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Politics Notes International Political Economy Notes

David Ricardo Notes

Updated David Ricardo Notes

International Political Economy Notes

International Political Economy

Approximately 13 pages

Adam Smith; anti-mercantilism; the Invisible Hand; non-interventionism; Das Adam Smith Problem; The Theory of Moral Sentiments; anti-colonial liberalism; the marketization of higher education; Brexit David Ricardo; labor theory of value; absolute advantage; comparative advantage; the Ricardian Vice; unequal exchange; exploitation & Empire; global value chains; the containerization of supply chains Thorstein Veblen; conspicuous consumption; leisure class; business vs. industry; Adam Smith; environ...

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DAVID RICARDO

QUESTIONS

  1. How can David Ricardo’s theory of comparative advantage be said to provide the normative foundations for liberal IPE? [2017]

  2. ‘Ricardo’s use of the labor theory of value limits the validity of his political economy’. Discuss. [2016]

  3. ‘The world depicted by Ricardo is a world in which the humblest person and the most resource-poor nation can find a niche and eventually prosper’ (Gilpin). Discuss.

  4. Assess the relevance of David Ricardo’s views on free trade to the contemporary international political economy. [2016, 2013]

  5. What does it mean to say that Ricardo ‘abstracts’ the economy from social life? Is an ‘abstract’ economy open to political influence?

Can we conceptualize economic relations without thinking of material relations?

‘Ricardo provides a cogent analysis of the political, economic and social implications of free trade’. Discuss.

What, if anything, is gained by situating IPE analysis in the context of a broader disciplinary history of political economy? [2015]

INTRODUCTION

Despite being 200 years old, David Ricardo’s theory of comparative advantage retains extraordinary rhetorical power as a hallmark for free trade and its institutional manifestations today. Comparative advantage engages directly with Smith’s notion of international trade, claiming that: regardless of whether a country produces goods more efficiently than any other competitor (absolute advantage), countries will profit more by specializing in industries that enjoy a lower relative internal opportunity cost. This win-win situation is backed by his famous example involving England and Portugal.

Ricardo’s name is frequently invoked by mainstream economists to show ‘academic credibility’, although the precise nature of his contribution is rarely elucidated. Indeed, the theory itself constitutes merely three paragraphs of his magnum corpus, Principles of Political Economy and Taxation. In this essay I argue that Ricardo’s comparative advantage theory is a product of historical experience, inextricably tethered to the milieu in which he ‘conceived’ them. I intend to contextualize, and subsequently challenge, his reductionist assumptions of capital immobility and equal distribution of gains from trade, with reference to the Anglo-Portuguese Methuen Treaty of 1703, transatlantic slave trade and questionable relevance to underdeveloped economies.

LABOR THEORY OF VALUE

  • An early attempt by liberal economists to explain why goods were exchanged for certain prices on the market. It suggested that a commodity’s value could be measured objectively by the total amount of ‘socially necessary labor’ required to produce it (as opposed to purely its ‘utility’).

  • This contrasts the subjectivist theory of value which posits that exchange value is not absolute but relative; based on subjective appraisals of ‘usefulness’.

COMPARATIVE ADVANTAGE

In order to properly assess Ricardian trade theory, one must first paint a picture of the 19th century British politico-economic scene. His analyses reflected a strong distaste for the Corn Laws of 1815-1846 (levying tariffs on imported grain), which maximized profits for landlords who extorted high rents leading to bloated food prices and costs of living. Factory-owners sought to retain their workers (already living below subsistence level) by paying higher wages and, as ‘profit depends on wages’, reductions in capital accumulation deterred industrial investment and devitalized the economy. International free trade in agricultural goods based on comparative advantage, Ricardo reasoned, could rectify the adverse effects of landowners’ disproportionate power whilst optimizing profit.

Absolute and comparative advantage are core principles in international trade that affect how and why nations devote finite resources to the production of particular goods/services, i.e. international specialization:

Absolute advantage Comparative advantage

The ability of an entity (country, company or individual) to produce goods/services at a lower unit cost – that is, requires fewer inputs and/or utilizes more efficient processes – than any competitor.

  • ‘Stipulates that it is beneficial for a country to import commodities whose production entails less real cost compared to the domestic production of the same amount of the imported commodities’ [King]

  • Rejecting the ‘18th-century rule’ of absolute advantage, Ricardo asserted that domestic and international markets operated according to disparate logics: ‘the same rule which regulates the relative value of commodities in one country does not regulate the relative value of the commodities exchanged between two or more countries’. Commodities in international trade derive their exchangeable value from two sources: scarcity, and the relative ‘minimum labor hours required for production’ (see: LABOR THEORY OF VALUE). As such, trade expansion through ‘the better distribution of labor by each country producing those commodities for which by its situation, its climate and its other natural or artificial advantages, it is adapted’’, would increase consumption opportunities globally, thereby promoting human happiness. This provokes new effective demand and stimulates entrepreneurial investments to improve productivity.

  • Another benefit is inclusivity and mutual reward among trading partners; no nation is so poor or inefficient that it cannot gain from free trade. Ricardo uses a hypothetical example of free trade between Portugal producing wine and England producing cloth.

Minimum labor hours required for production
Commodity
Cloth Wine
Portugal 90 80
England 100 120

  • Although Portugal enjoys absolute advantage in both industries, profits are optimized if English capital is redirected towards importing surplus cloth (100 < 200 labor hours) and importing Portuguese wine (80 < 90 < 120) which the latter specializes in.

  • To counter threats of economic dislocation posed by offshoring,...

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