wages or relative profits as a source ofdisturbance. It has been observed of some of these Ricardian features that theyappear in the early lectures given at Dublin in the Trinity term of 1833, while allLongfield’s ‘original contributions’ occur in the sixth and later lectures given in theMichaelmas term. His conception, runs this argument, altered as the year progressedand only by late 1833 was he in a position to formulate the subjective theory ofvalue and the productivity theory of distribution. It was during the period betweenterms in mid-1833 that Longfield ‘seems to have decided to break away from classical

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distribution theory and from Lecture VI on his analysis proceeds with impressiveoriginality’ (13).

If, however, we examine this hypothesis closely it will be found wanting in severalrespects and it is our view that, on the whole, Longfield retained a Ricardian structurethroughout. At the very commencement of Lecture VI – where the fullest treatmentof demand is undertaken – the main Ricardo-like propositions regarding value arere-stated. Thus the labour measure is again justified as a suitable (though not unique)measure: ‘as most of the commodities in which the wealth of the country consists areproduced by labour, political-economists make use of it as a measure of value’(Longfield 1834, 109). And it is in Lecture VIII where we read that ‘all the commoditieswhich men consume, and which can be made the subject of exchanges, owe theirexistence and their value to labour. The exceptions to this are very trifling, and areof such a nature that they do not vitiate any of the conclusions drawn from it’ (164).Moreover, the assumption of a constant wage and profit structure is maintainedthroughout the book. The secondary importance of demand theory as far as concernsthe main issue of distribution is also quite apparent in the sixth lecture, which islargely devoted to the theory of rent.

The differential rent theory served for Longfield precisely the same function asfor Ricardo, namely to permit the focus of attention upon the wage–profitrelationship: ‘This analysis I shall enter upon, merely for the purpose of disengagingthe cost of production from this element of complexity, and thus of renderingquestions concerning wages and profits more simple, by freeing them from a sourceof confusion and vicious reasoning, in circles to which they are particularly liable’(116). (The same theme is reiterated in the seventh lecture; 132.) 19 We must here takeinto consideration also Longfield’s rejection of Malthus’s insistence – evidently derivedfrom Smith – upon the multifold uses of land which renders rent a cost in any singleuse: ‘I cannot agree with Mr Malthus, in supposing that the rent which the worstland could pay, as pasture land, should be deemed part of the cost of production ofcorn’ (148).

Thus the standard rent theory presented in Lecture VI was not only accepted byLongfield but defended competently along lines which, for the most part, wouldhave been favoured by Ricardo. The only matter with which Longfield took issuerelated to some formal data in the Principles which imply a continually increasingproportion of rent in total produce (153f). Yet we know that Ricardo himself didnot stand by this relationship and altered his text at various points in the thirdedition to avoid any such implication.

Longfield defined profits as a ‘discount which the labourer pays for promptpayment’, or as the ‘sacrifice of the present to the future’ by the possessor of wealth‘who uses it as capital’. But he recognized that these expressions merely constitute adefinition of ‘what profits are’ (179). He also attempted to show ‘how their amount


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is calculated’, and in the course of this exercise he was led to define – as he phrasedthe issue in the Preface – ‘the meaning of proportional wages as they regulate profits’(xi), and to defend the Ricardian conception against criticisms by Torrens and McCulloch. Weare faced with a quite extraordinary reversal of roles.

Assuming that all advances are made for one year, and also that all advancesconstitute wages, the rate of profit can be defined as ‘the proportion in which thevalue of any commodity is divided between the labourer and the capitalist’ (171). 20

‘This proposition’, he conceded, ‘may be considered useless or untrue, as dependingupon false suppositions. It is, however, true in those cases in which it does apply,and all other cases may, with a little care, be reduced to them.’ And now it becomesclear for what ultimate purpose the measure of value was devised. ‘Such reduction’,he continued, ‘must be made, whenever we resort to labour as a common measurefor comparing the values of commodities. Whatever advances are not made in labourmust be reduced to the measure of labour. If a capitalist expends £50 in raw materials,it must be considered as so much advanced on account of labour. In order to makeuse of labour as a measure of value, we, as it were, reduce every thing else of value tothat denomination.’

The object of all this was to confute Torrens’s assertion that the doctrine accordingto which profits depend on wages ‘is equally untenable, whether the terms alterationof wages, alteration of profits, are employed with a reference to proportions, orwhether they are used in relation to quantities’ (1826, xv–xvi). Torrens based hisobjection upon an arithmetical illustration purporting to show that proportionalwages may remain unchanged while the rate of profits increases. The error of thecalculation lay, Longfield insisted, in a failure to recognize that all inputs other thanlabour may be reduced to labour so that the only payments to be taken intoconsideration are wages and profits (1834, 172f).

Longfield thus accepted the Ricardian proposition that the profit rate ‘dependsupon the proportion of the shares of the final value received by the labourer andthe capitalist’. Indeed in an Appendix he formulated, and justified, Ricardo’s isolationof the conditions required to assure that changes in money wages will reflect changesin proportionate wages:

Mr Ricardo frequently asserts that wages and profits together are always ofthe same value, and that nothing but a rise in one can produce a fall of theother. He uses the term ‘wages’, sometimes to signify the absolute wageswhich the labourer receives, and sometimes as the proportional wages. Thisdid not arise from an abuse of words or a confusion of ideas, it was the natural andnecessary consequence of a hypothesis, which for simplicity of illustration, he laid downat the commencement of his work. He assumes that any given quantity of gold, orthe metal of which money is made, is always produced by the same quantity

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of labour, with the same interval of time before its production. On thishypothesis, if gold is raised from mines within the kingdom, absolute moneywages will be identical with, and be measured by, proportional wages, and arise of wages, that is of money wages, will always be accompanied by a fall ofprofits.

(Longfield 1834, 266–7; emphasis added)21

The entire discussion thus far has merely provided a definition of profits and astatement of how the rate of profits is to be calculated. The ninth lecture is devoted‘to the investigation of the laws which determine their actual amount’ (179), whereinLongfield finally set out his objections to his conception of orthodox theory andadvanced his alternative. And although he fails to state precisely how his own theorywas related to the preceding defence of the Ricardian inverse profit–wage relationship,it seems clear enough that he envisaged the latter as a valid framework for a satisfactory theorybuilt around the efficiency of capital (envisaged as ‘machinery’) in its least productiveapplication within a demand-supply context (187f).

Longfield’s market-price analysis, involving the notion of marginal demand price,had rather limited direct influence upon subsequent subjectivist economic thoughteven in Ireland. And those writers, such as Butt and Lawson, who drew upon elementsof Longfield’s distribution analysis did not appreciate its relationship with anarchetypal supply–demand theory (Moss 1974, 427f). 22 Nonetheless, the positiveinfluence of Longfield was profound for his lectures elicited a formal retractionfrom Torrens of his severe critique of Ricardian distribution theory as we shall nowsee.

In his third edition (1826) of the Essay on the External Corn Trade Torrens haddescribed the Ricardian inverse wage–profit relationship as ‘equally untenable, whetherthe terms alteration of wages, alteration of profits, are employed with a reference toproportions, or whether they are used in relation to quantities’ (above, p. 294). Yetthe fact is that there probably exists no clearer statement in the entire literature ofthe period of the pure Ricardian theory of distribution involving the proportions-measuring ‘gold’ than that presented, favourably, by Torrens in his Colonization ofSouthern Australia (1835, 22–35). Similarly, in 1844 Torrens candidly withdrew hisearlier objections: ‘Some of the commentators on the doctrines of Ricardo appearto have fallen into the misconception, that, in altering his nomenclature and inmodifying his principles as varying circumstances required, they refuted his theoryof profits. In this censure I include myself.’ He had in mind precisely the Ricardianprinciple that ‘profits rise or fall only as wages fall or rise’ (1844, xxxvi), and provideda defence of the proportions measuring money against a number of strictures bySenior and Jones (xxii f). The change in position was attributed by Torrens himself


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to Longfield’s lectures which had ‘succeeded in removing the main objection to thereception of Ricardo’s theory of profit, by showing ... that the cost of productionis to be measured by the single standard obtained by reducing previous and proximatelabour to a common denomination’ (li–lii). 23

The Ricardian frame of reference is less marked in the works of Samuel Read – whichSchumpeter noted ‘bears witness to the influence of Bailey’ (1954, 488) – and G.Poullet Scrope than in that of the other ‘dissenters’ we have considered so far. Buteven in their cases the evidence is mixed: Read insisted upon an inverse relationshipbetween the wages of regular labour and the wages of management, 24 and Scrope’sobjections relate not so much to the inverse relationship as such but to the precisedifferential effects exerted by wage changes – a characteristic Ricardian problem(Scrope 1831, 29). To take this position is in effect to concede a very great deal ofthe Ricardian position. And the fact is that Scrope formally granted the validity ofthe inverse relationship on Ricardo’s own use of terms albeit as an uninterestingtruism. 25

As far as concerns increases in wages in ‘the correct and ordinary sense of theword’, Scrope insisted, the proposition that a wage increase will leave unaffected theprice level is ‘directly false’ (3). Unfortunately Scrope does not justify this assertion.What he presumably meant by the ‘ordinary’ sense of the term is ‘the money-priceof labour’, and even Ricardo agreed that a money-wage increase, if merely nominal,will be accompanied by a general price rise. 26

It is commonly asserted that R. Whately’s celebrated suggestion to rename politicaleconomy ‘Catallactics’, or the science of exchanges, implies a significant indicationof a deflection of classical economics from its primary preoccupations to a narrowlyconstrained emphasis upon the ‘sphere of circulation’. But this interpretation doesnot accurately reflect Whately’s intentions. His purpose in proposing the change ofnomenclature was to assure that a study of the wealth of nations should be limited toexchangeable commodities and exclude, for example, the analysis of problems relatingto a ‘Robinson Crusoe’ type economy (Whately 1832, 8). 27 That the emphasis wasnot on the phenomenon of exchange as such is clear from his rejection of the term‘philosophy of commerce’ as a designation of the subject matter (9). Whately’s suggestedredefinition cannot be interpreted as a sophisticated attempt to redefine the scopeand nature of political economy. In the final resort he remained concerned with ‘thenature, production, and distribution of wealth’ (26), and regarded the study ofwhat wealth ‘consist[s] in’ and what are ‘the fundamental laws that regulate itsdistribution’ as essential for an understanding of topical questions (223). 28

It will be clear that the extent of substantive hostility towards Ricardo is considerably

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less than is generally maintained. In concluding this section it may be appropriate torefer to the history of thought written by Travers Twiss, who, as Professor of PoliticalEconomy at Oxford, held the same chair as Senior, Whately and Lloyd.

Twiss in 1847 accepted Ricardo’s position that rent is not an element in price(169–70). He adopted the view, in sharp contrast to Smith, that ‘variations in therate of wages and profit, where the proportion of fixed capital is unchanged, affectall commodities in the same degree, so that their relations, in respect of such variations,would remain undisturbed, and their exchangeable value not be altered’ (170–1).And he accepted Ricardo’s distinction between circulating and fixed capital in termsof durability, observing that ‘variations in the rate of wages or the rate of profits,will ... affect the cost of production very differently, according as the use of perishableor durable capital preponderates in any branch of manufacture’ (188). There wascertainly no general Oxford revolt against Ricardo.

I I . S O M E R E A C T I O N S B Y ‘ D I S S E N T E R S ’ T O B A I L E Y

We return now to consider Bailey’s place in the dissenting literature. That Baileycannot legitimately be regarded, as is so common, as standing at the head of a line ofanti-Ricardians is clear if we consider a little more closely some reactions to his workby other so-called ‘dissenters’.29

Professor Schumpeter commented of Samuel Read’s work that it ‘bears witness tothe influence of Bailey whom Read followed in his Ricardo criticism’ (1954, 488).This comment is quite inaccurate. On the contrary, Read explicitly took Bailey totask in very strong terms for neglecting to consider the value of commodities interms of ‘their relation to mankind and to human labour’:

Notwithstanding the very high respect I entertain for this author, it will beseen in the following pages, that I find occasion to differ from him verywidely in his main positions in the ‘Critical Dissertation’. It appears to methat the fundamental error in that work, and that from which all the othersto be found in it flow, consists in his treating of value as if it were a mererelation of commodities between themselves ; whereas it appears to me that the ideaof value in commodities cannot even be conceived without being mingled withthe idea of their relation to mankind and to human labour, of which someportion must always be employed in producing or procuring them originally.

(Read 1829, viii) 30

Professor Meek in his study of the ‘decline of Ricardian economics in England’refers to this same passage relating value to ‘mankind and human labour’ butmistakenly understands it as a position rejected by Read who attributed it to


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Ricardo, rather than one maintained by Read himself, and observes that ‘it was thisvital concept which virtually vanished from English political economy after Ricardo’sdeath’ (1967, 67). The evidence to the contrary speaks for itself at least as far asconcerns Read.

Criticism of Bailey was in fact widespread amongst the dissenters. It is notapparently common knowledge that Cotterill was dissatisfied with significant partsof Bailey’s performance regarding the ‘cause’ of value: ‘the causes of value, as statedby the author of the “Critical Dissertations &c” are extremely unsatisfactory:notwithstanding many parts of that work cannot but be admired by everyone friendlyto the science of political economy’ (1831, 53). 31 Similarly, he did not think thatBailey’s work constituted

a performance likely to set the controversy at rest; on the contrary, I considerthe Author’s use of the term value, on many occasions, inconsistent with itsobvious meaning, and the chapter on the causes of value, in my opinion,leads to nothing less than complete scepticism. So that, however certain I am,that the work has done much to evolve the difficulties in which the subjectwas acknowledged to be enveloped, and however dexterously I conceive theauthor detected the double meaning in which Ricardo used the term I cannotbut regret the appearance of these blemishes.

(Cotterill 1831, 40–1) 32

He was equally critical of Bailey’s position on the measure of value as we have seen(above, p. 291).

Lloyd is quite specific as to the doctrine to which he objected. His criticisms arenot directed against Ricardo at all, although of course Ricardo’s definition of ‘value’differed from his own. The purpose of his pamphlet was to demonstrate the legitimacyof saying of a commodity that it varies in value ‘without any reference to otherobjects’ (1834, 28). He rejected the assertion (which in fact was by J.S. Mill) that‘value is a relative term: if it is not this, it is nothing if any one talks about absolutevalue, or any other kind of value than exchangeable value, we know not what hemeans’ (34).33 He took J.B. Say to task for his analogy between motion and value inhis argument that ‘all value is relative’. And he found fault with the pamphlet entitledObservations on Some Verbal Disputes in Political Economy (1821), which, as we shall see,bears a close resemblance in many respects to Bailey’s Critical Dissertation. 34

I I I . T H E R I C A R D I A N S

We devote this section to a brief consideration of the ‘Ricardians’ themselves, spe-cifically McCulloch, J.S. Mill and De Quincey, and their relationship with Ricardo.

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Recent commentaries on McCulloch perform a ‘disappearing trick’, as it were, inhis case. He is either dismissed, as by Schumpeter, as a ‘henchman’ of Ricardo andtherefore apparently not worthy of much attention, or he is classified as by O’Brienas a ‘Smithian’. Neither position seems adequate. In particular the argument ofProfessor O’Brien according to which McCulloch was not essentially Ricardian butdirectly in the Smithian tradition is overstated. The treatment of the invariablemeasure is taken – with considerable justification – to be the hallmark of Ricardianism;it is the statement that the invariable measure ‘never interested McCulloch at all’(1970, 46) which I believe involves a misreading of McCulloch’s position. 35

McCulloch’s formal denial of the existence of an invariable measure of value mustbe seen in proper perspective. In all editions of his Principles the existence of such ameasure is denied on the empirical grounds that all commodities are subject to‘perpetual variations’ in the quantities of labour required to produce them. 36 Yetthe fact remains that money was assumed to have the mean factor proportions sothat at least one of the Ricardian prerequisites for a suitable measure is presumed tobe actually satisfied in practice. Moreover, McCulloch distinguished conceptuallybetween the case of a nominal wage change, and that of a ‘real’ wage change reflectedin an altered wage in terms of money of ‘invariable value’, and it is the latter whichconcerned him. Equally significant is McCulloch’s insistence that while it could bedemonstrated that a rise in wages would leave unchanged the level of prices, yet evenin the event that the price level did rise the real value (in the sense of purchasingpower) of profits must fall. And, finally, and I believe conclusively, since Ricardoalso had forcefully insisted that his ‘fundamental theorem of distribution’ (to theeffect that the burden of a wage increase falls on capitalists) held good whether ornot the conditions required for a suitable measure of value were satisfied in practice,I conclude that McCulloch’s position in all essentials is identical with that of Ricardo.

Schumpeter shares with Marxist interpreters the view that J.S. Mill must beexcluded from that group which constitutes Ricardo’s ‘school’ namely James Mill,McCulloch and De Quincey (1954, 476). It is contended in particular that Millrejected on Bailey’s grounds the conception of a measure of absolute value (589,603).37 We have considered this view elsewhere and found it to be untenable: Millaccepted the Ricardian theory in the strict sense outlined earlier, specifically thederivation of the theorem about profits and wages from the concept of the invariablemeasure.38

It may not appear necessary to demonstrate De Quincey’s loyal adherence toRicardo. But the tide is so strong in favour of the view that the Ricardian influencewas short-lived that even he is being pushed into the opposition. 39 We must, however,keep in mind the opening declaration in the first part of the three-part essay forBlackwood’s in 1842 (1970b, 113) that ‘David Ricardo made the first and last effortthat can be made to revolutionize that science which, for nations, professes to lay


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bare the grounds of their prosperity, and for individuals, as distributed by natureinto three great orders of proprietors, the grounds of their expectations’. There canbe no doubt of his continued allegiance to Ricardo as will be made clear in thediscussion which follows of The Logic of Political Economy. 40

De Quincey’s dissatisfaction with the treatment in the literature of market pricesdiverging from long-run costs is quite apparent and Ricardo is indeed includedamongst the culprits; Ricardo’s fourth chapter is termed ‘a very short chapter and avery bad one’ (cf. 1970c [1844], 200). But it is Adam Smith who throughout bearsthe brunt of the criticism for his statement of the ‘paradox of value’ (144–5, 188–90),as well as those who ‘fancy that the relation of Supply and Demand could bypossibility, and that in fact it often does, determine separately per se the selling priceof an article’. 41 Furthermore, De Quincey spoke very warmly of Ricardo’s chapter‘On Value and Riches’, writing of it as ‘essentially novel’ and worthy of ‘specialadmiration’ (127). More significantly, when he turned to consider the case of long-run price – and without question this constituted his main concern in value theory– Ricardo is allowed to come fully into his own. Thus the chapter ‘On Value’, uponwhich is based ‘a total revolution of political economy’, is described as ‘Ricardo’sgreat reform’ (181), his ‘great inaugural chapter’ (200), after which ‘the powerfulhand of Ricardo, will be felt in every turn and movement of economy’ (179). 42 It isin fact the labour theory which De Quincey had in mind modified by thecomplication created by different proportions of fixed and circulating capital.

Moreover, De Quincey’s distribution theory is strictly Ricardian, as indeed isthe relationship between distribution and value. Ricardo’s illustrative data on wagesand rent are fully reproduced (224–5, 246). The emphasis is upon the inverse profit–wage relation which in Ricardian fashion is set squarely upon the labour theory:‘Even the novice is now aware that a rise in wages would leave prices undisturbed’ incontrast to the position of ‘the superannuated economic systems smashed by Ricardo’which envisaged wage increases passed on in the form of higher prices (248n). 43

More specifically:

In one brief formula, it might be said of profits that they are the leavings ofwages : so much will the profit be upon any act of production, whetheragricultural or manufacturing, as the wages upon that act permit to be leftachieved. ... But do not the wages and profits as a whole, themselves, on thecontrary, predetermine the price? No; that is the old superannuated doctrine.But the new economy has shown that all price is governed by proportionalquantity of the producing labour, and by that only. Being itself once settled,then, ipso facto, price settles the fund at which both wages and profits mustdraw their separate dividends. ...

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But if that is true, then it follows that wages and profits vary inversely.... Any other rise in profits, such as would leave wages virtuallyundiminished, could be only an apparent rise through some depreciationin the currency; and that depreciation, changing any one thing nominally,must change all other things: affecting all apparently, really it wouldaffect none.

(De Quincey 1970c [1844], 257–8)44

Finally we recall De Quincey’s adherence to Ricardian rent theory and morespecifically Ricardo’s analysis of its consequences for profits, wages, and prices,which placed economists ‘irredeemably’ in his debt. 45 There can surely be noquestion of De Quincey’s continued adherence to strict Ricardianism.

I V . S O M E R I C A R D I A N R E A C T I O N S T O T H E I R C R I T I C S

In many important instances the post-Ricardian critics simply misinterpreted Ricardo.Malthus, for example, believed quite erroneously that Ricardo maintained his costtheory of exchange value as an alternative to demand–supply theory (1963 [1824],181–2). Both Malthus and Longfield (1971 [1834], 184f) asserted without justice thatin Ricardo’s system rising capital with population unchanged leaves the profit rateunaffected – that the only cause of falling profits was resort to inferior land. Baileyimplied that Ricardo failed to appreciate the relativity dimension of exchange value.Senior’s objection to Ricardo – adopted also by Bailey and T.P. Thompson – that tosay ‘it is the price of [the] last portion of corn, which governs that of the remainder,is to mistake the effect for the cause’ and his adoption, as an alternative, of a demand–supply or ‘monopoly’ explanation falls into the same category. 46 The fact is that theRicardians – and to a considerable degree Ricardo himself confirms the point –accepted much of the substantive argument of the ‘critics’. We consider first someRicardian reactions to Bailey.

A Westminster reviewer, possibly James Mill, made the point that Ricardo wouldnot have objected to the principal theme of the first chapter of the CriticalDissertation relating to the nature of value: ‘This chapter is logamarchy, simplyand purely. It makes profession, or rather ostentation and parade, of being acontroversy with Mr Ricardo. But it contains not an assertion, to which, as faras ideas politico-economical are concerned, Mr Ricardo would not have assented;it contains, not indeed, as far as such ideas are concerned, an assertion which isnot implied in the propositions which Mr Ricardo has put forth. It is a criticismof some of Mr Ricardo’s forms of expression.’ 47 And that this would have beenRicardo’s view is clear from his reaction to the anonymous Verbal Disputes of1821, which in its essentials is so similar to the Critical Dissertation that Bailey


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feared he might be accused of plagiarism. 48 Writing to Trower in August 1821Ricardo observed:

With respect to our difference of opinion on the subject of exchangeablevalue it is more an apparent difference than a real one. In speaking ofexchangeable value you have not any idea of real value in your mind – Iinvariably have. Your criticisms on passages in my book are, I have littledoubt, correct, because they are also the criticisms of others on the samepassages. A pamphlet has appeared ‘On Certain Verbal Disputes in Polit.Econ.’ where the same ground of objection is taken as you take; the fault liesnot in the doctrine itself, but in my faulty manner of explaining it.

(22 August 1821; Ricardo 1951, IX, 38)

J.S. Mill, in a Note attached to McCulloch’s edition of the Wealth of Nations(1828) alluded to Senior’s objections to Ricardo’s rent theory when he wrote ofthose ‘who affect to suppose that Sir Edward West, Mr Malthus, and Mr Ricardo,considered the cultivation of inferior land as the cause of a high price of corn’. Theargument that ‘the cultivation of inferior soils is not the cause but the effect of highprice, itself the effect of demand’ was, he insisted, a doctrine ‘explicitly laid down bythe distinguished authors previously referred to, and particularly by Mr Ricardo’(1967, IV, 174). Much the same argument would apply to the strictures of T.P.Thompson.49

Mill’s reaction was perfectly justified. Ricardo himself said (to Trower) of Senior’sarticle: ‘I am glad to have got so good an ally, for what I think the correct principles,and you must partake of the pleasure which I feel in observing that they are everyday making way’ (11 December 1821: 1951, IX, 122). The fact is that in the PrinciplesRicardo had shown a thorough awareness that differential rent is but a special caseof a more general phenomenon. In his discussion of early settlements, he observed,‘no one would pay for the use of land, when there was an abundant quantity not yetappropriated, and, therefore, at the disposal of whosoever might choose to cultivateit’.50 The further extension of this statement runs explicitly in terms of demand andsupply (and refers to the authority of J.B. Say): ‘On the common principles ofsupply and demand, no rent could be paid for such land, for the reason stated whynothing is given for the use of air and water, or for any other of the gifts of naturewhich exist in boundless quantity ...; as the supply is boundless, they bear no price.If all land had the same properties, if it were unlimited in quantity and uniform inquality, no charge could be made for its uses unless where it possessed peculiaradvantages of situation’ (I, 69–70). Indeed Ricardo takes Smith to task for failing inhis occasional emphases upon the physical contribution of the land factor to appreciatethe dependency of the value dimension of rent upon scarcity: ‘Dr Smith does notreflect that rent is the effect of high price. ... It is ... from the price at which the

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produce is sold, that rent is derived; and this price is got not because nature assistsin the production, but because it is the price which suits the consumption to thesupply’ (I, 71n).

