RICARDO'S PRINCIPLES A MINI-TUTORIAL PART FIVE

You will recall that Adam Smith's attempt at a labor theory of natural price immediately foundered on the shoals of "accumulations of stock." In modern terms, his simple theory was unable to handle differences in capital intensity among the several sectors of the economy. Ricardo makes a significant theoretical advance in the treatment of this problem with a brilliant conceptual tour de force: embodied labor.

Before I explain this lovely idea, let me alert those of you who may actually be reading the Principles with this tutorial to the fact that Ricardo's exposition of the concept of embodied labor gets all tangled up with a quite separate issue -- the search for what the classical political economists called "an invariant standard of value." As Ricardo says, "Two commodities vary in relative value, and we wish to know in which the variation has really taken place." Both Smith and Ricardo thought that in the absence of some commodity whose value never varies, and which could therefore be used as the standard against which the value of all other commodities is measured, we would never be able to answer this question. This is actually something of a red herring, although it led Ricardo, as we shall see in a bit, into some very interesting theoretical territory.

How do we deal with the fact that the trap used by the beaver hunter may require less labor to make than the bow and arrow used by the deer hunter [to recur to Smith's famous little example]? Ricardo replies: when the maker of bows and arrows expends her labor on the making of a bow and arrows, that labor is, as it were, embodied in the bow and arrows. It is carried along [so to speak] when the hunter buys the bow and arrows from the bow and arrow maker [or trades her some deer for the bow and arrow, which from the point of view of the classical Political Economists is the same thing.] As the hunter uses the bow and arrows, bits of that embodied labor are transferred from them to the deer that are killed with their aid. Thus, the killing of the deer has actually required more than just the labor expended in hunting them. It has also required some portion of the labor embodied in the tools of the kill. The same is true of the traps used by the beaver hunter. When the two hunters meet to bargain, since they are rational [even if they are only wearing beaver skins and eating venison], they take into account the full quanta of labor embodied in the products they are offering for trade. Now, this notion of "bits of embodied labor being passed along" is of course a faҫon de parler, a convenient conceptual fiction. With modern mathematical techniques, it is easy enough to express the entire theoretical story without reference to fantastical imperceptible bits of labor. All one need do is set up and solve a system of simultaneous linear equations, or, what is the same thing, invert a square matrix of unit input coefficients. [Never mind.] Ricardo, despite not having those mathematical tools at his disposal, had the genius to intuit the formally correct solution to the problem.

There is, as he quite well realized, much more to the story than this, for the bow maker, when making the bow, uses knives and saws and hatchets and sandpaper and glue and many other tools and materials, each of which is the product of someone's labor in a previous period of time. And of course each of those inputs into production, as we call them, must be thought of as embodying some quantum of labor which is passed along in the production process until the tools wear out or the materials are used up, at which point we say that all of the embodied labor has been transferred and is no longer present them. [Talk about your miracles of transubstantiation! Marx, as I observed in the Weber tutorial, had a field day with the notion of embodied labor. For a full literary, philosophical, ideological, and metaphysical analysis of all of this, see my little book, Moneybags Must Be So Lucky.]

It should be obvious that we can repeat this story at each previous stage in the production process, for the tools used by the bow maker were themselves produced with the aid of tools and materials produced in an even earlier period. It takes very little imagination to recognize that the accumulated bits of labor embodied in some present-day commodity form an infinite series. It should also be clear, although perhaps not exactly obvious, that as the series goes on, extending farther and farther back in time, the bits of embodied labor being carried along become smaller and smaller. Does the sum of this infinite series of bits of embodied labor converge on some finite quantity? Indeed it does, although I do not think Ricardo ever framed the question to himself in quite this fashion. [If you are seriously interested in formal proofs of all the things I am saying in this discursive and casual way, you can consult the Appendix of my book Understanding Marx.]

So, Ricardo's solution of Smith's conundrum was to revise the theory Smith put forward. The new Ricardian Labor Theory of Value asserts that commodities exchange in the market in proportion to the quantities of labor directly and indirectly required for their production, where the quantities "indirectly required" are what we have been calling the bits of embodied labor transmitted from the inputs into the production of the commodities.

According to Ricardo, we are to understand each commodity as requiring, or embodying, some quantum of labor directly applied to it in the present period of production, and assorted quanta of labor indirectly required and transferred to it in the production process from the tools and materials employed. The sum of those various quanta is then the real value of the commodity, and in a fully competitive capitalist market exhibiting the behavioral and knowledge conditions discussed above, commodities will exchange with one another in proportion to the quanta of direct and indirect labor required for their production. This is the mature form of David Ricardo's Labor Theory of Value or Natural Price.

