4. The Decline of the Ricardian System, 1820-48

0:00Chapter 4. The Decline of the Ricardian System, 1820-1848 1. The Conundrum of Ricardo's Popularity What accounts for the popularity of Ricardo's principles and for the enduring dominance of the Ricardian system? The marginal utility revolutionary W. Stanley Jevons, writing the preface to the second edition of his great Theory of Political Economy in 1879, was forced to complain of the continuing dominance of the Ricardian doctrine, and to lament that when, at length, a true system of economics comes to be established, It will be seen that that able but wrong-headed man, David Ricardo, shutted the car of economic science onto a wrong line.

0:54Indeed. And Ricardo won the day with a theory that was not only far from self-evident, but in many ways bizarre, such as the labor theory of value, and he wrote his work in a crabbed and obscurantist style that would hardly be expected to sweep the field, either among laymen or in those more particularly interested in economics. Part of the explanation, as Schumpeter pointed out, is that Ricardo was politically in tune with the zeitgeist. Even though his methodology was so abstract as to be divorced from and to falsify reality, Ricardo's motivation was not abstract theory but its use in advancing politico-economic conclusions.

1:43Ricardo, like Mill, was devoted to free trade and laissez-faire, and as we shall see, to hard money, and he applied his abstract system like a hammer in their service. This ideology was fast becoming the wave of the future in England in the circles of businessmen and intellectuals. But what of Ricardo's abysmal writing in style and in organization? Dr. Gray's heartfelt critique is on the mark. As to the form rather than the substance of Ricardo's writings, it is perhaps sufficient to say that he was no writer. He himself dimly realized that he was a bad writer, but it is doubtful whether he can have known the whole truth.

2:32It is undiscerning flattery to regard his chief work, The Principles of Political Economy and Taxation, as a book at all. Another does it suggest the sweepings of a busy man's study, chapters of very varying length which he clearly found it difficult to arrange in the right order, brusque notes and memoranda on points which interested the author. In defense, it may be admitted that Ricardo did not mean to write a book. These were indeed memoranda written for himself and his friends, published on his friend's It is very possible, however, that it was precisely Ricardo's obscurantism that accounted for his success.

3:26For all too many people, laymen and professionals alike, obscurity and bad writing equal profundity. If they can't understand it and they hear at every hand that so-and-so is a great man and his theory is the current light, their belief in his profundity will be redoubled. There are great charms to obscurity. Moreover, there are particular charms for the adepts who cluster around the great man, the circle of initiates who claim, probably correctly, that only they can truly understand his work. Only they can penetrate the fog caused by the depth of the great man's wisdom. Schumpeter notes that quickly his circle developed the attitude, so amusing but also, alas, so melancholy to behold, of children who have been presented with a new toy.

4:22They thought the world of it. To them it was of incalculable value that only he could fail to appreciate who was too are too stupid to rise to Ricardian heights. Its murkiness and difficulty only heightened the enjoyment and pride of the adepts over their new toy. Nowadays this effect is considerably heightened by the fact that obscurity gives disciples and critics more to talk and write about, and thus greatly multiplies the career opportunities for scholars in the current age of publish or perish. Another reason for the popularity of Ricardianism was the persistent cadre activity of the indefatigable James Mill.

5:08One of Mill's important actions was to help found the Political Economy Club in London in 1821, a club that quickly became, for many years, the center of economic discussion and learning in Great Britain. It is characteristic of the early 19th century shift of the locus of economics from Scotland In Scotland, economic thought had centered in the two great universities of Edinburgh and Glasgow, with influence spread through academic, literary and business circles, and members of social clubs in the two cities. In England, on the contrary, there was almost no academic economics in the fossilized university courses of the day.

5:59Of the 30 founding members of the Political Economy Club, only one, Thomas Robert Malthus, was an academic, teaching political economy at the East India Company's College at Haleybury. The other leading English economists in the club included David Ricardo, Businessman and financier Thomas Took, 1774-1858, with Colonel Robert Torrens of the Royal Marines chairing the first meeting. Others were businessmen, publicists and government officials. A few years later, academic opportunities began to open up. Mill's Scottish friend and fellow leading Ricardian, John Ramsay McCullough, who had been lecturing for several years, became Professor of Political Economy in 1828 at the University College London and joined the Political Economy Club shortly thereafter.

