David Ricardo

Hi everyone and for this week we're going to continue our journey through classical political economy by looking at David Ricardo. So we're going to introduce Ricardo's theory of political economy and some of the key concepts in Ricardo's political economy include his concept of the labour theory of value. We're going to see that it's slightly more sophisticated and a little bit better worked out than Smith's theory of value. A theory of where wages come from, so what determines wages and wage levels. Ricardo talks about rent and he's one of the first people to introduce this idea that economic development can introduce different impacts on different social groups, so social classes. And finally one of his better known theories is comparative advantage. We're going to look at comparative advantage as well as some possible criticisms of comparative advantage later on in the lecture. So just a little background on Ricardo, he has a bit of an interesting story. He was born in London in 1772 and his name isn't an English sounding name because his family is originally from Portugal, so he has Portuguese ancestry. His father was a stockbroker and taught him how to be a stockbroker. He started working trading stocks and working in the stock market in the financial world when he was 14 years old. Now here's where the drama kicks in, he's 21 and he gets married to a Quaker, which is a known strange sect of Christianity I suppose. His family were a Jewish family and so they completely disowned him and cut ties with him and never speak to him again. But he uses his experience and the skills that he's developed to keep going with his career in finance, working for some big banks. And this leads him to make a huge stock bet on the outcome of the Battle of Waterloo, which was fought between Napoleon of France and a bunch of European states. Now the interesting thing about the battle is that everybody thought Napoleon was going to win, so all the other people in finance were betting in such a way that they assumed Napoleon was going to win this and conquer all Europe. But Napoleon lost and so Ricardo made a ton of cash, about a million pounds at the time, which today would be an absolute fortune. And he never had to think about money ever again because of this one decision. So because he's not so worried about money, he can turn his mind towards more intellectual pursuits. And in 1799 he's reading The Wealth of Nations by Adam Smith and this converts him to a lifelong interest in political economy. So his most famous book is Principles of Political Economy and Taxation, which comes out in 1817. And this is part of what you're going to do if you read the readings this week. And his main criticism of contemporary political economy writers at the time is that they don't spend enough time talking about what he talks about, which is subjects like wages, profits, and rents, and what determines these things. So specifically his criticism of Smith, now we have to remember the reason he got interested in political economy is Smith, but one thing that he criticizes Smith about is that he is not clear enough or committed enough to this labor theory of value. And we're going to see that Ricardo goes deeply into the idea of the labor theory of value and spends a lot of time explaining exactly what he means by it. So Ricardo's book tries to present a general theory of political economy that covers all of these subjects and it introduces concepts like value theory, rent, theories of wages, and comparative advantage in trade in an attempt to do this. So here's where we look at the labor theory of value in a more concrete way. We saw last week Adam Smith kind of obliquely refers to the idea that there's a connection between labor and value. Ricardo is much more specific. In the book he says the value of a commodity or the quantity of any other commodity for which it will exchange depends on the relative quality of labor which is necessary for its production and not on the greater or less compensation which is paid for that labor. So Ricardo's theory is making the suggestion that labor determines the value of a commodity and this includes the labor that goes into the raw materials behind the commodity as well. And we can make one major observation therefore about classical political economy is that the classical political economists say that value comes from the production process itself and if we compare that later on when we look at neoclassical perspectives they say that value comes from the acts of exchange itself. So production versus exchange and at this point you need to really think what's a more convincing argument for you, what do you think makes more sense. What's not in the labor theory of value? Well Ricardo also said that there are some types of commodities that are special and sit outside of his theory, you know, rare statues and pictures, scarce books and coins, wines of a peculiar quality which can only be made from groats grown on a particular soil. This type of value is wholly independent of the quantity of labor originally necessary to produce them and varies with the varying wealth and inclinations of those who would desire us to possess them. These commodities form a very small part of the massive commodities daily exchanged in the market. So here Ricardo was saying well there is my law of political economy, my concept of where wages and value come from that applies to most goods, right, that applies to most commodities in the market. And then there's exceptions for sort of special commodities that are very few in number where my rules don't apply. Why did Ricardo place so much emphasis on this idea of a labor theory of value? Why did he support it? Well as we've mentioned one of his biggest frustrations was that he was upset with Smith's inconsistent use of this theory. If we read Smith carefully what we will see is that sometimes labor is measured in terms of total quantity, sometimes labor is measured in terms of a certain amount of money, so how much wages are being paid, and sometimes the value