Alas, no sooner had Ricardo enunciated his new theory than he realized that it was not universally true. The problem was this: In some production processes, there is a very rapid turnover on the capitalist's investment. If his factory is producing woolen thread, let us suppose [I say "his" because at the time that Ricardo was writing, virtually all English capitalists were men], there is almost no gap at all between the time when the raw wool is brought to the factory and spun into skeins of thread and the time when the finished thread can be put on the market so that the capitalist can recoup his investment [suitably augmented by profit, of course] and start over again. But a maker of carriages may find that from raw materials to finished carriage is a matter of weeks, or even a month. Even though the amounts of labor directly and indirectly required in the fashioning of one carriage and some quantum of thread are the same, the carriage and that quantum of thread will not exchange equally for one another, for the carriage maker must be compensated for the time during which his capital is tied up in production. Otherwise, the thread merchant will make a greater return on his capital [for it will turn over one hundred times a year rather than twelve], and the workings of the market will force an adjustment in the relative price of carriages and thread. Once those market adjustments have played out, we will find that commodities containing equal amounts of labor directly and indirectly required for their production will not in general exchange as equals in the market.

This is a genuine theoretical difficulty, and Ricardo spent the last few years of his life, after the publication of the first edition of the Principles, unsuccessfully searching for a solution.

The next major theoretical advance in classical Political Economy did not take place for another half century. It was only with the publication of volume one of Karl Marx's hauptwerk Das Kapital in 1867 that a theoretically interesting effort was made to solve the problem left unresolved by Ricardo's Principles. But that is a story I have already told in my tutorial on The Thought of Karl Marx. Those who are interested will find it at box.net, accessible via the link at the top of this blog.

UNITS OF MEASUREMENT

We have a little cat named Christmas Eve [so named because we got her seventeen years ago on Christmas Eve -- but that is another story.] She weighs a bit more than ten pounds, and is the focus of attention in our little household [the reason we only go to Paris for three weeks at a time is because we cannot bear to be away from her longer than that.] I have now lost roughly eighteen pounds on my diet, with two and a half weeks to go. As I was walking this morning, I reflected that it is as though I had been carrying two Christmas Eves around all the time, strapped to my middection. Put that way, eighteen pounds is really quite a lot. [Since this is principally a political and philosophical blog, I suppose I ought to segue into a discussion of Friedman units, but I shall resist the temptation.]

RICARDO'S PRINCIPLES A MINI-TUTORIAL PART FOUR

Chapter One of the Principles is entitled "On Value." Ricardo launches immediately into his argument, picking up the analysis where it had been left by Smith forty-one years earlier. To clear the field for the development of the argument, Ricardo begins by setting to one side a certain class of goods whose price cannot be explained by the theory he is going to advance, but which by the time he is writing played a negligible role in the capitalist marketplace. He writes:

"There are some commodities, the value of which is determined by their scarcity alone. No labour can increase the quantity of such goods, and therefore their value cannot be lowered by an increased supply. Some rare statues and pictures, scarce books and coins, wines of a peculiar quality, which can be made only from grapes grown on a particular soil, of which there is a very limited quantity, are all of this description. Their value is wholly independent of the quantity of labour originally necessary to produce them, and varies with the varying wealth and inclinations of those who are desirous to possess them.

"These commodities, however, form a very small part of the mass of commodities daily exchanged in the market. By far the greatest part of those goods which are the objects of desire, are procured by labour; and they may be multiplied, not in one country alone, but in many, almost without any assignable limit, if we are disposed to bestow the labour necessary to obtain them."

I love the reference to rare wines. Ricardo had made a fortune on the stock market, and we may infer that he lived a luxurious life in which such wines played a significant role. Notice, by the way, that he is here simply brushing aside the assumption on which neo-classical economics rests, which is that price is determined ultimately by the subjective utility of consumers. That may indeed be true for Rembrandts and 96 point Cabernets, but it is not true for cloth and corn and carriages and shoes, and in a capitalist economy, it is these reproducible commodities that dominate the economic landscape.