6:58But after four years of teaching, he had to spend the rest of his life as a financial controller. The first economics post at Oxford was a chair founded by the banker and evangelist Henry Drummond in 1825, but the term of the chair was only five years. The first chair holder was the attorney and important young economist Nassau William Sr., 1790-1864, son of an Anglican vicar in Berkshire who had studied at Oxford and had joined the The New King's College London established in the same year as University College, 1828, as a Tory and Anglican haven to offset its non-denominational neighbor, appointed senior to its own political economy post in 1831.

7:54But senior was kicked out unceremoniously for publishing a pamphlet urging a reduction in the budget of the Anglican establishment in Ireland, and he spent the rest of his career as a real property attorney and government lawyer, with the exception of another drummond professorship at Oxford in 1847 to 1852. Cambridge treated economics with such disdain that its only contribution was to have a young A young lawyer of no distinction in the field, George Prime, teach economics without pay and at unpopular hours. Prime taught under those conditions for over 40 years from 1816 on, remarkably becoming professor of political economy in 1828.

8:45Apparently, he wrote nothing in economics and contributed to no important discussions. 2. THE RAPID DECLINE OF RICARDIAN ECONOMICS Before setting out to explain a problem, one must be quite sure that the problem really exists. Surely a partial answer to the conundrum of Ricardo's popularity and dominance over English economics is that that dominance was largely a myth. Until recently, the orthodox Richard's view in the history of economic thought was that Ricardianism dominated British thought from the date of Ricardo's principles through Jevin's abortive revolution in 1871 and until the 1890s when Alfred Marshall's neo-Ricardianism supposedly integrated marginal utility into a basically Ricardian framework.

9:44One of the last expressions of this orthodoxy came in 1949, when Professor Sidney G. Checkland, from an anti-Ricardian perspective, bewailed the manner in which the two Scotsmen, James Mill and McCullough, like Ricardo, the Spanish-Portuguese Jew, expatriates from their native culture, and therefore presumably alienated from mainstream English life, used brilliant cadre tactics is to acquire their hegemony over English thought. Checkland saw that Mill was the cadre leader of the Ricardians, cleverly advising Ricardo not to give publicity to his critics by deigning to reply to them in the third, 1821 edition of his Principles.

10:34Mill wrote his Elements of Political Economy as a Ricardian textbook in 1821, but since Since it lacked popular appeal, the younger McCullough, a charismatic, enormously strong, booming, burly, Scotch whiskey-drinking figure of a man, took over as the popularizer and propagator of Ricardianism. The first important revision of the myth of Ricardian triumph came with the Marxist Ronald Meek's rebuttal of Checkland the following year. Checkland, he points out, made the crucial mistake, following J.M. Keynes, of treating Say's law as equivalent to the Ricardian system. While Ricardo and McCullough followed Mill in considering Say's law to be very important, they did not regard it as crucial to the Ricardian system, which actually comprised the Ricardian theories of value and distribution.

11:33While Say's law indeed triumphed early, with only Malthus temporarily opposing it, the Ricardian system proper met a very different fate. In fact, as he managed to do in other areas of the history of economic thought, John Maynard Keynes, in his general theory, skewed and distorted Ricardian development. It was only Keynes, in his preoccupation with promoting government deficits and inflationism and attacking Say's law, who made that law the central feature of the Ricardian system. It was also Keynes who distorted the facts by holding up Malthus as the proto-Keynesian hero, stubbornly calling for an anti-Say and anti-Ricardian alternative to the Ricardian system.