of a goods that the worker can actually buy with the wages. So he's criticizing Smith for shifting his definition inside the theory, so he's not being consistent with the way that he applies this idea. Ricardo was really looking for a constant measure of value that he can, you know, because he wants a stable thing in his theory that he can use that has predictive power and stuff like that, like a good theory should have. And Ricardo is thinking, well, prices of commodities could go up and down probably when new technology was introduced. You know, why would he be thinking that? Well, probably because he was in the middle of the introduction of technology that was happening because of the industrial revolution and noticing that new technologies are coming up However, Ricardo had one big assumption, which is that profits could rise and wages could fall, or profits could fall and rents could go up. And despite all of this, if we assume the level of technology stays the same, the same amount of labor is going to be required to weave cloth or build ships or that sort of thing, right? What can change is the distributional consequences of production. Okay, so the variable is what profits, are the manufacturers going to get most of the money, are the landlords going to get most of the money, are the workers somehow going to get most of the money, right? This is the politics side, but what's going to stay the same is the amount of labor that it takes to make a ship or weave a t-shirt or something like that. So for Ricardo, that's really important because that makes labor look like the constant factor, whereas everything else is a variable factor determined by what's going on in the world around us. Okay, so that brings him to a theory of wages and also connected to this is a theory of population. So we saw last week that Adam Smith made a couple of speculative comments about population, but Ricardo goes into much more detail about the role that population plays in political economy. So let's look closely at his argument. So step one of the argument is that the natural price of labor depends on the price of food, necessaries and conveniences required for the support of the laborer and his family. With a rise in the price of food and necessaries, the natural price of labor will rise. With the fall in their price, the natural price of labor will fall, right? So there's an assumption here of what we call subsistence wages. In other words, we're paying people according to how much it's needed to sustain their existence in the economy. You know, pay them less subsistence, they start to get malnourished and die. So we're assuming a subsistence level of wages. In other words, we're connecting the cost involved to produce labor, costs like how much it costs to feed people, clothe people, give shelter to people, and the price of labor. So wages are being socially determined in this way. So socially determined by the costs of things that workers are seen to need. Now, Ricardo then goes on to argue that high wages will cause high levels of population growth, which is going to have the strange effect of then reducing the value of wages. So he says in the book, it's when the market price of labor exceeds its natural price. The condition of the laborer is flourishing and happy that he has it in his power to command a greater proportion of the necessaries and enjoyment supply, and therefore to rear a healthy and numerous family. When, however, by the encouragement which high wages give to the increase of population, the number of laborers is increased, wages then fall to their natural price. And indeed, from a reaction, sometimes fall below it. So he's talking about this problem that seems to exist where we go through periods of abundance where wages go up for some reason. And the natural response to that is that people who would have otherwise died live. And then there's more laborers, which then causes this destabilizing effect later where wages fall. And we'll see in the next topic that Malthus has a preoccupation with this same problem and talks a lot about population as well. So if wages fall too low, Ricardo expects that there's going to be poverty, but this poverty is going to naturally control population. There's going to be starvation, malnutrition, and death until there's a scarcity of workers. And at that point, political conditions will be favorable to a rise in wages. Now, when the market price of labor is below its natural price, he says the condition of the laborers is most wretched. Poverty deprives them of those comforts, which custom renders absolute necessities. It's only after their provisions have reduced their number or the demand for labor has increased that the market price of labor will rise to its natural price, and the laborer will have the moderate comforts which the natural weight of wages will afford. So he is very preoccupied with the instability that changes in prices, changes in wage prices especially. At the same time, he's very clear that wages are not just a simple matter of, I guess, the interaction between supply and demand. There's a massive social content in wages. So he says it's not to be understood that the natural price of labor, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country and very materially differs in different countries. So what causes this? Well, he says it essentially depends on the habits and customs of people. For example, an English laborer would consider his wages under their natural rate and too scanty to support a family if they enabled him to purchase no other food than potatoes and to live in no better habitation than a mud cabin. Yet his moderate demands of nature are often deemed sufficient in countries where, quote, man's life is cheap and his wants easily satisfied. Many of the conveniences now enjoyed in an English cottage would have been thought luxuries in an earlier period of history. So that's a pretty interesting component of his theory, is it includes a historical dimension. And if we compare this to modern economics, which doesn't include a