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Ricardian Economics in Historical Perspective
Tim Davis
In a Guest Editorial of 1996, James Henderson argued that
research in the history of economics ought take into account
the historical context in which economists developed their
ideas. I agree with the methodology Henderson proposes, for it
enables us to understand better the process by which economic
ideas evolved. It also helps us identify the substance of an
author's work, and, inasmuch as this is true, the methodology is
essential to correctly charting the history of economic ideas.
My intent in this editorial is to demonstrate the extent to
which our appreciation of an author's contribution to economics
is conditioned on the historical context in which we view his
works. For this purpose I will be referring to the works of David
Ricardo.
Ricardo is often criticized by historians of economic thought for,
among other things, advancing a dogmatic version of the law of
markets in the face of evidence-notably the depression after the
Napoleonic Wars-contradicting that theory. His apparent use of an
extreme version of Say's Law leaves authors sympathetic to him
perplexed. Even his greatest friend, Sam Hollander [(1979) pp.512,513],
in the same passage where he argues that-interpreted in the context
of his complete works-Ricardo can be shown not to adhere to a
strict version of the law of markets, proves unable to defend
Ricardo's treatment of the postwar depression:
"On a balance of the foregoing considerations the valid deduction
would appear to be that Ricardo, despite his occasional strong
statements (and despite his criticism of Say on the need for
'counter-commodities') adhered to that version of the law of markets
labelled 'Say's Equality,' which allows for temporary deviations
between the money values of commodities supplied and demanded, that
is, for temporary excess demand for money. We are not, however, yet
out of the woods. For as we shall now see, in his analysis of the
post-war depression Ricardo failed to recognize the relevance of
temporary excess money demand."
O'Brien [(1982) p.21], whose views represent authors less
favourable to Ricardo, responds to Hollander's passage saying:
"It seems to me that Hollander, in his charitable zeal to do the
best by Ricardo, is determined to drag Ricardo right out of the
woods, even if this means demolishing a lot of timber in the
process. This impression is further accentuated by something which
is very apparent throughout the discussion but particularly in the
section on the post-war depression. For by confining himself to the
Ricardo-Malthus correspondence, the notes on Malthus, and the
published volumes generally, the wider debate is almost totally
omitted."
Peach [(1993) pp.133,134] similarly criticizes Ricardo's treatment
of the postwar experience on the grounds that Ricardo regarded
hoarding and a lack of investment as "almost immaterial". His views
are echoed by Gilbert [(1996) p.308]: "[Ricardo's] refusal to
recognize the depth of the economic crisis following the Napoleonic
war, his repeated assurances to Malthus that prosperity would soon
arrive...all prove how justly Ricardo has been convicted of the
Ricardian Vice."
The criticisms by O'Brien and others are based, in part, on a
stylized economic history, according to which Britain entered
a decade-long depression at the close of the Napoleonic Wars
(the wars ended in June 1815) such that all branches of trade
were stagnant, unsold commodities glutted markets, and labourers
suffered chronic unemployment. The account attributes the postwar
depression to a deficiency of aggregate demand, coupled with an
ill-advised contraction of the money supply. As part of this story
Ricardo is blamed for having aggravated the depression since,
blinded by an attachment to Say's Law, he advanced the ruinous
policy of Resumption.[1]
Anyone who begins with this stylized history will likely conclude
that Ricardo used an extreme version of the law of markets to
interpret the economic events of his day and as the basis for
his proposals regarding monetary policy. The conclusion cannot
help but colour our perception of Ricardo's contribution to
economics-in particular, he seems to have advanced an abstract
macroeconomic model of little value then or now. This, I say, is
the conclusion we reach if we adopt the stylized account of
historical events. It is not, however, the conclusion I have reached.
In my doctoral study of Ricardo [Davis (1998)] I adopted a
methodology similar to that proposed by Henderson -- that is, I
assessed his works from the perspective of a financier and member
of Parliament living through the early 19th Century. This approach
led me to reconstruct the history of the period as it appears in
popular periodicals[2] and public reports, specifically Parliamentary
reports Ricardo mentions in his correspondence or in his published
works.[3] Part way through my research I realized that the stylized
account of the postwar period, implicit in the writings of O'Brien,
Peach, and even Hollander, bears little relation to actual events.
And it is from this fundamental point of divergence that I developed
a view of Ricardo as an economist, well informed about current events,
who understood these events in terms of plausible economic theories,
and who made responsible recommendations as to monetary and fiscal
policies on the basis of his theories.