12:25On the contrary, Malthus, despite various differences, considered himself a Smithian and was generally friendly to Ricardianism as well as to Ricardo personally. Malthus' interest in the alleged general glut and in denouncing Say's law was an ephemeral product of the post-Napoleonic war depression in England. When England's prosperity returned after 1823, Malthus totally Murray lost interest in the general glut question and wrote no more about it. Say's law had triumphed except among a few radical fringe people in the economic underworld, and Malthus steadfastly refused to be drawn into alliance with them. These fringe persons who continued their worn-out cries of a general glut into the 1830s included the prolific left Tory Murray's statist poet and essayist, Robert Southey, 1774-1843, who had attacked deflation after the Napoleonic War, and member of parliament, geologist and authority on volcanoes, George Paulette Scroop, 1797-1876.

13:44Raising the fallacious cry of underconsumption, Scrope, in his Principles of Political Economy, 1833, charged that any decline in consumption in favor of a general increase in the propensity to save would necessarily and proportionately diminish the demand as compared with the supply, and occasion a general glut. In this old proto-Keynesian fallacy, savings apparently leak out of the economy and result in permanent depression. Apparently investment, since it is transitional and not final, is not considered spending at all. And then, as in all varieties of crank economic analysis, the price system and the relationship of Selling Prices to Costs is somehow not considered worthy of mention at all.

14:42George Poulet Scroop was originally named George Thompson, son of John Poulet Thompson, head of a firm of Russian merchants. He took the name Scroop after marrying an heiress of the Scroop family. Born in London, Scroop studied at Oxford and Cambridge and was a member of the House of Commons for 35 years. A champion of free trade, he wrote so many pamphlets on economic issues, about 70, that he was commonly dubbed Pamphlet Scroop. In contrast to the triumph of Say's law, the Ricardian system proper was rapidly repudiated in the world of English economics. In January 1831, eight years after Ricardo's death, Colonel Professor Robert Torrens addressed the political economy club that Ricardo had helped to found.

15:37Torrens raised the crucial question, how many of the Ricardian principles were still held to be correct? His answer? All the great principles of Ricardian system had been abandoned, especially the critical ones of value, rent and profits. Samuel Bailey, in his Great Espousal of the Utility Theory of Value in 1825, had smashed the labor theory. Thomas Perenette Thompson had disposed of the Ricardian theory of rent. The theory of profit is unsound because Ricardo ignored the replacement of capital, and the Malthusian subsistence theory of wages had been generally abandoned.

16:22To the Marxian Ronald Meek, this wholesale desertion of Ricardianism comprised a capitalist plot against the labor theory of value, whose socialistic implications had been drawn out during the 1820s by the Ricardian socialists. At any rate, by 1829 to 1831, there were no adherents of the labor theory of value left in mainstream British economics. To Meek, the only exception was McCullough, who in turn had abandoned Ricardo on many other issues, including the idea of productive versus unproductive labor, the theory of profit and the theory of class conflict on the market implicit in the Ricardian theory of distribution.

17:12Only Say's law, with its strong laissez-faire implications, had survived what Meek laments as the purge. But the purge, or abandonment, came even earlier, antedating the Ricardian socialists. Professor Frank W. Fetter, in his classic article, points out that upon Ricardo's death in 1823, James Mill wrote despairingly to McCullough and noted that they were the two and only genuine disciples of Ricardo in existence, and McCullough did not stay one for long. Fetter notes that economic opinion in the 1820s was diverse and unsettled, except for a general adherence to free trade.

18:00Everyone dismissed the portentous Ricardian conclusion that profits varied inversely to wages, except as a banal arithmetic truism. Furthermore, even Ricardo himself had pointed the way to abandoning his own crucial permanent subsistence theory of wages, which the German socialist Ferdinand LaSalle was later to call the iron law of wages. Ricardo had adopted the subsistence wage theory taken from the hardcore Malthusian first edition of Malthus' Essay on Population, 1798. But many of his statements, apart from this rigid formal model, were really adopted from the much weaker, indeed contradictory second edition of the essay, 1803.

18:51These were qualifications which Marx would correctly note amounted to a desertion of the iron law. Criticism of Malthusian doctrine prevailed in the journals by the late 1820s. Thus, in early 1826, a writer noted in the monthly review that the law of relentless increase in population operates only in poor societies. It moves in an inverse proportion to the acquisition of wealth. It is only when people become more luxuriant, when those engagements which form the principal Finally, in 1829, Nassau W. Senior's letters to Malthus effectively put the boots to the iron law.