Ricardo now makes a number of simplifying assumptions about the workings of a capitalist system that enable him to carry out rigorous formal arguments. You must not be misled by the absence of equations and other familiar mathematic formalism in the Principles. That style of argument in Political Economy was still more than half a century in the future, and truth be told, Ricardo probably did not have the grasp of formal techniques required for casting his arguments in mathematical form. But his formal intuitions were brilliant, and a century and half later, a number of gifted mathematical economists recast his arguments, and those of Marx after him, in the appropriate mathematical form, thereby enabling them to ascertain exactly which of the claims of Ricardo and Marx were true, and which were not. It turned out that a startlingly high proportion of their claims were exactly correct. At the end of this mini-tutorial, I shall repeat some of the things I said in my tutorial on The Thought of Karl Marx about the modern literature, so that those of you who are interested can follow the contemporary discussion.

The first two assumptions Ricardo makes, as I have already noted, are that there is only one dominant technique of production for each commodity, and that there is a determinate real wage, or market basket of goods, that laborers purchase with their wages. The third assumption is that competition establishes a single economy-wide profit rate, or rate of return on invested capital.

This last assumption actually conceals, or presupposes, a number of subordinate behavioral and informational assumptions, each of which is a simplification of the reality on the ground. First of all, entrepreneurs are assumed to have essentially perfect information about the behavior of their competitors both in the marketplace and in their factories. That is, they are assumed to know when their competitors are offering equivalent commodities at a lower price. They are also assumed to know when a competitor has introduced a new and cheaper production technique. They are assumed to know what rate of return is being earned by capitalists in each sector of the economy. Second, entrepreneurs are assumed to have no irrational or traditional or emotional attachments either to the production technique they are using or even to the sector in which their capital is invested. If a new machine cuts production costs, they will very quickly substitute it for the machine they are now using. If junk dealers are earning 10% on their capital and luxury clothiers are earning 8%, they will leave the haute couture world and put their capital into junk, regardless of the complaints of their spoiled children. And third, consumers are assumed to choose from the many identical commodities in the market purely on the basis of price, about which they, like the entrepreneurs, are assumed to have perfect information.

Although Ricardo assumes one dominant technique of production for each commodity, he allows for innovation. A capitalist who pioneers a new, more efficient, technique will be able to cut his price and corner the market, increasing his profits. Since this will be known by his competitors, they will promptly shift to the more profitable technique, which will, after a bit, become the new dominant technique in that line of business.

The result of this ceaseless, utterly rational and ruthless quest for improved profits will be, he believes, a single economy-wide rate of return on invested capital. [Formally speaking he is quite correct about this, by the way.] That fact, together with the other assumptions, permits Ricardo to introduce his great theoretical innovation, and draw from it important -- although, as we shall see, ultimately unsuccessful -- conclusions.

Before proceeding to lay out that new idea, let me pause just for a moment for what might be considered a bit of specialist insider argumentation. These next few sentences are for the economics students among you [of whom, it is my impression, there are a few.] As we have seen, Ricardo assumes that entrepreneurs are motivated solely by their search for the highest rate of return on invested capital, and consumers are motivated solely by a search for the lowest price. But what happens if either of these assumptions is in fact false in any significant way?

Ricardo himself does not discuss this possibility, but his popularizer and follower John Stuart Mill. Mill, now best known for his long essays On Liberty and Utilitarianism, was the author of an enormously successful two-volume economics text called Principles of Political Economy. First published in 1848, the Principles went through many editions. It was the Samuelson of its day, and several generations of English students learned their economics from it. In Book II, Chapter iv, "Of Competition and Custom," which runs only eight pages in my 1897 copy of the fifth edition, Mill considers the fact that rents, wages, prices, and therefore profits do not always conform to the elegantly simple assumptions on which Ricardo had constructed his theory. Sometimes, consumers are moved by habit, or custom, to buy their goods at a shop whose prices are not the lowest available in the region [think Mom and Pop stores, or Whole Foods.] Sometimes, long custom, repeated over generations, maintains rents on a particular piece of land despite the fact that land of equal fertility is available more cheaply nearby. People, Mill suggests, do not always behave as the assumptions of classical Political Economy require for its deductions. What is the consequence of this well-known but theoretically unsettling fact? In a word, Macroeconomics. Permit me to explain.

There are two quite different ways of analyzing economic behavior. The first way is to lay down behavioral and knowledge assumptions and then deduce what economic actors will do when confronted with an array of facts on the ground. This is what Smith and Ricardo do [and Marx as well, by the way]. The result is a series of logical deductions and mathematical calculations that can be held to a quite satisfying degree of precision and rigor. This is what students learn in Microeconomics courses. The second way is to collect vast amounts of statistical information about the past behavior of economic actors, and then with the aid of various modeling techniques, make a series of extrapolations from past behavior to future behavior. This is what students learn in Macroeconomics courses. Although the formal representations of these extrapolations on the page can be quite formidable looking, the fact remains that they are simply guesses that things in the future will be as they have been in the past. To a serious theoretical economist, Micro is the Gold Standard and Macro a quite inferior brand, even though the Macro experts are the ones who get called to serve on the President's Council of Economic Advisors and are paid the big bucks as Wall Street consultants. I have always thought of Macroeconomists as modern versions of the people chained to the floor of Plato's cave, developing a knack for predicting the shadows on the wall but having no inkling of the nature of true reality.