It should be added that it is perfectly consistent with the Ricardian position thatrent may be generated even in the absence of differentials. We have in mind notmerely differentials reflecting differences in the ‘qualities’ of successive plots, for it isdiminishing returns at the intensive margin which constitutes a more general case (I,71, 72) but the increase in rent due to a constraint upon output expansion of anykind – whether at the extensive or intensive margins – in the face of rising demand. 51

We turn next to the Ricardian response to Malthus. In his Encyclopaedia Britannicacontribution of 1823, commenting upon Malthus’s Principles of 1820, McCullochobserved that while ‘some of the subordinate doctrines respecting value advancedby Mr Ricardo in the first and second editions of his Principles of Political Economyand Taxation were opposed by Mr Malthus in his recent publication’, yet ‘Mr Malthusdoes not attempt to invalidate the leading principles established by Mr Ricardo, andthe alterations and corrections which the latter has made in the third edition of hiswork have gone far to remove the objections of Mr Malthus’. 52 And that this isindeed so is clearly revealed by Malthus’s remarks, as we have already noted, whichsuggest that he adopted much of the Ricardian inverse profit– wage relationship(above, pp. 286–8).

How did Ricardo himself view Malthus’s position on distribution published in1820? The treatment of the Profits of Capital in Malthus’s Principles met with Ricardo’sapproval. Ricardo observed in his Notes that ‘I maintain no other doctrine than thatwhich has been well explained by Mr Malthus in the 2 first sections of 5th chapter.His own statements are sometimes at variance with it, mine I believe never’ (1951, II,288). More specifically, Ricardo commented favourably on Malthus’s analysis of theadverse effects upon the profit rate generated by increased difficulty of producingwage goods, and by increased commodity wages and concluded: ‘These 2 causes mayboth be classed under the name of high or low wages. Profits in fact depend on highor low wages, and on nothing else. ... In all this Mr Malthus and I appear to concur.Whenever the difficulty of production on the land is such that a greater proportionof the value of the whole produce is employed in supporting labour, I call wageshigh, for I measure value by these proportions ; and from Mr Malthus’s language here,everybody would think he agreed with me’ (II, 252).

Ricardo’s great complaint was that Malthus unjustly insisted that his analysisfailed to allow for the effect of real (basket) wage variation upon the profit rate: ‘Ihave invariably insisted that high or low profits depended on low and high wages,how then can it be justly said of me that the only cause which I have recognized ofhigh or low profits is the facility or difficulty of providing food for the labourer.


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I contend that I have also recognized the other cause, the relative amount ofpopulation to capital, which is another of the great regulators of wages’ (264). 53

Ricardo also saw eye to eye with Malthus in the Principles regarding the effects ofchanges in distribution upon prices. On reading of Malthus’s acceptance of theproposition that a fall in profits will generate a decline in the prices of capital-intensive goods, Ricardo observed:

Now I confess that I feared Mr Malthus himself would have found theproposition paradoxical, because in some of his works he has maintainedthat a rise in the price of corn will be followed by an equal rise in the priceof labour, and an equal rise in the price of all commodities; and it was onlyafter further consideration that he thought it fit to reduce the proportionin which commodities would vary when corn varied, and to fix it at 25 or20 p.c., when corn varied 33-1/3 – that is to say when corn varies 100 p.c.commodities are to vary 75 to 60 p.c.

(Ricardo 1951, II, 60–1)54

Actually Ricardo saw his position as closer to that of Malthus than to that of McCullochin the light of the extreme position sometimes adopted by the latter regarding thelabour theory. 55 It has recently been observed, quite correctly we believe, that whileRicardo was on good terms with both McCulloch and Malthus ‘he did not valuetheir opinions equally ... Malthus seems to be the person whom Ricardo took moreseriously than he did anyone else’ (Grampp 1974, 284).

As for Malthus’s contention in the Quarterly Review of 1824 that the New School– unlike Adam Smith whose position ‘strongly savours of the effects of demand andsupply’ (1963, 189) 56 – rejected demand and supply in accounting for competitivelong-run price, Mill insisted that in fact the very opposite was the case. All influencesupon price operated by way of demand and supply, and the cost theory was dependent thereupon(1967, IV, 33–4). Mill’s insistence that there is no conflict between cost and demand–supply analyses reflects precisely Ricardo’s position: ‘Mr Malthus mistakes the question’,Ricardo protested of the formulation in Malthus’s Principles, ‘I do not say that thevalue of a commodity will always conform to its natural value without an additionalsupply, but I say that the cost of production regulates the supply and thereforeregulates the price’ (1951, II, 48–9).

J.S. Mill’s reaction to De Quincey is also pertinent. In his review of De Quincey’sLogic for the Westminster of June 1845, he observed that ‘the larger half of the volumeis occupied with the theory of Value; which he rightly esteems the master key to theprincipal difficulties of the science’. But Mill denied that De Quincey’s observationson the relation between value-in-use and value-in-exchange had ‘all the originalitywhich he ascribed to them’, for he had merely brought ‘into full theoretical explicitness

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what was known to all clear thinkers’ (1967, IV, 395–6). He also believed that DeQuincey had not given due credit to received doctrine relating to prices divergingfrom cost: ‘Have not all political economists distinguished between articles whichcan be multiplied to an indefinite extent by labour, and articles naturally or artificiallylimited to a quantity short of demand, and have they not all, from Ricardodownwards, affirmed that in the former, and more common case, the value conformson an average to the cost of production, while in the latter there are no limits to thevalue except the necessities or desires of the purchaser?’ (1967, IV, 398).57 Butconsidering the work as a whole, Mill found little to object to and his recognitionof De Quincey’s allegiance to Ricardo is clear, as indeed is his own position: ‘One of[De Quincey’s] merits is his early and consistent appreciation of Ricardo, the truefounder of the abstract science of political economy, and whose writings are still,after all that has been written, its purest source’ (394). On matters of distribution inparticular ‘De Quincey thoroughly understands his master, and is therefore able tosupply new developments and illustrations of his master’s doctrines’ (401). Thisgeneral evaluation by Mill seems quite accurate, as we have seen above.

V . T H E C O N S I S T E N C Y O F R I C A R D I A N A N D‘DISSENTING’ PROPOSITIONS

That the Ricardians were able to see eye to eye with so much of the apparentlycritical work on value is not surprising. As already remarked Ricardo did not envisagehis cost of production theory as an alternative to supply–demand analysis. 58 Conversely,it should be emphasized that the majority of ‘dissenters’ continued to accentuate thecost determination of price. This is true of Bailey himself and Longfield, both ofwhom spoke of production costs as the main consideration in price determination.It is true also of Cotterill who included in costs only wages and profits and likeBailey excluded rent. Read adopted a cost theory although he was inconsistent inemphasizing in some circumstances Smith’s conception, while elsewhere he acceptedthe opinion that ‘rent is the consequence, not the cause, of high price of rawproduce’. Scrope, following Read, also adopted a theory of cost price which was anamalgam of that of Smith and Ricardo, and rejected the ‘vulgar opinion’ that rentaffects price. In Longfield’s analysis of changes in relative prices the emphasis, as withRicardo, was upon variations of the labour input, and here too was seen to lie thejustification of a labour measure. 59 Much weight is sometimes placed on Whately’scriticism of the labour theory; 60 but to our mind, it would be unjustified to exaggerateits import, for his criticism explicitly limits the discussion to the case of givensupplies. No labour theorist would have quarrelled with Whately’s observationssince they do not relate to long-run equilibrium values in the case of infinitelyelastic supplies, and are thus not inconsistent with a labour or cost explanation of


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long-run value. Indeed Whately himself conceded that ‘valuable articles are, in almostall instances, obtained by Labour’.

What, however, of Lloyd’s contribution to marginal utility or Longfield’s conceptionof intensity of demand? In this context the recent researches of Dr Marian Bowleyare particularly pertinent. As she puts the matter ‘no revolutionary significance’ wasattached to discussions of the law of diminishing marginal utility and relatedconceptions. Moreover, ‘these contributions did not affect the main classicalconclusions as to the nature of market and natural prices and their determination’(1972, 27). Her remarks are made with reference to attempts ‘to clear up particularproblems’ generated in the Wealth of Nations, but in our view Ricardo would nothave objected to the developments. While, of course, his main interests lay in long-run price determination, his economics required and, implicitly at least, hingedupon the operation of the competitive mechanism involving demand–supply analysis.His rejection of demand–supply theory did not apply to the particular versionelaborated by Longfield, and Longfield himself appreciated Ricardo’s objections tothe ‘indefinite’ and ‘vague’ expression ‘proportion between the demand and supply’as unhelpful in the prediction of market price (1971 [1834], 247). It may also beremarked that Lloyd’s famous analysis of marginal utility is not inconsistent with acost or even a labour theory, and was not so envisaged by Lloyd himself : ‘if labourbecomes more effective, so that commodities of all kinds shall be produced in adegree of abundance greater in proportion to the wants of mankind, all sorts ofcommodities, though exchangeable in the same proportions as before for each other,could be said to have become less valuable’ (Lloyd 1834, 28). This statement is quiteconsistent with a cost or labour theory of exchange value. 61

To what extent may the conception of interest as a return to ‘abstinence’ developedby Scrope, Read and Longfield be interpreted as a sharp break with Ricardianprocedures? To what extent would Ricardo have objected to an analysis of the precisenature of the savings supply function? The conception in Ricardo’s work of profitsas residual is we believe little more than a formal consequence of the implicitpresumption that the only contractual payment is that made to labour. There can beno doubt that Ricardo recognized the necessity of interest in the limiting case.More importantly, he took into account the effect of a declining profit rate onaccumulation. It is true that he gave no name to the effect but it is by no meanscertain that he would have objected to the investigation of the time preferencenotion which the so-called ‘dissenters’ insisted upon. J.S. Mill, of course, found nodifficulty in ascribing at one and the same time to the inverse wage–profit relationshipand to the abstinence conception.

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What finally of the widespread application of market demand–supply analysis tolong-run wage determination, as for example by Malthus, Longfield, Torrens, Read,Scrope and Senior? Here too there occurred no breakaway. The story would be adifferent one were it the case, as is apparently quite generally believed, that thesubsistence wage played a key role in Ricardo’s work, not only in the context of hisgrowth model but also in basic applications such as wage taxation. But this is farfrom an accurate perspective. Ricardo’s model was a growth model in the true sensewith wages and profits above their respective minima which become relevant only inthe stationary state; while the taxation theorems were applied by Ricardo to the caseof above-subsistence wages.

It is of great historical significance that Longfield did not actually attribute toRicardo a subsistence theory of wages. On the contrary, he recognized Ricardo’sascription to a model entailing secularly falling wages. 62 There can be no doubt thatLongfield hit upon one of the most complex issues of Ricardian growth theorywhen he objected that, in principle, there is no reason why wages cannot bear thefull brunt of secularly rising food prices since, in a context of ongoing populationexpansion, real (commodity) wages must initially exceed the ‘subsistence’ level (1971[1834], 182f). Yet Ricardo did address himself to this issue and attempted to justifythe secular decline in the rate of profit in circumstances of declining commoditywages, and Longfield failed to consider Ricardo’s case which turns upon the effect ofa declining wage upon the population growth rate, and the presumed operation ofa market process which assures that the population growth rate is kept in line with asecularly falling capital growth rate. 63

V I . T H E R E V I E W L I T E R A T U R E : A S E C O N D V I E W

A widespread hostility to the Ricardian theory of value and distribution has beendiscerned by a recent investigator of the review literature of our period (Gordon1969). This position, we believe, cannot be substantiated as far as concerns the fourleading journals. In the first place twelve (supposedly) ‘hostile’ writers – of whomonly seven (De Quincey, Ellis, Malthus, Merivale, Scrope, Senior and T.P. Thomp-son) can strictly speaking be described as economists – writing no more than sixteenarticles over almost three decades constitutes too small a sample to permit any stronggeneralizations. In any complete evaluation it would certainly be necessary to allowfor the contributions by such ‘pro-Ricardians’ as James and J.S. Mill and also thearticles by McCulloch in the Edinburgh Review – and his influence on editorial policy– which ‘by the standards of the time, and also by the judgements of later econo-mists’ had the reputation of being the leading economic journal (Fetter 1965, 427).Professor Fetter, writing of the Edinburgh Review during the period 1818–37, has


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described McCulloch as ‘preaching the Ricardian doctrine with almost fanaticaldiscipleship’ – a phenomenon which did much to bring about ‘the victory ofRicardian dogmatism’; over this period, ‘McCulloch’s virtual monopoly of eco-nomic articles enabled him to throw the influence of the Edinburgh back of thedoctrines of the Ricardian system and also to keep out of the Review articles criticalof the Ricardian system’ (Fetter 1953, 234, 238). Its readers would have had scarcelya hint of anti-Ricardian sentiment. 64

But even this takes for granted that we can accept the seven economists namedabove as hostile to Ricardian theory as far as concerns its key propositions. We haveshown in this study that this would be a questionable position to take. Merivale andDe Quincey positively supported Ricardo. The positions of Senior and Thompsonon rent do not conflict with Ricardian principles – indeed Ricardo welcomed Senior’sarticle of 1821. And Malthus recognized the value of the inverse profit–wagerelationship in his Quarterly Review contribution of 1824, a position consistent withvarious other statements.

V I I . T H E P O L I T I C A L E C O N O M Y C L U B : A S E C O N D V I E W

Our investigation leads us to question the accuracy of J.L. Mallet’s famous accountof the position of leading members of the Political Economy Club as conclusiveevidence of a decline in Ricardo’s influence. 65 When we find that so much of thefundamental Ricardian position relating to the specific matters of the measure ofvalue and the inverse profit–wage relationship – and not merely to general matters ofmethod – left a strong positive impression on Longfield, and brought about aconcession of error on the part of Torrens, and that even Bailey and several other‘dissenters’ writing during the early 1830s recognized the logical validity of Ricardo’sbasic theoretical structure, provided his use of terms is accepted, we are obliged toconclude that Mallet’s report fails to reflect the state of opinion during the post-Ricardian period as a whole even if it does provide an accurate account of the moodof particular Club meetings early in 1831.

But even when we limit our attention to early 1831, and set aside the change inopinion on Torrens’ part under the influence of Longfield, there are reasons not toexaggerate the import of Mallet’s report. The account is ambiguous. If Torrens tooka negative view of Ricardo’s stature, Mallet makes it clear that both Tooke andMcCulloch

considered that Rent was in point of fact the effect of differences in theproductiveness of soils, because inferior soils were not brought intocultivation until the demand for food and the increased price enabled thecultivator to bring those soils into culture with a fair profit. McCulloch[unlike Tooke] stood up vigorously for Value as well as Rent, and paid very

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high compliments to Ricardo, whom he still considered as right in mostpoints, and at all events as having done the greatest service to the science, hismethodical and scientific way of treating it, so that even where he was mistaken,his errors could be detected by a subsequent and more accurate analysis. Hewas not an inventor, and no more was Bacon; and their merits in McCulloch’sopinion had very much the same character. 66

Now according to Mallet ‘This seemed to be generally assented to’. Similarly, at the secondof the two meetings in question Mallet noted: ‘It was generally admitted that Ricardois a bad and obscure writer, using the same terms in different senses; but that hisprinciples are in the main right. Neither his Theories of Value nor his Theories ofRent and profits are correct, according to the very terms of his propositions; butthey are right in principle.’ 67

Torrens (according to Mallet) referred both to Bailey and to Perronet Thompsonas conclusively refuting Ricardo on Value and Rent respectively. Now we have alreadysuggested that such an evaluation of Bailey’s work as far as concerns value is anexaggeration. As for the matter of rent, it is clearly the case that several of the so-called ‘dissenters’, in addition to Tooke and McCulloch who spoke favourably at theClub meetings, supported Ricardo’s position. We have in mind Cotterill andLongfield and also Malthus who, in correspondence during 1829 and 1831, rejectedT.P. Thompson’s position that contemporary rent must be accounted for in termsof a monopoly theory rather than the principle of diminishing returns (de Marchiand Sturges 1973, 385, 386). Indeed it is of some interest that Malthus expresseddispleasure at Torrens’ particular formulation of the question debated by the PoliticalEconomy Club: ‘I was hardly prepared to expect that in so short a time as has sinceelapsed [since his debates with Ricardo], one of the questions in the Political EconomyClub should be “Whether any of the principles first advanced in Mr Ricardo’s workare now acknowledged to be correct?” My apprehension at present is that the tide issetting too strong against him.’ 68

VIII . CONCLUSION: A ‘DUAL’ DEVELOPMENT?

Acceptance of the Ricardian theorem on distribution – the inverse profit– wagerelationship – was far more widespread during the post-Ricardian period than isgenerally believed. But it is important to recognize that Ricardo obtained his re-sults, paradoxical as it may appear, by a more consistent and rigorous use of theconception of relative value than appears in the Wealth of Nations or for that matterin Bailey’s work. For the demonstration of Ricardo’s main theme obliged him topay considerable attention to inter-industry linkages. It is in fact impossible to do


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justice to Ricardian economics without keeping to the fore the micro-economic orallocative foundations thereof; indeed it is helpful to envisage Ricardo as engaged inan effort to distinguish between a disturbance (such as a tax) affecting a single indus-try which will leave the general profit rate unaffected – this conclusion stands even ifthe industry in question happens to be agriculture – and a disturbance (such as ageneral wage increase) affecting all industries which will reduce the general profitrate.69

Here we note that even those sections on the Wealth of Nations most consciouslypreoccupied with resource allocation are severely constrained from this veryperspective. For the average returns to the factors are not themselves determined inthe adjustment process set in motion, for example, by demand disturbances; themovement of factors between industries acts upon product prices and the prices offactors in particular industries but the average returns remain unaffected. Hisprocedures in formal analysis – as distinct from applied studies – imply identicalfactor proportions between sectors. Furthermore, Smith neglected the matter ofvariable proportions in any productive unit. In much of this Ricardo followedSmith. But he was much more conscious of the analytical problems created in thepricing process by the existence of differential factor proportions and was preoccupiedby the relative dimension of price to a very marked degree. Similarly, he was in alarge part of his work engaged in the rejection of Smith’s isolation of the pricing ofcorn for special treatment, insisting that corn must be treated in the same manner asevery other product of the system. Ricardo thus corrected a variety of deficienciesin Smithian allocation economics along what were to be the ‘neoclassical’ lines.

As far as concerns the matter of abstinence or recognition of a supply price forcapital, it would appear that Ricardo as well as J.S. Mill, Senior, Read, Scrope andLongfield abandoned the standard eighteenth-century position according to whichsavings are institutionally determined. In this regard too Ricardo – unlike Smith –stands on the neoclassical (Marshallian) road.

Most striking of all is Ricardo’s adherence to a supply–demand analysis of long-run wages. In this respect, and also in his analysis of wage taxation Ricardo waswholly dependent upon Smith.

From all these perspectives – and bearing in mind the relationship between thedissenters and Ricardianism outlined in this paper – it appears unhelpful to think ofa ‘dual development’ of economic analysis during the nineteenth century, involvingon the one hand Smith, the dissenters, Mill and Marshall, and on the other Ricardoand Marx. We do not intend, of course, to suggest an identity of objective or ofprocedure between Ricardo and Marshall but the picture is far too complex topermit a neat and clearcut categorization such as that outlined at the outset.

In conclusion we wish to consider a recent remark by Professor Frank Fetter to

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the effect that ‘if, as was the general impression by the 1830s, Ricardo’s theoreticalframework had been largely rejected, there is a mystery as to why the name ofRicardo was so closely associated with the economic theory of John Stuart Mill andEnglish neoclassical economics’ (1969, 80). A number of explanations for thephenomenon alluded to are offered, amongst which are the respect of Alfred Marshallfor tradition, and Mill’s respect for the memory of Ricardo which left the impressionthat ‘even when the analysis was quite contrary to Ricardo’s ... the Ricardian frameworkremains almost unaltered. No one would suspect, from reading Mill’s Principles, thecriticisms to which Ricardian ideas on rent, value, wages, and profits had beensubjected in the previous twenty years’ (81). 70 But in the light of our own discussionit is not at all clear that there is a problem to resolve. For J.S. Mill did not ignore thecriticisms of the preceding quarter century; the point to keep in mind is that he didnot believe these criticisms to be destructive of the main Ricardian theoretical structure.His position is very clearly formulated in his review of De Quincey’s Logic in whichhe comments on De Quincey’s belief that there had occurred little advance since the1817 ‘revolution’:

We dissent from the opinion that political economy does not advance. Wethink it is in a state of most rapid progression. But ... the superstructureseems to be overgrowing the foundation. The science is growing at theextremities, without a proportional and suitable enlargement of the maintrunk. Many important new views – new, at least, in having been previouslyoverlooked – have dawned upon political economists during the last twentyyears. But for want of sufficiently careful habits of systematic thought, thesenew views have been too frequently promulgated as contradictions of thedoctrines previously received as fundamental; instead of being, as they almostalways are, developments of them; corollaries flowing from these fundamentalprinciples, certain conditions of fact being supposed ... What has been addedto the science since Ricardo, does not need to be substituted for his doctrines,but to be incorporated with them. They do not require alteration orcorrection, as much as fuller exposition and comment.

(Mill 1967, IV, 394)

Our analysis of the monograph and periodical literature suggests that J.S. Mill wasquite justified in taking this view. Many of the criticisms of Ricardo turn out to bequite in accord with Ricardian theory and Ricardo himself, to the extent that he wasfamiliar with the critical literature, took a view quite consistent with that of Mill.


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NOTES

*I am indebted to Walter Elter and Lawrence Moss for contructive criticism.1. Dobb 1973, 36; ‘income-distribution (e.g. the profit–wage ratio) was a precondition of the

formation of relative prices’. (Also Dobb 1973, 169, 261, 266.) And see p. 116: Given thewage rate ‘the conditions of production in the industry or industries producing necessitiesfor wage-earners played a key role in determining the ratio of profits or surplus to wages,and hence (given necessary labour-expenditures in various lines of production) relativeexchange values’.

2. See also Hutchison 1952, 428–9: ‘nearly all the great economists of the second quarter ofthe nineteenth century, especially those regarded as significant and original today,abandoned the main Ricardian questions and the main Ricardian answers (with the verydoubtful exception of J.S. Mill). The obvious examples are Bailey, Longfield, the Oxfordgroup of Whately, Senior and Lloyd and also Richard Jones ... to take only the mainEnglish names.’

3. Marx 1965, 14–15 (Afterword to the second German edition, 1873, of Capital, vol. 1);Marx’s rough draft notes (written 1857) Grundrisse (1973, 883). (See also Meek 1967, 54.)T.W. Hutchison (1974, 14) has observed that by adopting this position Marx placed all

his ‘bourgeois’ contemporaries ‘beyond the pale of serious scientific discussion’ – thusrepresenting the development of economics ‘as a process uniquely culminating in, andconsummated by, the writings of Marx himself’.

4. ‘From Marshall’s Principles, Ricardianism can be removed without being missed at all.From Mill’s Principles it could be dropped without being missed very greatly’ (Schumpeter1954, 629).

5. But see the position of Pedro Schwartz (1972, 16–17) which places Mill more firmly in theRicardian tradition at least as far as concerns analysis: ‘The sway of Ricardian doctrineover British economic thought was in some way restored with the publication of JohnStuart Mill’s Principles in 1848. From an analytical point of view, Mill’s treatise followedthe pattern of the master, while the doctrinal changes that Mill introduced made it easierto accept the Ricardian heritage.’

6. The treatment of the invariable measure of value, which is said to be ‘central to Ricardo’ssystem’, we are told, ‘never interested McCulloch at all’ (O’Brien 1970, 146).

7. Insofar as concerns the theory of value the essential point to keep in mind is its function asa necessary preliminary for the analysis of distribution, particularly the analysis of profit-ratedetermination and the effect of wage-rate changes upon the rate of profit. Ricardo waspreoccupied with the problem of defining the minimum conditions required of a mediumof exchange – at least in principle – to assure approximate constancy in the value of theoutput to be shared between the recipients of income net of rent in the face of changes indistribution. Cf. editor’s introduction to the Principles, Ricardo 1951, I, xlviii. For accountsof the Ricardian procedure see also Stigler 1965, 156–97; and Blaug 1958, esp. 23–5.

