David Ricardo's ＂The Principles of Political Economy and Taxation＂ (Part 3⧸3)

Hey hey everyone, back again. Today we're going to conclude David Ricardo's The Principles of Political Economy and Taxation. Now before jumping into it, if you want to follow me anywhere other than here, you can find me on Instagram at theory underscore and underscore philosophy or on Twitter at David Guineo. If you're new here, welcome, I'm David, I try to explain philosophical texts in a way that makes them accessible to you. So if you're new, like, share, subscribe, comment, I'd love to hear from you. If you want to help me out, obviously do all those things just mentioned. You can help me out via Patreon or PayPal if you want to do it that way, but obviously no pressure. If you found this on YouTube, you're going to be able to find it in podcast form pretty much anywhere where you get podcasts or if you found this on podcast form or in podcast form, you're going to be able to find me on YouTube where I sometimes release videos and you know, sometimes that's better. But yeah, without further ado, without wasting more of your time with that stuff, we're going to continue on here with part three, the last part of Ricardo's The Principles of Political Economy and Taxation starting with chapter 21, The Effects of Accumulation on Profits and Interest. Now before jumping explicitly into the content or specifically into the content, I just want to give a little brief recap about Ricardo's approach to rent because that's really the core of his argument here. So rent for Ricardo is set by the accumulation of profit. So as profit is made on land, then more money is going to be given to the landlord in the form of rent. And this comes out of the work of Adam Smith as well, where rent is a portion of profits made to give to the landlord. Now as accumulation grows, as populations grow, there's going to be a greater demand for things being made or on land, for example, things being grown. Now that demands that more land is going to have to be cultivated, which means worse land is going to have to be cultivated. Now on that worse land, they're still going to be making or growing, let's say, for example, corn, they're still going to be growing corn and selling it at the same price as the first plot of land, the most fertile plot of land. So because of that, what they're going to earn is going to be less in the form of profits than the first plot of land because they're going to have to sell the corn for the same price in order to actually make sense in the market. But they're going to earn less then, so they're going to have less money to give to the landlord, which means that they will pay ostensibly no rent. And this is Ricardo's argument. But they set the stage or they set the tone for how much that corn will be sold for because they have the most difficulty, the most labor is going into it. And if the first plot of land, that is the most fertile plot of land, set the price of corn, that more difficult plot of land won't actually be able to compete. So they must both set the price of corn through the difficulty to cultivate it or producing it if they're producing something else. But because they are also the plot of land that pays no rent, it is the plot of land that pays no rent that sets the price of things, more or less. Now this is Ricardo's big criticism of other political economists of the time and before him. So I just wanted to put that out there as a recap because I know it's been a couple weeks since the first episode came out where I first kind of presented that idea. So yeah, let's jump here into chapter 21, the effects of accumulation on profits and interest. So he says that over time, the accumulation of capital will ultimately elevate profits. Even though in the last episode, for some periods, profits will actually go down as capital is accumulated because prices will go up, which means that wages will have to go up, which means that profits will have to go down. But over time, generally, there's going to be a general increase of profits. And there are so many other factors that are going to cause dips in profits. There might be a shortage of labor, there might be a shortage of specific kinds of labor, there might be a war, there are any number of possibilities that might affect this accumulation of capital and therefore profits. Now the accumulation of capital for Ricardo, and this is certainly echoed in other political economists at the time, the accumulation of capital is going to bring prices down in the long run because with the accumulation of capital will come better means of producing things through machinery, new techniques, technology, science, is going to make things much easier to accumulate, much easier to produce, which is going to bring down the labor necessary, the difficulty in making it, which is generally going to bring down the price of things. But this is referring to the real price of things, that is, more of it is going to be bought with less worked money, less money that is acquired through labor, while the prices might go up because with the accumulation of capital, it just makes sense that there's going to be a rate of inflation. And so the dollar value, the nominal value of things, is going to keep going up. That's why today, you know, it costs $2 for a soda in a corner store and not 25 cents like it did 40, 50 years ago. But relative to everything else, that soda is now cheaper in terms of how much you can actually get for it or you get less for it. Or sorry, well, it's just made so much easier, then therefore, it is ultimately cheaper for the consumer. At least this is the idea that Ricardo