RICARDO'S PRINCIPLES A MINI-TUTORIAL PART THREE

As I begin my exposition and analysis of the Ricardo's central argument and most important theoretical contribution -- his Labor Theory of Value -- I am forced to recapitulate things that I have already discussed in some detail in my Tutorial on the Thought of Karl Marx [see Box.net via a link at the top of this blog] as well as in my book Understanding Marx. I apologize to those faithful readers who have already read one or both of those texts, but there is no way around it, because Ricardo entered a debate that had been under way for four decades, and one can understand the significance of his version of the Labor Theory only if one knows what problems in previous versions it was intended to solve.

Briefly, Adam Smith began his Wealth of Nations by drawing several distinctions, posing a question, and then offering a preliminary answer. The first distinction was between "value in use" and "value in exchange." Many things are useful to us in satisfying our wants or meeting our needs -- food of all sorts, clothing, shelter, medical care, carriages, air, water, arable land, swords, pins, needles, plows, seed corn, feathers, furs, musical instruments, and so on and on. These are useful, or have value in use, insofar as they are instrumental in furthering whatever ends and purposes we may have, in meeting whatever needs we may have. Some, but not all, of these things bring a price in the marketplace when they are offered for sale. Furs and carriages do, air and water by and large do not. Those things that do bring a price in the market are said to have "exchange value" or value in exchange. We will die very quickly without air, and only slightly less quickly without water. Hence their use value to us is beyond calculation. But because they are, under most circumstances, readily available in virtually unlimited quantities, they bring no price at all in the market.

Adam Smith, and after him two and half centuries of economists, including Ricardo and Marx, is not interested in value in use, content to leave that subject to chemists, physiologists, engineers, dieticians, and tailors. His interest is in exchange value, and more specifically in the price that is commanded in the market by such things as indeed have exchange value.

Smith initiates his argument by drawing a second distinction on which all of classical Political economy is erected. He observes that although the market prices for goods fluctuate day by day in response to such factors as weather or variations in supply and demand, those familiar with the market know that there is a customary or price at which each commodity sells for the most part, and he calls this the "natural price" of the commodity. The same is true, he says, for land, labor, and capital. There is a "natural rent," "natural wage," and natural "profit" on which buyers and sellers in the market can depend. Smith likens these natural prices to "centers of gravity" that draw toward them the fluctuating market prices, in much the way that a physical center of gravity will tend to stabilize an unsteady object. This is, on Smith's part, a deliberate attempt to give to the new study of Political Economy something of the majesty and rigor of what was then the gold standard for theoretical investigations, Newtonian Physics.

Smith calls these natural prices "values," and he sets himself to offer an explanation for, or a theory of, the natural prices that rule in the marketplace. Thus, Smith seeks a Theory of Natural Price, or, what is for him the same thing, a Theory of Value. His answer, in a phrase, is that natural prices or values of commodities are regulated by the quantity of labor required to produce them. Thus, he offers, in a very crude and preliminary form, a Labor Theory of Value.

Before getting into the fascinating and perplexing details of the Labor Theory of Value, let us just pause for a moment to reflect on the real significance of what Smith proposes. Economists, by and large, are so eager to get to the fun stuff, the equations, that they do not give as much thought as they ought to the conception of the world that underlies those equations.

Smith is suggesting that it is human labor that confers exchange value of commodities. It is not the admirable capacity of capitalists to defer their personal gratification so that the money not spent on luxuries can be invested productively [a favorite of the apologists for Capitalism -- see my mini-tutorial in Max Weber's The Protestant ethic and the Spirit of Capitalism for the religious origins of that story]; nor is it the entrepreneurial genius of those same capitalists that confers exchange value on the commodities that are produced on their land and in their factories [another favorite.] Nor is it the interplay of consumer demand and producer supply that explains exchange value [the story currently enshrined in college textbooks. It is labor. Who performs that labor? The workers.