8. The weakness of the Smithian position came to the fore partly in consequence ofpreoccupation with the great monetary issues during the early years of the century. And itshould be remarked that, despite the attention paid to the problem of constructing asuitable measure of value, the conclusion that wagerate increases are non-inflationary wasmaintained quite generally and applied to the ‘real world’ where the conditions requiredof the theoretical measure are not fulfilled .

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9. Professor Jacob Viner observed many years ago that any investigation of the extent andnature of the dissension requires that attention be paid to the replies of the Ricardiansto their critics, for ‘some of the criticisms directed against the Ricardian analysis wereeither based on misinterpretations of it or would have been accepted by the Ricardians’(1958, 419–20).

10. Mark Blaug has also argued the case for the resilience of ‘Ricardian’ economics using theterm, however, in this context in a sense different from ours. Blaug has in mind ‘theproposition that the yield of wheat per acre of land governs the general return oninvested capital as well as the secular changes in the distributive shares’ (1958, 3). See alsop. 61: ‘The rate of capital formation was still held to be governed by returns in agriculture,and the core of the Ricardian system, the law of diminishing returns, continued todominate the body of economic thought.’

11. Ricardo’s emphasis upon the role of demand–supply analysis in both product and factormarkets is substantiated more fully in my Economics of David Ricardo [1979]. See alsoHicks and Hollander 1977.

12. See also Malthus 1964 [1836], 260–1.13. See also Malthus 1964 [1836], 88.14. However, Bailey continues rather less generously:

But then, although some inconsistencies would by this means be obviated or explainedaway, we should obtain in their place a number of others equally irreconcilable, and alsoa series of unmeaning and identical propositions. For instance, the proposition that amillion of men always produced the same value, but not the same riches, would bereduced to this, that what a million of men produced always cost the labour of a millionmen: a = a. The truth appears to be, that the idea of real value was seldom distinctlypresent to his mind, although there was almost constantly an obscure reference to it.

15. It should be carefully noted that Bailey retains the Ricardian usage of profits as a share inaggregate output while at the same time he utilizes the conception of commodity wages,concluding, not surprisingly, that in the case of constant output an increase in thecommodity wages paid to a given work force must involve a decline in the profit share(Bailey’s ‘rate of profit’) – while in the case of an increasing output due to technicalprogress an increase in the commodity wages need not have this effect (Bailey 1825, 64f).

16. He asserted (Bailey 1825, xii) that ‘the science cannot yet be exhibited in a regular andperfect structure’.

17. His concession was, however, made rather grudgingly. In this context, Bailey praised DeQuincey’s analysis of the severe problems relating to qualitative differences in labourand the use of the wage scale to obtain units of standard labour (Bailey 1825, 214f).Bailey recognized Ricardo’s concession that a variation in wages will influence relativeprices in the event of differing factor proportions but asked: ‘Why persist in callingquantity of labour the sole determining principle of value?’ (217).

18. He might have included Say, in principle, who thought of the invariable standard as a‘chimera’.

19. Here Longfield insisted that differential land fertility was not per se the ‘cause’ of rent, since‘whatever is useful, and is limited in quantity is capable of possessing value, if it can be madethe subject of exchange’ (1971 [1834], 134). Ricardo would have accepted this proposition.

20. Longfield uses the term ‘depends upon’ but he obviously intended an identity relation.21. Despite his adherence to the main propositions of the Ricardian position, Longfield

simultaneously ascribed in the same lecture (VIII) to Smith’s view that an increase in


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wages will generate a general rise in the level of prices. The latter argument was not,however, soundly based upon a specific theory of value. And since he ends the lecturewith a defence of Ricardo’s inverse profit–wage relationship we conclude that in adoptingthe Smithian position he fell into serious error from the perspective of his own argument.

22. Butt’s combination of the utility teaching of Say and Senior with aspects of Longfield’stheory of distribution to arrive at an early statement of the marginal utility theory ofimputation seems to be one of the most impressive outcomes but it is only in thiscentury that Butt’s work is becoming generally known. See Moss 1973.

23. For a full discussion of this matter see Lionel Robbins 1958, 53f. This evidence haslargely been overlooked; cf. Black 1971, 26; Blaug 1958, 127, 159. Lord Robbinsconjectures that Ricardo would probably not have welcomed the Longfield–Torrensdefence insofar as it was based upon a theory of value depending on quantity of capital,or accumulated labour, which Ricardo had turned down in earlier debate with Torrens(1958, 57).

24. Read 1829, 249: ‘The more the inferior labourer gets as his wages, the less will remain tothe superior labourer as his’.

25. ‘Having persuaded themselves of the truth of these false conclusions, our economists goon, in the most self-satisfied way, to draw from them several corollaries, such as, “It isabundantly certain, therefore, that no rise of wages will ever occasion a general rise ofprices, and no fall of wages a general fall of prices” ( McCulloch, ...). Why certainly, whenwages are defined to be merely the labourer’s share, as compared to that of the capitalist,their fall or rise can have no influence on the value of the joint return. ... We need noprofessor of political economy to announce, as a recondite proposition, what is identicalwith their own postulate’ (Scrope 1831, 3).

26. It is an increase in wages expressed in money of unchanged general purchasing power –either because of constant real costs of production of the metal or because of a constantsupply of money – which cannot be accompanied by a general price rise.

27. Whately does not, however, limit the investigation to material objects.28. It is certain that opponents of Ricardianism writing from an inductivist or historical

point of view, would have read Whately’s work as a defence of Ricardian procedures.29. Despite his assertion that ‘the decay of the Ricardian School must have become patent’

soon after 1826 Schumpeter (1954, 478) hedged his account with multifold qualifications:the influence of Bailey ‘was much greater than appears on the surface’; ‘though but fewcontemporaries did justice to him, it became clear in time that he had turned the tideand dealt a fatal blow’ (599). Similarly, while Bailey’s critique did not ‘pass unnoticed’,and while ‘it is safe to presume that his influence extended beyond the range of explicitrecognition’, and although ‘a poll of writers on value from 1826 to 1845 would producea considerable majority for Bailey’, nevertheless there occurred no ‘spectacular victory’,Bailey’s ‘defeat’ (our emphasis) being accounted for on two grounds, that his challenge was‘premature’ and that Bailey failed to show how Ricardo’s system might be replaced. ThusBailey and those who followed his example helped ‘undermine’ the system ‘but they didso by a slow process of attrition’ (487).

30. The same kind of criticism is directed by Read against Lauderdale’s Inquiry of 1804. Anyattempt ‘to reduce the idea of value to a mere relation of commodities between themselves,without any connexion with mankind, with labour, or with cost of production’ is fatal,since ‘the connexion of the exchangeable value of commodities with labour and cost of

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production is indeed the only circumstance which confers any importance on theconnexion of the exchangeable value of commodities between themselves’ (221).

31. In his chapter dealing with the causes of value Bailey (1825, 185) had distinguishedbetween ‘commodities which are monopolized, or protected from competition by naturalor adventitious circumstances’; those ‘in the production of which some persons possessgreater facilities than the rest of the community, and which therefore the competition ofthe latter cannot increase, except at a greater cost’; and those ‘in the production of whichcompetition operates without restraint’. The general notion is that ‘their respectivecauses of value cannot be the same’.

32. Thus if Cotterill was critical of Ricardo in the context of the cause of value, he was equallydissatisfied with the treatment of Bailey whose explanation of longrun exchange value interms of cost of production was ‘defective’: ‘it does not include profit, and thereforenever can determine value, because, though the labour or capital should not vary, theprofit may vary, and consequently the value of any commodities’. On similar groundsCotterill objected also to Torrens (1831, 46).

33. The citation is from J.S. Mill’s (unsigned) review of Malthus’s contribution of 1824,‘Periodical Literature – Quarterly Review’. Cf. Westminster Review III, 5, January 1825.Mill by his assertion intended to deny Malthus’s conception of aggregate demand, not,as is often maintained, to challenge the Ricardian position regarding absolute value.Lloyd, however, took the statement out of context and applied it generally.Bailey himself (1826, 37) applauded the sentiment of the article but expressed surprise

at finding an insistence upon value as a relative conception in the Westminster Review,which in 1826 had published an attack – which we know to be by James Mill – upon hisown Critical Dissertation. If the respective contexts are borne in mind the apparentinconsistency of position between the journal volumes creates no difficulty.

34. See below, pp. 301–2, regarding this pamphlet.35. Cf. Schwartz 1972, 15: ‘After reading Dr O’Brien, one might even say that in a short

time he [James Mill] was the only one left in the Ricardian succession – together withJohn Stuart Mill.’

36. Principles of Political Economy, edn 1, 1825 (London, 1872), 119; edn 5, 1864 (New York,1965), 243.

37. See also Blaug 1958, 172–3.38. On Mill see my ‘Ricardianism, J.S. Mill and the Neo-Classical Challenge’ (1976).39. Groenewegen 1973, 193, refers to De Quincey’s remarks on the mutual determination

of exchange value by ‘intrinsic utility’ and ‘difficulty of attainment’ as a ‘change of heartin favour of the Smith tradition in value theory’.

40. De Quincey wrote a three-part essay for Blackwood’s in 1842 entitled ‘What is the RadicalDifference between Ricardo and Adam Smith? With an occasional Note of Ricardo’sOversights’. This essay was recast and expanded as The Logic of Political Economy (1844).

41. A view attributed to ‘almost every journal in the land’ which he knew (De Quincey 1970c[1844], 121).

42. De Quincey also referred to his early work Dialogues of Three Templars on Political Economy,which originally had appeared in three successive numbers of the London Magazine in1824 (1970a, 37) and which had been considered with some respect by Bailey in hisCritical Dissertation. The object of this early work, De Quincey observed (1970c, 119), hadbeen ‘to draw into much stronger relief than Ricardo himself had done that one radical


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doctrine as to value by which he had given a new birth to Political Economy’. And whilehe has been pleased with the attention given to the work by Bailey, nevertheless ‘with allhis ability, that writer failed to shake any of my opinions. I continue to hold my originalideas on the various aspects of this embarrassing doctrine.’

43. In the Logic reference is also made to an earlier demonstration in the ‘Templars’ Dialogues’that the concept of a stable measure of value was ‘demonstrably a chimera, an ens rationis,which never could be realized’ (De Quincey 1970c [1844], 151–2). In the ‘Dialogues’Ricardo himself is cited to the same effect, the third edition of his chapter on value‘having for its direct object to expose the impossibility of any true measure of value’ (93).Yet Ricardo used the notion of a constant measure as a conceptual device, and DeQuincey followed the same procedure: Ricardo’s practice was to ‘neglect the variations inthe value of money ... he made it understood, that ... he would always assume money asranging at its stationary natural value’ (201–2).

44. De Quincey emphasized the fundamentally important feature of Ricardian economicsthat ‘a change cannot commence in profits; that function of industry is not liable to anyoriginal affection of change’ (1970c [1844], 277); see also 258– 9: ‘Any change that candisturb the existing relations between wages and profits must originate in wages: Whateverchange may silently take place in profits always we must view as recording and measuringa previous change in wages ... Ricardo’s chapter upon profits is substantially no morethan a reiteration of his two chapters upon wages and rent.’

45. But De Quincey at the same time criticized Ricardo for playing down ‘that eternalcounter-movement which tends, by an equivalent agency, to redress the disturbingbalance’ (1970c [1844], 249). Accordingly, he denied that one could speak of an‘immovable law of declension’ of the profit rate (294). Yet oddly enough he also concededthat technical progress ‘may be altogether torpid’ while diminishing returns is aphenomenon which ‘is sometimes for a century together proceeding with activity’ (259).But it is doubtful whether De Quincey’s charge can be sustained; see Hollander 1977.

46. Nassau W. Senior, ‘Report on the State of Agriculture’, Quarterly Review XXV, 50, July1821; T.P. Thompson (1832) The True Theory of Rent in Opposition to Mr Ricardo and Others,9th edn, London.

47. ‘On the Nature, Measures, and Causes of Value’, Westminster Review V, 9, January 1826:157. (Reprinted with the London, 1967 (Cass) edition of the Critical Dissertation. ) For theattribution of the review of James Mill, see Fetter 1962, 584.

48. The authorship of Observations on Certain Verbal Disputes in Political Economy (1821) hasnot yet been ascertained. The Cass edition of Bailey’s works (London, 1967) includes thepamphlet, but see the note by Ken Dennis (1973, 17–18) on ‘The Bailey Notebooks andAuthorship of “Verbal Disputes” ’. Marx (1971, 125) commented on the similaritybetween the works in question.

49. Thompson himself (1832, 12) raised the question whether there was, in fact, anysubstantive difference between his approach and that of the Ricardians, and gave a ratherunconvincing answer to the affirmative :

If it is urged that both the present writer and Mr. Ricardo from whom his theory isderived, have distinctly represented the cultivation of the inferior soils as flowing from theappropriation of land and the limitation of its quantity, and that to affirm that rentproceeds from the secondary cause is tantamount to affirming that it proceeds from thefirst; – the answer is, that it is one thing to affirm that the competition is the simple causeof rent in all cases, and would equally cause it if no difference in the qualities of soils and

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no knowledge of the art of forcing crops were in existence, – and another thing to affirm,that it causes rent through the intervention of these circumstances, and would not causerent without them.

Thompson, it may be added, commended Ricardo for his proposition that ‘rent will bepaid because corn sells high; and not corn sell high because rent is paid’, which orderedthe causal sequence correctly (8).

50. Ricardo 1951, I, 69. Conversely, ‘[if] air, water, the elasticity of steam; and the pressureof the atmosphere, were of various qualities; if they could be appropriated, and eachquality existed only in moderate abundance, they, as well as the land, would afford a rent,as the successive qualities were brought into use’ (75).

51. See J.S. Mill 1965, II, 428. Ricardo on various occasions explained in great detail theprocess of output expansion in response to rising demand. Within his structure, permanentconstraint on such expansion must imply an increase in rents to prevent the profit ratein agriculture remaining permanently in excess of that in manufactures.

52. See McVickar 1966 [1825], 135.53. See also Ricardo 1951, II, 285, 446.54. The reference is to the Grounds of an Opinion, 1815. Malthus’s emphasis upon the

disturbance to the price structure of a wage-rate is reiterated, in Ricardo 1951, II, 285–6.55. Thus he wrote to McCulloch (9 October 1822; IX, 279): ‘You go a little further than I go

in estimating the value of commodities by the quantity of labour required to producethem: you appear to admit of no exceptions or qualification whatever, whereas I amalways willing to allow that some of the variations in the relative value of commoditiesmay be referred to causes distinct from the quantity of labour necessary to producethem.’ Here he had in mind the effects of changing wages: ‘To this second cause I do notattach near so much importance as Mr Malthus and others but I cannot wholly shut myeyes to it.’ To Malthus himself, he insisted that their difference was only one of degree,that is to say, that the effects of a variation in wages were limited: ‘no great effects canfollow because profits themselves constitute but a small portion of price, and no greataddition, or deduction can be made on their account’ (9 October 1820; VIII, 279).

56. Malthus had in mind Smith’s notion of the ‘natural prices’ of commodities determinedby the natural rate of wages and profits or ‘the ordinary or average rate which is found inevery society or neighbourhood, and which is regulated ... by the general circumstances ofthe society, their riches or poverty, their advancing, stationary, or declining conditions’.

57. De Quincey actually recognized the distinction in question but believed that the literaturetreated the matter at a superficial level (1970c, 155). De Quincey was much concernedwith bilateral monopoly while J.S. Mill operated in terms of a competitive structure andwished to fit De Quincey’s case into demand–supply analysis (1967, IV, 399f).

58. Extraordinary as it may seem Read went so far as to charge the ‘Ricardo School’ forfollowing Lauderdale’s lead in emphasizing utility and scarcity or supply– demand ratherthan cost analysis (1829, 220–1).

59. Several of the dissenters accorded labour a special role in their definitions of wealth. ThusRead defined wealth as ‘those external material objects, necessary, useful, or agreeable tomankind which it costs some considerable exertion of human labour or industry toproduce or acquire originally, and which once acquired can be transferred from one toanother – appropriated or alienated’. Further, he concluded that ‘as the existence of allvalue in exchange is wholly dependent on the necessity of some portion of human labour


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being employed in the production of those commodities in which value in exchangeforms an attribute, so labour is the only certain measure of that value’. Longfield, for hispart, observed that ‘as most of the commodities in which the wealth of the countryconsists are produced by labour, political-economists make use of it as a measure ofvalue’, and also that ‘all the commodities that men consume, and which can be made thesubject of exchanges, owe their existence and their value to labour. The exceptions to thisare very trifling, and are of such a nature that they do not vitiate any of the conclusionsdrawn from it.’ Whately, for his part, asserted that ‘valuable articles are in almost allinstances, obtained by labour’. And while Scrope spoke harshly against the notion oflabour as the ‘only source of wealth’, he nonetheless chose to describe capital as the‘result of previous labour’.

60. Whately 1832, 252–3: ‘It is not that pearls fetch a high price because men have dived forthem; but on the contrary, men dive for them because they fetch a high price.’

61. In a recent study of Lloyd, Romano (1977) observes that Lloyd adopted an approach torent as residual which grows in the course of secular expansion; however, he ascribed tothe ‘scarcity’ theory of rent developed by Thompson and Senior according to whichdifferential productivity is not a necessary condition. He made only scattered referencesto profits but suggests that profit rates had fallen due to increased ‘competition ofcapitals’ – the Smithian position.

62. But the charge of inconsistency on Ricardo’s part – having maintained simultaneouslythe conception of declining secular wages and the proposition that custom and habitassured constant wages – is quite unjustified (Longfield 1971 [1834], 205). There is nothingin the orthodox position which requires secular wages to be a constant in a growingeconomy.

63. Torrens, quite independently, formulated in his fifth (1829) edition of the Essay on theExternal Corn Trade (London: Longman, Rees, Orme, Brown, and Green, 1829), 468–9,a statement of the theory of development with special reference to the course of wagesand profits, which reflects, we believe, Ricardo’s own position on the matter. See also OnWages and Combination (London: Longman, Rees, Orme, Brown, Green, and Longman,1834), 21–2 for the same passage.

64. Actually very little appeared on the specific issue of value and distribution. But one sucharticle by Empson (‘Life, Writings, and Character of Mr. Malthus’, Edinburgh Review130, January 1837) was very well disposed towards Ricardo. Empson refers to Ricardo’s‘masterly criticism’, in his last letters, of Malthus’s pamphlet of 1823; and observed(correctly) that the influence of Ricardo remained strong with Malthus (1837, 470–2).

65. The proceedings of the Political Economy Club, particularly those of 13 January 1831,are frequently cited as evidence of widespread hostility amongst economists towardsRicardian economics. The debates in question turned on the question put by Torrens:‘What improvements have been effected in the science of Political Economy since thepublication of Mr Ricardo’s great work; and are any of the principles first advanced inthat work now acknowledged to be correct?’ (Centenary Volume of the Political EconomyClub (London: Political Economy Club, 1921, 35). According to J.L. Mallet’s account itwas Torrens’s opinion that

all the great principles of Ricardo’s work had been successively abandoned, and that histheories of Value, Rent and Profits were now generally acknowledged to have beenerroneous. As to value the dissertation on the Measure of value published in 1825 by Mr.

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Baillie [Bailey] of Leeds has settled that question. As Thompson had shown that Rent wasnot the effect of differences in the relative productiveness of soils, but the effect of demandand price, and as to profits, it is clear that the part that goes to replacing the capitalemployed, which Mr Ricardo had omitted to take into the account, was decisive of theunsoundness of his views (223–4).

66. Political Economy Club Centenary Volume, 224. (Cf. also McCulloch’s ‘boldly standing byRicardo’s doctrine, that equal quantities of labour are equal in value all over the world’ –in opposition to Torrens and Malthus.) However, both McCulloch and Tooke are reportedas accepting the criticism that Ricardo’s theory of profit was vitiated by the failure toallow for the replacement of fixed capital; while Tooke took exception to Ricardian valuetheory.

67. Political Economy Club Centenary Volume, 225 (emphasis added). Mallet himself took amore reserved view.

68. Letter to Whewell, 31 May 1831, in de Marchi and Sturges 1973, 391.69. Despite Schumpeter’s strong ‘indictment’ of Ricardo on the grounds of a failure to

appreciate the production–distribution process as a ‘web of exchanges’, on occasion hewas less severe. (See Schumpeter 1954, 568, 690.)

70. See also Schwartz 1972, 236–7.

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Bailey, S. (1825) A Critical Dissertation on the Nature, Measure and Causes of Value, London: R.Hunter

——(1826) A Letter to a Political Economist on the Subject of Value, London: R. Hunter.Black, R.D.C. (1971) ‘Introduction’, The Economic Writings of Mountifort Longfield, New York:

Augustus M. Kelley.Blaug, Mark (1958) Ricardian Economics, New Haven, Conn.: Yale University Press.Bowley, Marian (1972) ‘The Predecessors of Jevons: The Revolution that Wasn’t’, The Manchester

School of Economic and Social Studies XL (March): 9–29.——(1973) Studies in the History of Economic Theory before 1870, London: Macmillan.Cotterill, C.F. (1831) An Examination of the Doctrines of Value, London: Simpkin Marshall.de Marchi, Neil and Sturges, R.P. (1973) ‘Malthus and Ricardo’s Inductivist Critics’, Economica

XL (November): 379–93.Dennis, Ken (1973) ‘The Bailey Notebooks and Authorship of “Verbal Disputes”, History of

Economic Thought Newsletter No.11 (Autumn): 17–18.De Quincey, Thomas (1970a) [1824] Dialogues of Three Templars on Political Economy, in D.

Masson (ed.) Political Economy and Politics, Vol. X, Collected Works of Thomas de Quincey,[London, 1897] New York: Augustus M. Kelley, 37–112.

——(1970b) [1842] ‘Ricardo and Adam Smith’, Blackwood’s Edinburgh Magazine LII, 323(September), in D. Masson (ed.) Political Economy and Politics, 113–17.

——(1970c) [1844] The Logic of Political Economy, in D. Masson (ed.) Political Economy and Politics118–294.

Dobb, Maurice (1973) Theories of Value and Distribution since Adam Smith, Cambridge: CambridgeUniversity Press.


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Fetter, Frank W. (1953) ‘The Authorship of Economic Articles in the Edinburgh Review,1802–1847’, Journal of Political Economy LXI (June): 232–59.

——(1962) ‘Economic Articles in the Westminster Review and their Authors, 1824– 51’,Journal of Political Economy LXX (December): 570–96.

——(1965) ‘Economic Controversy in the British Reviews, 1802–50’, Economica XXXII:424–37.

——(1969) ‘The Rise and Decline of Ricardian Economics’, History of Political Economy I(Spring): 67–84.

Gordon, Barry (1969) ‘Criticism of Ricardian Views on Value and Distribution in theBritish Periodicals, 1820–1850’, History of Political Economy I (Fall): 370–87.

Grampp, W.D. (1974) ‘Malthus and his Contemporaries’, History of Political Economy VI(Fall): 278–304.

Groenewegen, P.W. (1973) ‘Review of Dobb Theories of Value...’, Economic Journal LXXXIV(March): 192–3.

Hicks, John and S. Hollander (1977) ‘Mr. Ricardo and the Moderns’, Quarterly Journal ofEconomics 91,3: 351–69.

Hollander, S. (1976) ‘Ricardianism, J.S. Mill, and the Neo-classical Challenge’ in J.M.Robson and M. Laine (eds) James and John Stuart Mill: Papers on the Centenary Conference,Toronto: University of Toronto Press.

——(1977) ‘Ricardo and the Corn Laws: A Revision’, History of Political Economy IX (Spring):1–47.

Hutchison, T.W. (1952) ‘Some Questions about Ricardo’, Economica XIX (November):415–32.

——(1974) ‘The Cambridge Version of the History of Economics’, University of BirminghamOccasional Paper No. 19 (January).

Knight, F.H. (1956) On the History and Method of Economics, Chicago: University of ChicagoPress.

Lloyd, W.F. (1834) A Lecture on the Notion of Value, London: Roake and Varby.Longfield, Mountifort (1971) [1834] Lectures on Political Economy (Dublin), in The Economic

Writings of Mountifort Longfield, New York: Augustus M. Kelley.McCulloch, J.R. (1872) [1825] The Principles of Political Economy, 1st edn, London: A

Murray.——(1965) [1864] The Principles of Political Economy, 5th edn, New York: Augustus M.