historical dimension at all, we can see that there's a kind of, I suppose, level of sophistication in Ricardo's thinking that maybe we've forgotten about how to think like that today. He's saying that over time, the level of development of society has changed, the level of productive power that we have at our disposal changed. And so the result of that is a change in our expectations about what our living standards should be. And this change over time has a really big effect in the way that we think about wages, and then in turn has a really big effect in our life decisions. So based on our expectations, we think to ourselves, well, things are going well now or things are going poor now. What life decisions should we make? Should we get married? Should we have a family? Should we do things like that? Are all determined by, in a way, our expectations about what wages should be and the extent to which those expectations are being fulfilled. So let's look at some of the assumptions and implications behind Ricardo's theory of wages. Now, on the one hand, he's going to argue it's pointless to try and raise wages of working people in the short term, because the response to that is people will just have too many children. That sounds really negative, but that's his theory. And the other implication is that poverty is not a long term problem. Poverty is a short term cyclical problem. And if we just allow people to be miserable and die, poverty will resolve itself. This is kind of semi-connected to this. These days, we would use equilibrium, the concept of equilibrium, to describe that. But if we just let things naturally balance themselves out, eventually many of the problems of our society will disappear by themselves without intervention. Ricardo had a similar belief about poverty. Okay, so let's look at rent now. And we need to be very careful here, because when we use the term rent in this case, when Ricardo uses the term rent, we need to distinguish between the common English language usage of the term rent and what Ricardo means by rent. So what political economy means by rent. Rent in the modern English usage is like somebody else owns something and I pay them for the temporary use of that thing. And what Ricardo is more or less talking about is, as rent, as we'll see, is a bit different from that. It's like an additional price premium you get above what the natural price should be. Let's kind of explain that now. So if we've read The Wealth of Nations, and you've read a lot of it by now, Adam Smith treats manufacturing and agriculture as basically the same thing, right? Remember, he had this split between productive labor and unproductive labor. Agriculture and manufacturing are both forms of productive labor. And so he basically said, well, they're basically the same thing. They produce physical vendable commodities, right? So they must be the same. On the other hand, Ricardo says, actually, there's a big difference between manufacturing and agriculture in terms of how production takes place. If we look at manufactured goods, they get made in factories. So let's say we have one factory that makes, I don't know, 50 cars a day. It's a pretty good factory, right? I'm just making this up. If we build the exact same factory next to it, that factory will also build 50 cars a day, right? So it's an equal, you know, the more we expand it, production will expand equally with the size of the production facility. Okay. Now, Ricardo is going to object and say, well, actually, there is a difference when it comes to land. Okay. Farmers are historically not stupid people. When they were establishing their farms, they probably looked around for the best quality land, right? There's a reason human civilizations have settled next to things like rivers or stuff like that, because it makes agricultural land more fertile. There's a reason most people didn't try to grow agricultural produce in the desert, for example. Okay. So farmers have probably picked the best land already. And what that means is we could double the size of the farming areas today, but that's probably not going to double production because if we expand into the poor quality land, yes, we can grow stuff on it. Yes, we can even grow stuff in the desert. There's ways to do that, but it's not going to double production, right? So double the production size doesn't equal double the production. That leads Ricardo to say land and agriculture is certainly different from industrial manufacturing. And that leads him to this theory of rent. So if we use wheat as an example, I'm taking this example straight from his book. On the best land, let's assume it takes three pounds to produce 10 bushels of wheat and get that wheat to the town market where we can sell it. This cost is including the necessary amount of profit to make sure that the farmers are sufficiently motivated to actually farm the land. So in an early stage of development, all the farmers have picked the best land. And so it costs three pounds to get the 10 bushels of wheat to the market. Let's say then that there's this middle quality of land. It's not terrible, but it's not great. It has some problems, but it's still doable. So it costs four pounds to produce the same amount of wheat there and transport it to the town market. And then there's the poor quality land. It's probably like deserted or it's got rocks in it. Or I don't know, imagine ways that land can be bad. Here it costs five pounds to produce and transport 10 bushels of wheat. In other words, the differences in cost, remember this labor theory of value again, the differences in costs reflect the differences in the amount of labor required. Growing stuff on the best land, relatively speaking, is easy money. Okay. Growing stuff in the poorest land usually means you're breaking up rocks or clearing things or stuff like that. Okay. So what that brings us to is that if, and here's the connection to population, if our population remains small and we don't have many people to feed, Ricardo's going to argue we can meet our total food requirements by only