#16604 - David Ricardo - International Political Economy

DAVID RICARDO

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:

CRITIQUE

• The ‘Ricardian Vice’

Ricardo’s depiction of free trade is certainly an alluring one. However, numerous critiques have been levied against implementing comparative advantage theory in legislation. Schumpeter reprimanded Ricardo for his ‘abstract reasoning’ – the so-called ‘Ricardian Vice’ – which involved deriving logically watertight policy prescriptions from impossible premises and perceiving economic phenomena as comprising a separate domain. This type of theorizing undermines the complexity/nuance of political reality (e.g. context, social relations of production) by ascribing dynamic components with arbitrary value, such that they are mathematically beautiful but largely impractical.

• Unequal exchange

The validity of comparative advantage hinges on capital immobility across national borders – at least, insofar as capital movements are too weak to equalize wages/rates of profit internationally – to support trade liberalization policies aimed at rendering those same borders increasingly permeable for both capital and commodities. Ricardo is therefore vulnerable to the criticism that market relations are predicated on unequal exchange, in that low-wage countries export agricultural ‘luxury’ goods (subject to diminishing returns) that require greater quantities of labor than manufactured ‘wage’ goods (subject to constant returns) imported from high-wage countries. This dynamic inevitable promotes industrialization in the latter, and dependency* in the former; structurally enforced through ‘persistent trade deficits, periodic exchange rate devaluations and eventual debt crisis’ [King] about which Ricardo had little to say.

• Exploitation and Empire

Every functioning economy is partly a system of economizing – that is, for wealth distribution and the allocation of resources – and partly a system of power, organization and control. When studying IPE, it is easy to become engrossed in the statistical macroeconomic domain of states and multinational corporations and lose sight of the subjective human experience. Where an individual ‘belongs’ in this broader lattice of labor division determines their quality of life; a lattice often tainted by collusion and monopoly. It is ironic that domestic theory-wise, Ricardo pre-empted Marx in anticipating class conflict and labor exploitation, but this same sensitivity does not translate internationally. His stance on procedural justice takes a more consequentialist form, justifying global injustice and peripheral underdevelopment in furtherance of free trade.

Ricardo’s allegedly innocuous description of comparative advantage implied two ‘entirely static equilibrium positions’ but the real England and Portugal already held defined rankings in the hierarchy of international trade. Indeed, Ricardo’s ‘hypothetical’ example blatantly parallels the 1703 Methuen Treaty (114 years before Principles was published), which culminated in Portugal forcefully appropriating Brazilian gold using slave labor to remedy its chronic balance of trade deficit, and Britain amassing over 25 million in gold bullion between 1700 and 1760. This tremendous accumulation of wealth propelled Britain’s Industrial Revolution and the consolidation of Pax Britannica, whereas Portugal’s manufacturing sector was completely...