gives us here. Then he moves into chapter 22, where he considers bounties on exportation and the prohibition of importation. So a bounty on exportation is something that Adam Smith writes about quite a bit, where a bounty is when the price of a produced product, let's say corn is just an easy example. The price of a produced product or cultivated product is sold at a reduced price to another country to be exported in order to encourage exportation. So let's say one corn cost a dollar, just for argument's sake, cost a dollar in the home market, a bounty might offset that cost a little bit in order for it to cost not a dollar in the foreign market, but to instead cost 95 cents in the foreign market in order to encourage people to buy it. Now there might be any number of reasons for this. Let's say, for example, there was one year where there was a super good harvest and they had lots of extra corn. It would be in their interest to get rid of it, to sell it to another country at a reduced price just to get rid of it, because otherwise it's going to go bad. And so they do that to encourage its exportation, where the rate of profit is still going to be there. They're still going to make profit, but it's going to be less than it would have been if they were selling it at the natural price in the home market. But the thing is, they wouldn't have been able to sell it because there was way too much supply for the demand. Now in Smith's work, in The Wealth of Nations, he doesn't like bounties. He thinks what bounties do is it falls on the home country, because how do you actually make up for that loss? The lost price or the lost profits? Well, what'll happen for Smith is that all the home market prices will raise, instead of being a dollar, will be a dollar and five cents in order to make up for the lost five cents going overseas or going to another country to be exported. Now Smith has a pretty negative view of it in that way, but Ricardo says that that's not actually going to happen, because if there was a rise in prices in the home market from a dollar to a dollar and five cents per corn, then that would mean then that wages would have to increase in order to make up for that, which means that it won't actually hurt the consumers who are mostly wage earners, and there will be a more of an organic adaptation to the bounty. Now I say that, but Ricardo still thinks that bounties are an unnatural intervention in the market in order to encourage exportation that otherwise wouldn't happen. So it's therefore not letting the free market do whatever it will, which is ultimately bad for him. And one of the other issues here, and this might be echoing stuff I've already said in previous episodes, but Ricardo, sorry, but Smith attributes a lot of value to corn as being some kind of like transcendent commodity that somehow, if it is affected, will disproportionately affect everything else. Now Smith thinks that because corn is to him a necessity. Everybody needs it, and so if it's affected, it's going to affect everything in a bad way, whereas Ricardo says no, it is just a commodity, it is just a product like everything else, and therefore it being affected will have a proportional effect on everything else, just like if anything else was affected, it will have a proportional effect on everything else, where if there is some kind of intervention, sure, there might be a blip in corns exceeding the natural price in the market, which might have a kind of short-term effect on people, but ultimately it's going to reach equilibrium once again. Now the only real effect that Ricardo is concerned with, with a bounty, is an increase in rent, because if there is a bounty, that means there's going to be more demand for corn from other countries that it's being exported to, which means that more land is going to need to be worked, more bad land is going to need to be worked, which is going to raise the rent of the good land that is being worked, and that is the only kind of real effect, the tangible effect that Ricardo pays attention to, and this is why bounties will have different effects in different industries, so in agriculture it will have more of an effect because more bad land will need to be worked on, whereas something like manufacturing, like if you're making hats, it won't have that same effect because rent doesn't have the same relationship to manufacturing as it does in agriculture, because making new hats doesn't demand you go work worse land, you just open up a new factory somewhere and the conditions will stay relatively the same, I assume, barring other circumstances, like if it's an area of the world that is prone to tornadoes, which why would they make a factory there, but anyways, that's a possible consequence, and that puts us then into on bounties on productions. So, as I just mentioned, bounties won't have that much of an effect on production because the only way that really profits will increase, real profits will increase, is by the capitalist making things more productively, more efficiently, whereas a bounty will only raise the nominal price of things, which is going to look like more profits are being made, but it's just the dollar amount of profits that is going to rise in proportion to everything else, so it doesn't actually get you more buying power. And here he moves into chapter 24 to consider more closely his own critique of Adam Smith, titled Doctrine of Adam Smith Concerning the Rent of Land. So, as I've already mentioned, in The Wealth of Nations, Smith suggests that all land will yield a rent, because if you're going to work on land, you have to be paying rent to someone, whereas for Ricardo, he