tiistai 12. syyskuuta 2017

David Ricardo: On the Principles of Political Economy and Taxation (1817)

1772-1823

The main aim of David Ricardo’s work is to find the natural measure for evaluating different commodities in economy. Ricardo continues in the footsteps of Adam Smith, who had suggested that corn - or more extensively, nourishment - provided such a natural measure, in other words, that one could always determine the true value of a thing by checking how much food one could get with it. Yet, Ricardo pointed out, the value of food fluctuated as much as the value of any other commodity - during a year when fields produced more corn, its value would be considerably lower. If one wanted to use some commodity as a measuring stick for other commodities, one might as well use gold, the quantity of which didn’t change as radically as the quantity of corn. Still, even the value of gold could fluctuate somewhat, e.g. if new mines were found, so even gold was not the best possible answer for the desired criterion.

Ricardo’s answer was then that the true value of a thing was determined by the amount of human work required for producing that thing. For instance, if a machine could be used for reducing the need of manpower in producing corn, the value of corn would be lowered. At first sight this seems like a strange thing to say - surely the value of a thing would have something to do with how much demand a thing has. Ricardo’s answer appears to be twofold. Firstly, he insists that this effect of demand is in some manner built in to his model of value - work of a jeweler is qualitatively more difficult than work of a farmer. This solution seems a bit of a cop out, especially as Ricardo never develops the idea of qualitative differences in work, but in practice speaks only of things that can be easily mass produced, like shoes or corn. Indeed, one might suggest that a growing part of modern economy happens in a qualitatively higher level than mere simple production of commodities, because e.g. design of a thing may raise its value, although it wouldn’t require that much more work to make it.

Ricardo’s second answer is that he is speaking of the natural value of a thing, which may differ from the actual price a thing has in the market. Ricardo’s point is, first of all, based on the hypothesis that prices of commodities, if left to themselves, would inevitably tend to move towards their natural values. For instance, if it would become more difficult to produce corn, more workers would be required for producing the same amount of corn, thus, the person selling the corn would have to eventually raise the price of corn if he wanted to get some profit from his business.

An obvious objection to Ricardo’s suggestion is that the price of work or the wages of workers can also fluctuate. Suppose, for instance, that the population of a country would grow larger through reproduction or through immigration and that there would then be more potential workers than before. In a non-regulated system and with more competition for all jobs, the employers wouldn’t have to pay that much money to their employees, thus making it possible to for them to get more profits with the same products, although the amount of work required for doing something would have stayed same. Ricardo’s answer is simple. Surely once the wage costs of a manufactured good diminish, someone would come to the market and start selling it with smaller price. In time, other producers would be forced to change their prices, if they wanted to remain in the business of selling things. The price of things in general would be lowered and thus the workers would get the same amount of goods with their money, although their wages would have been seemingly lowered.

Ricardo’s explanation makes one suspect that in many cases the eventual behavior of a commodity cannot be so straightforwardly determined or that the so-called natural values might never be reached, except in very idealised conditions. Indeed, there is a clear moralistic tendency in Ricardo’s theory of natural values - government should leave the economy alone and we would soon be in those idealised conditions. One example of this tendency is the Malthusian strain in Ricardo’s ideas. If the wages of workers would be generally lowered, the worker population would diminish, because workers wouldn’t have enough money to provide for a big family. Diminishing population would then eventually then lead to a rise of the wages to their normal level, where a worker has just enough to sustain himself and a modest family. At least in Western world, this Malthusian link between the price of work and the amount of population has broken, because workers clearly have more than enough money for providing for their families and still the population growth has reached almost a standstill. The reason for this, as I pointed out when speaking of Malthus, is that the link between the satisfaction of basic sexual needs and the family size is no longer in effect, because of developments with contraceptives, changes in moral outlook of Western world and other things.

Although Ricardo’s theory is supposed to be true in all circumstances, it is hence evidently built on the context of his own time. One peculiarity is his theory of the rent of land. On some land, production of some good, say corn, is peculiarly easy, on others, it requires more effort. At first, only the lands easy to till are in use, but as the economy grows, even the less suitable lands will be used for farming. The result of this change is then that the landowners of the better lands will start to ask for a rent from the farmers. The worse and worse are the lands used for farming, the more and more grows the rent in the better lands. This whole story Ricardo makes up is evidently meant to apply to the English society, in which the landowners did not till their lands themselves, and indeed, in which the main use for land was farming. In a modern urban society, value of land is determined more by its environment than its use in production - one square piece near or within a buzzling city is far more in value than a good farmland far away from cities.

If Ricardo’s take on rent looks back on the last feudal vestiges in English society, his ideas about the use of machines show how uncertain he still was of the effects of the industrial revolution. In the original edition, Ricardo was certain that the use of machines could be nothing but beneficial for the workers as well the machine owners, because they could buy cheaper commodities. In a later edition, Ricardo corrected himself that this would be literally true, only if workers would still be able to find work somewhere, even if machines took care of production of commodities. He suggested that the best hope would be if the machine owners would start to live like medieval nobility and hire workers to do menial work for them. This suggestion is in one sense ahead of its time, since in the current Western world it is a quite distinct possibility that the number of workers in service sector might grow when the number of workers in industrial sector diminishes. In another sense, it is another sign of Ricardo’s times - Ricardo speaks of individuals as owners of machines, while in modern world, industries often belong to companies.

Ricardo’s individual-centred view on economy is glaringly obvious in his ideas about foreign trade. He states as a certain truth that capitalists rarely move their industry from one country to another, because they are accustomed to the habits and culture of one country. This may well be generally true of individual owners, but when it comes to large companies with no clear single owner, the case is rather different. Indeed, in the globalising world it is not at all uncommon that one company moves its production to a completely different continent, for instance, to avoid large wage expenses. Workers, on the other hand, are often in a situation where such a movement is practically impossible due to just mentioned cultural differences.

If Ricardo’s blindspot reveals an intimidating possibility of a world where global enterprises can take advantage of workers in one country and leave workers of another country completely destitute, one distinction he makes raises a more hopeful possibility. Ricardo distinguishes between value and richness - while value means the relation of commodity to work required in producing it, richness is for Ricardo the collection of all goods and commodities available to a certain nation. Now, he notes that there is no clear correlation between the two quantities. If a nation uses more workers to produce more commodities, the total value of commodities in a nation grows and at the same time the nation becomes richer. Then again, it is quite possible that nation becomes richer without any increase in value, if the commodities produced are made by machines. Indeed, one might say that the common human being is more interested of richness, which is a general indicator of how much goods people have in their use. One might even suppose that the society would become more ideal if it became richer through use of machines - provided that this increase of richness would make everyone richer, instead of filling up only some pockets. In fact, in such an ideal society all commodities would have quite a low value, because of ease in making things.