I reached these conclusions, in part, because I interpreted Ricardo's
work in an historical context different from that used by other
authors. For contrary to the stylized history I described earlier,
there was no prolonged depression in the decade following the
Napoleonic Wars. Instead, there were two agricultural depressions[4]
and two depressions in trade and manufacturing.[5] Neither of the
agricultural depressions resulted from a lack of aggregate demand
or from monetary contraction, rather, high domestic yields coupled
with abundant corn imports worked in both instances to depress corn
prices. Similarly, neither depression in trade and manufacturing can
be attributed to a chronic lack of consumption. And though poor
management of the money supply played a role in both depressions,
monetary contraction was not the underlying cause of either. Instead,
the first crisis was a consequence of the chaos at the end of the war
and British manufactures adjusted to peace-time production,[6] and
the second crisis largely resulted from a sudden decline in the demand
for British exports. This decline occurred simultaneously, but for
different reasons, in each of the Britain's principal markets: on the
Continent there was a financial crisis, triggered by the Bank of
France protecting its silver reserves; in South America the outbreak
of war closed markets for a time; and in North America the fledgling
U.S. banking system effectively collapsed.
When I compared Ricardo's account of the postwar experience with
actual events, I concluded that his explanations were reasonable.
He described both agricultural crises exactly as they occurred. His
accounts of the depressions in trade and manufacturing are also
meritorious. There was, as he said, a significant temporary
dislocation of capital immediately after the war. It took the economy
two years to adjust to the shock, but by mid-1817 most industries
had returned to normal production. Ricardo also understood that the
depression experienced in Britain from early 1819 to mid-1820 resulted
from a decline in the demand for exports. He regarded the setback as
temporary and predicted that the economy would recover once trade
resumed its normal channels. The prediction proved correct, for the
demand for exports regained normal levels by mid-1820 and, concurrently,
British manufactures returned to full employment.
With regard to Ricardo's policies, his recommendation that the Bank
of England be forced to return to the gold standard cannot be
considered irresponsible. It is true that the legislation passed at
a time (the Summer of 1819) when many regions of Britain were
suffering unemployment. But the Resumption Act did not require the
Bank to take up the gold standard immediately, in fact, the Bank had
three years to make the transition. And in any event, Britain's
economic troubles partly stemmed from the fact that the Government
and the Bank, acting in tandem, had long mismanaged the currency.
It seemed to Ricardo that the only way to end this abuse was to pass
legislation similar to the Resumption Act. The Whigs attempted this
for years, but had on every occasion been foiled. When finally the
opportunity came in early 1819, the alternative policies facing
Ricardo were not, on the one hand, passing the Resumption Act, and,
on the other, adopting a more responsible policy. Rather, the choice
was between passing the Act or allowing the Bank and the Government
to continue mishandling the currency.
In sum, I found that the historical context in which I interpreted
Ricardo's works led to very different conclusions about his
contribution to economics. Instead of merely viewing Ricardo as
a builder of abstract models, I realized that his economic theories
explained current events fairly well. And not only that, but the
policies he proposed also appear responsible in the prevailing
circumstances.
Notes
1. The 1819 Resumption Act required the Bank of England to return
to the gold standard.
2. Notable periodicals were the Edinburgh Review, the Farmers
Magazine, the Scots Magazine, Blackwoods, the Quarterly Review
and the Annual Register.
3. Thousands of reports covering all aspects of the Empire were
prepared for Parliament. Reports on crucial variables, such as the
money supply or the level and pattern of foreign trade, appeared
quarterly, or even more often if needed.
4. The first period of low corn prices lasted from the harvest of
1813 to the Spring of 1816. The second agricultural depression
began in 1820 and continued till 1823 or 1824.
5. The first depression began in mid-1815 and lasted till early
1817. The second depression began in early 1819 and last till the
Summer of 1820.
6. Between 1815 and 1817 military expenditures "diminished by
about fifty millions" according to the Edinburgh Review [(June 1816)
p.262]. This reduction accounted for nearly 18% of aggregate
demand and it caused havoc in war-related industries.
References
Davis, Timothy. 1998. David Ricardo's Macroeconomics. Ph.D. diss.,
University of Toronto.
Gilbert, Geoffrey. 1996. Review of Interpreting Ricardo, by Terry
Peach. History of Political Economy 28 (2): 307-309.
Henderson, James. 1996. The Whig History of Economics is Dead-
Now What? Guest Editorial, HES List, 11 November 1996.
Hollander, Samuel. 1979. The Economics of David Ricardo. Toronto.
O'Brien, D.P. 1982. "Ricardian Economics." Oxford Economic
Papers 34 (2): 247-252.
Peach, Terry. 1993. Interpreting Ricardo. Cambridge.
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