Kelley.McVickar, John (1966) [1825] Outlines of Political Economy, New York: Augustus M. Kelley.Malthus, T.R. (1957) [1823] The Measure of Value Stated and Illustrated, New York: Kelley

and Millman.——(1963) [1824] ‘Political Economy’, The Quarterly Review 30,60: 297–334, in Bernard

Semmel (ed.) Occasional Papers of T.R. Malthus, New York: Burt Franklin, 71–104.——(1964) [1836] Principles of Political Economy, 2nd (posthumous) edn, New York: Augustus

M. Kelley.Marx, Karl (1965) [1863] ‘Afterword’ to the 2nd German edition (1873) of Capital, I,

Moscow: Progress Publishers.

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——(1971) Theories of Surplus Value, III, Moscow: Progress Publishers.——(1973) [1857] Grundrisse: Foundations of the Critique of Political Economy, London: Penguin.Meek, R.L. (1967) Economics and Ideology and Other Essays, London: Chapman and Hall.Merivale, H. (1837) ‘Senior on Political Economy’, Edinburgh Review 133 (October).——(1840) ‘McCulloch’s Edition of The Wealth of Nations’, Edinburgh Review 142

(January).Mill, J.S. (1965) Principles of Political Economy, Collected Works, II, Toronto: University of

Toronto Press.——(1967) ‘The Nature, Origin, and Progress of Rent’, Collected Works, IV, Toronto:

University of Toronto Press, 161–80.Moss, Lawrence (1973) ‘Isaac Butt and the Early Development of the Marginal Utility

Theory of Imputation’, History of Political Economy V (Fall): 317–38.——(1974) ‘Mountifort Longfield’s Supply-and-Demand Theory’, History of Political Economy

VI (Winter): 405–34.O’Brien, D.P. (1970) J.R. McCulloch: A Study in Classical Economics, London: George Allen

and Unwin.Pasinetti, L.L. (1974) Growth and Income Distribution, Cambridge: Cambridge University

Press.Read, Samuel (1829) Political Economy: An Inquiry into the Natural Grounds of Right to

Vendible Property or Wealth, Edinburgh: Oliver and Boyd.Ricardo, David (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11

vols), Vol. I: Principles of Political Economy, Cambridge: Cambridge University Press.Robbins, Lionel (1958) Robert Torrens and the Evolution of Classical Economics, London:

Macmillan.Romano, R.M. (1977) ‘William Forster Lloyd – A Non-Ricardian?’ History of Political

Economy 9: 412–41.Schumpeter, J.A. (1954) History of Economic Analysis, New York: Oxford University Press.Schwartz, Pedro (1972) The New Political Economy of John Stuart Mill, London: London

School of Economics.Scrope, G. Poulett (1831) ‘The Political Economists’, Quarterly Review XLIV, 87 (January):

1–52.Seligman, E.R.A. (1903) ‘On Some Neglected British Economists, II’, Economic Journal

XIII (December): 511–35.Senior, Nassau W. (1821) ‘Report on the State of Agriculture’, Quarterly Review XXV, 50

(July).Stigler, G.J. (1965) Essays in the History of Economics, Chicago: University of Chicago Press.Thompson, T.P. (1832) The True Theory of Rent in Opposition to Mr Ricardo and Others, 9th

edn, London: R. Heward.Torrens, Robert (1826) An Essay on the External Corn Trade, 3rd edn, London: Rees, Orme

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——(1844) The Budget: On Commercial and Colonial Policy, London: Smith, Elder.Twiss, Travers (1847) View of the Progress of Political Economy in Europe since the Sixteenth

Century, London: Longman, Brown, Green and Longman.Viner, Jacob (1958) The Long View and The Short, Glencoe, Ill.: Free Press.Whately, R. (1832) Introductory Lectures on Political Economy, 2nd edn, London: B. Fellowes.

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This paper constitutes a speculative discussion of Ricardo’s possible ‘indebtedness’to Jeremy Bentham during the early course of development of his theoretical system.A precondition for good scholarship is, of course, the phrasing of worthwhilequestions. There are, in fact, two ‘mysteries’ which set the stage for our investigation.The first relates to Ricardo’s breakaway from Smithian principles – the abandonmentof the famous conception ‘competition of capitals’ in the context of profit-ratetheory, and more particularly the introduction of agricultural productivity as a keyvariable in that context. The second turns upon a lost Bentham manuscript, apparentlyonce in Ricardo’s possession, dealing with the effects on profits of cultivatingsuccessive qualities of land. A little elucidation is required regarding these matters.

In his pamphlet of 1810–11 Ricardo appears as a full-fledged Smithian on mosttheoretical matters. Thus, for example, in the High Price of Bullion he insisted that‘profits can only be lowered by a competition of capitals not consisting of circulatingmedium’ (Ricardo 1951, III, 92). But a concern with the general profit rate is notconspicuous at this stage and the matter is scarcely raised between Ricardo andMalthus in their correspondence of 1811. Indeed a preoccupation with currencyand the exchanges characterizes the extant Ricardo correspondence until March1813. The first indications of a specific concern with the theory of profits, and onewhich implies a breakaway from Smith (partial only at this stage) are contained intwo letters to Malthus dated 10 and 17 August 1813. 1

In the first of the two letters in question Ricardo objected to Malthus’s contention(made in correspondence and perhaps also in conversation) that contemporaryextensions of foreign trade could be taken as evidence of a rising rate of profit: ‘Onfurther reflection I am confirmed in the opinion which I gave with regard to theeffect of opening new markets or extending the old. I most readily allow that since

19THE ROLE OF BENTHAM IN THE

EARLY DEVELOPMENT OFRICARDIAN THEORY:A SPECULATIVE ESSAY


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the war, not only the nominal but the real value of our exports and imports hasincreased – but I do not see how this admission will favour the view which you takeof this subject ... [Extension of trade] does not prove a general increase of profitsnor any material growth of prosperity’ (VI, 93). 2 In the second letter Ricardo explicitlystated the position that attention should be directed at agricultural productivity tounderstand trends in the rate of profit:

That we have experienced a great increase of wealth and prosperity since thecommencement of the war, I am amongst the foremost to believe; but it isnot certain that such increase must have been attended by increased profits,or rather an increased rate of profits, for that is the question between us. Ihave little doubt however that for a long period, during the interval youmention [1793–1813], there has been an increased rate of profits, but it hasbeen accompanied with such decided improvements of agriculture bothhere and abroad, – for the French revolution was exceedingly favorable tothe increased production of food, that it is perfectly reconcileable to mytheory. My conclusion is that there has been a rapid increase of Capital which has beenprevented from shewing itself in a low rate of interest by new facilities in the productionof food.

(Ricardo 1951, VI, 94–5; emphasis added)

Quite clearly, Ricardo presumed that but for improved agricultural technologyduring the Revolutionary and Napoleonic periods the profit rate would have declinedwith accumulation.

Each of the extracts given above is followed by statements insisting that an increasein general prices occurs only in consequence of a rising money supply (or velocity),while only a falling level of prices can induce a monetary inflow. 3 Although wecannot be positive about the matter it is most likely that the statements alluding tothe profit rate and those relating to the monetary mechanism are connected ratherthan independent. If this is so, Ricardo appears to be objecting to a formulation byMalthus very similar to that which was to appear later in the latter’s Principles of 1820– namely that an increase in the value of aggregate output from given resources maybe ‘occasioned by commerce’ and will be associated with a rise in profits of thoseengaged in the new or expanded trade which extends to the general rate of return. 4

It would seem to be precisely this body of doctrine, which attributes the rising valueof national product since 1793 to the opening of new markets for British goods,with which Ricardo took issue in 1813, apparently on the grounds that the expansionof the means of finance required to assure a higher level of prices and profits, ofwhich Malthus was very confident, would not in fact be forthcoming.

Ricardo’s rejection of Malthus’s position implies the rejection of the standardSmithian view according to which ‘the acquisition of new territory, or new branches

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THE ROLE OF BENTHAM

of trade, may sometimes raise the profits of stock ... even in a country fast advancingin the acquisition of riches’, by way of the reduction in the pressure exerted by‘competition of capitals’ (Smith 1937, 93). Early in 1811 Ricardo had been maintainingthe Smithian position that the price level will vary with the general profit rate(analysed in terms of ‘competition of capitals’; 1951, III, 92), although at the sametime (as we shall see) he also insisted (in a different context) that a monetary expansionwas essential to assure a rise in general prices. He was bound sooner or later formallyto take issue with the Wealth of Nations. Malthus’s analysis of the period 1793–1813 interms of Smithian principles may have merely served as catalyst in this intellectualprocess.

Still, dissatisfaction with Smith along the above lines does not explain adoptionof the alternative analysis relating the profit rate to agricultural productivity. Theprecise nature of this transition remains an uncertain matter. Whence this positiveaspect of Ricardo’s new position?

Here a potentially complicating feature of the record requires attention. Whatconclusions can be drawn regarding Ricardo’s intellectual indebtedness from therecognition by Smith himself of the phenomenon of increasing land scarcity and itsimplications for distribution? For at one juncture in his chapter ‘Of the Profits ofStock’ Smith related the secular decline of the return on capital to the necessity ofextending cultivation to increasingly inferior land: ‘As the colony increases, theprofits of stock gradually diminish. When the most fertile and best situated landshave been all occupied, less profit can be made by the cultivation of what is inferiorboth in soil and situation.’ The (real) wage is likely to rise, we are told, at least for aperiod, but since the ultimate state of stationarity is characterized by minimumwages (‘subsistence’ wages in the technical sense) the effects of increasing land scarcitymust ultimately include a falling trend of average wages: ‘In a country fully peopledin proportion to what either its territory could maintain or its stock employ, thecompetition for employment would necessarily be so great as to reduce the wages oflabour to what was barely sufficient to keep up the number of labourers’ (Smith1937, 92f). (This is not the only discussion in Smith’s work of this kind of conception.The implications of changing factor ratios for resource allocation between agricultureand manufacturing and different categories of manufacturing – plentiful and cheapland and scarce and dear labour at an early stage of development, and increasingscarcity of land and abundance of labour as growth proceeds – are developed quiteextensively in Book III of the Wealth of Nations in the chapter ‘Of the NaturalProgress of Opulence’ and in Book IV in the chapter ‘Of Colonies’.) 5

Despite the presence in Smith’s work of these allusions to the implications ofincreasing land scarcity, it would, I believe, be an error to give much weight to anydependency by Ricardo upon his predecessor as far as this matter is concerned. Onthe contrary, the evidence suggests that he was quite unaware of Smith’s discussions.


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But if Ricardo in fact misunderstood Smith’s intentions, Smith himself must bear alarge part of the responsibility, for his notion of ‘competition of capitals’ occursrepeatedly in the analysis of the profit rate and is presented as the general theoryinto which the consequences of diminishing returns may be fitted as a special case.It is not surprising then that what appear to be the obvious implications for Ricardo’sown argument of what Smith had to say about secular changes in factor ratios ingeneral and land scarcity in particular should have escaped him.

I conclude therefore that Ricardo’s new theory of profit – that aspect involvinga linkage between agricultural productivity and the profit rate – constituted anintellectual break with Smith. While for some purposes it may be legitimate to talkof a ‘canonical’ classical theory of growth and distribution, 6 it would be inappropriateto do so in the context of our present problem.

Where does Bentham fit into the story? In The Works and Correspondence of DavidRicardo, there appears the following editorial note: ‘In the Mill–Ricardo case [of theRicardo Papers now deposited at Cambridge] there is also a paper probably inBentham’s hand-writing on the effects on profits of cultivating successive qualitiesof land’ (1951, X, 388n). I have made a thorough search of the Ricardo Papers andno such document is to be found. It is perhaps fair to assume that the editor feltthat the item in question lacked any connection with the origins of Ricardo’s theory,or was not in any other way interesting. 7 Yet to leave the matter there is not satisfying.The existence of such a manuscript whets the appetite. It opens up the possibility atleast that Ricardo may have learned something from Bentham regarding the matterat hand. For this reason I wish to explore further some of the potentialities of theconnection.

I shall consider first, within an appropriate general framework, Bentham’s ownposition on the question of land scarcity and its implications for distribution,before turning to what we know of Ricardo’s familiarity therewith.

I . L A N D S C A R C I T Y A N D T H E F A L L I N G R A T E O FPROFIT

Throughout the entire range of Bentham’s writings allusions will be found to adownward trend in the rate of profit during the course of secular expansion – atrend formally related to increasing ‘competition of capitals’. There can be no doubtof the Smithian pedigree for the principle, on the basis of which Bentham rationalizedthe supposed fact that ‘Holland excepted, there is no nation that has so much capitalas England, and consequently none which invests it with so little profit’. 8 But thereis an ambiguity to be reckoned with. When Smith referred to ‘competition ofcapitals’ he had in mind pressure in both commodity and labour markets. It is not

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always clear which of these phenomena – the first clashing with the law of marketsand the second quite consistent with it – Bentham had in mind in his variousstatements or whether both were intended.

The falling profit rate is sometimes discussed without reference to pressure fromrising real wages: ‘It is the tendency and property of what may be called naturallyformed capital, to lower prices in a variety of ways, in proportion to its encrease: tolower the cost of production in respect of labour, by division of labour, introductionof machinery, and so forth, as per Adam Smith; to lower the rate of profit on stock,to wit by competition, as again per Adam Smith’ (1954f [1800–1], II, 450). It appearsthat Bentham, here at least, had in mind downward pressure on final prices, animpression confirmed in the lengthy tract on Circulating Annuities in a passage touchingupon some consequences of a rise in the rate of accumulation:

By adding to the number of capitalists of all sorts, [i.e.] proprietors of stockemployed in the several branches of productive industry in the productionof the several vendible articles of national wealth, and thereby, by encreasingthe competition amongst them, in their capacity of vendors of such articles, reducing therate of profit upon stock (including the rate of interest on money borrowed tobe employed as stock), reducing the real as well as money prices of sucharticles, in as far as the profit upon stock constitutes a component part inthe composition of such prices, and thus encreasing the quantity of vendiblearticles of each given kind brought to market by the employment of a givensum of money.

(Bentham 1954e [1800], II, 303)

It cannot however be ruled out that, even when not explicit about the matter,Bentham may also have intended pressure on profits by way of rising real wages.And there are instances where this certainly appears to be his intention. Thus in theearly work In Defence of Usury : ‘when capital is plenty, interest will be low, and realprice of labour high’ and when capital is scarce, interest is high, and real price oflabour low. More generally, ‘the relative quantity of capital will encrease, andconsequently the rate of interest fall, where thesaurisation goes on faster thanpopulation’ (1954a [1787], I, 206–7). From this perspective profits are treated as a‘residual’, 9 varying inversely with the wage rate.

Rising real wages appear in Bentham’s vision of the recent past – the last three orfour decades of the eighteenth century – given in the paper of 1795 entitled SupplyWithout Burden. Here Bentham observed that ‘Children in greater and greater numbersare every year produced, children which for a certain number of years in the earlyerpart of their lives consume something without producing anything. But wealth instill greater quantities than is necessary for the maintenance of the children during


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that expensive period of their lives is at the same time every year laid up’ (1954d[1795], I, 361).10

It must be noted that a rapid rate of accumulation (and consequently risingwages) is not necessarily inconsistent with ‘diminishing returns’. But on the whole theimpression seems to be that Bentham here took for granted increasing returns. Referenceis frequently made to increasing ‘relative wealth’, or ‘wealth in proportion to thenumbers of those who share it’ (366), which strictly interpreted includes non-wageearners as well as wage earners. If increasing real average wages are in fact a featureaccounting for the falling rate of profit it must logically be presumed that theirupward movement exceeds that of productivity.

In the later Institute of Political Economy further reference is made to growth ratesduring the last three or four decades of the eighteenth century, implying that ‘wealthhas gone on encreasing faster than population’ (1954j [1801–4], III, 376). At the sametime Bentham also observed that ‘the half, or thereabout, of the aggregate wealth willbe that which is shared among individuals of the poorest class: and in the case ofthat class, the wealth of an average individual appears within the period in questionto have rather diminished than encreased’. The reference to falling real wages isspecifically to the poorest class and it does not preclude rising wages to labour as awhole.11

Whatever may have been the experience of the past with respect to productivityand general wages, prospects for the future were less promising. I come at last to thematter of land scarcity and its implications for distribution.

In some of his earlier writings Bentham made a case against colonies on thegrounds that domestic investment opportunities – with particular reference toagriculture – were unlimited; colonial activity implied merely the transfer of capitalfrom one use to another with no net benefit: ‘It is impossible ... [that] you can everhave too much agriculture. It is impossible that, while there is ground untilled, orground that might be better tilled than it is, any detriment should ensue to thecommunity from the withholding or withdrawing capital from any other branch ofindustry and employing it in agriculture. It is impossible ... that the loss of anybranch of trade can be productive of any detriment to the community’ (Bentham1954b [c.1790], I, 217) The assertion hinges on the proposition, that ‘by promotingan encrease of the productions of agriculture ... you create a demand for the industryof those who afford a demand for the productions of agriculture’ (216). It is unlikelythat it would have been so formulated in the event that land scarcity constituted anissue. But, somewhat later, a case was made out for colonization in the Institute ofPolitical Economy, as a means of counteracting the prospective downward trend ofreal wages attributed to growing land scarcity: ‘taking futurity into the scale, thewell-being of mankind appears to have been promoted upon the whole by theestablishment of colonies. Taking Britain for example, at the rate at which population

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has been encreasing for this last century, long before the conclusion of the presentcentury, the population would have extended beyond the utmost number for whichthe soil would be capable of affording sustenance: long before which period [a]great diminution of relative opulence, a severe sense of general poverty and distress,would necessarily have taken place’ (1954j [1801–4], III, 355). 12

The True Alarm similarly spells out the consequences of land scarcity as an evenmore immediate prospect: ‘If we consider further the rapid encrease of populationsuch as it has been even during the war, if we observe that it would soon, by itsnatural course, reach the point where it exceeds the means of subsistence which thetwo isles could produce, it will be recognized that the emigration of men and capitalis a real good in the present state of Great Britain’ (1954g [1801], III, 68). 13 And, inthe Defence of a Maximum, ‘exportation of capital and emigration’ are cited as the solevalid solutions, apart from the setting up of state magazines, for the consequences ofthe increasing scarcity of corn:

The scarcity has for its ulterior cause prosperity in all its shapes: an exuberantpopulation, exuberant not with reference to wealth taken in all its shapes, forthat too is an exuberance, but with respect to the capacity of raising withinthe local precincts of the chief seat of empire the quantity of food necessaryfor the sustenance of its inhabitants ....

In regard to scarcity, two remedies commonly relied on as sufficient areessentially inadequate: cultivation of wastes, and importation with or withoutbounties: ... two others commonly shrunk from, but the only ones uponwhich any safe reliance can be placed: magazines on public account, andfacility afforded, allowance declaredly and liberally given, to exportation ofcapital and emigration.

By inadequate, in speaking of cu[l]ture of wastes, I certainly do not meanundesirable: but where is the resource when all shall have been brought intoculture? a state of things which many now living may perhaps live to see. Thearrival of the period is an event worth calculation, but [this] is not a fit place[for it]. ... In the mean time encrease of mouths is going on, as fast perhapsas the encrease of land in a state to feed them. ...

It is time to cast off antipathies and panic, and look difficulties in theface. Subsistence must remain for ever precarious, or magazines must beestablished. Wheat with the inferior grains rather than none – rice fromHindostan would stand clearest of objection. The objections that have beenurged against magazines are strong, perhaps conclusive. But they all turnupon a state of things out of which we have emerged, and in which nothingbut some unexampled calamity can replace us. They turn upon an habitualsufficiency, either actual or possible, of the average stock of grain for the


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subsistence of [all] inhabitants. With us, barring calamity as above, oremigration to an unexampled and improbable amount, the very possibilityof such a sufficiency is gone for ever. Population has already outstrippedculture. Population having no limit, so long as food is to be had fromabroad in exchange for wealth, that it should ever be overtaken by cultureseems altogether improbable, that it should long continue so to do is, unlesscontiguous land were to arise out of the sea, impossible.

(Bentham 1954i [1801], III, 293–6)

In the same work will be found pertinent references to the limits imposed uponthe application of capital to agriculture (flowing in part from the small size ofholdings) (299f). And a criticism of the expenses entailed by colonies concludes inthe following terms:

Thus stands the account, so long as the land suffices for its inhabitants inprospect as well as in existence, and so long as emigration, whether of handsor capital, is a loss. But when efflux in both ways is become a relief – effluxof hands and mouths by mitigating scarcity, efflux of capital by mitigatingthe income tax imposed by capitalists upon capitalists as capital accumulates,and the rate of interest, the income obtainable for the use of it, is bornedown – in this already impending, if yet scarcely so much as imagined, stateof things, colonies, though still a drain, are notwithstanding, and even becausethey are a drain, a relief.

(Bentham 1954i [1801], III, 301–2)

The outcome of this seems clear enough – the consequences of land scarcity are afalling rate of real wages and a falling rate of profit. 14 The former trend is explicitlynoted and also suggested by the allusions to emigration, while the latter is impliedby the references to capital export also within the context of the implications ofland scarcity.

It also follows that the falling profit rate does not necessarily hinge upon risingcommodity wages; it may, in conditions of falling productivity, occur despite adownward trend in the real wage rate. This constitutes what was to be standard Ricardiandoctrine and Bentham preceded Ricardo in the general formulation. Can more be saidregarding the logic for the case? I turn to this matter in the next section.

I I . A N I M P L I C I T L O G I C A L B A S I S F O R B E N T H A M ’ SPOSITION

It is possible to construct a logical basis for Bentham’s position from his writingsalong the following lines. The reasoning amounts in substance to that subsequentlyutilized by Ricardo.

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Land scarcity is manifested in the rising prices of cereals. Thus in Paper Mischiefthe contemporary price movements are explained partly by an ‘occasional’ cause –poor harvests – and partly by an ‘habitual’ cause, namely ‘a deficiency in the quantityof land employed in the production of the article in question, regard being had tothe continually encreasing numbers of the mouths that call for it’ (1954f, II, 435). 15

Moreover, Bentham adhered to Smith’s approach towards both real-wagedetermination, running in terms of the relative growth rates of capital and population,and money-wage determination involving the real wage in conjunction with theprices of wage goods. According to the Smithian analysis a change in the price ofcereals will imply subsequently an appropriate change in the money wage to assureagainst any reduction in the commodity wage. (It must be emphasized that nothingin the argument hinges upon the presumption that ‘subsistence’ wages prevail.) Thematter is stated repeatedly but nowhere clearer than in the Manual of Political Economyin the context of a hypothetical fall in the price of oats in consequence of a subsidy:

Oats would be sold to the poor for less money to the amount of the bounty,but they would get less money to buy oats with. What the poorest class of thepoor has to live upon, is the wages of labour: that is the quantity of wealthgiven to them in exchange for their labour. But the rate of wages dependsupon, and is necessarily governed solely and exclusively by, the degree ofopulence in the country at the time: that is by the proportion of the quantityof wealth in readiness to be employed in the shape of capital in the purchaseof labour to the number of persons for whose labour there is a demand: andthis degree of opulence is supposed ... to be the same.

(Bentham 1954c [1793–5], I, 247–8)16

For the next step in the argument we must refer back to Bentham’s adherence tothe Smithian ‘adding-up’ cost theory of price. This has been briefly documentedearlier from various statements relating reduced general prices to a lower return oncapital in the context of the discussion of ‘competition of capitals’ (above, p. 327).In one of the relevant discussions – that in Circulating Annuities – there is a considerableelaboration of the consequences for prices of upward pressure on wages. A distinctionis there drawn between cases of initial unemployment and initial full employment;money supply increase in the latter case will generate upward pressure on generalprices in consequence of higher wage costs per unit:

If it were possible that such offer should confine itself to hands whose timewas already fully employed, and employed to as much advantage (in respectof the amount of their contribution to the general mass of national wealth)as they would be were the supposed fresh offer to be accepted by them, itcould not, although it were accepted, be productive of any the smallest


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addition whatever to the general mass of national wealth: it could have noother effect than that of raising the price of labour, and thence the prices ofgoods, in respect of such part of the price of goods as is composed of theprice of the labour employed in the production of those goods.

(Bentham 1954e [1800], II, 304–5)17

It appears from this passage read in context that the adding-upcost approach,according to which a rise in a cost element (such as wages) implies a consequentialincrease in general prices, was strictly conditional upon a concomitant expansion of themoney supply. Moreover, detailed discussions of the effects on general prices of increasedmoney supply acting by way of the higher expenditure by labourers on consumergoods will also be found in The True Alarm (1954g, III, 114f). Bentham’s adherence toSmithian doctrine was evidently much qualified. Before exploring the implicationsof this qualification it will be fruitful to examine Bentham’s highly critical commentson Smith regarding the general price level.