says, no, that's not true, because if you pursue new land, you know, you aren't going to wait for someone to buy the land that you have to then pay for, or pay to, to use that land. You are just going to work this worse land that, you know, you will then be both the capitalist, or even the farmer, and the landlord of, but, you know, you're earning less money because it's worse land than the already best cultivated land. And likewise, or Ricardo says that there's a very kind of interesting logical fallacy in Smith's work, where Smith says, yeah, we have this issue with land where all land is going to pay rent, but he says that that doesn't apply to mines. And he says that more difficult mines to work are just going to be worked by the people interested in them. No one's just going to own these mines for no reason. And Ricardo says, well, isn't that the exact same thing? Like, why aren't you applying that same logic you apply to mines to land? Because that'll totally overwork or totally overhaul his approach to political economy, specifically the accruement or the procurement of rent. And here, we move into chapter 25 on colonial trade. And you might get the sense everything is moving a lot quicker now. And that's because every chapter is only a few pages at this point. And I wanted to be as clear as possible, really splitting it up as per the chapters. So in The Wealth of Nations, Smith says that mother countries, countries producing things, or that have various colonies, often hinder the growth of colonies by establishing monopolies. And Ricardo kind of agrees with this, but isn't totally convinced. So in Smith's argument, what he says is that when a colonial country sets up various colonies around the world, what it often does is it says, hey, colony that is ours, everything that you produce is going to come back to us, you aren't going to trade this with other countries, because then, you know, other countries are going to get the things that the mother country is going to have, could have a monopoly over, which they don't want. So Smith doesn't like that. Smith says that if you're going to have colonies, which he's already a little bit shaky about, he doesn't actually see the point of colonization as it was, as it happened, not to mention the fact that all the destruction, the death of wildlife and humans living there. But barring all that, Smith says that a hindrance of a colony's ability to engage in the free market by selling things, wherever they can sell them for the best price, is going to hinder that colony's growth. Now, Ricardo isn't totally convinced about this, because he really wants to nuance the discussion and not to say that monopolies are just bad because they're monopolies. He says that if there's a colony that is importing something exclusively to the home country, then that might actually have a beneficial effect in the economy, because that home country might be more efficient at actually distributing the product, might have closer connections to other countries. So for example, we know Europe's a long history of colonization, obviously, and all the horrors that came with it. But by importing stuff back to the home country would allow the facilitation of that product to then be disseminated to other nearby countries, because we know Europe is comprised of many countries very close together. So this is just one way to nuance that discussion and not to say that monopolies are always bad. Now, in addition, or in The Wealth of Nations as well, Smith lays into treaties. So a treaty is when two countries, let's say France and England, agree to sell one product each or of each other to the other exclusively. So for example, England might only buy its wine from France, or France might only buy tea from England. Now, Smith says that this is bad because it stops the possibility of getting a better price somewhere else. Now, Ricardo says, yeah, you know, this could be a bad thing. But also, we can't forget that sometimes countries are just better at producing one thing over others. And it can, you know, have diplomatic effects can be, you know, diplomatically useful, because not everything is the market. And it's totally shortsighted to think that there aren't other interests at play here. And one country might just have a vested interest in paying more for a product, because it really likes it. England might really like French wine, and are therefore willing to pay more for it, in order to maintain a kind of monopoly in buying exclusively French wine. Now, again, Ricardo is nuancing these discussions, but he still doesn't celebrate them. He still would prefer things to be enacted or to be operated on exclusively by the free market, and not to be infringed upon by government interest or anything like that. And that puts us here into chapter 26, on gross and net income. So in The Wealth of Nations, Smith puts, I guess, all his emphasis on gross national income and production. So he says that, you know, the more you make, the better. Where Ricardo sees the gross as a bad measure, as opposed to the net. So the net is the difference between what you make, and what you have to then pay for, for what you made. So the net is essentially your profits, what you're making after paying for everything else, which he says is a much better measure of a country's success, than just what they make, period. Because if they make a lot of stuff, but have a lot of expenses, a lot of debt, maybe, they don't actually earn that much, because they have to pay back all that debt. Now, this is kind of an interesting point that Ricardo picks up on, because in The Wealth of Nations, Smith makes the case that other