The question simply cries out to be asked: If it is the labor of the workers that confers exchange value on commodities, then why do those same workers end up with so little of that exchange value? Why, as their labor creates more and more exchange value, do they remain as poor as ever, while the entrepreneurs grow richer and richer day by day? Before we move on to the details, I should like just to suggest that it was not the elegant mathematical superiority of the marginalist theories of Alfred Jevons, Karl Menger, and Leon Walras, advanced in the 1870's, that persuaded the entire Economics profession to abandon the school of Classical Political Economy. It was the fact that the new economic theories made it very easy to stop asking those troubling questions, questions that thrust themselves unavoidably on us as we read the writings of Adam Smith, David Ricardo, and Karl Marx.

Well, enough of my ranting and raving. On to the theory. To defend the thesis that it is labor that lies at the heart of exchange value, Smith tells a little story about a deer hunter and a beaver hunter who meet in the woods and negotiate the terms on which they will trade deer for beavers. to their mutual advantage. Since according to Smith it takes two days to catch a beaver and one day to catch a deer [I accept Smith's hypothesis without demur, never having hunted day in my life], the deer hunter will not pay more than two deer for one beaver, and the beaver hunter will not accept less than two deer for one beaver. The reason, of course, is that if the deer hunter is asked to pay four deer for one beaver, which four deer it would take him two days to catch, he would be better off [labor being a curse, not a blessing, as the Good Book tells us] spending one day hunting beaver, and a second day hunting deer. He will then have, for his two days of labor, one beaver and two deer, rather than merely one beaver. The beaver hunter makes a parallel calculation, and so, by "the higgling and jiggling of the market," as Smith puts it, they arrive at a price of two deer for one beaver. [We are assuming, among other things, that each hunter has positive marginal utility for both beaver and deer, which may of course not actually be true. There are only so many beaver pelts one can put to good use, and only so much venison one can eat, but never mind.]

Immediately upon advancing this theory, Smith acknowledges that it applies only to the rude state of society 'before the appropriation of land and the accumulation of stock." The problem is this: Once some people have laid claim to ownership of the arable land, and are in a position to defend their claim by the majesty of the law and force of arms, aspiring farmers seeking to get a living by cultivating the soil will be compelled to pay rent to those landowners, and that payment of rent, he thought, would drive up the price at which the farmers would be willing to sell their grain at market. [Hence the appeal of the "New World," where, it was commonly said, there was virgin land owned by no one save disposable savages.] As for the "accumulation of stock," the hunting of deer and beaver requires beaver traps and rifles or bows and arrows. Those tools of the trade cost a certain amount of labor to produce, and they last for some average amount of time before they must be replaced. Now, there is in general no reason at all to suppose, Smith realized, that the same amount of time and effort goes into the making of the tools of the trade in each line of production. Some techniques of production are, as later economists learned to say, "capital intensive" while others are "labor intensive." Even under the most technologically primitive conditions, men and women are not stupid, and they will demand that the labor expended on the making of those means of production, that "stock," be compensated by an appropriate adjustment in the Natural Price, or Value, of the commodities produced with their aid.

And there Adam Smith stopped, unable to figure out how to take into account the appropriation of land and the accumulation of stock in the determination of natural price. Tomorrow, we shall meet David Ricardo's brilliant breakthrough -- embodied labor.

RICARDO'S PRINCIPLES A MINI-TUTORIAL PART TWO

Ricardo announces the theme of class conflict in the opening sentences of the Preface to the Principles:

"The produce of the earth—all that is derived from its surface by the united application of labour, machinery, and capital, is divided among three classes of the community; namely, the proprietor of the land, the owner of the stock or capital necessary for its cultivation, and the labourers by whose industry it is cultivated.

"But in different stages of society, the proportions of the whole produce of the earth which will be allotted to each of these classes, under the names of rent, profit, and wages, will be essentially different; depending mainly on the actual fertility of the soil, on the accumulation of capital and population, and on the skill, ingenuity, and instruments employed in agriculture.

"To determine the laws which regulate this distribution, is the principal problem in Political Economy."

And right here we have the answer to my naive question in John Eatwell's class. Why do we want to know how prices are determined in a capitalist economy? Not because we care how much it costs to buy a yard of cloth or a bushel of wheat or a peck of potatoes. No, those are not the prices we really care about as Political Economists. We want to know the price of land, labour, and capital, which is to say rents, wages, and profits, because it is through the intermediation of those prices that the annual social product is divided up among the "three classes of the community," landowners, workers, and entrepreneurs.