In The True Alarm Bentham took Smith to task for failing to deal with twoquestions relating to the monetary mechanism: ‘In which way and by what causesdoes cash receive an encrease?’ and ‘Why is the Bank of England the only channel, oralmost the only channel, through which gold in bars passes to the Mint and entersinto circulation?’ (131n). 18 In a subsequent passage, apparently part of the samemanuscript (sometimes referred to as ‘Of the Balance of Trade’) the first criticism isapplied to Smith’s analysis of contemporary price movements, according to which –at least on Bentham’s reading – increased general prices, over an extended period oftime, were accounted for in terms of a series of poor harvests, without allowance forthe necessary increase in money supply :

Speaking of his own time, [Smith] denies the facts of an encrease of prices inso far as it depends on an encrease of money. He does admit an encrease ofprices, and even for the period of the ten or twelve years ending in 1775; buthe attributes it to the bad seasons, and not to money. He prefers theassumption of ten or twelve bad seasons to any other: not considering that,though the dearth of corn may encrease the relative price of this commodityfor a time, yet it cannot encrease the aggregate of prices for any considerablelength of time: because the encrease in the aggregate of prices implies bydefinition an encrease in the aggregate of money, both quantity and [velocityof] circulation being taken into account.

(Bentham 1954h [1801], III, 237) 19

Bentham frequently restated his position – without necessarily referring to theWealth of Nations – that an increased volume of money (or higher velocity) is

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essential to maintain a higher price level, except in the case of short-term grainshortages and war:

These two causes suffice to bring about, each in its sphere of action, a rise ofprices, and even a considerable rise, without any addition having been madeto the mass of money.

These two cases excepted, prices can only rise by reason of a pecuniaryaugmentation in the mass of the national revenue, that is to say, in the totalof individual revenues: and that augmentation can only take place by theaddition of a new quantity of money, or by a greater rapidity in its circulation.

(Bentham 1954g [1801], III, 114–15)

It follows logically from all this that a rise in money wages during the course ofa regular process of capital accumulation – assuming relatively slow population growth,and an unchanged supply of money – cannot generate a general rise of prices. 20 Italso follows logically, and this is the key point for our purposes in this paper, thatthe rising price of corn in the course of secular expansion due to land scarcity,induces a compensatory rise in the money wage rate to assure unchanged real wageswhich cannot be passed on in higher general prices (in the event of a constant moneysupply) and which therefore exerts pressure on the return on capital. 21 In the eventthat the burden of land scarcity is, so to speak, shared between labourers and capitalists– as Bentham implies by his allusions to a falling real-wage rate as well as a fallingprofit rate in his discussions of secular trends – a slight modification is required:The money-wage increase in consequence of the higher corn price will be insufficientto prevent some decline in the commodity wage in which case the fall in the profitrate is somewhat checked though not prevented. 22

I I I . O N R I C A R D O ’ S P O S S I B L E ‘ D E B T ’ T O B E N T H A M

The inverse relationship between wages and profits constitutes what came to beknown as the fundamental Ricardian theorem on distribution. It is my belief, basedon the foregoing evidence, that the theorem itself and the logic upon which Ricardoconstructed his case for a falling profit rate in consequence of land scarcity – whichturns strategically upon the demonstration of constant general prices in the face ofa rising price of corn and money wage rate 23 – are to be found in Bentham’swritings at the turn of the century.

Yet we must proceed cautiously. Even if it were certain that the Bentham documentsexamined above had been available to Ricardo we could not be sure of the impressionconveyed thereby. It must be remembered that while Bentham related the seculardecline of the profit rate to land scarcity the logic for the relationship traced out in


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our reconstruction was by no means formulated by Bentham himself in a deliberateand concerted fashion; in particular, the squeeze on profits exerted by the constancyof prices in the face of rising money wages is only an implicit property of hisargument, but not explicitly stated. Nor did he formally disclaim the principles of‘competition of capitals’ and the ‘adding-up-cost’ approach to pricing. 24

What we in fact do know of Ricardo’s reaction to Bentham and othercontemporaries during the period of his transition from Smithian theory, andimmediately before, reinforces the need for prudence in the drawing of intellectuallinkages. This matter requires our attention.

A French translation, entitled ‘Sur les Prix’, by Etienne Dumont of Bentham’sThe True Alarm – made during the period 1802–10 – found its way into Ricardo’shands through James Mill, and Ricardo made informal notes on the manuscript. Itis not clear that he saw the entire document reproduced by Stark and the specificcriticism therein of Smith. 25 Moreover, the document sometimes referred to as ‘Ofthe Balance of Trade’, which was originally probably part of The True Alarm, may nothave been seen by Ricardo (Stark 1954, III, 27). But Ricardo did comment uponBentham’s allowances regarding general price increase (given the money supply) inthe case of short-term grain shortages: ‘If any rise in the price of commodities iscaused in the way here supposed it must be by diminishing the amount ofcommodities, which will make the money which circulates them more relativelyabundant. If the commodities remained the same and their price was increased,more money would be absolutely necessary to circulate them. But if it is the mass ofprices of which the author speaks, he is mistaken because what [ sic] one commodityrose in price another would fall’ (Ricardo 1951, III, 300).

The passage is somewhat unclear for it would seem logical to suppose that in thecase of a poor harvest the volume of transactions does decline. However, the followingnote suggests that Ricardo was insisting upon an unchanged price level in finalequilibrium alone, conceding a temporary price increase as part of the adjustmentmechanism: ‘[Bentham’s] arguments are all founded on the supposition of the countryto which they are applied being insulated from all others. If not it is evident that therapidity of the circulation would cause an exportation of money, and would nottherefore raise prices at home’ (III, 300). 26

An increase in the money supply was thus said to be essential for a (permanent)rise of general prices. 27 Moreover, at least in the ‘sound state’ of the currency, suchan increase in the money supply occurred only in response to an initially reducedprice level; no other means of raising the money supply was conceded (III, 325).Indeed, Ricardo firmly rejected Bentham’s various allusions to real output effects ofmonetary expansion in terms making this very clear: ‘money cannot call forth goods’,he insisted, ‘but goods can call forth money’ (III, 301).

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THE ROLE OF BENTHAM

Ricardo’s insistence, in line with that of Bentham, upon an increase in the money supply toassure a higher level of prices is inconsistent with subscription to the Smithian proposition that amoney wage increase or an increase in profits will be passed on to consumers. It is precisely thisdirection that the subsequent Ricardian argument was to take. But there is nothingto suggest at this stage that Ricardo recognized these implications.

We must now address the matter of land scarcity and its relevance for distribution.Ricardo explicitly commented on a passage in Dumont’s translation involving theconsequences of land scarcity for the returns to labour and capital, 28 but denied anyadvantage to capital outflows and insisted that stationariness was a far distant prospect:‘It can never be allowed that the emigration of Capital can be beneficial to a state. Aloss of capital may immediately change an increasing state to a Stationary or retrogradestate. A nation is only advancing whilst it accumulates capital. Great Britain is fardistant from the point where capital can no longer be advantageously accumulated.I do not mean to deny that individual capitalists will be benefited by emigration inmany cases, – but England even if she received the revenues from the Capital employedin other countries would be a real sufferer’ (III, 274). By itself this might appear toconstitute an index of Ricardo’s appreciation of the key theoretical issue at hand –his difference with Bentham amounting solely to the empirical question of proximityto the stationary state. There exists, moreover, an independent allusion in Ricardo’snotes on Bentham to the matter of diminishing returns: ‘It appears to me that thepossession of new Land would add to our own sum of riches without additionallabour, because the same labour employed on double the quantity of equally goodland now in cultivation in England would produce a greater return. This opinion isfounded on the decreasing power of the land to produce in proportion to thelabour and capital employed on it’ (III, 287). 29

But the implications of these references should not be exaggerated. This becomesclear when we carry the story further. I turn to an obscure work of 1810 by CouttsTrotter which came to Ricardo’s attention. 30

Trotter had denied the existence of a contemporary excess paper issue: ‘the currencyof the country is in no degree depreciated by the use of paper’ (in Ricardo 1951, III,388). That the currency had lost some part of its value is conceded but the fact isascribed to gold itself (throughout Europe) falling in value relative to commodities;to the burden of taxation; and to the increase in population. It is the last whichinterests us here. For Trotter gave a clear statement of diminishing returns, andattempted to relate the phenomenon to the level of general prices by way of theprice of corn and the wage rate:

In a country insulated as ours now is, by political as well as naturalcircumstances, every increase of population must make an increase in the


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demand for all the articles which land and industry produce. To raise theformer, worse soils and more unfavourable situations must be taken intocultivation; and the produce therefore will be obtained, and must be sold, atan increased expense. To create the latter, men must be paid at a higher rateof wages, because in every state of society, and especially in one progressive,as that of England is, men must receive somewhat above what is necessary fortheir support; and the expense of that support will be regulated principallyby the cheapness or dearness of food.

(Trotter, in Ricardo 1951, III, 388–9)

Trotter thus linked the Smithian relationship between the corn price and generalprices to the principle of diminishing returns.

Ricardo’s response is of the very first importance. It is that ‘every increase ofpopulation must arise from an increase of capital, and has a tendency to lower theprices of commodities and therefore the wages of labour, not to raise them’ (III,389). The notion of diminishing returns, and implications thereof for the risingreal costs of food production, would appear from this observation to have beentotally foreign to Ricardo – despite the allusions to the phenomenon in the Notes onBentham. Ricardo had his eye solely upon the depressing effects upon prices ofSmith’s ‘increased competition’ between capitalists: ‘An increase of Capital neverraises the prices of commodities. ... Can there be an increase of population withoutan increase of Capital having preceded it?, yet ... we are told that an increase ofpopulation will occasion a rise in the price of commodities, and in the wages oflabour. ... A competition of Capitalists keeps down prices’ (III, 389–90).

It is evident then that, at least until the early months of 1811, Ricardo fell squarelyin the Smithian camp. His attachment to the principles of the Wealth of Nationsextended to the effect on the price level of changes in the price of corn by way ofwage-rate variation; the ‘adding-up’ cost theory of price; and the explanation ofprofit-rate determination in terms of the ‘competition of capital’. At the same time,building-blocks for a reconstruction were already at hand in Trotter’s explicit formulation of theprinciple of diminishing returns applied to explain rising corn prices and money wages – if not inBentham’s less formal statements – coupled with Bentham’s insistence – to which Ricardosubscribed – that any general price increase cannot be sustained without an increased volume ofmoney. Ricardo’s total unawareness of this potent mixture is clear not only from thefact that he rejected Trotter’s case based upon diminishing returns, but that he didso on the grounds of inconsistency between this argument and the Smithian notionof ‘competition of capitals’ whereby capital accumulation was supposed to lowergeneral prices, rather than the ‘monetary’ grounds of the non-sustainability of highergeneral prices (along which lines the breakaway was ultimately to occur).

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It seems fair to conclude from this episode, quite generally, that the extant documentswhich came to Ricardo’s attention in 1810–11 – and these include some of theBentham items we have discussed – left no impression upon him (no consciousimpression at least) regarding the main issue at hand. There remains then only thelost Bentham manuscript on the effects on profits of cultivating successive qualitiesof land, referred to by Piero Sraffa. Unless and until this comes to light I cannot seethat much more can be said on the potential influence of Bentham upon Ricardo.

In conclusion, I would add only that since Bentham had written most of hiseconomics by 1813 it is probable that the lost document was of no later date; ittherefore remains an open possibility that Ricardo’s new doctrine, formulated inthe first half of that year, may have owed something to Bentham. This possibility isreinforced by the presence in the extant Bentham manuscripts of arguments, outlinedin this paper, which are quite consistent with those subsequently used by Ricardo inmaking his case.

NOTES

1. There are no extant letters between those of late March and early August 1813, whilethose up until 24 March make no mention of profit-rate determination. As it is mostunlikely that what Ricardo called ‘my theory’ in August would have been underconsideration without appearing in the correspondence, the transition from the Smithianconception, it seems safe to conclude, probably occurred at some time during the four-month period from April to July 1813.

2. Malthus’s letter, to which Ricardo’s of 10 August is a reply, and Malthus’s answer areboth wanting; indeed we do not have any Malthus letters from March 1812 until June1814. The two met frequently, however, during 1813 and the issue of profit-ratedetermination was doubtless discussed. Letters by other correspondents to Ricardo betweenJanuary 1812 and November 1813 are missing.

3. Thus immediately after the passage from the letter of 10 August Ricardo formalized theproposition in the following terms: ‘I am of opinion that the increased value ofcommodities is always the effect of an increase either in the quantity of the circulatingmedium or in its power, by the improvements in economy in its use, – and is never thecause. It is the diminished value, I mean nominal value, of commodities which is thegreat cause of the increased production of the mines, – but the increased nominal valueof commodities can never call money into circulation. It is certainly an effect and nota cause.’ Similarly, immediately following the passage from the second letter Ricardoasserted of commodities in general that it is ‘their cheapness which is the immediatecause of the introduction of additional money’ (1951, VI, 93–4, 95).

4. This interpretation was first suggested by G.S.L Tucker, ‘The Origins of Ricardo’s Theoryof Profits’ (1954, 323–4).

5. The discussion of Smith’s Books III and IV is analysed in my Economics of Adam Smith(1973), chap. 10, dealing with investment priorities.

6. Great weight is placed on the ‘Ricardian’ implications of Smith’s discussion of growthand distribution in Samuelson 1977 and Samuelson 1978.

7. Professor Burns, who heads the University College ‘Bentham Project’, has written to the


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present writer: ‘Nothing that I am aware of here, in the British Museum or among theDumont papers in Geneva seems to correspond to the paper Sraffa described.’

8. Jeremy Bentham, Of the Balance of Trade [1801], in W. Stark (ed.) Jeremy Bentham’s EconomicWritings (London, 1954) III, 222. I rely throughout on this collection.

9. See, for example, 1954a [1787], I, 116–17, where Bentham writes of profits as therevenue remaining to the employer after deducting wages.

10. It may be noted that the falling profit rate is alluded to in this context, p. 359.11. Cf. also some rough notes by Bentham cited by Stark 1954, III, 482, referring to ‘the

impossibility of raising the wages of ordinary labour beyond mere subsistence’, but alsoasserting that ‘the higher the wages of labour the better consistent with national security’which implies a distinction between different groups of labourers.

12. (See also 352–3.) There is a similar (but not identical) reference recorded by Bowring inhis edition of the Manual of Political Economy :Let us take England, for example. According to the progress which population hasmade during the last century, it may be supposed that it would soon have attained itsextreme limits – that is to say, that it would have exceeded the ordinary means ofsubsistence, if the superabundance had not found means of discharging itself inthese new countries. But a long time before population has reached these limits, therewill be a great diminution of relative opulence, a painful feeling of general povertyand distress, a superabundance of men of all the labouring classes, and a mischievousrivalry in offering their labour at the lowest price. (John Bowring, The Works of JeremyBentham, London 1833–43, III, 53)

According to Stark (1954, I, 49), the ‘Manual’ as published by Bowring is in fact largelyfrom a manuscript developed after the turn of the century, and designed for the Instituteof Political Economy.In certain materials apparently prepared for the Manual of Political Economy (1793–5), as

classified by Stark, there is explicit reference to the stationary state and subsistencewages, reminiscent of the Wealth of Nations ; cf. 1954, III, 539. Also in the Manual will befound the celebrated passages in Latin alluding to birth control as a means of preventingpopulation increasing more rapidly than capital (1954c, I, 272–3). On this matter seeJ.R. Poynter, Society and Pauperism; English Ideas on Poor Relief, 1795–1834 (London andToronto, 1969), 122f.

13. It is not clear to me that the case for capital export is necessarily connected to Bentham’sallowances of a possible divergence between savings and investment; but see Winch1965, 33.

14. The falling profit rate for Bentham (as for Smith and the later classicals) was a ‘contingentprediction’, conditional upon appropriate ceteris paribus conditions. See, for example,1954d, I, 359–60; 1954h, III, 222, 287, 352, 469.

15. Reference is made in The True Alarm (1954g, III, 135) to a relative rise in the prices ofagricultural compared to manufactured produce – since 1760 the former had increasedby more than 50 per cent and the latter by at most 12 ½ per cent. (Cf. also CirculatingAnnuities, 1954e, II, 331.)

16. See also 1954c, I, 236n, 272–3, regarding real-wage determination. On the variability ofthe money wage with the price of provisions see II, 447–8; III, 91–2, 127, 246, 503. Forfurther discussion of Bentham on real-wage rate determination see Poynter 1969, 120–1.

17. (The same principles are applied to rent, 1954e, II, 303.) By contrast: ‘If it were possible

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that such offer could confine itself to hands as yet altogether without employ, it would,in as far as it were thus accepted, be productive of a real addition to the mass of wealth,without any corresponding addition, or any addition at all, to the price of labour, andtherefore without any addition at all to such part of the prices of goods as is composed ofthe price of the labour employed in the production of these goods’ (304).

18. Cf. also 1954e, II, 339, 342n.19. Bentham did not, however specifically attribute to Smith (in the present context) a

process whereby an increase in the price of corn acts upon general prices by way of themoney-wage rate.

20. See a possible allusion to this result 1954g, III, 120–1.21. The argument is foolproof, however, only if it is certain that the burden of a wage

increase does not fall on rent. While Bentham does not develop the differential rentprinciple it must be borne in mind that Ricardo too formulated the inverse profit-wagerelation before realizing the significance of the principle for his case; differential rent wassubsequently fitted easily into a well prepared structure.Much later Bentham apparently criticized Ricardo’s formulation in the [ Essay on Profits ].

See Bowring, The Works of Jeremy Bentham, X, 498: ‘In Ricardo’s book on Rent’, runs thereport, ‘there is a want of logic. I wanted him to correct it in these particulars; but he wasnot conscious of it, and Mill was not desirous. He confounded cost with value. ’

22. In a later manuscript (dated 1821) Bentham asserted that the corn laws entailed a highcorn price and ruin to the labourers (1954k, III, 410). This assertion also suggests that therising corn price is not entirely compensated for.

23. It may be noted that Ricardo did not formulate a complete case in early 1813. And evenin the following year he still maintained a positive (if qualified) relationship between thecorn price and general prices. In short, the relevance for his own approach to profits ofthe monetary argument used to counter the principle of ‘competition of capitals’ wasapparently not self-evident.

24. The absence of a well thought out case may be illustrated by the apparent failure byBentham to apply his monetary argument against Smith’s analysis of the corn exportbounty according to which the rise in the price of corn would generate, via the moneywage rate, a general rise in the level of prices. (For Bentham’s own case against thebounty, see 1954c, I, 268–7; 1954e, II, 295–6.)

25. Above, pp. 332–3. In particular, there are no comments by Ricardo on the questionsraised by Bentham, 1954g, III, 131n.

26. See also Ricardo’s response (1951, III, 311): ‘Is not the mass of prices the same after[corn] scarcity as before. May we not as before put the mass of commodities of all sortson one side of the line, – and the amount of money multiplied by the rapidity of itscirculation on the other. Is not this in all cases the regulator of prices?’ This too ispresumably a statement relating to long-run equilibrium states allowing therefore for atemporary increase in the general level of prices.

27. Except where taxation was responsible for higher prices; Ricardo 1951, III, 270, 307, 328, 341.28. See above, p. 329 for corresponding English text given by Stark (1954g, III, 68).29. Ricardo actually took Bentham to task in this context for failing to appreciate the

phenomenon of diminishing returns. Immediately thereafter (1951, III, 288) he concededthat Bentham possessed the principle.

30. The Principles of Currency and Exchanges applied to the Report from the Select Committee of theHouse of Commons Appointed to Inquire into the High Price of Gold Bullion, 1st edn (London,


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1810). See for the full text J.H. Hollander, Minor Papers on the Currency Question (Baltimore:The Johns Hopkins Press, 1932). (Ricardo’s comments were written in December 1810,or thereabouts.)

APPENDIX

While searching the Ricardo Papers I came across a manuscript (ADD. 7510. IV. B24) writtenin French, in Ricardo’s hand, entitled ‘The advantages and disadvantages of colonies are ablyexplained by Mr Bentham’. (The item bears no watermark.) Here we find Bentham in a‘conservative’ mood; it is not generally known that Ricardo, at any period, took a similarposition, approving of the notions that it were better for the colonies to remain with themother country; that the United States would have been better served by remaining longerunder Britain; and that Egypt would benefit by coming under British rule.

Internal evidence suggests, according to Professor J.H. Burns, that the original fromwhich Ricardo copied was a Bentham manuscript in French (rather than a Dumont translation)and that such a manuscript could have been communicated to Ricardo by James Mill duringthe period 1810–11. Circumstantial evidence also suggests that the manuscript dates to theearly years of the new century; see Winch 1965, 34: ‘In the early years of the nineteenthcentury, possibly as a result of the turn of events in France, Bentham retreated from theradicalism on questions of government expressed in some of his writings in the 1790’s. Priorto his meeting with James Mill in 1808, Bentham’s Toryism seems to have reasserted itself;and this change of heart is reflected in his views on colonies at this time.’

There is a resemblance (although not an identity) between the manuscript in question,and passages in the Etienne Dumont collection Théorie des peines et des recompenses, 3rd edn(Paris, 1826), II, Livre Quatrième, chap. XII (‘Des Colonies’), 336–55, and in the materialsreproduced by W. Stark as ‘The Institute of Political Economy’. The manuscript lacks thediscussions of the ultimate limits to population growth due to land scarcity, and of therelatively slow growth of population in oldsettled countries contained in these works. (Seeabove, pp. 328–9 and note 12.) It cannot, however, be positively excluded that the manuscriptfrom which Ricardo copied contained these or similar passages.

REFERENCES

Bentham, Jeremy (1954a) [1787] Defence of Usury, in Jeremy Bentham’s Economic Writings, I, ed.W. Stark, London: George Allen and Unwin, 121–207.

——(1954b) [c. 1790] ‘Colonies and Navy’, I, 209–18.——(1954c) [1793–5] Manual of Political Economy, I, 219–73.——(1954d) [1795] Supply without Burden, I, 279–367.——(1954e) [1800] Circulating Annuities, II, 201–423.——(1954f) [1800–1] Paper Mischief (Exposed), II, 425–58.——(1954g) [1801] The True Alarm, III, 61–216.——(1954h) [1801] Of the Balance of Trade, III, 217–246.——(1954i) [1801] Defence of a Maximum, III, 247–302.——(1954j) [1801–4] Institute of Political Economy, III, 303–80.

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——(1954k) [1821] Observations on the Restrictive and Prohibitory Commercial System, III, 383–418.Bowring, John (ed.) (1833–43) The Works of Jeremy Bentham, Edinburgh: Wilham Tait.Hollander, Samuel (1973) The Economics of Adam Smith, Studies in Classical Political Economy

Vol. I, Toronto and Buffalo: University of Toronto Press.Poynter, J.R. (1969) Society and Pauperism; English Ideas on Poor Relief, 1795–1834, Toronto:

University of Toronto Press.Ricardo, David (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 vols),

Cambridge: Cambridge University Press.Samuelson, Paul A. (1977) ‘A Modern Theorist’s Vindication of Adam Smith’, American

Economic Review LXVII, 1 (February): 42–9.——(1978) ‘The Canonical Classical Model of Political Economy’, Journal of Economic Literature

XVI,4 (December): 1415–34.Smith, Adam (1937) [1776] An Inquiry into the nature and causes of the Wealth of Nations, New

York: Modern Library.Stark, W. (ed.) (1954) Jeremy Bentham’s Economic Writings, London: George Allen and Unwin.Trotter, Coutts (1932) [1810] The Principles of Currency and Exchanges, in J.H. Hollander (ed.)

Minor Papers on the Currency Question, Baltimore: The Johns Hopkins Press.Tucker, G.S.L. (1954) ‘The Origins of Ricardo’s Theory of Profits’, Economica XXI (November):

320–33.Winch, Donald (1965) Classical Political Economy and Colonies, London: London School of

Economics.

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It is probable that Professor Samuelson’s statement of the ‘canonical classical modelof political economy’ will become the locus classicus for the next generation of textbookwriters; teachers of the history of thought would be advised to familiarize themselveswith the ingenious diagrams in particular. But the author, who himself warns of thedangers of myth-making in undertaking such reconstructions (1978, 1415),particularly (I would add) such Gestalt reconstructions – has provided no meanswhatsoever whereby the reader is enabled to evaluate the historical accuracy of theformulation. 1 It is to repair this deficiency, in part at least, that I devote the presentnote, attending largely to Adam Smith and David Ricardo.