19:50In this published exchange of correspondence, following the delivery of his lectures on and Population, Two Lectures on Population, to which is added a correspondence between the author and the reverend T. R. Malthus, London, 1829, Senior dealt a devastating blow to the Malthusian doctrine. In the first place, while agreeing that excessive population growth could conceivably one day constitute a problem, Senior in effect stood Malthus on his head by pointing out that while population indeed pressed on the food supply in undeveloped countries, the history of the prosperous countries of the West had been marked by an increase in the food supply outstripping the rise in population.

20:40Indeed, this fact is simply demonstrated by the rising living standards of the Western countries over the centuries, and this economic growth must be due to a general tendency of of Agricultural and Other Productivity to Rise, as well as people devoting themselves to safeguarding their higher living standards. As a result, population does not grow enough to reduce the living standards of the public to the subsistence level. And while Malthus would not verbally go so far as senior in speaking of a general tendency for Food to Increase Faster Than Population, it was clear from Malthus' reply that the mellower Malthus of the second edition had triumphed.

21:29That senior saw the full implications of the changes of the second edition is also demonstrated by his own formulation of the population principle. That the population of the world is limited only by moral or physical evil, or by fear of the deficiency of those articles of wealth which the habits of individuals of each class of its inhabitants lead them to acquire. But while the iron law of wages was in fact finished de facto, it still continued to reign as it were de jure. For Nassau Sr., suffering from excessive piety toward Malthus, lacked the instinct for the The juggler that would have stripped the veil of evasions from the grave fallacies of the Malthusian doctrine.

22:21Instead, Senior collaborated in the sham, insisting, though he knew better, on continuing to hail the Malthusian principle of population as a cornerstone of economic science. As Joseph Schumpeter, ever alive to the follies of economists, lamented, Senior always treated Malthus with infinite respect. He even called him a benefactor of humanity, and did all in his power to minimize his deviation from what he evidently considered to be established doctrine. All the less justification is there for the practice of some later writers, who, with nauseating pontificality, treated Senior as a none-too-intelligent pupil who needed to be set right by Malthus.

23:12As a matter of fact, it is perfectly clear that Senior realized the extent to which Malthus' qualifications ought to have spelled recantation, and to what degree his adherence to some of 3. THE THEORY OF RENT The Ricardian Theory of Rent was effectively demolished by Thomas Perenette Thompson, 1783-1869, in his pamphlet, The True Theory of Rent, 1826. Thompson weighed in against this fallacious This capstone to the Ricardian system. The celebrated theory of rent, Thompson charged, is founded on a fallacy, for demand is the key to the price of corn and to rent.

24:07The fallacy lies in assuming to be the cause what in reality is only a consequence. It is the rise in the price of produce that enables and causes inferior land to be brought into Cultivation, and not the cultivation of inferior land that causes the rise of rent. Thompson goes on to note in wonder that Ricardo perceived the fallacy in the view that corn sells for a high price because rent is paid and not vice versa, and yet pressed on to adopt a similar cost theory of price. Here Ricardo reversed cause and effect by maintaining that the cultivation of inferior land causes the price of corn to rise instead of the other way around.

25:00During the same year, Colonel Robert Torrens himself destroyed the Ricardian theory of rent even more effectively, zeroing in on the crucial fallacy of rent as a differential. Characteristically, Torrens, who was involved in all the economic controversies of the day and changed his mind significantly on nearly all of them, delivered his coup de grâce in the third edition of a work in which he had originally predated Ricardo in the discovery and championing of the theory of differential rent. This work was the Essay on the External Trade, originally published in 1815. But now, Torrens honed in on the critical point that the rent of land, A, does not depend on its being more fertile or productive than some other piece of land, B, that on the contrary, the rent on each land stems from its own productivity, period.

