A Prize Essay – Where Ricardo Went Wrong?

Throughout my lifetime everybody has been incessantly informed what a mistaken notion was mercantilism and how cosmically correct was Ricardo’s theory of comparative advantage, which mandates international trade even in those goods you can actually produce for yourself. Ye shall know the tree by the fruits thereof, and an economic theory that produced the world described by Charles Dickens (now making a comeback) must surely have something wrong with it. Not that Soviet Communism was any better, but the capitalist system as modified by a holy terror of bloody revolution was not in fact so bad. I say this having myself grown up under it.

It is a great and valuable principle that whatsoever everybody knows to be true generally just isn’t so. Humanity believed for a long, long time in the Galenic theory of humours and in astrology. If David Ricardo, who tended to derive his opinions from mathematics rather than practical experience, had made a fundamental mistake back in the early nineteenth century, would his paradigm then be discredited? Or would we continue to teach him as orthodoxy, ignoring even the caveats of the man himself? When, for example, Ricardo wrote that “most men of property [will be] satisfied with a low rate of profits in their own country, rather than seek[ing] a more advantageous employment for their wealth in foreign nations”, he was plainly wrong. Even then, and far more so now. Indeed, the consensus history of his own country’s later decline seems to be that its businessmen scorned investment in domestic plant in favour of overseas get-rich-quick schemes.

Although Schumpeter and others have criticised certain logical fallacies inherent in Ricardo’s theory of free trade, I wonder how deep they actually penetrated. Might there be a case for offering a big cash prize to the person who first demonstrates, not merely that “comparative advantage” does not apply under all technological and developmental conditions, which is pretty well accepted, but that Ricardo made a more fundamental error still. Might he have confused some notional good of all with the good of a few corrupt operators? Yes, free trade and deregulation has brought economic expansion, and will continue to bring it, provided that we define “economic expansion” as the good of said corrupt operators, who find it very convenient to be identified with “society”. Yes, free trade brought cheap food, but was it self-evidently such a good thing to allow metropolitan populations to grow far beyond sustainability?

If, on the other hand, crude protectionism helped lead to the Second World War, no wonder people have subsequently been so afraid of it. So perhaps we need someone to make an intellectual case for a more level-headed kind of mercantilism. Perhaps the mere prefixing of mercantilism with a “neo” will be enough to win this battle. After all, it worked for liberalism, didn’t it?

Posted on December 17, 2011 at 18:39 by Hugo Grinebiter · Permalink
In: RESISTANCE IS FUTILE!, Some Modest Proposals

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