------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (September 2005)
Timothy Davis, _Ricardo's Macroeconomics: Money, Trade Cycles, and
Growth_. New York: Cambridge University Press, 2005. xii + 316 pp.
$75 (hardcover), ISBN: 0-521-84474-6.
Reviewed for EH.NET by James C.W. Ahiakpor, Department of Economics,
California State University, East Bay.
I very much looked forward to reading this book. I expected to find
another fresh contribution to the reinterpretation of David Ricardo's
macro-monetary analysis in contrast with much of what one reads of
him in the modern literature, based mainly on misrepresentations of
his work by John Maynard Keynes and Joseph Schumpeter. I came away
more disappointed than pleased with Timothy Davis's work. On one
hand, Davis reaffirms some earlier reinterpretations of Ricardo's
work, following mostly Sam Hollander, reinterpretations Davis calls
"the new view" (p. 29). On the other hand, Davis does not appear to
go much beyond these earlier reinterpretations. Indeed, some of his
arguments and analysis might properly be described as retrogressions
or a diminution in the quality of Ricardo's macro-monetary analysis
-- a diminution because Davis takes some steps backward from some
recent advances in the literature on Ricardo's macroeconomics,
particularly on the law of markets. Davis also misses several
opportunities to assist advancement in modern macroeconomic analysis
from Ricardo's work.
The book contains eight chapters. The first lays out the background
to David Ricardo's emergence into economic writings, mainly on the
issues of money, credit, taxation, trade, and the causes of economic
growth and recessions. Significant among the motivating factors for
Ricardo were the Napoleonic wars, the inflations and recessions
associated with the cessation of these conflicts, the suspension of
convertibility of the pound into specie and subsequent resumption,
Ricardo's study of Adam Smith's _Wealth of Nations_ and his
disagreements with parts of Smith's arguments, particularly Smith's
theory of value and views on bounties. The six subsequent chapters
provide numerous textual evidence to support the theoretical
summaries contained in chapter 1.
Thus, chapters 2 and 3 describe events during the business cycles of
1815 to 1818 and 1818 to 1825, respectively. These show that,
contrary to some perceptions, the British economy was not mired in a
decade-long depression following the Napoleonic wars. Chapter four
documents Ricardo's familiarity with economic events from his
pamphlets, letters and speeches in Parliament, based on his
experience as a professional stock jobber and a loan contractor, and
having known the relevant sources of financial data. The main point
here is to counter the prevalent notion of Ricardo as someone who was
uninformed about economic events and built models purely from
deductive reasoning. Chapter five, devoted to Ricardo's analysis of
postwar events, mainly contrasts Ricardo's views with those of Robert
Malthus. Ricardo comes out as clearly having views more consistent
with the facts about the British economy's adjustments through
recessions and recoveries. Chapter six attempts an analysis of
Ricardo's views on the law of markets, while chapter seven is devoted
to Ricardo's monetary analysis. The concluding eighth chapter
summarizes some of these arguments again and draws some parallels
between Ricardo's views on the resumption of convertibility of the
pound and the gold standard in the early 1820s and Keynes's views on
Britain's return to the gold standard in 1925. There is also an
impressive set of appendices covering 64 pages, including financial,
price, and trade data. Analysts, besides Keynes, whose
interpretations of Ricardo Davis rebuts in the book are Joseph
Schumpeter, Mark Blaug, Frank Fetter, T.W. Hutchison, Piero Sraffa,
D.P O'Brien, Lionel Robbins, B.A. Corry, William Coleman, Terry
Peach, and to some minor extent, George Stigler and Jacob Viner.
Indeed, Davis also takes some dissenting positions from those of Sam
Hollander, e.g., pp. 142, 147-48. So why wouldn't I rate the book as
a major contribution to the advancement of scholarship on Ricardo's
macroeconomics?