By adopting a historical approach, some quite tricky problems of interpretationraised in the article are avoided. Professor Samuelson alludes to a number of modernauthorities who take issue with his view that the principle of diminishing returnsfeatures prominently in the Wealth of Nations (Samuelson 1978, 1432n). This is surelya matter that can be answered by careful textual analysis. There is in fact much thatcan be said in a formal sense in favour of Professor Samuelson’s reading of AdamSmith; it is indeed possible to build up from the texts a model wherein the profit ratetends to decline secularly in consequence of extensions to increasingly inferior land.But this would be ‘irrelevant’ 2 if contemporary and near-contemporary economistswere totally unaware of Smith’s position. And such indeed seems to have been thecase. The outstanding historical fact, which is in danger of being overlooked, is thefailure of late eighteenth- and early nineteenth-century writers to recognize thepresence in Smith’s work of diminishing returns and its implications for distribution.

The significance of this fact, which certainly requires explanation, cannot beoverstated. It colours the reading of the early nineteenth-century literature; inparticular, an entire range of difficult questions arises relating to the nature andtiming of what Ricardo considered, with reason, to be his break-away from Smith

20

ON PROFESSOR SAMUELSON’SCANONICAL CLASSICALMODEL OF POLITICAL

ECONOMY

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ON SAMUELSON’S CANONICAL CLASSICAL MODEL

regarding profit rate determination and the rationalization of the profit-rate trend.For despite the presence in Smith’s work of allusions to the implications of increasingland scarcity, the evidence reveals that Ricardo was totally unaware of Smith’sdiscussions. The significance to Ricardo of the principle of diminishing returns layless in any resultant ‘prediction’ of a declining rate of profit and more in thenegative proposition that in its absence there would be no other conceptual reasonfor a decline; in short, he regarded his argument as a counterfoil to Smith’s analysis in termsof ‘competition of capitals’, which had to be ruled out of court because it flew in the face of thelaw of markets – to which Smith himself subscribed.

If Ricardo misunderstood Smith’s intentions, Smith himself must bear a largepart of the responsibility, for his notion of ‘competition of capitals’ occurs repeatedlyin the analysis of the profit rate and is presented as the general theory into whichdiminishing returns may be fitted as a special case. Smith’s own responsibility inthis regard is further compounded by the presence in his work of propositions(conspicuously formulated) relating to corn pricing that actually imply a denial ofthe principle of diminishing returns.

Professor Samuelson has asserted at one point of his argument that the differencesbetween the classical authorities were matters of semantics alone (1430, 1432); andmore specifically that there are ‘no thought experiments proposed by Ricardo towhich he has given a different substantive answer than would Smith’s system’ (1432n).It will become clear in what follows that this is simply not the case. Neither is it truethat the contradictions in the Wealth of Nations can be regarded as ‘insignificant’(1415); they were significant enough to have caught the attention of contemporarycommentators.

Before we proceed to substantive matters, it should be emphasized that ProfessorSamuelson’s short-circuited version of the ‘canonical’ classical model, attributed to Ricardo,is a serious and regrettable case of myth-making; so too is his (related) assertion thatRicardo failed to appreciate as clearly as did Smith the demand–supply determinationof wages (1416–17; also Samuelson 1977). It is unnecessary to provide verse and linereferences for all of this. The case has been fully documented recently by David Levy(1976), Sir John Hicks and Hollander (1977), and Carlo Casarosa (1978).

In what follows I outline the textual evidence suggesting the presence of the‘canonical’ model in the Wealth of Nations. In Section II, I attempt to account for itsneglect by Smith’s contemporaries and near-contemporaries. Section III discussesthe Ricardian theory of profits envisaged as a challenge to Smithian doctrine; referenceis made also to the position of Sir Edward West from the same perspective. Furtherobjections to Smith in terms of the conflict between the principle of ‘competitionof capitals’ and the law of markets are taken up in Section IV. The final sectiondiscusses Ricardo’s fundamental innovation on distribution–the inverse profit–wagerelationship.


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I . T H E C A N O N I C A L M O D E L I N T H E ‘ W E A L T H O FNATIONS’

The celebrated notion ‘competition of capitals’ occupies centre stage in the profit-rate analysis of Smith’s first Book and appears as the general theory into which theimplications of diminishing returns are fitted as a special case. This section is devotedto an exposition of the textual evidence.

The ‘ordinary’ rate of profit, in Smith’s account, is ‘every where regulated by thequantity of stock to be employed in proportion to the quantity of the employment,or the business which must be done by it’ (1937 [1776], 799). Accordingly, the ratetends to fall with accumulation in consequence of ‘increased competition’ betweencapitalists: ‘The increase of stock, which raises wages, tends to lower profit. When thestocks of many rich merchants are turned into the same trade, their mutualcompetition naturally tends to lower its profit; and when there is a like increase ofstock in all the different trades carried on in the same society, the same competitionmust produce the same effect in them all’ (87).

The phenomenon is related in Smith’s Book II to what would now be called anincreasing paucity of investment opportunities; it will be noted that the pressure onprofits manifests itself in the forms of both rising wages and falling final prices:

As the quantity of stock to be lent at interest increases, the interest, or theprice which must be paid for the use of that stock, necessarily diminishes, notonly from those general causes which make the market price of things commonlydiminish as their quantity increases, but from other causes which are peculiarto this particular case. As capitals increase in any country, the profits which can be madeby employing them necessarily diminish. It becomes gradually more and more difficult tofind within the country a profitable method of employing any new capital. There arises inconsequence a competition between different capitals, the owner of one endeavouring to getpossession of that employment which is occupied by another. But upon most occasionshe can hope to justle that other out of this employment, by no other meansbut by dealing upon more reasonable terms. He must not only sell what hedeals in somewhat cheaper, but in order to get it to sell, he must sometimestoo buy it dearer. The demand for productive labour, by the increase of thefunds which are destined for maintaining it, grows every day greater andgreater. Labourers easily find employment, but the owners of capitals find itdifficult to get labourers to employ. Their competition raises the wages oflabour, and sinks the profits of stock. But when the profits which can be madeby the use of a capital are in this manner diminished, as it were, at both ends,the price which can be paid for the use of it, that is, the rate of interest, mustnecessarily be diminished with them.

(Smith 1937 [1776], 336; emphasis added)

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The only specific instance of such increasing paucity of investment opportunities isan allusion in the basic chapter on profits to diminishing agricultural returns. Thepassage in question, which deals specifically with ‘new colonies’, is important for thereference to both high wage and profit rates at an early stage of development, and arising wage rate but falling profit rate during the course of subsequent progress:

High wages of labour and high profits of stock, however, are things, perhaps, whichscarce ever go together, except in the peculiar circumstances of new colonies. A newcolony must always for some time be more under-stocked in proportion tothe extent of its territory, and more under-peopled in proportion to theextent of its stock, than the greater part of other countries. They have moreland than they have stock to cultivate. What they have, therefore, is appliedto the cultivation only of what is most fertile and most favourably situated,the land near the sea shore, and along the banks of navigable rivers. Suchland too is frequently purchased at a price below the value even of its naturalproduce. Stock employed in the purchase and improvement of such landsmust yield a very large profit. ... Its rapid accumulation in so profitable anemployment enables the planter to increase the number of his hands fasterthan he can find them in a new settlement. Those whom he can find, therefore,are very liberally rewarded. As the colony increases, the profits of stock graduallydiminish. When the most fertile and best situated lands have been all occupied, less profitcan be made by the cultivation of what is inferior both in soil and situation. ... [But] thewages of labour do not sink with the profits of stock. The demand for labourincreases with the increase of stock whatever be its profits; and after these arediminished, stock may not only continue to increase, but to increase muchfaster than before.

(Smith 1937 [1776], 92–3; emphasis added)

In the chapter specifically devoted to colonies in Book IV the high wages andprofits characterizing new establishments are discussed in the following terms:

Every colonist gets more land than he can possibly cultivate. He has no rent,and scarce any taxes to pay. No landlord shares with him in its produce, andthe share of the sovereign is commonly but a trifle. He has every motive torender as great as possible a produce, which is thus to be almost entirely hisown. But his land is commonly so extensive, that with all his own industry,and with all the industry of other people whom he can get to employ, he canseldom make it produce the tenth part of what it is capable of producing.He is eager, therefore, to collect labourers from all quarters, and to rewardthem with the most liberal wages. But those liberal wages, joined to the


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plenty and cheapness of land, soon make those labourers leave him, in orderto become landlords themselves, and to reward, with equal liberality, otherlabourers, who soon leave them for the same reason that they left their firstmaster ...

In other countries, rent and profit eat up wages, and the two superiororders of people oppress the inferior one. But in new colonies, the interestof the two superior orders obliges them to treat the inferior one with moregenerosity and humanity; at least, where that inferior one is not in a state ofslavery. Waste lands of the greatest natural fertility, are to be had for a trifle.The increase of revenue which the proprietor, who is always the undertaker,expects from their improvement constitutes his profit; which in thesecircumstances is commonly very great. But this great profit cannot be madewithout employing the labour of other people in clearing and cultivatingthe land; and the disproportion between the great extent of the land and thesmall number of the people, which commonly takes place in new colonies,makes it difficult for him to get this labour. He does not, therefore, disputeabout wages, but is willing to employ labour at any price.

(Smith 1937 [1776], 532–3)

These passages must, however, be read in conjunction with Smith’s allusions to a‘stationary state’ marked by wage and profit rates at their respective minima:

In a country which had acquired that full complement of riches which thenature of its soil and climate, and its situation with respect to other countries,allowed it to acquire; which could, therefore, advance no further, and whichwas not going backwards, both the wages of labour and the profits of stockwould probably be very low. In a country fully peopled in proportion towhat either its territory could maintain or its stock employ, the competitionfor employment would necessarily be so great as to reduce the wages oflabour to what was barely sufficient to keep up the number of labourers,and, the country being already fully peopled, that number could never beaugmented. In a country fully stocked in proportion to all the business ithad to transact, as great a quantity of stock would be employed in everyparticular branch as the nature and extent of the trade would admit. Thecompetition, therefore, would every-where be as great, and consequently theordinary profit as low as possible.

(Smith 1937 [1776], 94–5)

Reference has just been made to a rising trend of real wages and an ultimate stateof stationariness when wages are at their minimum or subsistence level. Evidently a

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stage of falling per capita wages must be envisaged along the route. Smith did not spellout the logic behind this downward trend in his analysis of the falling profit rate, but there arepertinent materials from which to draw elsewhere and these perhaps allow us to fillin the picture.

The characteristic feature of Smith’s analysis of wages is the role accorded tothe rate of capital accumulation as an ‘independent’ variable governing the demandfor labour, upon which depends the (long-run or secular) real wage rate and thegrowth rate of population; to each growth rate of labour demand there correspondsa long-run real wage rate, which assures an equivalent rate of growth of population,and therefore of the work force: ‘It is not ... in the richest countries, but in themost thriving, or in those which are growing rich the fastest, that the wages oflabour are highest’ (69). 3 According to the Smithian position, an increase in the(long-run) wage rate will occur in consequence of a change in the rate of capitalaccumulation; a steady rate of increase of capital would not alter (longrun) percapita wages. By extension it may, therefore, be fair to attribute to Smith the viewthat the implied falling trend of real wages, alluded to earlier, is attributable to adeclining rate of capital accumulation, itself a reaction to the falling profit rate.This interpretation, however, begs many key questions as will shortly becomeclear.

The foregoing textual analysis brings together much of the primary evidence, ofwhich I am aware, in support of Professor Samuelson’s argument that the ‘canonical’classical model appears in the Wealth of Nations. It is indeed quite an impressive case. 4

Yet from the point of view of the intellectual historian the disturbing fact must be faced thatSmith left no impression whatsoever on his contemporaries regarding his formulation. On thecontrary, as we shall see, commentators focused on aspects of Smith’s work thatpoint conspicuously away from the phenomenon of diminishing returns.

I I . S O M E C H A R A C T E R I S T I C S O F T H E S M I T H I A NPRESENTATION AND THE NEGLECT OF SMITH’S

CANONICAL MODEL

I shall attempt in what follows to explain the neglect of Smith’s discussion of landscarcity and its implications for distribution by subsequent commentators.

Some allowance should perhaps be made for matters of exposition. The discussionis not concentrated in one location; it is scattered and, most significant, much of theevidence given above derives from the analysis of colonies where institutionalarrangements differed in some important respects from those in the competitiveexchange system, which primarily concerned contemporaries. These formal mattersmay well have played a part in disguising Smith’s argument.


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More important is the fact that Smith, unlike Ricardo, did not establish landscarcity as the sine qua non for a secularly falling profit rate. If we take into accountdisturbances that check or reverse the regular downward trend of the profit rate, itbecomes apparent that increasing land scarcity – diminishing agricultural returns –is not a necessary condition for the supposed trend. Thus the trend would be checkednot only by the ‘acquisition of new territories’ but also by the ‘acquisition of newbranches of trade’, which reduces the pressure of ‘competition’ in commodity markets,thus permitting final prices and thus profits to rise:

The acquisition of new territory, or of new branches of trade, may sometimesraise the profits of stock, and with them the interest of money, even in acountry which is fast advancing in the acquisition of riches. The stock of thecountry not being sufficient for the whole accession of business, which suchacquisitions present to the different people among whom it is divided, isapplied to those particular branches only which afford the greatest profit.Part of what had before been employed in other trades, is necessarilywithdrawn from them, and turned into some of the new and more profitableones. In all those old trades, therefore, the competition comes to be less thanbefore. The market comes to be less fully supplied with many different sortsof goods. Their price necessarily rises more or less, and yields a greater profitto those who deal in them, who can, therefore, afford to borrow at a higherinterest.

(Smith 1937 [1776], 93; emphasis added)

The analysis is, incidentally, applied to explain an upward movement in interestrates in London after the peace of 1763. ‘New business’ was provided by the British‘acquisitions’ in North America and the West Indies, and capital was diverted awayfrom the Mediterranean and European branches of trade: ‘So great an accession ofnew business to be carried on by the old stock, must necessarily have diminished thequantity employed in a great number of particular branches, in which the competitionbeing less, the profits must have been greater’ (93–4).

I conclude that Smith’s rationalization of the falling profit rate includedconsiderations apart from land scarcity. The combining of such distinct phenomenacould not have helped the case.

In any event the argument is vitiated by severe ambiguities. It is not even clearwhether the pressure exerted upon the profit rate by increased ‘competition ofcapitals’ takes the form of rising wages in addition to falling prices. Smith is sometimescircumspect on this matter; as we have already seen ‘the increase of stock, whichraises wages, tends to lower profit’ – a fall which is then apparently related formallyto competition in commodity markets.5 We must here keep in mind that capitalists arefrequently accorded the ability to escape the burden of rising wages by way of increased

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manufacturing prices and reduced rents (see below, p. 350). It is difficult in anyevent to appreciate why the wage rate tends ultimately to fall ; to explain it in termsof a declining rate of accumulation as provisionally suggested above does not reallysolve the problem, for Smith explicitly asserts that ‘the demand for labour increaseswith the increase of stock whatever be its profits; and after these are diminished,stock may not only continue to increase, but to increase much faster than before’(93). Finally, and most important, it is not made clear why, if indeed there is scopefor a decline in the real wage (and setting aside pressure on final prices), there is anynecessary reduction on the profit rate at all. It was Ricardo who ultimately developed amodel where all these issues are resolved.

These considerations suggest that the main case was not well thought through orclearly argued in the Wealth of Nations. But the failure to leave any impression on themain issues that concern us can be better appreciated if we also keep in mind thecommon belief that Smith had actually ruled out diminishing returns.

This may be illustrated from An Inquiry into the Nature and Progress of Rent (1815)where Malthus set out the principle of differential rent, which he contrasted withthe notion of rent envisaged as a ‘monopoly’ return by Smith, Say, the Physiocrats,Sismondi and Buchanan. 6 What is particularly striking from our present perspectiveis the interpretation and critical assessment of the Smithian approach to corn-pricedetermination in a secular context:

Adam Smith has very clearly explained in what manner the progress of wealthand improvement tends to raise the price of cattle, poultry, the materials ofclothing and lodging, the most useful minerals, &c. &c. compared with corn;but he has not entered into the explanation of the natural causes which tendto determine the price of corn. He has led the reader, indeed, to concludethat he considers the price of corn as determined only by the state of themines which at the time supply the circulating medium of the commercialworld. But this is a cause obviously inadequate to account for the actualdifferences in the price of grain, observable in countries at no great distancefrom each other, and at nearly the same distance from the mines.

(Malthus 1970b [1815], 209) 7

For his own part Malthus accounted for a ‘high comparative money price of corn’in terms of its ‘high comparative real price, or the greater quantity of capital andlabour which must be employed to produce it’ (210).

Ricardo made precisely the same point. It is appropriate to keep in mind thestrength of his objections to Smith’s position on corn pricing whereby ‘if youexcept corn and such other vegetables as are raised altogether by human industry, ...all other sorts of rude produce, cattle, poultry, game of all kinds, the useful fossilsand minerals of the earth, &c. naturally grow dearer as the society advances in


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wealth’ (1937 [1776] 217). ‘Why should corn and vegetables alone be excepted?’, heprotested. ‘Dr Smith’s error throughout his whole work, lies in supposing that thevalue of corn is constant; that though the value of all other things may, the value ofcorn never can be raised’ (1951 [1817], I, 374).

There is a closely related aspect of Smithian theory that next requires attention. Ihave referred to Smith’s apparent denial of a secular increase in the corn price due tothe pressure of growing land scarcity. But more generally it was his position that arise in the price of corn in consequence of government intervention in the corntrade, for example by the corn export bounty, can have no allocative implications;the argument presumes that an increase in the price of corn will be translated by wayof the money wage rate to the prices of manufactured goods, leaving unchanged therelative profitability of agricultural activity.

The model is laid out in the chapter ‘Of Bounties’, although the various constituentelements are established in the theoretical chapters of Book I:

the money price of corn regulates that of all other home-made commodities.It regulates the money price of labour, which must always be such as to

enable the labourer to purchase a quantity of corn sufficient to maintainhim and his family either in the liberal, moderate, or scanty manner inwhich the advancing, stationary or declining circumstances of the societyoblige his employers to maintain him.

It regulates the money price of all the other parts of the rude produce ofland, which, in every period of improvement, must bear a certain proportionto that of corn, though this proportion is different in different periods. Itregulates, for example, the money price of grass and hay, of butcher’s meat,of horses, and the maintenance of horses, of land carriage consequently, orof the greater part of the inland commerce of the country.

By regulating the money price of all the other parts of the rude produceof land, it regulates that of the materials of almost all manufactures. Byregulating the money price of labour, it regulates that of manufacturing artand industry. And by regulating both, it regulates that of the completemanufacture. The money price of labour, and of every thing that is theproduce either of land or labour, must necessarily either rise or fall inproportion to the money price of corn.

(Smith 1937 [1776], 476–7)

The outstanding theoretical conclusion is that an increase in the wage rate can bepassed on by employers in the form of higher final prices in the manufacturingsector, and lower rents in agriculture (e.g. 816, 824). As for matters of policy, Smith’sfundamental conclusion is that government intervention designed to raise agriculturalprofits by means of a corn export bounty must fail in its objective because of the

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effects of a higher corn price upon money wages and therefore manufacturingprices in general: ‘The real effect of the bounty is not so much to raise the real valueof corn, as to degrade the real value of silver; or to make an equal quantity of itexchange for a smaller quantity, not only of corn, but of all other home-madecommodities’ (476). Similarly, a few pages later, in the first two editions, we find anequally strong statement: ‘[Our country gentlemen] did not perhaps attend to thegreat and essential difference which nature has established between corn and almostevery sort of goods. ... The nature of things has stamped upon corn a real valuewhich no human institution can alter. No bounty upon exportation, no monopolyof the home market, can raise that value’ (482).

This feature of Smith’s work was remarked upon repeatedly by contemporaryand near-contemporary commentators. Critical reference to it is the most strikingfeature of the literature during the period 1776–1815. It seems scarcely surprisingthat late eighteenth- and early nineteenth-century critics were unaware of what AdamSmith wrote about land scarcity and its consequences given his treatment of cornpricing and its apparent denial of the possibility of real changes in the price ofcorn. I wish to elaborate upon this feature of the historical record. 8

In his Observations on ... National Industry, James Anderson developed a case –precluded as we have just seen by Smith – for government intervention to encouragedomestic agriculture by means of an export bounty. In the course of an attempt tofix upon the precise magnitude of the subsidy required, Anderson utilized theprinciple of diminishing returns – from which he deduced the conception of rentas an intra-marginal surplus – on the grounds that it is the level of marginal costs thatis relevant for the calculation. The exposition of the principle is striking (1779[1777], 207–9). Anderson did not formally emphasize that his rent conception differedfrom that of Smith, and he did not base a full-fledged ‘Ricardian’ system upon it;but the principle of diminishing returns from which the rent concept derives isused nonetheless to counter Smith’s position on the bounty. In effect, the entirebody of Smithian theory, according to which variations in the price of corn can beonly nominal variations in consequence of the general effect upon prices as a whole,is turned down.

The same case was presented by Anderson in his An Enquiry into the Nature of theCorn-Laws. Here he observed, in criticism of Smith’s general analysis of price inBook I, chapter 7 of the Wealth of Nations that ‘it is not ... the rent of land thatdetermines the price of its produce but it is the price of that produce that determinesthe rent of the land’ (1777, 45n). 9 Accordingly, to fix a low corn price would meannot merely a fall of rent but a reduction in agricultural output despite the ‘popularobjection ... that the price to the farmer is so high only on account of the high rents


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and avaricious extortions of proprietors. Lower (say they) your rents, and the farmerwill be able to afford his grain cheaper to the consumer.’ The notion of no-rent landat the (extensive) margin of cultivation is expounded with most impressive clarityin an account that has much in common with that regarded as ‘revolutionary’ nearlyforty years later.

On Anderson’s Enquiry, let us note, J.R. McCulloch later wrote that its publication‘marks an important era in the history of economic science, from its containing theearliest explanation that is anywhere to be met with of the real nature and origin ofrent’ (1845, 68).

Malthus provides a conspicuous illustration of the present theme. In the secondedition of his Essay on Population he added a chapter ‘Of Bounties on the Exportationof Corn’ – a subject of the ‘highest importance’ – which took strong exception bothto various aspects of Smith’s analytical treatment of the issue, and to his policyconclusions (1803). Here he insisted inter alia that an export subsidy would in factraise the agricultural profit rate and thus encourage expansion, denying the existenceof any ‘great and essential difference’ between corn and other goods such as thatemphasized by Smith:

When Dr Smith says that the nature of things has stamped upon corn a realvalue, which cannot be altered by merely altering the money price; and thatno bounty upon exportation, no monopoly of the home market, can raisethat value; nor the freest competition lower it; it is evident, that he changesthe question from the profits of the growers of corn in any particular country,to the physical and absolute value of corn in itself ... I certainly do not meanto say, that the bounty alters the physical value of corn, and makes a bushelof it support a greater number of labourers for a day, than it did before: butI certainly do mean to say that the bounty to the British cultivator does, inthe actual state of things, really increase his profits on this commodity; andby thus making the growth of corn answer to him, encourages him to sowmore than he otherwise would do, and enables him in consequence to employmore bushels of corn in the maintenance of a greater number of labourers.

(Malthus 1803, 461–2)

In the later Observations on the Effects of the Corn Laws (1814), formally designed asan impartial evaluation of the merits of protection and of free trade, the discussionagain turned on Smith’s treatment of the corn-export bounty and in particular thespecial treatment accorded corn pricing: ‘I have always thought, and still think, thatthis peculiar argument of Dr Smith is fundamentally erroneous’ (1970a [1814], 96-7). The issue at stake, as in the Essay on Population, was Smith’s assertion that ‘corn isof so peculiar a nature, that its real price cannot be raised by an increase of itsmoney-price; and that, as it is clearly an increase of real price alone, which can

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encourage its production, the rise of money-price, occasioned by the bounty, canhave no such effect’ (98). Here too Malthus insisted that the money wage rate doesnot rise proportionately with the corn price, and this because of the existence in thewage basket of home and imported goods other than corn (99). Moreover, thereaction of money wages to an increase in the price of corn occurs in consequenceof a slow response of labour supply so that ‘corn and labour rarely keep an even pacetogether; but must often be separated at a sufficient distance and for a sufficienttime, to change the direction of capital’ (100). In brief, ‘the price of corn does notimmediately and generally regulate the prices of labour and all other commodities;and ... the real price of corn is capable of varying for periods of sufficient length togive a decided stimulus or discouragement to agriculture’ (106). It is worth addingthat Malthus considered Smith’s theoretical position to fly in the face of the general theory ofresource allocation : ‘it cannot be maintained without violating the great principles ofsupply and demand, and contradicting the general spirit and scope of the reasoning,which pervade the “Wealth of Nations” ’ (97). The Smithian approach excluded cornfrom those normal supply responses which flowed from changes in the relativedemands for commodities and constituted an unjustifiable exception to ‘the operationof that principle, so beautifully explained and illustrated by Dr Smith, by whichcapital flows from one employment to another, according to the various and necessarilyfluctuating wants of society’ (101).