farming the best land. And if we can do that, the price of wheat will be three pounds. But if the population grows, we're going to have to expand our farming into the middle grade land areas. Okay. And that's going to raise the price of wheat to four pounds per bushel, 10 bushels. So if that means if you are lucky enough to own the best land, you can now charge what he calls rent. So premium price of one pound per 10 bushels of wheat. Okay. So that leads to this situation where you have like a landlord class who realizes they can make money by not doing anything, right? I can pay somebody else. If I own the best quality land, I can pay somebody else to farm the land for me. And I can get an income of one pound per 10 bushels of wheat while somebody else works for me. Right. So I've got this passive income where I'm not actually doing anything, but I'm getting money for not doing anything. But if I own the middle grade land, I can't charge rent because the cost of production is equal to the price of production. Right. So if I own the middle grade land, I've just got to farm the land. Okay. So here's where class structures start to evolve that become complicated because some people have the good land and some people don't. Some people have large amounts of the good land and some people don't. So similarly, if population grows even more to the extent that we have to farm the poorest quality of land, the price is going to rise to five pounds per 10 bushels. And now rent is widespread. So the owners of the best plan, they're going to get a two pound per 10 bushel rent. And the owners of the middle grade land now can collect a one pound per 10 bushel rent. So now lots of people are collecting rent. And that makes things really complicated, because as we'll see in a minute, that means that people's class interests now start to disagree with each other. People start to be rivals in this political economy where not everybody has the same unified set of interests in terms of the way development works. So if we remember again, that Ricardo argued for a labor theory of value that raises this interesting problem for agriculture. How can we have a labor theory of value if there are three different types of land and three different types of price? Well, Ricardo then becomes very specific about what he means in a labor theory of value. And he says, value is governed by the amount of labor required under the most unfavorable circumstances. In other words, the amount of labor needed on the poorest quality of land, which the level of demand in society causes us to bring into production. And from this, we can see that Ricardo's labor theory of value is significantly more sophisticated than Smith's idea of value, because it's considering the environment where labor takes place, the prevailing level of development, the type of land that we're farming, the techniques that are being used, and stuff like that. So Smith ended up arguing that high rents cause high prices. And Ricardo was arguing kind of the opposite here, that high prices were being caused by high population. So a population growth that exceeds our production, our ability to produce the necessary goods for society, which then causes high rents. So that kind of sets up the story in Ricardo's understanding of the universe, where, well, there are certain people who are helpful to our society, probably the industrialists and to a lesser extent, the workers. And there are certain people that are less helpful, the landlords, because the landlords are just basically collecting this rent and not actually doing anything, right, in the process, destabilizing the economy somewhat. So in summary, Ricardo's labor theory of value says, value is determined by the amount of labor needed for production, including the labor used to produce raw materials and the worn out part of the capital equipment. Secondly, for agriculture, value is determined by the amount of labor needed to produce things on the poorest type of land that we must bring into development. Wages are determined by the values of goods and services that a working class family needs to survive and reproduce, so this concept of subsistence wages. Capitalists pay suppliers, repair and replace worn out equipment, pay workers, and then sell products for a price that's determined by the amount of labor that it took to produce it. Profit is just what's left over, okay, so if you've got anything left after all those people get little bits of stuff, profit is what you've got left over after all those things. So that leads to a contradictory situation where there are definite winners and losers in the economy. If the price of bread is high, wages are also going to be high, the profits are going to be low. On the other hand, agricultural landowners are going to collect a high rent because they're getting a lot of money for the wheat that goes into the bread. On the other hand, if the price of bread is low, wages are also going to be low, but there's going to be high profits, however there's not going to be much rent. So the key idea that this sets up is that there is an adversarial relationship, a fight between agricultural landowners and industrial capitalists, and these people's interests are opposed to each other. They can't both, I guess, win. So that brings us to Ricardo's other big theoretical contribution, which is comparative advantage. So here we need to remember that Mercantilism's argument was that the purpose of trade was to control and accumulate resources for the purpose of building political and military power, and the purpose of building political and military power is to control and accumulate resources. So virtuous cycle, I suppose, for a believer in Mercantilism. Ricardo is going to argue something very different, which is that countries should specialize their production in a type of international division of labor. And we'll see that there's a theoretical basis to why he believes we should specialize. So his argument is a very big, big claim, which is that industrial specialization and free trade will