First, most of the interpretations rebutted are rather old, before
the 1970s, and are mainly reaffirmations of Sam Hollander's earlier
work. It is curious, for example, that Davis does not refer to
Blaug's editions of _Economic Theory in Retrospect_, but only to his
1958 views on Ricardo. Second, in several cases the textual evidence
cited is not the most suitable to the case at hand, particularly on
the law of markets and on machinery and unemployment. Third, numerous
pieces of textual evidence are cited without carefully laying out the
theories they are supposed to validate. One easily can get lost
wondering what the relevant macroeconomics is supposed to be, if one
does not already know. For example, several of the quotations cry out
for identification with Ricardo's and Malthus's employment of the
classical forced-saving principle (in the reverse), e.g., pp. 136,
140, 160n, a concept Davis hardly mentions. That identification would
have been a helpful counter to the view gaining currency with some
writers that the forced-saving doctrine is mainly an Austrian
analytical concept. Fourth, Davis repeats the sterile debate over
whether Say's Law might be interpreted as an identity or an equality
proposition. This in spite of the fact the identity version would be
meaningful only for a barter economy, a point Davis recognizes (p.
162). And since the classics dealt with a monetary economy, that
discussion seems unworthy of the ink and paper spent on it; the point
is made in a chapter in Kates (2003), a book to which Davis also
contributed.
Fifth, and what is most disappointing, Davis accuses Ricardo of
having failed to employ the law of markets consistently, and having
adopted the equality version which "allows for a temporary glut of
all commodities" (p. 162). He later quotes Ricardo's (4: 344) own
statement, insisting that "there may ... be a glut of 2 or of 10
commodities but ... there cannot be a glut of all" (p. 173), but
offers no reconciliation of the apparent inconsistency with his
interpretation. In fact, as J.S. Mill explains, money is included
among the commodities, and this is why there cannot be a glut of all
commodities at the same time (also mentioned in Kates (2003, p.
113)). It is also from such understanding that we easily can make
sense of Ricardo's declaration to Malthus: "Men err in productions,
there is no deficiency of demand" (which Davis quotes on p. 147).
Earlier, Davis (pp. 41-42) argues that Ricardo's macroeconomics
"suffers because it does not integrate his insight that aggregate
demand might, in theory, be deficient and that, in practice, the
hoarding of cash sometimes occurs." But Ricardo (1: 358-59; 5:
199-200, cited on pages 156-57), for example, does employ hoarding by
the public and the Bank to explain the occurrence of economic
distress. Davis (p. 182) also quotes Ricardo as making the same point
about hoarding.
Sixth, in the chapter on the law of markets, Davis repeats the claim
that the so-called "Treasury view" of fiscal policy, attributed to
Ricardo, assumes Say's identity and full employment: "he assumed full
employment with no underlying analysis ... [he] assumed away the
underlying problem [of wage and price adjustments] and then concluded
that no remedy [to unemployment in a recession] was required" (p.
162; also p. 182). But Ricardo's argument is simply that whatever a
government spends out of tax revenues or borrowed funds must be at
the expense of private sector spending (see Ricardo's statements
quoted on pp 166 and 168). Ricardo's use of the term "capital" to
refer to the funds transferred from the private sector to government
may have confused many readers who follow Keynes and B�hm-Bawerk in
interpreting "capital" to mean only capital goods, and thus conclude
that Ricardo did not recognize the existence of excess productive
capacity in recessions. But the problem with that confusion of
"capital" with capital goods in the modern literature has been
publicized since 1990. Thus, Davis could have made a greater effort
to find consistency in Ricardo's (1: 265) recognition that, in
economic distress, "much fixed capital is unemployed, perhaps wholly
lost, and labourers are without full employment" (quoted on p. 182),
with Ricardo's views on fiscal policy rather than to accept that he
assumed full employment. That "Hollander (1979, 515) also concedes
that Ricardo adhered to a full employment model" (p. 166) is no good
reason for repeating the claim now. Besides, of what use is any
macroeconomic theory for understanding economic recessions if it is
founded on the assumption of full employment, a point Keynes (1936)
successfully used to discredit classical economics? Of course, Keynes
had no valid basis for that attribution to the classics, as has been
pointed out since 1995 and mentioned in Kates (2003).