Most modern students of Economics probably imagine that what distinguishes the old guys -- Smith, Ricardo, Mill, and Marx -- from the new hotshots -- Walras, Jevons, Menger, Marshall, Samuelson, Malinvaud, and Minkiw [well, no, not Minkiw] -- is the fact that the old guys use addition and subtraction and multiplication and division, with sometimes a foray into the taking of averages, while the new hotshots use the calculus and all that cool stuff. Not so. The real distinction is that the two groups of theorists ask different questions and are interested in different issues.

The classical Political Economists were concerned, above all else, about two things: Distribution and Growth. They wanted to know how and why the annual social product got divided up among the three great classes of society in the way that it did, and they wanted to know under what conditions that annual social product would expand year by year, and under what conditions it would not. As we shall see in a bit, their mathematical intuitions were in fact quite acute, even though their mathematical tools were rather primitive, and it is not difficult, with some modern math [linear algebra, mostly, not the calculus] to present their arguments in a quite mathematically rigorous fashion.

What are modern so-called "neo-classical" economists concerned with [never mind why "neo-classical"]? Here is a standard answer from Chapter One of Nobel Laureate Paul Samuelson's famous Economics text. [My edition, the ninth, was published in 1973. According to Amazon.com, the current edition is the eighteenth. Samuelson died two years ago, but his textbook, like the evil that men do, lives after him.]

"Economics is the study of how men and society end up choosing, with or without the use of money, to employ scarce productive resources that could have alternative uses, to produce various commodities and distribute them for consumption, now or in the future, among various people and groups in society. It analyzes the costs and benefits of improving patterns of resource allocation."

Or, as Lord Lionel Robbins rather more succinctly put it in his 1932 classic, An Essay on the Nature and Significance of Economic Science:

"Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."

The classical Political economists were quite capable of considering the efficient allocation of scarce resources with alternative uses, but that was not what they were interested in. And modern economists can discuss growth and distribution, but their treatment of those problems tends to be clumsy and ad hoc because that is not the principal focus of their attention. I shall have more to say about this later on.

The real methodological difference between the two schools is in the nature of the simplifications they posit in order to bring their analytical tools to bear on the analysis of a capitalist economy. Economics is quite unlike, for example, History as a discipline. Historians revel in particularity [which is why Aristotle consider History inferior to Poetry, but that is another matter.] Even ideologically driven historians will lavish time and attention on the irreducible specificity of an historical moment, positively relishing the details their archival research have unearthed. Two good examples among my very most favorite works of historiography are Georges Lefebvre's great work, La Revolution Franҫaise, and Leon Litwack's Been in the Storm so Long: The Aftermath of Slavery. Lefebvre was a Marxist, and he begins his work with a brief preface in which he lays out a standard Marxian line about the French Revolution as an episode in the rise to power of the bourgeoisie. But once that is out of the way, we are treated to a meticulously detailed account of the revolution, in which the details of the doings of particular people in particular regions of France quite obscure the ideological message. Litwack's work is equally informed by his impassioned moral and ideological commitment, but as one turns the pages, one finds story after story recovered from archives and other literary remains of the ways in which particular former slaves reacted to their new-found freedom.

Economists construct radically simplified models of an economy in order to carry out logical and mathematical deductions. There is nothing wrong with this way of proceeding. The same thing is done by geneticists, climatologists, physicists, and [of course] logicians. What is interesting is the fact that the classicals and the neo-classicals choose exactly opposite simplifications. To put it in a phrase, the classicals assume there is one dominant technique of production for each category of commodity, and the neo-classicals assume there are an infinite number, so arrayed that a function relating the vector of inputs to a quantity of outputs is continuous and twice differentiable. As a consequence of these alternative simplifications, the arguments of the classicals are best rendered mathematically by means of linear algebra, and the arguments of the neo-classicals are best rendered by the differential calculus.

The classicals and neo-classicals also differ in the way in which they model the real wage, which is to say the actual physical bundle of goods and services that the workers consume. The classicals, writing at a time when the condition of the working class was quite miserable, assume that there is a single quite plain market basket of goods that each worker and his or her family purchase with their money wage. For some purposes, as we shall see, Ricardo even goes so far as to assume that this market basket contains a single commodity -- grain [or "corn," as the English would say. When I first read about the dispute over the Corn Laws, which were tariffs on imported corn, I was mystified, because to me "corn" refers to maize, or as we say, "corn on the cob." But the English don't eat corn on the cob. It turns out "corn" is the British term for whatever is the dominant grain of a locality. Hence when the first English settlers got to the Americas and discovered the locals eating maize, they called it "corn."]

The neo-classicals, writing at a later time, assume that workers will make a series of choices about how to spend their money wage, and a good deal of their most mathematically sophisticated manipulations are devoted to relating those choices to their subjective preferences.