always produce positive results. There is never a downside to specialization and free trade. The bigger the claim, the more the evidence and the more the logic that's needed to support it. So Ricardo's made a big claim. Can he defend it? Let's see. Most importantly, Ricardo's going to argue that free trade is going to be good even if another country is better at making everything than your country is, even if they're superior in every possible way. You should still adopt free trade and specialization. You shouldn't do things like protect young industries, the tariffs or subsidies or stuff like that. So he's one of the earliest proponents for this idea of free trade. Behind this theory, though, there's a bunch of assumptions, which we should look at very seriously. Why? Especially because comparative advantage is one of the few things from classical political economy that modern economics retains. They keep this idea, comparative advantage is still being used to this day. So let's look at some of the assumptions that Ricardo built into the theory of comparative advantage. Firstly, that both labor and capital are immobile. We can't move labor or capital from country to country. Secondly, in his model, there's only two countries, England and Portugal. We'll see how that works in a minute. Thirdly, in his model, there's only two commodities, cloth and wine. Fourth, consumer tastes are the same in both countries. English people and Portuguese people are assumed to like wine and cloth as much as each other, exactly as much as each other, and to have the same appetite for cloth and wine as each other. Labor is the only factor in production. So Ricardo's model does not include raw materials and where raw materials come from. Next, his theory is based on a homogeneous unit of labor. So he assumes that everybody is equally productive as everybody else. Workers are homogeneously productive. Next, that the supply of labor doesn't change. So he's assuming there's no labor force growth due to population and no labor force growth due to women entering or exiting from the workforce. So female labor force participation is not seen as a factor. Okay, next, commodities are produced based on constant returns. So there's no such thing as diminishing marginal returns, which becomes a consideration later when we learn about this concept. Free trade exists between the two countries. So he assumes free trade is already in place. The countries are trading freely. There's no tariffs, no subsidies, no embargoes, nothing like that, no quotas. He assumes that transport costs are zero, that there's theoretically no cost or a negligible cost to move goods from one country to another. And lastly, and this is one thing he shares with the mechanicalists, he assumes that all factors of production are fully employed. So everybody's fully employed, all resources are fully utilized. And those are the assumptions behind this theory. Now that we know all that, let's see the way the theory works. Okay, so here it is, a table with two columns. All of international trade theory is basically built on this table. Okay, so I'm joking, but it's a fundamentally important argument that still has relevance today. And if we disagree with him, we have to really make a case as to why. All right, so this table reflects the hours of work that are needed to produce a single unit of cloth or wine in both England and Portugal. And if we look carefully at the example, it should tell us that Portugal is actually way more efficient for whatever reason at making stuff than England is, right? They take less time to make wine, way less time to make wine, and they take a little less time to make cloth. Let's see how this works in practice. So the options, what if England and Portugal don't trade? So they both make all of their wine and they both make all of their cloth. England will take 220 hours to make a single unit of cloth and a single unit of wine. Portugal will take 170 hours to make a single unit of cloth and a single unit of wine. But if we introduce specialization and trade, Ricardo observes like, okay, what if Portugal specializes in wine? And what if England specializes in cloth? Then England's going to take 200 hours to make two units of cloth and Portugal's going to take 160 hours to make two units of wine. The countries will then trade. England's going to save about 20 hours of labor. Portugal is going to save about 10 hours of labor per unit of labor they produce. Okay, interesting. It's an argument for free trade. Okay, let's look further. Now, Ricardo's example is supposed to demonstrate that even if a country isn't very good at something, they should still choose a specialization. Let me go back for a second. England is clearly worse at everything in this scenario, okay? I'm just making fun of they're worse at everything. But according to Ricardo, England should still pick cloth because that's the thing that they're least worst at, right? So if the country is better at everything than you are, we call this absolute advantage, okay? And Ricardo's argument is that nonetheless, countries should specialize in the thing that they're least worst at, right? Least worst at, not best at, but least worst at. And we call this comparative advantage. So as a result, we should open our borders to free trade. Based on this argument, in the long run, this will improve the economic efficiency of the country. So if we remember back to Smith's idea of the division of labor, this is a fairly similar idea with similar logic, just applied to international trade instead of individual production processes. The end result is going to be that every nation is going to specialize in some type of production and then trade with each other for the things that they don't specialize in. And in Ricardo's universe, that's the best possible way. So what's potentially wrong with this approach, especially now that we have, you know, 200 years of experience roughly to test the theory, okay? Ricardo's comparative advantage theory is one of the cornerstones of modern economics. It's one of the