Seventh, Davis interprets Ricardo as having argued the position of
discretionary monetary policy (chapter 7). This in spite of Ricardo's
prescription of convertibility as a means of restraining excessive
paper money creation, or under a purely paper money system, the Bank
of England having the prime duty of keeping the price level from
varying -- that is, observing a price-level stability rule. Indeed,
it would appear that Ricardo's aversion to a central bank's ability
to vary the price level and thus distort the distribution of incomes,
through the mechanism of forced-saving, led to his not prescribing
the responsibility of lender of last resort function to the Bank. The
pursuit of price-level stability assures that a central bank would
expand its notes in periods of excessive demand for money during
panics, the very condition under which the lender of last resort
function is typically urged in modern macroeconomic analysis.
Besides, Ricardo (esp. 1: 363-64; 3: 91-92) well understood that
capitals -- investment funds -- are supplied by savings, not the
quantity of money a central bank creates. Variations in market rates
of interest reflect the relative demands and supplies of such
capitals or savings. Thus, it properly is not the business of a
central bank to attempt to manipulate market rates of interest.
Instead, Davis claims that Ricardo did not advocate the lender of
last resort function for the Bank of England because that function
already had been undertaken by the Exchequer (pp. 20, 209, 221). One
would think that a person of Ricardo's brilliance, which the book
also seeks to illustrate, would have argued that function for the
Bank if he thought it was proper. It also seems strange that Davis
sees nothing wrong with a suggestion attributed to Thornton, namely,
that "the Bank might amass a hoard [of gold] sufficient to fund an
external drain for up to two years" (p. 212), as a viable, let alone
sensible, monetary policy. From where does the Bank, a private
corporation, find the means to engage in such a loss making
proposition? It would, it seems to me, also be unwise even for a
state corporation to do the same. But Davis holds the suggestion to
be "vastly superior" to Ricardo's position.
Davis attempts to play up his perceived analytical superiority of
Ricardo's over Smith's in the book, which I think leads to some
incorrect claims. One is that Smith assumed that "profits are
exogenously fixed" (p. 25), only to be contradicted with a quote from
Smith (p. 26n) as well as Smith's argument that profit rates are
reduced by the competition of capitals (p. 35). He also quotes Smith
as arguing that "The increase of stock, which raises wages, tends to
lower profit" (p. 170), the same inverse wage-profit relation
famously attributed to Ricardo. Ricardo indeed took a great deal of
his macro-monetary analysis from Smith, besides David Hume. J.-B. Say
also drew on Smith's _Wealth of Nations_ in formulating the law of
markets. Yet Davis accuses Smith of having failed to understand that
increases in investment would lead to increased incomes and the
demand for goods and services over time (pp. 35, 183), whereas
Ricardo understood that process as part of Say's Law. Ricardo did
criticize Smith's views on bounties, but conceded Smith's main point
that bounties misallocate capitals and raise the price level
(Ricardo, 1: 316); see also Davis's quotations of Ricardo, pp.
128-30. Ricardo employed a slightly different process to arrive at
that conclusion, particularly that the importation of money in return
for the exported corn raises the price level. But in Davis's account,
Smith was simply prone to committing the "fallacy of composition,"
and thus was wrong in his conclusion (p. 35; see also pp. 171, 183).
In the process of denigrating Smith's analysis, Davis misses a good
chance to draw a useful lesson for modern policy analysis from the
corn bounties debate, namely, that subsidizing exports in order to
encourage their domestic production does not promote overall
efficient economic growth and well-being. Davis's apparently low
regard for Smith's macroeconomic analysis also shows in his
questioning whether Smith accepted Hume's price-specie flow mechanism
(p. 8). But a careful or perhaps a sympathetic reading of Smith,
which Davis quotes (p. 8n), and the rest of Smith's chapter on money,
would indicate that he did follow Hume's monetary analysis.