26:06In turn, partially determined by the scarcity of that particular land and by the demand for its product, the existence of a return on a piece of land is by no means dependent on the existence of inferior lands. As Torrance puts it, neither the gradations of soil nor the successive applications of capital to land with decreasing returns are in any way essential to the appearance or for the Rise of Rents. If all soils were of one uniform quality, and if land, after having been adequately stocked, could yield no additional produce, still the rise in the value of raw produce would cause a portion of the surplus produce of the soil to assume the form of rent.

26:58In the very same year, 1831, that Colonel Torrens was thus pronouncing the death of of the Ricardian System, the Rev. Richard Jones, 1790-1855, a Cambridge graduate, put the final boots to the Ricardian theory in his discourse on rent, in his essay on the distribution of wealth, a Baconian inductivist, historicist and anti-theorist who paradoxically first succeeded senior as professor of political economy at King's College London and then When followed Malthus as professor at the East India College of Halleberry, Jones stressed the error of Ricardo's historical dictum that the most fertile lands are always cultivated first in every country, which then moved successively to less and less fertile lands.

27:55For Schumpeter and others to dismiss Jones' case as confusing historical fact with an An Abstract Theoretical Model Misses The Real Point Fallacious anti-theorist Richard Jones undoubtedly was. But from his own point of view, David Ricardo was not simply setting up an abstract and totally unrealistic theoretical model. Ricardo was interested above all in political applications, and he was deluded enough to to believe that his model was spewing forth accurate laws of past and future historical trends. For Ricardo, inexorable rises in rent, crippling future economic development, were a predictable empirical consequence of his own theory.

28:48Specific empirical facts cannot give rise to or test theory, but a theoretical law that Attempts to predict past and future can be validly countered by examining the course of actual history. Empirical facts can properly be used to refute empirical generalizations. The various demolitions of Ricardo's theory of rent, especially that of Perenette Thompson, quickly triumphed in the economic literature. The Thompson critique had been anticipated in the influential journals in the British Critic as early as 1821, and by Nassau W. Senior in the quarterly review in the same year.

29:35By the early 1830s, Thompson's view had triumphed in the journals, including an article by Samuel Mountafort Longfield, the first Irish professor of political economy at Trinity College, Dublin. By the 1840s, the Ricardian theory of rent was dead in the water and almost beneath discussion. Apart from McCullough, the only one willing to defend it was the ardent and emotional Ricardian, the poet and writer Thomas de Quincy, 1785-1859. David Ricardo, as he himself acknowledged, did not originate his differential theory of rent. It began in 1777 on the publication of an inquiry into the nature of the Corn Laws by the Scottish farmer James Anderson, 1739-1808.

30:31An Aberdeenshire farmer, Anderson founded and edited the weekly Bee and later moved to London, where he edited publications in Agricultural Science and the Arts. Anderson's theory, however, remained forgotten until independently replicated by three writers in 1815, Thomas Robert Malthus in his Inquiry into the Nature and Progress of Rent, Sir Edward West's 1782-1828 Essay on the Application of Capital to Land, and the first edition and of Torren's Essay on the External Corn Trade. Malthus did not integrate his theory into anything like the Ricardian system, and furthermore, he was scarcely an opponent of the landlords or of land rent. To the contrary, Malthus defended the corn laws. On the other hand, West, an attorney and fellow of University College, Oxford, who later served as Supreme The interesting question is, what gave rise in a very short period of time, 1815 to 1817, with such intense concern, or at least attention to, the alleged problems of rising rents.

32:07For apart from the relatively unknown James Anderson, attention to rising rents occurs within a very few years shortly after the end of the Napoleonic Wars. The answer was brilliantly supplied by the early 20th century American-Austrian economist Frank Albert Fetter. The Napoleonic wars of the first 15 years of the 19th century were marked by high taxation, blockages of food imports, currency inflation and, consequently, unprecedentedly high prices for corn in England and, hence, highly inflated agricultural rents. It is surely no accident, as Fetter notes, that the so-called Ricardian doctrine of rent was independently formulated by several other writers, West, Malthus, Torrens and others, between 1813 and 1815, when wheat prices were at their peak.