Francis Horner, in his well-known article for the Edinburgh Review of 1804 adopted(though with qualifications) the Smithian position in his analysis of the corn exportlegislation of that year, asserting that ‘the real price of corn will be maintained thesame, notwithstanding a nominal variation’, and adding that ‘without a justapprehension of this fundamental truth, it is impossible to reason with accuracyupon the subject’ (1957 [1804], 106). Horner’s article was subsequently described byRicardo, in his chapter dealing with ‘Bounties on Exportation’, as subject to the‘common error which has misled Dr Smith, and, I believe, most other writers onthis subject’, namely that ‘because the price of corn ultimately regulates wages, ... itwill regulate the price of all other commodities’ (1951 [1817], I, 302). Indeed, Ricardomaintained that ‘perhaps in no part of Adam Smith’s justly celebrated work, are hisconclusions more liable to objection, than in the chapter on bounties’ (I, 304). It isprecisely in the context of corn legislation – it must be remembered that what is saidof a corn export subsidy had clear implications for corn import duties as well – thatwe can perceive most clearly the differences between the Smithian and the Ricardiantheoretical models.

The point in question is reiterated in one form or another throughout theentire range of Ricardo’s writings. It is worth recalling, for example, Ricardo’s repeateddenial, in debate with Malthus, that it is possible to identify a change in the cornprice with a change in money value as Smith, we have seen, did: ‘Money I think only


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falls in value, when it will exchange for less of all things; not when it will exchangefor less of one thing, or of two things, or of a dozen things’ ([1820], II, 144). WhileRicardo believed that corn was ‘the most important commodity of all others’ (II,180), he nonetheless insisted that it must be treated merely as one among the others.Similarly, in the Essay on Profits (1815): ‘It has been thought that the price of cornregulates the price of all other things. This appears to me to be a mistake. If the priceof corn is affected by the rise or fall of the value of the precious metals themselves,then indeed will the price of commodities be also affected, but they vary, becausethe value of money varies, not because the value of corn is altered’ (IV, 21n).

The turning point in the transition between the Essay and the Principles came atthe end of 1815 when Ricardo, having commenced the expansion of the pamphlet,wrote to James Mill: ‘I know I shall be soon stopped by the word price’. Ricardothen expanded his argument in terms relevant for our case:

[My readers] must know that the prices of commodities are affected two waysone by the alteration in the relative value of money, which affects allcommodities nearly at the same time, – the other by an alteration in thevalue of the particular commodity, and which affects the value of no otherthing, excepting it enter into its composition. – This invariability of thevalue of the precious metals, but from particular causes relating to themselvesonly, such as supply and demand, is the sheet anchor on which all mypropositions are built; for those who maintain that an alteration in thevalue of corn will alter the value of all other things, independently of itseffects on the value of the raw material of which they are made, do in factdeny this doctrine of the cause of the variation in the value of gold andsilver.

(Ricardo 1951 [1815], VI, 348–9)

Ricardo reacted quickly enough to what he regarded as the Smithian error in J.R.McCulloch’s essay on the national debt: ‘Your system proceeds upon the suppositionthat the price of corn regulates the price of all other things, and that when corn risesor falls, commodities also rise or fall, – but this I hold to be an erroneous system,although you have great authorities in your favour, no less than Adam Smith, MrMalthus, and M. Say’ ([1816], VII, 105). And there can be no question that one of hismain objectives in the Principles itself was to demonstrate the error of Smith’s position(common ‘to all the writers who have followed him’), according to which an increasein wages generates an increase in the prices of all commodities: ‘I hope I havesucceeded in showing, that there are no grounds for such an opinion, and that onlythose commodities would rise which had less fixed capital employed upon themthan the medium in which price was estimated, and that all those which had more,would positively fall in price when wages rose’ ([1817], I, 46. Cf. 302, 307, 315).

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‘These results’, Ricardo insisted, ‘are of such importance to the science of politicaleconomy, yet accord so little with some of its received doctrines, which maintainthat every rise in wages is necessarily transferred to the price of commodities’ (I, 61).

I I I . T H E R I C A R D I A N B R E A K - A W A Y O N T H E T H E O R YOF PROFITS

It is scarcely surprising that an economist who denied the possibility of a relativeincrease in the price of corn during the course of secular expansion should havebeen understood as neglecting the implications of increasing land scarcity – whateverhe might have written about the matter in the context of new colonies. And it is alsoscarcely surprising that Ricardo should have referred to his theory of profit-ratedetermination in the first extant Ricardo documents touching on the ‘classical’approach to the problem. I allude here to the famous letter to Malthus of 10 August1813: ‘On further reflection I am confirmed in the opinion which I gave withregard to the effect of opening new markets or extending the old. I most readilyallow that since the war, not only the nominal but the real value of our exports andimports has increased, – but I do not see how this admission will favour the viewwhich you take of this subject. ... [Extension of trade] does not prove a generalincrease of profits nor any material growth of prosperity’ (VI, 93). In a second letterRicardo explicitly stated the position that attention should be directed at agriculturalproductivity to understand trends in the rate of profit:

That we have experienced a great increase of wealth and prosperity since thecommencement of the war, I am amongst the foremost to believe; but it isnot certain that such increase must have been attended by increased profits,or rather an increased rate of profits, for that is the question between us. Ihave little doubt however that for a long period, during the interval youmention [1793–1813], there has been an increased rate of profits, but it hasbeen accompanied with such decided improvements of agriculture bothhere and abroad, – for the French revolution was exceedingly favorable tothe increased production of food, that it is perfectly reconcileable to mytheory. My conclusion is that there has been a rapid increase of Capitalwhich has been prevented from shewing itself in a low rate of interest by newfacilities in the production of food.

(Ricardo 1951, VI, 94–5)

This formulation, it must be emphasized, was regarded by Ricardo as an alternativeto the Smithian view of profit-rate determination and rationalization of the profit-rate trend, running in terms of ‘competition of capitals’, which he himself had


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once held. Each of the extracts is followed by a statement insisting that an increasein general prices occurs only in consequence of a rising money supply (or velocity), while onlya falling level of prices can induce a monetary inflow. It is most likely that the statementsalluding to the profit rate and those relating to the monetary mechanism areconnected. If this is so, Ricardo appears to be objecting to a formulation byMalthus very similar to that which was to appear later in the latter’s Principles of1820 – namely that an increase in the value of aggregate output from given resourcesmay be ‘occasioned by commerce’ and will be associated with a rise in profits ofthose engaged in the new or expanded trade, which extends to the general rate ofreturn. It would seem to be this body of doctrine (which attributes the risingvalue of national product since 1793 and a correspondingly upward trend in theprofit rate to the opening of new markets for British goods) with which Ricardotook issue in 1813, on the grounds that the expansion of the means of financerequired to assure a higher level of prices and profits, of which Malthus was veryconfident, would not in fact be forthcoming. In short, the argument was seen tobe inconsistent with Hume’s specie-flow mechanism. But Ricardo’s rejection of Malthus’sposition implies the rejection of the standard Smithian view referred to above according towhich ‘the acquisition of ... new branches of trade, may sometimes raise the profits of stock ...even in a country fast advancing in the acquisition of riches’, in consequence of the reductionin the pressure exerted by ‘competition of capitals’.

It is in this light that one may best understand the objective of the Essay on Profitsitself: ‘Profits of stock fall because land equally fertile cannot be obtained, and throughthe whole progress of society, profits are regulated by the difficulty or facility of procuringfood. This is a principle of great importance, and has been almost over-looked in the writings ofPolitical Economists. They appear to think that profits of stock can be raised by commercialcauses, independently of the supply of food ’ (IV, 13n; emphasis added). And the centraltheme of the famous chapter on Foreign Trade in the Principles is important fromthe same standpoint: ‘extension of foreign trade’ in itself alters neither the ‘value’ ofthe national product nor the general return on capital ([1817], I, 128). Smith’scontention that such extensions – by attracting funds from alternative (domestic)projects thereby reducing the pressure of ‘competition between capitals’ – raise thegeneral return on capital is firmly rejected: ‘I am of opinion, that the profits of thefavoured trade will speedily subside to the general level.’ His concern was to providean ‘independent’ refutation of Smith’s position rather than merely to assert thevalidity of his own theory of profit rate determination, according to which foreigntrade can play a part only in the special case that real wage-goods prices are affected.Nonetheless, the latter proposition is strongly formulated: ‘It has been my endeavourto shew throughout this work, that the rate of profits can never be increased but bya fall in wages, and that there can be no permanent fall of wages but in consequence

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of a fall of the necessaries on which wages are expended. ... Foreign trade, then ... hasno tendency to raise the profits of stock, unless the commodities imported be ofthat description on which the wages of labour are expended’ (I, 132–3).

The extent of the break-away from Smith may be gauged also by reference to SirEdward West’s pamphlet of February 1815, famous for its formulation of the principleof diminishing returns (allowing both for the intensive and extensive margins) andfor the use of the principle in the analysis of the declining secular return on capital.What concerns us most here is West’s rejection of the Smithian position, which runs in termsof increasing ‘competition of capitals’ on the grounds of fallacy of composition :

Smith therefore attributes this decline in the rate of profit to increasedcompetition. But the slightest consideration will detect the fallacy of thisopinion. If the capital employed in one branch of trade alone be increased,doubtless the increased competition of the dealers in that branch will lowerthe price of their articles, and consequently the profits of those dealers. Butwhy is the price lowered except because that article is now more abundantthan others, and could not be sold without such diminution of price. But ifthe capital in all the different branches of trade, and consequently the quantityof all the articles of those respective trades be increased in the same degree,the same ratio between each and all the rest remains, and each article must sellfor the same real price as it fetched before. If the competition be increased inany one article, it for the same reason is increased in all; and as it exists in thesame degree in each, it cannot alter the real price of any one. It is only therelative alteration of the demand and supply which can increase the price,and here there is no such alteration

(West 1815, 21).

West’s implicit distinction in this passage between relative and absolute prices isof the first importance. It is conceded that there would be a temporary decline ingeneral money prices in the case at hand which would, however, be corrected by amonetary inflow: ‘The money price of all articles would no doubt be diminished,and therefore the money-profits of stock; but this would not lower the real price ofthose articles, nor the real profits; even the money price would soon be raised to alevel with the real price, by a favourable balance of trade and the consequentintroduction of bullion’ (21).

West’s argument bears a close resemblance to that of Ricardo, who also insistedthat a disturbance affecting all commodities can have no real consequence, while achange in the general level of prices (in any single country) will be temporary onlyin the light of money flows.


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I V . T H E L A W O F M A R K E T S

Ricardo’s objections to the Smithian analysis of the profit rate extended further.For, on his reading, the principle of ‘competition of capitals’ conflicted also withthe law of markets to which, of course, Smith subscribed. This aspect of the criticismis made very clear in the chapter of the Principles specifically devoted to the effects ofaccumulation on the profit rate.

The chapter is designed to demonstrate that the only cause of a falling profit rate isan upward trend in ‘wages’: ‘If the necessaries of the workman could be constantlyincreased with the same facility, there could be no permanent alteration in the rate ofprofits or wages, to whatever amount capital might be accumulated.’ Similarly, ‘whetherthese increased productions and the consequent demand which they occasion’ – in thecourse of accumulation – ‘shall or shall not lower profits, depends solely on the rise ofwages’. Adam Smith’s ascription of the declining secular return on capital to ‘increasedcompetition’ between capitalists is rejected as in conflict with the law of markets, for ‘atthe same time that capital is increased, the work to be effected by capital, is increasedin the same proportion’ (1951 [1817], I, 289, 292, 289–90). Smith’s contentions regardingthe effects on profits flowing from ‘competition’ for labour are accepted by Ricardobut only in so far as concerns the short run. The weight of emphasis is upon ‘competition’in product markets, and Smith’s approach is rejected entirely.

Ricardo clearly conceived his chapter as a demonstration of the untenability ofthe notion of secular stagnation – or an approach to stationariness – independentlyof the considerations given pride of place in his own model. Accordingly, the onlyconceivable (permanent) constraint on growth is that deriving from a rising realcost of producing wages, which reduces profits to their minimum: ‘there cannot,then, be accumulated in a country any amount of capital which cannot be employedproductively, until wages rise so high in consequence of the rise of necessaries, andso little consequently remains for the profits of stock, that the motive for accumulationceases’ (I, 290). But provided the profit rate yields an adequate motive to accumulate,expansion of capacity will occur without check, since demand expands pari passu.

In support of his general position in the chapter, Ricardo drew upon Say’sauthority. Specifically, in support of the case against Smith’s doctrine relating to‘competition of capitals’, Ricardo observed that ‘M. Say has ... most satisfactorilyshewn, that there is no amount of capital which may not be employed in a country,because demand is only limited by production’. And regarding Smith’s statement tothe effect that ‘the more disposable capitals are abundant in proportion to theextent of employment for them, the more will the rate of interest on loans of capitalfall’, Ricardo, in the light of ‘M. Say’s principle’, asked rhetorically, ‘If capital to anyextent can be employed by a country, how can it be said to be abundant, comparedwith the extent of employment for it?’

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V. THE INVERSE PROFIT–WAGE RELATIONSHIP

The implications of Smith’s ‘error’ were profound. For if, as Smith believed, theimpact of a rise in the price of corn and accordingly in the money wage rate wereupon prices (in the manufacturing sector) and rents (in agriculture), there need beno fall in the profit rate during the course of secular expansion; capitalists could‘pass on’ the burden imposed by land scarcity.

The appearance of Robert Torrens’s famous Essay on the External Corn Trade inFebruary 1815 provided an ideal opportunity for Ricardo to state this case, forTorrens repeated Adam Smith’s belief that increases in the price of corn are passedon to consumers in consequence of rising money wages. Ricardo simply insistedthat Torrens ‘on this part of the subject appears to me defective, as I think that theprice of commodities will be very slightly affected either by a rise or fall in the priceof corn. If so every rise in the price of corn must affect profits on manufactures, andit is impossible that agricultural profits can materially deviate from them’ (VI, 213).A year later, however, he was pleased to find that Robert Torrens had apparentlyaccepted the ‘Ricardian’ position on the main issues at stake. ‘Have you seen Torrens’Letter to Lord Liverpool? – He appears to me to have adopted all my views respectingprofits and rent; and in some conversation which I had with him a few days ago, heunequivocally avowed that he was now of my opinion, that the price of labour,arising from a difficulty of procuring food, did not affect the prices of commodities.He confessed that his former view on that subject was erroneous’ (Ricardo VII, 24).And a little later he repeated that Torrens had become ‘quite a convert to all whatyou have called my peculiar opinion on profits, rent, &c.’ (VII, 36).

The general argument may be briefly summarized: Wages expressed in terms of‘money’ of constant ‘value’ depend upon both the commodity wage and the price ofwage goods. But in consequence of the rising real cost of producing wage goods – areflection of diminishing returns – money wages will rise secularly. The secularincrease in money wages – despite a reduced commodity wage – in turn has the effectof reducing the profit rate in manufacturing, since manufacturing prices are notraised by the wage increase: ‘Notwithstanding, then, that the labourer would bereally worse paid, yet this increase in his [money] wages would necessarily diminishthe profits of the manufacturer; for his goods would sell at no higher price, and yet theexpense of producing them would be increased ’ ([1817], I, 102; my emphasis). The sameconclusion is repeated in the chapter ‘On Profits’: ‘Supposing corn and manufacturedgoods always to sell at the same price, profits would be high or low in proportionas wages were low or high. But suppose corn to rise in price because more labour isnecessary to produce it; that cause will not raise the price of manufactured goods inthe production of which no additional quantity of labour is required. If, then,wages continued the same, the profits [of manufacturers] would remain the same;


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but if, as is absolutely certain, wages should rise with the rise of corn, then [their]profits would necessarily fall’ (I, 110–11).

All of Ricardo’s theoretical efforts were in fact devoted to demonstrating that ageneral increase in wages implies an inverse fall in the profit rate leaving generalprices unaffected. (In the reconstruction, it would seem, the differential rent theoryplayed a key but nonetheless supplementary role. The point here is Ricardo’s insistencethat the existence of rent in no way disturbed the inverse wage–profit relationship;the importance of the rent doctrine should be evaluated within the context of thefundamental theorem on distribution.)

It was Ricardo’s great achievement to demonstrate that what is at stake in profit-rate analysis is proportionate wages; to this end he sought an appropriate measuringdevice in terms of which a rise in ‘money’ wages would imply a rise in theproportionate share of wages in the net product to be distributed between labourersand capitalists. On these terms it became quite clear how even a falling commoditywage – which characterizes the trend path of an economy subject to diminishingreturns – might be consistent with a rising ‘money’ (Ricardian ‘real’ or ‘proportionate’)wage and thus entail an inverse profit-rate change. 10

VI. CONCLUSION

To conclude: The ‘canonical’ model can be said to be present in the Wealth of Nationsonly on the basis of a very selective choice of texts. Even this selection is largelyconstrained to the special context of colonies and leaves much to be desired in termsboth of internal consistency and consistency with central Smithian propositionsrelating to corn pricing. As for ‘influence’, there was none. On a balance ofconsiderations I suggest that the model was a Ricardian construction insofar asconcerns both pure logic and intellectual indebtedness.

NOTES

1. Apart from an extraordinary appeal to authority, including his own (Samuelson 1978,1430). The same deficiency characterizes Samuelson 1977.

2. ‘Irrelevant’ in the special sense suggested by George J. Stigler (1976). Stigler makes thepoint that if we seek to understand the scientific role played by a figure in the history ofeconomic theory, what is relevant is how his work ‘appeared to his contemporaries’, for‘science consists of the arguments and the evidence that lead other men to accept orreject scientific views’ (1976, 60). The ideas they may have intended to express are notrelevant from this perspective.

3. See Hollander 1973, 157. 4. There is no obvious relationship between the Smithian analysis of ‘investment priorities’

and his ‘forecast’ of a secular downward trend in the average rate of profits in a growingeconomy. I have argued (1973, 281–3) that the relatively high profit rate available in theagricultural sector frequently emphasized in the Wealth of Nations reflects the extreme

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cheapness of land, which is regarded as typical in an economy at an early stage ofdevelopment. Economic growth tends to alter the factor endowments such that theagricultural profit rate falls relatively to that potentially available in manufacturing. Theredoes not seem to be any necessary implication for the profit rate trend since, in principle,increasing labour supplies might counterbalance the effect on profitability of increasingland shortage.

5. See above, p. 344. 6. Malthus also took Smith to task for the view ‘that all land which yields food must

necessarily yield rent’, but recognized that Smith sometimes ‘contemplates rent quite inits true light’ (1970b [1815], 180).

7. Cf. Smith’s discussion in the ‘digression on silver’ (particularly 1937 [1776], 191) regardingthe determination of the corn price (also 36); and 217 regarding the relative prices ofagricultural products other than corn to that of corn (also 174–6).

8. I draw freely from Hollander 1979, ch. 1. 9. Cf, also David Hume (1932 [1776], 311): ‘I cannot think’, he wrote to Smith, ‘that the

Rent of Farms makes any part of the Price of the Produce but that the Price is determinedaltogether by the Quantity and the Demand’.

10. See Hicks and Hollander 1977.

REFERENCES

Anderson, James (1777) An Enquiry into the Nature of the Corn-Laws, Edinburgh: T. Cadell andC. Elliot.

——(1779) [1777] Observations on the Means of exciting a spirit of National Industry, Vol. II, Dublin:S. Price.

Casarosa, Carlo (1978) ‘A New Formulation of the Ricardian System’, Oxford Economic Papers30,1 (March): 38–63.

Hicks, [Sir] John and Hollander, S. (1977) ‘Mr Ricardo and the Moderns’, Quarterly Journal ofEconomics 91, 3 (August): 351–69.

Hollander, S. (1973) The Economics of Adam Smith, Studies in Classical Political Economy, Vol.1, Toronto and Buffalo: University of Toronto Press.

——(1979) The Economics of David Ricardo, Studies in Classical Political Economy, Vol. 2,Toronto and Buffalo: University of Toronto Press.

Horner, Francis (1957) [1804] ‘Observations on the Bounty upon Exported Corn’, EdinburghReview, 5 (9) (Oct. 1804), Reprinted in The Economic Writings of Francis Horner in theEdinburgh Review 1802–6, ed. F.W. Fetter, New York: Kelley and Millman, 96–114.

Hume, David (1932) The Letters of David Hume, Vol. II, ed. J.Y.T. Greig, Oxford: OxfordUniversity Press, Clarendon Press.

Levy, D. (1976) ‘Ricardo and the Iron Law: A Correction of the Record’, History of PoliticalEconomy 8,2 (Summer): 235–51.

McCulloch, John R. (1845) The Literature of Political Economy, London: Longman, Brown,Green, and Longmans.

Malthus, T.R. (1803) An Essay on the Principle of Population, 2nd edn, London: Joseph Johnson.——(1970a) [1814] Observations on the Effects of the Corn Laws, 2nd edn, London: J. Johnson and

Co; reprinted in Pamphlets of Thomas Robert Malthus, New York: Kelley, 93–131.


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——(1970b) [1815] An Inquiry into the Nature and Progress of Rent, London: John Murray;reprinted in Pamphlets of Thomas Robert Malthus, New York: Kelley, 175–225.

——(1820) Principles of Political Economy, London: John Murray.Ricardo, David (1951–73) The Works and Correspondence of David Ricardo, ed. P. Sraffa (11 Vols),

Vol. I: On the Principles of Political Economy and Taxation [1817], Vol. IV: Essay on the influenceof a low price of corn on the profits of stock [1815], Vol Vl: Letters 1810–1815, Vol. VII: Letters1816–1818, Vol. II: Notes on Malthus’s ‘Principles’ [1820], Cambridge: Cambridge UniversityPress.

Samuelson, Paul A. (1977) ‘A Modern Theorist’s Vindication of Adam Smith’, AmericanEconomic Review 67,1 (February): 42–9.

——(1978) ‘The Canonical Classical Model of Political Economy’, Journal of Economic Literature16, (4) (December): 1415–34.

Smith, Adam (1937) [1776] An Inquiry into the Nature and Causes of the Wealth of Nations,Modern Library edition, New York: Modern Library.

Stigler, George J. (1976) ‘The Scientific Uses of Scientific Biography, with special reference toJ.S. Mill’, in J.M. Robson and M. Laine (eds), James and John Stuart Mill: Papers of theCentenary Conference, Toronto: University of Toronto Press, 55–66.

Torrens, Robert (1815) An Essay on the External Corn Trade, London: J. Hatchard.West, Sir Edward (1815) Essay on the application of Capital to Land, London: T. Underwood.

