I recently had the privilege of assisting one of the world’s greatest economists in his detective work that comprehensively completes the great work of demolishing the conceptual foundation of the free trade cancer that, far from enriching them, has destroyed the economies of the West. The subsequent paper, The Deliberate Deception in Ricardo’s Defence of Comparative Advantage, was published today by the lead author, Steve Keen. And while it’s a pure coincidence that he happened to notice Ricardo’s textual amphiboly at about the same time that I noticed Kimura’s algebraic amphiboly, I don’t think it’s entirely accidental that two intellectual fixtures of modernity should prove to be constructed on such fundamentally flawed foundations.
Abstract
Ricardo’s arithmetical example of the gains from trade considers only the transfer of labour between industries, and ignores the need to transfer physical capital as well. He discusses the transfer of capital in the subsequent paragraph in Principles, but uses a textual amphiboly: whereas exploiting comparative advantage involves transferring resources from one industry to another in the same country, Ricardo speaks instead of the transfer of resources “from one province to another”. The fact that this verbal deception has escaped attention for over two centuries is in itself notable. When considered in the light of subsequent discussions of capital immobility by Ricardo, this implies that the person whose model led to the allocation of existing resources becoming the foundation of economic analysis, was aware that this foundation was fallacious.
Introduction
The theory of comparative advantage is perhaps the most influential and celebrated result in economics. Challenged by a mathematician to nominate an economic concept that was both “logically true” and “non-obvious”, Samuelson nominated the theory of comparative advantage:
That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.(Samuelson 1969, pp. 1-11)
From Ricardo’s original demonstration in 1817, to modern trade theory, the conclusion has remained constant: even if one nation is more efficient at producing everything than all others, it and its trading partners will gain from specialization and trade.
However, there is an obvious flaw in the logic: while labor can hypothetically be moved between industries at will, fixed capital cannot. Ricardo’s own text contains evidence that he knew that this reality invalidated his theory, since his defense of comparative advantage relied on an amphiboly that conflates two categorically different forms of capital mobility. Remarkably, though this evidence was hiding in plain sight, it has not been noted until now.
The Amphiboly: Province Versus Industry
In Chapter VII of the Principles, Ricardo presents his famous example of England and Portugal trading cloth and wine. Portugal has an absolute advantage in both goods but a comparative advantage in wine; England has a comparative advantage in cloth. Gains to both countries result from specialization according to comparative advantage. Portugal ceases cloth production and England ceases wine production, both countries focus their resources on the industries where they have a comparative advantage, and total output of both cloth and wine rises:
England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time. England would therefore find it her interest to import wine, and to purchase it by the exportation of cloth. To produce the wine in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England. Though she could make the cloth with the labour of 90 men, she would import it from a country where it required the labour of 100 men to produce it, because it would be advantageous to her rather to employ her capital in the production of wine, for which she would obtain more cloth from England, than she could produce by diverting a portion of her capital from the cultivation of vines to the manufacture of cloth. (Ricardo, Sraffa, and Dobb 1951, p. 135)
Ricardo next explains that international trade means that “England would give the produce of the labour of 100 men, for the produce of the labour of 80”, something which is not sensible with domestic trade. He then states that:
The difference in this respect, between a single country and many, is easily accounted for, by considering the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the activity with which it invariably passes from one province to another in the same country. (Ricardo, Sraffa, and Dobb 1951, p. 136. Emphasis added)
“Province”? Why does Ricardo give the example of moving capital between provinces here? His model involves something categorically different: to exploit comparative advantage, capital must move between industries—from cloth production to wine production.
This is not a minor distinction. Geographic mobility of financial capital means that financial resources can flow to wherever returns are highest—a bank in London can lend to a manufacturer in Yorkshire. Geographic mobility of physical capital means moving equipment by road or canal, rather than by sea and ship. But sectoral mobility of physical capital means that the physical means of production in one industry can become the physical means of production in another—that looms can become wine presses, and vice versa. These are entirely different forms of mobility—one feasible, the other impossible.
Ricardo elsewhere in the Principles demonstrates his awareness of the distinction between physical and financial capital, and the fallacy inherent in treating physical capital as if it has the fungible characteristics of financial capital. In Chapter IV, “On Natural and Market Price,” he explains how the profit rate equalizes across industries: “the clothier does not remove with his capital to the silk trade” (Ricardo, Sraffa, and Dobb 1951, p. 89). Adjustment happens through the financial system, not through physical transformation of productive equipment. Only money moves between industries, and only relative prices change; the looms and the wine presses stay where and as they are.
Read the whole thing on Steve Keen’s site.