My own personal opinion is that the classical simplification is closer to the underlying reality than that of the neo-classicals. But what really interests me is the fact that the classical simplification makes it much easier and more perspicuous to study the structure of the distribution of the annual social product. It becomes trivially easy to demonstrate formally that the money wage rate and the money profit rate vary inversely to one another, which is a mathematical way of saying that the interests of the working class of irreducibly opposed to those of the capitalist class. It is, of course, possible to show this in the neo-classical model -- the thing about properly constructed mathematical models is that they are always inter-translatable -- but the opposition between Labor and Capital is hidden rather than made manifest in the neo-classical models.

In these days when mouthpieces for Capital cry "class warfare" at the slightest suggestion that what goes into the pockets of the rich comes out of the pockets of the poor, it is convenient to employ a model of the economy in which this fact is impossible to miss.

RICARDO'S PRINCIPLES -- A MINI-TUTORIAL PART ONE

David Ricardo was born in 1772, four years before the publication of Adam Smith's Wealth of Nations, and died in 1823, six years after the publication of his great work, On the Principles of Political Economy and Taxation. For more information about Ricardo's life and work, you may read the important and very long Introduction by Piero Sraffa to his magisterial edition of the complete works of Ricardo, published by Cambridge University Press. You might also take a look at the 1958 book on Ricardian Economics by Mark Blaug, a noted economic historian. [Personal aside: In 1984, a brilliant student named Ricardo Blaug turned up in one of my courses at the University of Massachusetts. Sure enough, he was the son of Mark Blaug, who had named his son David Ricardo Blaug. Ricardo has since gone on to a distinguished career in the English academic world. We are still in touch from time to time.]

Ricardo was close friends with Jeremy Bentham, Thomas Malthus, and James Mill, and according to Sraffa, it was in fact the latter who persuaded Ricardo to expand an earlier essay into the book-length Principles. [Another personal aside of what might be called an "apostolic succession" nature. Bentham was the godfather of young John Stuart Mill, who in turn was the godfather of Bertrand Russell. In 1954, at the age of twenty, I had tea with Russell, who was then eighty-two. So I can claim to have taken tea with the godson of the godson of Jeremy Bentham!]

Continuing in this stroll down memory lane, I will report that I first encountered Ricardo's thought and writings in the Spring of 1978. After six and a half years at UMass, I had earned a sabbatical leave, which I chose to devote to the study of Economics, a subject about which I knew practically nothing. For reasons explained in my Autobiography, I spent the month of January teaching myself Linear Algebra, up through the theory of eigenvectors and eigenvalues and the Perron-Frobenius theorems. Then I exercised my privilege as a member of the faculty to sit in on, and work through the materials of, three graduate courses in the splendid UMass Economics Department, which even then had acquired a well-deserved reputation as the foremost radical Economics department in the country. My first course, with a fine neo-classical economist, Donald Katzner, was devoted to a mathematical treatment of Microeconomics, using a then standard text by Henderson and Quandt. [Boundary conditions and Bordered Hessians and all that stuff.] The second course, devoted to Macroeconomics, was taught by a new young member of the department, Robert Costrell. [I subsequently attended a boisterous and quite enjoyable Seder at his home.]

The third course was taught by a brilliant thirty-three year old economist from Cambridge, England named John Eatwell. The title of the course was "Theories of Value," which turned out to have nothing at all to do with what philosophers like me understood by that phrase. It was taught at a frighteningly high level of abstraction, and was attended by a number of members of the Economics Department as well as some very fortunate students. Needless to say, I was operating way above my pay grade, but I put on my game face and quizzed some of the friends I had made in the Econ Department when I got lost. On the very first day, Eatwell said that he was going to start with a discussion of theories of price. I raised my hand [no one ever accused me of being shy] and asked why it was important to have a theory that explained how much corn or linen or potatoes cost. He was so startled by the sheer naiveté of the question that he did not actually give me a coherent answer, but in time I worked out my own answer. As we shall see, the politically and ideologically most hotly contended issues in social theory turn on the answer to the simple question, "What determines the price at which commodities sell in the market?" [That brilliant and very charming young man is now, heaven help us, Baron Eatwell of Stratton St Margaret in the County of Wiltshire, a Labour member of the House of Lords. The English have an odd way of recognizing intellectual accomplishments.]