33:104. Colonel Perenette Thompson, Anti-Ricardian Benthamite We must pause a moment to consider the fascinating character of Colonel Perenette Thompson, an An ardent Benthamite radical and a champion of free trade and opponent of the Corn Laws. Thompson, the son of a prosperous merchant and banker from Sussex and member of parliament for a decade, spent the first part of his adult life in the military, retiring from active service in 1922 at the age of 39 with the rank of lieutenant. Despite this relatively low rank, Thompson had been made the first royal governor of the colony of Sierra Leone in 1808, but got himself recalled quickly by clamoring for the abolition of the slave trade.

34:06His removal by the Tory-British government over the issue of slavery radicalized young Thompson, whose education in classical liberalism was further advanced by reading Adam Smith and Turgeau. After retiring from active service, Thompson was compensated for his low rank in important work over a long military career by being repeatedly promoted while inactive. By the time of his death, Thompson had risen to the rank of full general. Before going into military service, Thompson had graduated from Queens College, Cambridge, and Ben Made, a fellow of that college. On retiring from the military life, he joined Bentham's circle of admirers and plunged into Benthamite utilitarianism and radicalism.

35:00Thompson's first published work appeared in the very first issue of Bentham's own periodical, The Westminster Review, 1824, his true theory of rent designed to uphold Adam Smith's views on Rent as Against Ricardo, followed, and the next year, Peronette Thompson published his well-known Catechism on the Corn Laws, 1827, generally considered the most important work in the entire anti-corn law literature. Later, Thompson became one of the most effective members of the Anti-Corn Law League. In 1829, only half a decade since his plunge into politics, The now Lieutenant Colonel Thomas Perenette Thompson became the sole owner of the Benthamite Westminster Review and contributed articles to every issue until relinquishing ownership seven years later.

36:00After being defeated for parliament in 1834, Thompson won election a year later, taking his stand with George Grote and the philosophic radicals in parliament. Losing his seat two years later, he ran several times unsuccessfully, serving in Parliament from 1847 to 1852 and, again, from 1857 to 1859. Thompson's writings were prolific and in many areas. At the age of 59, a six-volume collection of his writings to date was published, Exercises as Political and Others, 1842, and he kept writing pamphlets and newspaper articles on democratic reform until the day before his death at the age of 86.

36:52In addition to his widespread political and economic concerns, Thompson wrote and published works on mathematics, the science of acoustics and the theory of musical harmony. An organ, built on the lines of Thompson's harmonic theory, received honorable mention at the Great Exhibition of 1851. Thompson contributed more to economics than his attack on rent. His first article in the Westminster Review on the instrument of exchange followed Bentham's own inflationist views by advocating an inconvertible paper currency. Another equally dubious contribution of Thompson's in the same essay followed up a hint made 10 years before by Malthus.

37:39Malthus, who had been trained in mathematics at Cambridge, had observed in a pamphlet in 1814 that differential calculus might prove useful in the theory of morals, economics, and politics, since many questions in these disciplines center around the pursuit of maxima and minima. By the time of the publication of his Principles of Political Economy in 1820, however, Malthus had wisely grown skeptical of the possibilities of maths in economics as well as in ethics and politics. Thompson, however, also trained in mathematics at Cambridge, had no such scruples, and his The 1824 article opened a fateful door by using the differential calculus in defining a maximum gain.

38:32The perfect benthamite, steeped in looking at maxima of pleasure and minima of pain, had struck a fateful chord. Pandora's box had been opened. Thompson's sympathy for mathematical economics, however, did not keep him from denouncing the Smith-Ricardo search for a fixed and invariable measure of value, which he wisely dismissed as a chimera. Furthermore, in the Westminster Review in 1832, Thompson trenchantly criticized all cost theories of value, pointing out that cost and price almost always differ. And these differences, he added, are not accidental and ephemeral, as Smith and especially Ricardo assumed, in their focus on the long-run natural price.

39:25On the contrary, these short-run differences are the essence of the dynamic real world. This perpetual oscillation on both sides of the cost-price, instead of being an inconsiderable accident, is in reality the great agent by which the commercial world is kept in motion.