political economists before him thought that having more gold in a country meant it had more wealth, to which Smith was like, no, no, no, no, more gold does not mean more wealth, in fact, more gold might mean less wealth, because that means you're probably not engaging in the right amount of trade, you aren't actively putting your capital into production to make things better, more efficient, or whatever. You could be just sitting on a stockpile, which yeah, sure, might be good for five minutes, but with time, other countries are going to kind of beat it out of you. So it seems in that way, he's very much opposed to just accumulating money for the sake of accumulating money, or having more for the sake of having more, where Ricardo is really correct in saying, it's not about just the total amount you make, or the total amount of money you have, but it is about the difference between production of the costs of production versus how much is made, and then how much of that is made in profits has to be put back into production to then keep the cycle going, to be able to keep growth going. And here he moves into chapter 27, dealing with currency and banks. So money attains its value, or its buying power in proportion to the difficulty in actually acquiring it. So gold, he says, for example, at the time was 15 times more valuable than silver, because it was 15 times more laborious to actually get it. Now, these proportions are obviously going to change over time. There were times when silver was more valuable, and it goes back and forth, because these things aren't fixed. Now, interestingly, coins, like if you have gold coins, are actually more valuable than the gold itself, because a gold coin has to make up for not only the cost of the gold within it, but the cost of, I guess, coining the gold, you know, turning it into coins, the cost of transporting the gold, any other costs that might happen, whether it's like the printing costs, if there's like a stamp put on the coin, whatever. All of these costs have to be factored into the gold coin itself, which is an interesting kind of factoid he gives us. Now, paper money came along, and Smith recounts this as well, came along with the introduction of banks, who could then, banks would take in gold, and kind of give out these IOUs to people in the form of paper money that said, you know, you have X amount in the bank, you know, come back with this IOU, and we'll be able to give you the money. But then people could trade their IOUs, or, and they didn't call them IOUs, I'm just trying to illustrate it in the easiest way, could give that paper money to someone else who could then, they could go to the bank, and they, they're owed that amount in gold. And that was kind of the introduction of paper money. And paper money is super cost efficient, because it's easy to produce, and it is a stand in for gold. And it's easy to transport, you know, you could transport paper money a whole lot easier than you can transport gold. Now, certain issues obviously arise with paper money, because it can so easily be abused, because it's so easily made, you can just reprint more paper money, and then you can kind of artificially inflate how much money you have. And so he says that there is a necessity to limit this, to restrain it, to put restrictions on paper money, especially the restrictions on banks and banks abilities to give out loans, which are apt to be abused, they can give out loans that are, that are bad, they don't actually have the money to cover it. And so they could give out bad loans, they could give out loans to people who can't pay back in order to, you know, put those people in an endless cycle of debt, you know, whatever. And one way to combat this for him, and we get this in Smith, as well, one way to combat this is to make sure that paper money never exceeds or the value of paper money in circulation never exceeds the amount or value of gold that is currently in banks or in circulation, so that all paper money is tied to gold, which obviously isn't the case anymore. But this is something that he Now, Ricardo is very concerned with what banks could do with paper money. So they could just like withhold paper money to artificially elevate the value of paper money. Or they could like offer lower interest rates in order to, you know, attract more people. But that was, you know, all these are artificial ways to just inflate the amount of money any bank would make, which is bad. And he says that that comes at the expense of the community. So it is very necessary in Ricardo here for there to be strict surveillance of these kinds of companies of banks to make sure that they do not abuse their power, which I don't fully know how he squares with the just general idea that the free market must just go of its own accord, you must just let the chip allow the chips to fall where they may, everything will regulate itself out, when he's very clear that that presents some fundamental risks, and that these risks need to be addressed. But in any case, if anyone has a better knowledge of Ricardo more generally, and his how he necessarily deals with that issue, I'd love to hear about it. And you can comment away. And that puts us here into chapter 28, on the comparative value of gold, corn and labor in rich and poor countries. So in the nation, Smith believed that as society develops, things will become more expensive, except corn are their absolute necessities, because everyone needs to have them. Now, this misconception for Ricardo comes from the idea within Smith, that no matter what, corn is still going to feed the same amount of people, you know, it is that baseline thing, one