few things that the economics profession has kept from classical political economy. It's the main reason that if you're a believer in like neoliberalism or neoclassical political economy, these people, these organizations support free markets, free trade, and specialization. In fact, in the 20th century, two economists, Eli Heckscher and Bertolt Ohlin, take Ricardo's model and they make an even bigger recommendation based on it. Developing countries should specialize in labor-intensive production because they have an abundance of workers. And developed countries should specialize in capital-intensive production because they have an abundance of capital. And that's a good way to develop, right? Is it? Let's see. So there's a lot of assumptions behind the theory that if we look at them carefully, we can see that they're quite questionable assumptions. And this should at least raise our critical mind and say, well, do I really want to bet my entire future on this theory that was invented 200 years ago that sort of doesn't look very empirically sound? Ricardo assumed that labor and capital is mobile and can't move from country to country. If we look at the economy, especially today, capital is extremely mobile. Capital moves in and out of countries very quickly at times, depending on the political conditions, of course. And labor, even though it's relatively immobile, if you want to work in another country, there's generally a visa regime that's going to stop you from doing that unless you meet certain circumstances. But we do know that 3% roughly of the international workforce are migrant workers. And so labor does move both within and between countries fairly often. So next in Ricardo's model is that of England and Portugal. We obviously know that there's many countries and that these countries are very different from each other. They have different sizes. They have different amounts of natural resources. Some countries are just more politically significant than others. Some countries are landlocked. Some countries have oceans. Some countries have a bunch of mountains in the way of everything. We can't treat the countries as being the same and pretending like geographical and political differences are not important variables. In Ricardo's model, there's only two commodities, cloth and wine. And we know that there's many more commodities than that. And we also know that some commodities are just fundamentally more significant than each other. If you don't have food security, that's a way bigger problem than not having iPads and stuff like that. Next, consumer tastes are assumed to be the same in both countries. Well, anybody who's ever traveled even slightly a bit knows that consumer tastes vary wildly between countries. What's a good example considering we're talking about England and trade and India? Well, the consumer tastes in India obviously include a desire to consume spices in the form of food, whereas the British people monopolized the spice trade for a long period of time and never added spices to their food. That's a really good example of differences between countries in terms of consumer tastes. Next, labor is the only factor in production, not raw materials. We should know by now that raw materials, many of them only exist in certain places. A really interesting talk now is about rare earth metals and their importance to modern production process of certain goods. Rare earth metals are only found in certain places. Things like uranium is also found in only certain places. It's not the case that everybody has the same amount of stuff. Some countries just don't have very much of anything. Some countries are lucky and have an abundance of natural resources. The homogenous unit of labor thing, the idea that everybody's as productive as each other, actually countries have significant productivities between each other. There are various factors that determine this, and we can't go too deeply into this idea. Take something like education, for example. One of the reasons we place so much emphasis on public education is that the more educated a workforce is, the more productive they're likely to be. We know that not every country in the world has the same level of education. Therefore, we definitely can't assume that everybody in the world has the same level of productivity. The idea that the supply of labor doesn't change is pretty much indefensible. We know that the supply of labor has changed a lot, both upwards and downwards. There are times in history where the supply of labor grows because of large-scale population growth. That's something that Malthus will talk about next week. Downwards, because of things like disasters or disease or war or things like that, we also know that the rate at which women enter and exit the workforce is an important variable. Sometimes we see, as a result of feminism, for example, in the 20th century, a large number of women enter the workforce in some countries and drastically change the labor supply. In other countries, we can see that there's a reaction against women's liberation, for example, that removes women from the workforce and, again, has a big impact on the labor supply. We can't assume that the labor supply isn't changing. Political factors and population factors have a big impact on the labor supply. Next, the idea that commodities are produced on constant returns is, again, indefensible. Diminishing returns is real. I don't have time to go too much into this right now, but if you look up the concept of diminishing returns, you'll get an understanding of what that means. The idea that free trade exists between the two countries is super, super indefensible. Almost every country that exists exists based on an actually existing state of relationship that's been developed with other countries over a long period of time as a result of various historical factors, complex factors like wars and history and shared values and things like that. Countries don't always share, as a result of this, a free economic relationship. Now, more than ever, we should know