Before we turn to the first page of the Principles, it will be useful for me to say a few words about some background matters, historical and theoretical, to set the stage for Ricardo. When Smith published Wealth of Nations in 1776, England had an agricultural economy with a small but growing sector devoted to factory production. The reigning economic theory was Mercantilism, which taught that a nation's wealth consisted essentially in its store of gold and silver. [I am going to simplify all of this for the sake of brevity.] The more gold and silver a nation possessed, the wealthier it was thought to be. From this it followed that each nation must strive as hard as it could to sell more abroad than it bought, maintaining what was called a "favorable balance of trade," for each sale brought gold and silver to its shores as the buyer and seller settled up, whereas each purchase resulted in gold and silver leeching away to foreign owners. The result was a series of high tariffs imposed on foreign goods and a seemingly endless series of wars over markets in Africa and Asia.

Smith was convinced [correctly, by the way -- Ron Paul take note] that this theory was wrong -- hence the full title of his great work: "An Inquiry into the Nature and Causes of the Wealth of Nations." The success of Spain and Portugal in locating and stealing the gold and silver of the peoples of the Americas resulted for a time in their experiencing an enormous boom, as they used the pilfered metals to buy spices, luxurious cloths, and fancy horses, and to hire hordes of armed men to protect their piles of goods and conquer new colonies. But over time, this money flew north to the Low Countries, where industrious merchants flourished. By Smith's day, Spain and Portugal were no longer the envy of the European world. Smith argued that the wealth of a nation consisted in the productivity of its people. High tariffs simply impeded trade and resulted in a lowered level of productivity for the nation imposing them. Because the regime of tariffs was inevitably reciprocal, the entire undertaking was self-defeating.

Smith's most urgent concern was the conflict he perceived between the interests of the landed gentry, who owned or controlled the agricultural land on which England's productivity depended, and the interests of the new entrepreneurial class. [Keep in mind that in 1776, much of this entrepreneurial activity consisted of renting land owned by the gentry and putting it to use growing crops and grazing sheep. Relatively less of their investments were in the new industrial sector, important though it was.] Smith had nothing but contempt for the landed gentry, whom he described as parasitically maintaining a luxurious standard of living by hiring crowds of servants who engaged in "unproductive labour."

It followed immediately from Smith's analysis that the landed gentry and the entrepreneurs were engaged in an irresoluble conflict. Since the rents on which the landed gentry lived were paid out of the profits of the entrepreneurs, these two magnitudes -- rents and profits -- varied inversely. Smith's great fear, and that of Ricardo forty-one years later, was the advent of what was called "the stationary state." This was a condition of zero growth in which the rents demanded by the landowners would drain away so much of the profits earned by the productive activities of the entrepreneurs that virtually nothing would remain for the new investment required for expanded production.

The third great social and economic class -- the workers -- were not a focus of Smith's concern. Their meager food and shelter were understood by him to be one of the costs of production, on a par with seed corn and farm machinery -- what he called "stock." Thomas Malthus, whose Essay on the Principle of Population appeared a quarter of a century after The Wealth of Nations, argued that population would in all circumstances expand, driving down the income of the working classes to bare subsistence, and pressing against the available supplies of food.

It is perhaps over simple, but still essentially correct, to say that the story of classical Political Economy from Smith through Ricardo to Marx is the story of inevitable class conflict, with the focus of that conflict shifting from the opposition between landlords and entrepreneurs in Smith and Ricardo to the opposition between entrepreneurs and workers in Marx, the change being in part a result of the decline and defeat of the landed interests and the ascendancy of capital.

Let me say that again, because it is so important. It was not Karl Marx who introduced into classical Political Economy the idea of class warfare. That idea comes straight out of Smith and Ricardo. Marx simply took it over and offered a new and different analysis of it. So modern so-called "Conservatives" who celebrate Adam Smith [they tend not to know anything about David Ricardo] and decry "class warfare" are just dead ignorant. That idea was introduced by their hero, Smith, not by their nemesis, Marx.

A NEW MINI-TUTORIAL

I have decided to try my hand at another mini-tutorial, this time devoted to David Ricardo's great classic work, The Principles of Political Economy and Taxation, first published in 1817, forty-one years after Adam Smith's Inquiry into the Nature and Causes of the Wealth of Nations, and just a half century before the publication of Karl Marx's Das Kapital.

Ricardo's Principles is available on-line, if anyone would like to read parts of it while I am posting my mini-tutorial. It is my impression that several graduate students in Economics have been attracted to this site lately by my snarky comments about Greg Minkiw. Perhaps they, and my faithful readers, will find the Ricardo mini-tutorial interesting.

If all goes well, I shall launch the mini-tutorial tomorrow.