thing of corn or, you know, a basket of corn is going to still feed the same family, you know, now, or 100 years from now, or 1000 years from now, they'll still have the same use, like use, use value, it's still going to do the same thing. But then Smith also says, in a time of like, of war or poverty or something, the cost of corn will go up and threaten a famine. And so Ricardo is like, how can it be both? You know, how can corn just go up at certain times, but on the average, just stay where it is, if it unless it is subject to change within the market, you know, there might be a year when corn is going to be a lot more difficult to cultivate. And so its value is going to have to go way up, and its money price is going to have to go way up, and fewer people are going to be able to afford it. And so he just kind of points out how Smith just makes this logical fallacy or produces this logical fallacy here. And that puts us in chapter 29, taxes paid by the producer. So this is mostly repetition, what you what you've already heard, but a tax expected from a producer will fall on the consumers. So if a producer is making something, a capitalist is producing something in the factory, all that they're going to do if they're taxed is raise the price of the thing being produced, so that it can offset the cost of the tax, which would therefore then just fall on the consumer with a higher price of the product. And here we go to chapter 30, on the influence of demand and supply on prices. So Ricardo is clear that the cost of production will regulate the price, not the supply and the demand. Supply and demand may only have temporary effects. So there might be like a like a trend, or something where there's suddenly like a big demand for something, but still the supply hasn't met it hasn't reached it yet. So producers know, oh, we can raise our prices, because there's such a strong demand for this thing, people are willing to pay more for it. So we're going to raise those prices, and then they're going to earn more money. But that is only temporary. Ultimately, the cost of production for Ricardo is what is going to determine the price of something. And this is the cost of production, not only the cost of labor, but the cost of raw materials, machinery, everything else going into it. Now the same applies to labor, but the cost of labor won't be as affected by supply and demand, that is the supply of labor versus the demand for labor, as it will be by a rising or a lowering of the price of goods, or cost of production, you know, whatever. So this goes back to the idea that wages have to be in proportion to the cost of necessities in order to keep the wage earners, the laborers, alive. So supply and demand isn't going to affect the cost of labor as much as the price of goods. So the price of goods is going to affect how high or low wages will be. So supply and demand only has a significant effect on monopolized goods. So things that are only made by one company has no competition, and they can set their prices to be whatever. Now in the free market that, as I've already said with these other examples, in the free market, supply and demand doesn't have that much of an effect on prices, which might seem totally counterintuitive. And I don't know how many economists today actually buy that idea. But in any case, this is Ricardo's opinion. Now here we move into what I think is the most interesting part of this whole text when Ricardo considers machinery, and the introduction of machinery into production. So prior to writing this book, Ricardo believed that machines were good for landowners, capitalists, and laborers. So they were good for all three classes of society. So for capitalists and landowners, he saw that new machinery would make production more efficient, and so they could earn more profit, or at least the same profit by having fewer expenses in the form of labor. So they would make more money, they would make more profit, they would make more rent. Therefore, it would then be better for the capitalists and landowners. And he also believed that for workers, there would be a kind of initial fear that machines would take over jobs. But in the end, these machines would actually demand labor themselves. So there would need to be labor to build the machines, to maintain the machines, whatever. So labor wouldn't actually disappear. And not to mention the fact that there's always going to be a demand for labor, if it's not then in that factory that introduced the machines, another factory or another industry is going to need labor, whatever. Now that's what he believed. And he still maintains that for capitalists and landowners, machines are good for them. But he's not so convinced that it's good for laborers. Now, ultimately, I just want to say as a kind of spoiler alert, ultimately, he does welcome the introduction of machines, but he tempers it by saying, it has to happen gradually. You know, we can't just introduce only machines because that'll have deleterious effects. So he says the introduction of machines will lower the demand for labor. Ultimately, and which makes sense, more machines means you need fewer people. Even if you're employing more to make the machine, because once that labor is done, then it's done, the machines made and those laborers, then unless they go make another machine, it's going to ultimately bring down the demand for labor. Now, when you reduce labor, what you are doing is reducing the demand for goods, because there are going to be fewer people earning wages, which means that there are fewer consumers. So there's going to be fewer things to sell. So these producers are going to be