this. There's a lot going on in the world at the moment where countries are playing with each other, fighting with each other, some might say, based on this idea of their economic relationship, where we go through periods where we move closer towards free trade and periods where we move closer towards not at all free trade, like the United States and China or India and China at the moment are good examples where you can hardly argue that free trade is a viable assumption behind an economic relationship. The idea that transport costs are zero is particularly controversial today, because one thing about today is that a lot of people are very worried about environmental damage, and transport is a major contributor to global environmental damage. So this idea that transport costs can be treated as if they don't exist, especially for environmentalists, really makes you a bit upset in terms of the way this theory operates. If we think of the environment as if it doesn't matter, maybe free trade sounds like a tremendous idea, but if we think of the environment as important and think of the cost that logistics imposes on the environment, maybe it's less of a good idea. Equally, for a landlocked country or a country with terrible infrastructure, transport costs might be really significant. You might have to spend a lot of money to get whatever goods you make to another country. For a country that is lucky and happens to be right next to a bunch of important countries, or a country that has wisely spent money on infrastructure, maybe transport costs are less important because of those decision makers. So this idea that we can't treat transport costs as important is a pretty questionable idea, considering all of that. Lastly, the idea that all factors of production are fully employed is a questionable idea. We know labour is rarely fully employed. Unemployment is real. Unemployment is an actually existing thing. On top of that, underemployment is real too. People don't always, even if they do get some work, they don't always get the amount of work that they would want. No nation fully utilises its resources. Now that we know there's always problems with the assumptions behind the theory of comparative advantage, we need to think carefully about why is it a good theory? Why are we going to keep this theory if there's so many problems? So should we rethink this idea of free trade and specialisation as a result of these problems? We have good reason to question whether free trade and specialisation are actually good ideas, and we'll see later in the semester a number of theorists have alternative theories that are based on this criticism. For now, it's enough for us to know that even in Ricardo's little tiny example of England and Portugal, that example in practice, this is the difference between economic modelling and real evidence gathering. In practice, that didn't work out the way he thought it was going to. Joan Robinson notes that the imposition of free trade on Portugal killed off a promising textile industry and left Portugal with a slow-growing export market for wine. People can obviously, unless you want to get really drunk, people can obviously consume a lot more textiles than wine. So while for England, exports of cotton led to the accumulation, mechanisation, and spiralling growth of the industrial revolution, as a result of imposing free trade, England benefited a lot, and Portugal, their economy kind of got ruined. So Robinson's criticism here is that Ricardo's theory is not really based on real world experience. Countries are usually at different levels of development from each other, and we can't treat them like they're all the same. And this creates the possibility that trade is not always good. Trade can be unequal, and trade on unequal terms can hurt a country's development, can lock us into the production of not-so-good things, can stop us from reaching our full potential. So in summary, Ricardo's theory is an example of some of the best things about analysing the economy, and some of the worst things that people do when they analyse their economy. Some of the best stuff, he's arguing for precise definitions, and he's looking at all these different variables as being important. And he's saying, well, what if people don't share the same interests? What if they're interested in each other, and there's rivalry and complexity and stuff like that? The worst things, you make lazy assumptions, easy to model assumptions, but lazy assumptions that aren't based on real world experience. You create economic models that don't look like the world you're actually trying to analyse. So he significantly improved this debate about the labour theory of value, and contributed a lot to the discussion of what is determining wages, prices, and profits. Ricardo's understanding of political economy also introduced this idea that the development of the economy can impact social classes in a different way. It's very unlikely, according to Ricardo's theory, that development is going to equally benefit workers, industrial capitalists, and landlords. It's almost impossible, right? What's more likely is there's going to be winners and losers as a result of development. On the other hand, his comparative advantage theory that recommends free trade and specialisation is an extremely simplistic model. And like most theories in economics, it's not a realistic model, it's not rooted in reality. But it's methods, somehow, the worst part of his theory there. The least applicable part of his theory. That's what we keep. That's the intelligence of mankind, I suppose. That's what we keep. And that's what we're still teaching in modern economics courses, as a law. So comparative advantage is considered a law, like a physical law in economics, which is another example of the kind of weak claim that economics has to being a science. Yeah, I hope you enjoyed that talk on Ricardo. And I hope you find him an interesting person to study when you're reading this week. He certainly had an interesting life. Next lesson, we'll focus on Thomas Malpass.