Ricardian Vice

BIBLIOGRAPHY

The term Ricardian vice, which refers to the English economist David Ricardo (1772–1823), was coined by Joseph A. Schumpeter in his History of Economic Analysis (1954). It was intended to highlight Ricardo’s alleged habit of introducing utterly bold assumptions into an already oversimplified representation of the economy and treating these as givens when in fact they are unknowns. In Schumpeter’s words, Ricardo’s “fundamental problem” was that he “wanted to solve in terms of an equation between four variables: net output equals rent plus profits plus wages” (Schumpeter 1954, p. 569). Operating with this perspective, Ricardo was bound to treat three of the variables as constants. Schumpeter also deplored Ricardo’s alleged habit of “piling a heavy load of practical conclusions upon a tenuous groundwork” (Schumpeter 1954, p. 1171). Two examples serve to illustrate what Schumpeter considered to be Ricardo’s inadmissible way of reasoning. The first is Ricardo’s famous suggestion, made in 1819, that the whole of the British national debt accumulated during the Napoleonic Wars could be repaid in a few years by means of a tax on property (Ricardo 1951–1973, vol. 5, pp. 38, 271). Such a tax, Ricardo argued, would not diminish total wealth and would also not unduly hurt the propertied classes, because the capital value of the current taxes levied on them to cover interest charges and amortization was equal to the lump-sum property tax suggested. This proposal became known as Ricardo’s equivalence theorem. The second example is Ricardo’s view that the burden of a tax on wages or on goods consumed by workers will not be borne by workers (e.g., Ricardo 1951–1973, vol. 1, p. 203). Both conclusions are the logical consequence of the underlying premise that workers are paid a subsistence wage that cannot be changed. As Schumpeter opined, Ricardo’s theory of wages amounted to taking wages as fixed at the “subsistence” level (Schumpeter 1954, p. 665).

These criticisms elicit two remarks. The first concerns the way Ricardo reasoned. Apparently his critics have not taken seriously his statement that “in all these calculations I have been desirous only to elucidate the principle, and it is scarcely necessary to observe, that my whole basis is assumed at random, and merely for the purpose of exemplification. The results though different in degree, would have been the same in principle. ... My object has been to simplify the subject” (Ricardo 1951–1973, vol. 1, pp. 121–122). Hence, while it is true that Ricardo frequently employed bold cases to “elucidate” the principle at hand and draw attention to what he considered the most important aspects of the problem under consideration, he certainly did not seek to prevent his readers from trying out less restrictive assumptions and investigating their implications, nor did he himself abstain from doing so. Some later commentators rightly praised him for having heralded an approach in economics that requires a clear statement of the assumptions on the basis of which certain propositions are taken to be valid within a given analytical context. This is now considered an indispensable prerequisite of scientific communication. Therefore what Schumpeter considered a vice, others took to be a virtue.

As regards the analytical core of Ricardo’s argument, it would be wrong to take Ricardo to have been a strict follower of the Malthusian concept of a subsistence wage. While he used this concept in some contexts for the sake of simplicity, in others he explicitly stressed the historical and social dimensions of the “natural wage” and warned that it must not be mistaken for a minimum required for physiological subsistence (see, e.g., Ricardo 1951–1973, vol. 1, pp. 96–97). He took into account the possibility that workers might receive a share of the social surplus product and maintained that the rate of profits is inversely related to “the proportion of the annual labour of the country devoted to the support of the labourers” (Ricardo 1951–1973, vol. 4, p. 49).

This brings us to the second observation, which concerns the fact that the “standpoint … of the old classical economists from Adam Smith to Ricardo has been submerged and forgotten since the advent of the ‘marginal’ method,” as Piero Sraffa remarked perceptively (Sraffa 1960, p. v). By the turn of the nineteenth century it was no longer understood that the classical economists had advocated a theory of income distribution that was fundamentally different from the marginalist one. The marginalist approach sought to determine the rate of profits and the wage rate in terms of the relative “scarcities” of the respective factors of production, capital, and labor and thus on the basis of the economy’s given initial endowment of the factors. (With heterogeneous capital goods the amount of capital in given supply can be expressed only as a sum of value, which spoils the symmetry between the factors with [homogeneous] labor given in terms of its own natural unit.) The classical economists, on the contrary, determined the rate of profits for the system of production in use in terms of the “social surplus” left over after all used-up means of production and wage goods consumed by workers at a given wage rate have been deducted from gross output levels. Hence, whereas the marginalist authors treated profits and wages symmetrically, the classicals treated them asymmetrically. This asymmetric treatment was unimaginable to the marginalist authors, who therefore felt entitled to accuse the classical authors of treating as a constant what is a variable—that is, the wage rate. Schumpeter’s incomprehension was in fact anticipated by major marginalist authors, such as William Stanley Jevons and Léon Walras (see Kurz and Salvadori 2002, pp. 390–395). However, to treat wages as a given in one part of classical theory is a priori no less admissible than to treat the capital endowment as a given in one part of marginalist theory. As Sraffa (1960) has shown, the classical approach to the theory of value and distribution can be formulated in a coherent way that allows one to determine the unknowns (one of the distributive variables and relative prices) in terms of the givens, without depending on bold assumptions, such as the existence of a subsistence wage.

In light of these considerations and granting the fact that Ricardo based some of his arguments on highly simplified analytical constructions, it appears to be somewhat problematic to speak of “Ricardian vice.” One can only wonder whether it would be more appropriate to speak of “Schumpeterian incomprehension.”

SEE ALSO Economics; Economics, Neo-Ricardian; Long Period Analysis; Marginalism; Napoleonic Wars; Ricardo, David; Schumpeter, Joseph Alois; Sraffa, Piero; Surplus; Taxation; Wages; Walras, Léon

BIBLIOGRAPHY

Kurz, Heinz D., and Neri Salvadori. 2002. One Theory or Two? Walras’s Critique of Ricardo. History of Political Economy 42 (2): 365–398. Reprinted in Heinz D. Kurz and Neri Salvadori, Interpreting Classical Economics: Studies in Long-Period Analysis (London: Routledge, 2007).

Ricardo, David. 1951–1973. The Works and Correspondence of David Ricardo. 11 vols. Ed. Piero Sraffa, with the collaboration of Maurice H. Dobb. Cambridge, U.K.: Cambridge University Press.

Schumpeter, Joseph A. 1954. History of Economic Analysis. Ed. Elizabeth Boody Schumpeter. London: Allen and Unwin.

Sraffa, Piero. 1960. Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory. Cambridge, U.K.: Cambridge University Press.

Heinz D. Kurz