making less of things. And what that will do then, because people don't just disappear when they aren't working, is more people are going to be impoverished, because they're not going to be able to engage in labor, they're not going to be able to have jobs. So more profits will be made, and the cost of things will come down. But that cost of things coming down won't be enough for people to actually buy them. And so people will just start dying. Essentially, they won't be able to engage, they won't be able to work for a living. Now, I don't know why he only kind of gives this concern, and he doesn't do it in a very sympathetic way. He's just like the population will become redundant, when that's just code for people will die. Thousands, millions of people will die. But that's what the language he gives us. I don't know why that doesn't extend to the rest of his theories when he considers wages, you know, being determined by the market, where wages will come down in proportion to prices, so on and so forth. But that would demand a kind of litmus test or an assessment of the actual condition of workers, which will always be later than the actual effects, which might have been too late, and thousands, millions of people might have died, and no one would have cared, no one would have noticed. But that's what we get when we're dealing with people who are totally unconcerned with human suffering, at least in the text. And so here he says that if machinery is gradually introduced, what that will mean then is a much more organic transition from a more human-focused laboring society to one that implements machinery. Now, as we'll see in Marx, you always need human labor, and that's why today some of these concerns about automation are kind of unfounded, even though there is some legitimacy to it. But there's always going to be a demand for human labor, and this is why jobs are always sought overseas for cheap labor. You can get more out of humans than you can get out of a machine, which might seem kind of counterintuitive, but we'll get into that with Marx. So Ricardo thinks that machines, while they present risks, are going to be beneficial for everybody if they are introduced gradually, because they're going to allow more things to be made for cheaper, which is what is necessary to actually accommodate a growing population. Because with the accumulation of capital, so too will populations grow. Now again, I don't know how true that is, actually, because there are a lot of impoverished nations that have a very high population, while, you know, in terms of money, more wealthy nations have a less population. So I don't really know how that stacks up today, but anyway. Now here we get into chapter 32 on Mr. Malthus's opinions on rent. So here he's critiquing Malthus, and it's going to be another political economist, and it's going to be a lot of the same here, but we'll go through it anyways. So rent, for Ricardo, is the creation of value and not wealth. It is not productive, that is rent, because it is a transfer of value, and it's not capital. It does not affect natural prices of anything or anything like that. So when rent is being made, it's just money going from the to the landlord. It's not being spent productively. Now, of course, the exception is that if the landlord owns, like, buildings on land, and they are going to put that money into bettering the buildings, making them more efficient, whatever, then that can be productive. But if that's not how it's being spent, then rent is not an indicator, or it doesn't increase capital, or value, I should say. And Malthus also thinks that high rent is owing to fertile land, when, as Ricardo has already shown, high rent is actually when, or comes about, when worse land is worked on. You know, when land is worked on that is more difficult to work on, then the rent of the fertile lands will increase. Malthus also thinks that growth of population is due to abundance of necessities that can be, therefore, bought more cheaply. Whereas Ricardo says that he's kind of confusing correlation, or Malthus is confusing correlation with causation. Rising population for Ricardo is a product of the accumulation of capital, not food. Demand must precede the supply. So it's not as though there's more food, and then people are just happier, and they're reproducing more. Because that wouldn't, like, why would more food have been made in the first place, unless there was already a growing population? So he's kind of got that reversed, according to Ricardo. Malthus also thinks that rent grows up with low wages, when the opposite is kind of the case. Rent goes up with wages. So it's not the opposite, but anyways, the point is that rent goes up with wages, because as more bad land is being worked on, rent is going up, which means more labor is needed, which means the cost of things is going to go up, which means wages are going to have to go up to buy those things. Now he concludes the book by remarking on the benefits of importation, and how it is cheaper. Like, if you can import something for cheaper than you can produce it at home, then you should do that. And that is kind of the benefit of the free market for Ricardo. And that is more or less it. If you listened this far, congratulations. I was really hoping this would be a two-part thing, but, you know, I didn't want to really cover all my bases here. But if there's anything that I screwed up or got wrong, you know, I'd love to hear about it. And if you're listening to this in Apple Podcasts or on Spotify, even, if you can leave a review, leave five stars, that would obviously help me out a lot. Yeah. Catch you next time. Take care.