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abstinence, theory of 186–7, 306,310

‘adding-up’ cost approach, Smith’s 72,101, 124, 161, 331–2, 334, 336

adjustment mechanism:Marshallian 155; Ricardian 140;wage 252–3; Walrasian 155–7

agricultural productivity 19–20, 24, 27–8, 62,63–4, 65, 324

agricultural profits 19–21, 26–8, 34, 44–5, 60–4,65, 130–2

allocation theory: in neo-classical economics138, 204; Ricardian 4–5,9, 139, 160, 161, 167–8, 182–3

Anderson, J. 103, 351–6Arrow, K. 202–4, 213

Bailey, S. 285, 286, 296, 297–8, 301–2, 308–9;cost determination ofprice 305; measure of value 288–91,298, 299; rent theory 109, 290–1

basket see wage basketBentham, J. 323–37; and colonization

328–30; and falling rate of profit326–30, 333–4; and falling rate of realwages 330, 333; his missing paper onprofits 326, 337; as influence onRicardo 323, 330, 333–7; and landscarcity 328–30, 331–3; andSmith 326–7, 331–3

Bharadwaj, D. 139Black, R.D.C. 292Blaug, M. 1–2, 5, 6, 8, 77, 292bounty see subsidy (bounty) on cornBowley, M. 292, 306

Brewer, A. 195Bronfenbrenner, M. 2–4, 5–6, 11Buchanan, J. 147, 349Bullionism 96, 104–5

Cambridge school 91–2, 137–8, 142,213, 219

‘canonical classical model’ 221–2, 224,342–60

capital accumulation: decelerating268–9, 271, 274–8; Malthusian theoryof 21–2, 25–6, 47, 118, 244; and profit rates20, 22, 25–6, 27–8; andsaving 118–19; Smithian 347; andwage rates 223–4

capital, Marshall’s theory of 157–9Casarosa, C. 94, 117, 220, 221‘Catallactics’ 296Churchman, N. 10circular flow process 121–2, 161class conflict 112–14classical economics 135–40, 159–60,

168–9, 197; ‘canonical classicalmodel’ 221–2, 224, 342–60

colonization 328–30, 345–6, 348‘competition of capitals’, Smith’s 101,

323, 326–7, 336, 344–7, 348–9, 356–7;conflicting with Law of Markets 122,343, 358

constant real wages: and Malthus 227,261–3; in Ricardo’s growththeory 96–8, 222, 242–3, 247–8, 253–4

corn: as both input and output 19, 21,34–5, 44–5; effect of subsidies 100–1,102, 103–4, 206, 350–1, 352-3;

I N D E X

INDEX

364

corn (cont’d )restrictions on importation 21–3, 24,26–7, 323–4; taxation 207; used asnuméraire by Ricardo 29, 56, 72

Corn Laws 9–10, 93, 99, 132, 213corn prices: and corn wages 48–55;

Hume on 33; Malthus on 33, 103–4,352–3, 354; Smith’s theory of 32–3,83–4, 101–6, 129, 349–51, 353–4

corn wages 48–55‘corn–profit model’ 23–4, 44–56, 72–7,

79–86; ascribed to Torrens 79–82;Eatwell on 44–56; lost papers? 23,60, 61, 63, 69; Moss’s belief in 127,132; O’Brien’s view of 92–4; Sraffa’sinterpretation of Ricardian profittheory as 44–6, 47–8, 56, 60–9, 79–86;use in prediction 93, 99; see alsoprofit rate theory

correspondence (Note: only the mostfrequently cited letters are indexedindividually):letter from Ricardo to Malthus: 26

June 1814 21, 23, 61, 64, 66, 269; 25July 1814 22–3, 61, 64, 66, 73, 74,269–70; 11 August 1814 24, 66, 72,73; 23 October 1814 25, 63, 256– 7;18 December 1814 67, 255, 256,271–2; 27 March 1815 48, 52–3, 54

Malthus to Horner 48, 54Ricardo and Malthus: on demand–

supply analysis 7, 145, 178, 212,286; on methodology 97, 253–4; onprofit rate theory 19–28, 48–55,60–4, 72–4, 75–6, 323–4, 355–6; onscarcity 176; on Torrens 83–4; onwages 253–4, 255–9

Ricardo to McCulloch 99, 102, 276;Ricardo to Mill 98, 102, 354–5;Ricardo to Trower 20, 60, 65, 302

cost: rent distinct from 145–7, 180,183–4, 207, 297; Smith’s ‘adding-up’approach 72, 101, 124, 161, 331–2,334, 336; see also opportunity cost;production cost

cost approach to value: classical 136–7,168; Ricardian 28–9, 139, 140, 141–5,178–80, 301, 305; Walrasian 155–9

Cotterill, C.F. 291, 298, 305, 309Cournot, A. 172, 173

De Quincey, T. 285–6, 291, 299–301,304–5, 307–8, 311

de Vivo, G. 82–5, 170demand: classical omission of 137, 169;

derived 120–1, 137, 140, 148–9, 155,195–9; as determinant of margin204–11; and distribution 195–9;elasticity of 119–20, 175–6, 207;Malthus’s theory of 22, 24, 62, 287;for manufactured goods 21–2, 23, 66;Ricardian 119–22, 139–40, 142–3,172–8, 195–9, 202–11; see alsodemand–supply analysis

demand–supply analysis: and long-runwage determination 310; as receiveddoctrine 178–9; Ricardo and Malthuscorrespondence on 7, 145, 178, 212,286; Ricardo’s use of 107, 108,119–22, 123, 124, 144–5, 178–80;Smith’s 120, 310; Torrens’s 178–9,286; see also demand; supply

derived demand 120–1, 137, 140, 148–9,155, 195–9

differential rent: and land scarcity 109,145–7, 183–4, 302; Malthusian theoryof 28, 293, 349; see also rent theory

diminishing returns: present inSmith 326, 342–3, 344–5, 349, 351;and profit rates 20, 27, 82, 85, 249–50,256, 263; Ricardian 20, 27, 35–6, 51,132, 219; Trotter’s 335–6; andwages 263, 266, 273

‘Dissenters’ 283, 285–98distribution: and demand 195–9;

neo-classical interdependence withpricing 91–2, 117, 123–4, 187;relationship with expenditure 187,195–8

distribution theory: classical 137; DeQuincey’s 300–1; influence ofBentham 330, 333–7; Longfield’s292–5; neo-classical 136;Ricardian 144, 184–5, 283–311; seealso inverse wage–profit relation

Dobb, M. 170, 195, 199, 284Dumont, E. 334, 335Dupuit, J. 173

Eatwell, J. 44–56elasticity of demand 119–20, 175–6, 207Essay on the Profits of Stock,

Ricardo 28–33, 44–55, 259–61, 272–4;Table 45, 46, 48–55, 74–7, 113–14

expenditure, and distribution 187,195–8

INDEX

365

factor mobility 142–4, 159–60factor and product market

independence 139, 141, 180; Say 140–1,179–80; Walrasian 140

factor substitution 180–1falling rate of profit see profit ratesfalling rate of real wages see wagesFetter, F.W. 307–8, 310–11food prices, as determinant of

profits 21, 28–9food production, and population

growth 174–5, 208–10French tradition of economics 136,

140–1, 168Frisch, R. 137, 169

Garegnani, P. 64–9, 270general equilibrium: in classical

economics 167; in neo-classicaleconomics 135, 137–8; O’Brien’sdistaste for 92; in Ricardianeconomics 4, 139–40, 168, 179–80,185; Say’s 180; Walrasian 140, 180

Gibbard, K. 268–78Gossen, H.H. 173Groenewegen, P.W. 79growth theory: classical 226–39; and

constant wages 96–8, 222, 227, 247–8,253–4; and land scarcity 4, 235–9;Malthus’s 226; Mill’s 226;Ricardian 96–8, 125, 160, 185–7, 208– 11,241–63; wage rates and populationgrowth 117–18, 233–4, 235–9, 246–7

Hicks, Sir J. 208Hicks, Sir J. and Hollander, S. 94, 117,

220, 221High Price of Bullion, Ricardo 112, 323Horner, F. 353Hume, D. 33, 110–11, 112, 356Hutchison, T.W. 10, 11

income effect 175inflation 102, 105, 324‘invariable measure’ of value 107,

288–9, 291, 299inverse wage–profit relation 4, 21,

127–32, 255–61, 286–97, 333–7;dismissed by Moss 127–9; influence ofBentham 330, 333–7; and landscarcity 106, 210–11; andLongfield 130, 285, 308; andMalthus 105, 130, 255–9, 285, 286–8,

303, 308; O’Brien on 93, 94–5, 104–6,107–8; and Roncaglia 125; andTorrens 130, 285, 294, 295–6, 308, 359;see also profit rate theory; wages theory

Italo-Cambridge school 168, 169–70,185

Jevons, H.S. 174Jevons, W.S. 171–4, 180–1, 284; chain ofcausation 171–2, 174; on Mill 136,148–9, 155, 171; and pricingtheory 136, 140, 168, 169, 173–4, 187

Kaldor, N. 92Knight, F.H. 137, 169

labour, demand for see derived demandlabour theory of value 51–2, 181–3,

202–4, 285, 291, 305–6land: multi-use 147–8, 154, 160;

single-use 204land scarcity: Bentham on 328–30,

331–3, 335; and differential rent 109,145–7, 183–4, 302; and growththeory 4, 235–9; Mill on 153–4; andRicardo’s rent theory 108–9, 121–2,145–7, 183–4, 205–6; Say on 146;Smith on 325–6, 347–8; as special caseof inverse wage–profit relation 106,210–11; see also rent theory; scarcityprinciple

Langer, G.F. 79–82Lauderdale, J.M. 284law of markets 185; conflict with

Smith’s competition of capitals 122,343, 358; Mill’s 15–6, 22, 25–6, 82;Say’s 25, 82, 358

letters see correspondenceLevy, D. 94Lloyd, W.F. 286, 298, 306long-run cost price determination 49,

123, 150–1long-run wage determination 242,

254–5, 307, 310Longfield, M. 4, 266–7, 292–6, 310;

as ‘dissenter’ 284, 285, 286, 292–6, 301,305–7; rent theory 293, 309; andRicardo’s inverse wage–profitrelation 130, 285, 308

McCulloch, J.R. 105, 291, 292, 353; andRicardo 99, 105, 284–6, 299, 304,307–9

INDEX

366

Mallet, J.L. 308–9Malthus, T.R. 6, 85–6, 303–4; aggregate

demand theory 22, 24, 62, 287; capitalaccumulation theory 21–2, 25–6, 47,62–3, 65, 118, 244; on corn prices 33,103–4, 352–3, 354; correspondence ondemand–supply analysis 7, 145, 178,212, 286; correspondence on profit ratetheory 19–28, 48–55, 60–4, 72–4, 75–6,323–4, 355–6; correspondence onwages 253–4, 255–9; differential renttheory 28, 293, 349; misunderstandingof Ricardo 6–8, 62–4, 141–2, 224–5,266; population theory 24, 25–6, 175,208–9; and Ricardo’s concept of netrevenue 224–5, 255, 301, 303–4; andRicardo’s inverse wage–profitrelation 105, 130, 255–9, 285, 286–8,303, 308; and Ricardo’s theory ofvalue 288, 303, 307; and Smith 103–4,284, 356; and Torrens 85–6; wagestheory 226–8, 233–9, 261–3, 276–7,288, 307

manufactured goods 21–3, 27–8, 55–6,82–3, 131–2; cost of production142–3; demand for 21–2, 23, 66;prices 22–3, 45, 53, 73–4, 142–5

margin: endogeneity of 212;Ricardo’s demand determined204–11

marginal productivity 180–1marginal utility 159, 172–3, 176–8;

concept missing in Smith andSay 176, 178, 188; as determinant ofvalue 171–4, 177–8; Lloyd’s conceptof 286, 306; non-paradigmaticnature of 136, 159, 188; Ricardo’sdawning recognition of 120, 172–3,177–8

marginalist economics 167–8, 188;‘marginalist revolution’ 135–40,159–60, 169; see also neo-classicaleconomics

Marshall, A. 9, 167–88, 284; andmarginal utility 120, 136, 159, 177–8,188; neo-classical approach 9, 284;and Ricardo 107, 118–19, 120, 136,139–40, 167–88, 213; theory ofcapital 157–9

Marx, K. 170, 185–7, 284Meek, R.L. 297–8Menger, C. 169, 173, 181Merivale, H. 291–2, 307, 308

methodology: comparison of Smith andRicardo 93; Ricardo’ssimplification 116, 222, 243, 247–8,250, 268, 276; Ricardo’s use of ‘strong’cases 8, 30–2, 97, 112, 223, 254–5

Mill, J.S. 139–40, 148–55, 161, 284–6;and cost approach to value 137,149–53, 160, 169, 307; and DeQuincey 304–5; and demand forlabour 148– 9, 155, 199; Jevonson 136, 171; relationship withRicardo 106, 139–40, 149–55, 299,307, 310–11; and scarcity of land 153–4;and surplus as source ofprofits 185–6, 306; wagestheory 226–8, 236–9, 266

Mill, James 98, 105–6, 266, 291, 299,307; Mill’s Law of Markets 15–6, 22,25–6, 82

model building: Ricardo’s practice 92,94–5, 98–100; see also ‘corn–profitmodel’

monetary theory 96, 110–12money, quantity theory of value of 107money supply 324, 332–3, 334–5, 336,

355–6, 357money wages: and prices 25–6, 66–7;

and profit rates 21, 23–4, 61–5, 67–9,246–9; and real wages 246–9; andRicardo’s theory of distribution 95;see also wages

Morishima, M. 6Moss, L.S. 127–32

‘natural price’ 124, 142, 178natural wage: classical approach 137,

168, 224; subsistence wage as 245,251–2

neo-classical economics: continuity ofRicardo with 9, 120–4, 135–61;criticism of classical economics135–40, 168–9; general equilibriumanalysis 135, 137–8; interdependenceof distribution and pricing 91–2, 117,123–4, 187; see also marginalisteconomics

neo-Ricardianism 169–70, 197, 202,213

New View 4, 8, 9, 11, 241; Gibbardon 268–78; Peach on 9, 243–4, 245,249–53, 255–8, 260, 263

Notes on Malthus, Ricardo 197–8,261–3, 276–7

INDEX

367

O’Brien, D.P. 91–114, 284, 299; onRicardo’s inverse wage–profitrelation 93, 94–5, 104–6, 107–8; andRicardo’s model building 92, 94–5,98–100; on Ricardo’s Smithianlegacy 100–6

opportunity cost: neo-classical 136;Ricardian 139, 140, 141, 143, 181–3;Say’s 141, 148, 179–80

Owen, R. 82

Pasinetti, L.L. 8, 244, 250, 251, 252Peach, T. 9, 10–11, 71–7, 243–61, 263,

265Physiocrats 349Political Economy Club 308–9population growth: and food

production 174–5, 208–10;Malthusian theory 24, 25–6, 175,208–9; and wage rates 117–18, 233–4,235–9, 246–7

prediction 98–100; use of ‘corn model’for 93, 99

Prendergast, R. 85–6price effect 268, 269–70, 273, 274–5, 277prices: cost determination of 305;

long run cost determination of 49, 123,150–1; of manufactured goods 22–3,45, 53, 73–4, 142–5; and moneysupply 324, 332–3, 334–5, 336; andmoney wages 25–6, 66–7

pricing: average-cost or marginalcost51–3, 56; classical model 137,168; neo-classical model 91–2, 117,123–4; Ricardo’s cost approachto 136, 140, 141–5, 178–80, 301, 305;Smith’s ‘adding-up’ approach 72, 101,124, 161, 331–2, 334, 336

Principles of Political Economy andTaxation, Ricardo 245–54, 274–6;‘On Gross and Net Revenue’ 254–5;‘On Machinery’ 112–13, 123, 149,195; ‘On Profits’ 249, 275, 287, 359;‘On Taxation on Wages’ 110, 118,223, 251–2; ‘On Value andRiches’ 172–3, 300; ‘On Wages’ 109,110, 222, 243–4; ‘Taxes on RawProduce’ 109, 222–3, 250

production cost 28–9, 150–1productivity: and corn prices 25;

marginal 180–1; and profit rates19–20, 24, 27–8, 62, 63–4, 65, 324;and surplus labour time 186–7

profit rates: and abstinence 186–7, 306,310; and agricultural productivity19–20, 24, 27–8, 62, 63–4, 65, 324; andcapital accumulation 20, 22, 25–6,27–8; and discovery of new markets21, 256, 324–5, 348, 356–7;equalization of 26–8, 30–2, 107–8,120, 181–2, 187; falling 8, 19–28,29–36, 220–1, 246–9; ‘material rate’60–9; and money wages 21, 23–4,61–5, 67–9, 246–9; and principle ofdiminishing returns 20, 27, 82, 85,249–50, 256, 263; relationship betweenagricultural and general 19–21, 26–8,34–5, 44–6, 60–4, 65, 130–2; andtrade 21, 26–7; and waiting 118–19;see also inverse wage–profit relation

profits: agricultural 19–21, 26–8, 34,44–5, 60–4, 65, 130–2; food prices asdeterminants of 21, 28–9;maximization of 140, 142–3, 145, 167,169; as residual 306, 327; Ricardo’sconcept of 118–19; surplus as sourceof 119, 185–6

profits theory: Bentham’s falling326–30, 333–4; Malthus’s 21–2, 25–6,47, 62–3, 65, 118, 244; Marshall onRicardo’s 118–19; Marx’s 185–7;Ricardian 19–36, 44–56, 60–9, 71–7,118–19, 158–9; Ricardo and Malthuscorrespondence on 19–28, 48–55,60–4, 72–4, 75–6, 323–4, 355–6;Smith’s 101–2, 323, 324–6, 342–3,358; Sraffa on Ricardo’s 44–6, 47–8,56, 60–9, 79–86; Stigler onRicardo’s 35–6; Torrens’s 79–86;Walrasian 157–9; see also ‘corn–profitmodel’; inverse wage–profit relation

proportionate wages 105, 360

‘rational foundation’ of profittheory 44–5, 46, 47–8, 69, 79–86

Read, S. 286, 296, 297–8, 305, 306, 307,310

real wages: assumption of constant96–8, 222, 242–3, 247–8, 253–4; anddiminishing returns 263, 273; andmoney wages 246–9; secularly falling8, 229, 231–3, 244, 246–9, 255–9;see also inverse wage–profit relation

rent: differential 28, 109, 145–7, 183–4,293, 349; distinct from costs 145–7,180, 183–4, 207, 297

INDEX

368

rent theory: Anderson’s 351–2;Bailey’s 109, 290–1; Longfield’s 293,309; Malthus’s differential 28, 293,349; Mill’s 153–4; Ricardian 28–9,108–9, 121–2, 145–7, 183–4, 203–7,302–3; Senior on 109, 302, 308;Smith’s 108, 302–3, 349; see alsodifferential rent; land scarcity

revenue, Ricardian 219, 224–5, 254–5,301, 303–4Ricardian economics: canonical classicalmodel’ 221–2, 224, 342–60; asdetour 114, 116; and dualdevelopment of economictheory 283–4, 286, 309–11;interpretation of 95–8, 161, 171,220–2, 225, 241–4, 265–7;misinterpretation of 219, 222–3, 301;neo-classical? 9, 91–2, 117, 120–1,122–4, 135–61; revitalized byMarx 284; and the Ricardians298–301; Smithian continuity 109–12,114; supposed demise 283–5, 311;‘Walrasian’ claims for 102, 109, 117,124

Robinson, J. 137–8Roncaglia, A. 116–25, 138

Samuelson, P.A. 161, 202–4, 220, 221–2,267, 342–60; ‘canonical classicalmodel’ 221–2, 342–60; incomedistribution and demand 197–8, 213

saving 267, 306, 310Say, J.B. 120–2, 140–9, 176–8, 179–80,

298; circular flow 121–2, 161; andmarginal utility 141, 176–8, 188;opportunity cost 141, 148, 179–80;and Ricardo 25, 120–2, 140–9, 161,179–80; Say’s Law 25, 82, 122, 358;and Smith 120, 177, 284; andWalras 121, 137, 140–1, 168

scarcity 123, 124–5, 147, 176–7, 184,205–6; see also land scarcity

Schumpeter, J.A. 167, 169, 284, 288,290–1, 292, 299

Scrope, G.P. 286, 296, 305, 306, 307,310

Seligman, E.R.A. 292Senior, N.W. 286, 301, 302, 307;

abstinence 186, 310; and Ricardo’srent theory 109, 302, 308

Shove, G. 136, 139Sismondi, J.C.L. S. de 349

Smith, A. 93, 100–6, 323–7, 342–60;‘adding-up’ cost approach 72, 101,124, 161, 331–2, 334, 336; andBentham, J. 326–7, 331–3; andcolonization 345–6, 348; corn pricestheory 32–3, 83–4, 101–6, 129,349–51, 353–4; influence onRicardo 100–6, 109–12, 114, 120, 129,176–7, 336; lacked concept ofmarginal utility 176; and landscarcity 325–6, 347–8; law of marketsnot followed 122, 343, 358; andMalthus 103–4, 284, 356; ‘naturalprice’ 142; O’Brien on Ricardo’sreaction to 100–6; passing on ofwage-rate increases 22–3, 100, 285,289–90, 335, 350–1, 359; and principleof diminishing returns 326, 342–3,344–5, 349, 351; profits theory 101–2,323, 324–6, 342–3, 358; renttheory 108, 302–3, 349; resourceallocation 310; and supply anddemand analysis 120, 310; ontaxation 223; viewed bycontemporaries 102–4, 347, 351–5,357; see also ‘competition of capitals’,Smith’s

Sraffa, P. 44–6, 60–9, 79–86, 202–4, 213;Bentham’s missing paper onprofits 326, 337; and corn as bothinput and output 19, 21, 34–5, 72, 86;inference of lost ‘corn model’papers 23, 60, 61, 63, 69; ‘one-legged’pricing models 202–4, 213; andRicardian profit theory as ‘corn profitmodel’ 44–6, 47–8, 56, 60–9, 79–86

Stigler, G.J. 35–6, 219–25, 241–4, 254–5,265–7; on textual exegesis 6, 98,220–2, 225, 241–4

subsidy (bounty) on corn 100–1, 102,103–4, 206, 350–1

subsistence wage 250–5; classical 136,137, 168; as natural wage 245–6,251–2; in Ricardian distributiontheory 8, 35–6, 219, 222–3, 286; andtaxation 110, 222–3, 250; use in‘prudential wage’ theory 239

substitution effect 175supply: and long-run cost price

determination 150–1; Ricardo’semphasis on primacy of 7–8, 145,178–9, 211–12, 213; see also demand–supplyanalysis

INDEX

369

surplus: concept of 185–7; as source ofprofits 119, 185–6, 306; andsubsistence wage 254–5

taxation 109–10, 148, 184, 207, 222–4Thompson, T.P. 286, 301, 302, 307, 308,

309Tooke, T. 308–9Torrens, R. 79–86, 295–6, 307, 308–9;

demand–supply analysis 178–9, 286;and inverse wage–profit relation 130,285, 294, 295–6, 308, 359

trade: effect of restrictions/extensions 21–3, 24, 26–7, 323–4;Ricardo’s comparative costapproach 185; and Ricardo’s costprice theory 144, 148

Trefusis, D. 1Trotter, C. 335–6Trower, H. 20, 60, 65, 209Turgot, A.R.J. 9, 284Twiss, T. 297

utility: final 173; marginal see marginalutility; total 120, 172–3, 177–8

value: Bailey’s measure of 288–91, 298,299; classical theory of 137, 149–50,168, 169; cost approach to 136, 140,141–5, 178–80, 301, 305–6; DeQuincey’s theory of 300, 304–5;demand and supply approach to178–9, 301, 305; ‘invariable measure’of 107, 288–9, 291, 299; labour theoryof 51–2, 181–3, 202–4, 285, 291,305–6; Longfield theory of 292–4;and marginal utility 171–4, 177–8;measuring 33, 36, 129, 276, 288, 303;paradox of 176–7, 300; quantitytheory of value of money 107;Ricardian theory of 171–4, 202–4,285–97, 300, 305–7; Say’s theoryof 140–1, 179–80; Smith’s theory ofcorn 100–1, 353; Torrens on 83, 294

Viner, J. 8

wage basket 26–8, 67–9, 268–72, 274–6;constant 268, 269–70, 272, 274–6;

mixed 51, 53–4, 67–9, 131–2, 269–72,273; Sraffian assumption of cornonly 46, 69, 268–9

wage rates: and capitalaccumulation 223–4; demand–supplydetermination of 343; as endogenousvariable 117–18; and populationgrowth 117–18, 233–4, 235–9,246–7

wages: adjustment mechanism 252–3;Bentham’s falling 330, 333; corn48–55; determined by food prices 21;and diminishing returns 263, 266,273; long-run 242, 254–5, 307 310;Malthus-Mill prudential falling235–9; money 21, 23–4, 25–6, 61–5,66–9, 95, 246–9; proportionate 105,360; Ricardian constant 96–8, 222,242–3, 247–8, 253–4; Ricardian fallingreal 8, 229, 231–3, 244, 246–50, 255–9,265–7, 330; Ricardian rising 23–4,229–30; Ricardian variable 117–18,185–7, 220–2, 225, 244; Ricardo andMalthus correspondence on 253–4,255–9; Smith’s passing on ofincreases 22–3, 100, 285, 289–90, 335,350–1, 359; Stigler on 242, 254–5; andtaxation 109–10, 222–4; see alsomoney wages; real wages

wages fund 136, 148–9, 155, 168,199

wages theory: classical 226–39; of J.S.Mill 226–8, 236–9, 266; ofMalthus 226–8, 233–9, 261–3, 276–7,288, 307; prudential wage path 235–9;Ricardian 226–33; Ricardo’ssubsistence 8, 110, 219, 222–3; seealso inverse wage–profit relation

waiting 118–19Walras, L. 155–9, 160, 187; admiration

for Say 121, 137, 140–1, 168, 180; andclassical pricing theory 137, 140,155–9, 160, 168, 187; and subjectivepricing theory 169, 173

West, Sir E. 302, 343, 357Whateley, R. 296, 297, 305–6Wicksell, K. 202–3, 205, 210, 212Winch, D. 266

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