Some other minor points: (1) By not keeping clearly in mind the
classical distinction between "capital" as funds from capital goods,
Davis (p. 128) gives a distorted interpretation of Ricardo's (1: 395)
explanation that "every rise of wages will have a tendency to
determine the saved capital [funds] in a greater proportion than
before to the employment of machinery. Machinery and labour are in
constant competition, and the former can frequently not be employed
until labour rises." This was not a question of Ricardo having
"recognized the theoretical possibility that _capital_ might displace
labor; but as a practical matter he associated a high stock of
physical capital with a high demand for labor" (p. 128; italics
added). Ricardo (1: 388, 395) also appears to be more illustrative of
Ricardo's view on machinery and unemployment than 1: 390, which Davis
quotes (p. 21) to make the point. (2) Davis does not explicitly
recognize that Ricardo employed the forced-saving mechanism -- the
lagged adjustment of wage rates behind changes in the price level,
which leads to increased employment when prices are rising and
increased unemployment when prices are falling -- as in Ricardo
(9:20), "We know from experience that the money price of labour never
falls till many workmen have been for some time out of work" (cited
on p. 140n). But by asserting that Ricardo recognized that wages and
prices are flexible (pp. 40, 127), Davis appears to land Ricardo in
the midst of Keynes's mythical group of classical economists who did
not recognize that wages typically are rigid in the short run. (3)
Since Keynes's time, modern macroeconomists have tended to associate
investment with only the purchase of capital or producers' goods.
Thus, by characterizing Malthus's concerns with "oversaving" as his
having been concerned over "excessive investment" or "the production
of capital goods" (pp. 176-81), Davis likely gives the wrong
impression of Malthus's argument. Increased saving in the quotations
cited refers to the diversion of funds from the employment of
"unproductive" laborers, such as service workers, to more employment
of "productive" laborers, including those in manufacturing or
agriculture.
I think it would help to encourage modern economists to appreciate
the value of reading the classics if historians of economic thought
drew useful lessons in terms of theoretical analysis and appropriate
policy formulation from the classical literature. Otherwise, dwelling
upon their disagreements may rather give the impression that the
history of economic thought is mostly about "the wrong ideas of dead
men," and the time spent reading that literature is little more than
a "depraved form of entertainment." Much, indeed, still can be
learned from the work of David Ricardo by macroeconomists and
monetary analysts. Davis's book shows, for example, the importance to
Ricardo of employing relevant data to evaluate economic arguments. In
the absence of national income accounts data, Ricardo relied upon tax
revenues as well as Bank of England financial records to gauge the
economy's performance in the early nineteenth century. That lesson
alone perhaps makes the book worth reading. My criticisms mostly have
been occasioned by Davis's failure to make much more of the material
at hand to inform modern macro-monetary analysis and his failure to
have utilized more recent materials relevant to his study. Perhaps I
might have been less disappointed with the book, had it been titled,
"The Historical Foundations of Ricardo's Macroeconomics."
James C. W. Ahiakpor is Professor of Economics, California State
University, East Bay, Hayward, CA. He is the author of "Ricardo on
Money: The Operational Significance of the Non-Neutrality of Money in
the Short Run," _History of Political Economy_ 17 (Spring), 1985:
17-30; "Say's Law: Keynes's Success with its Misrepresentation," in
Steven Kates, editor, _Two Hundred Years of Say's Law_, Cheltenham,
UK: Edward Elgar, 2003:107-32; _Classical Macroeconomics: Some Modern
Variations and Distortions_, London and New York: Routledge, 2003;
and editor of _Keynes and the Classics Reconsidered_, Boston: Kluwer
Academic Publishers, 1998.
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