----------------- HES POSTING ----------------- 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. ------------ FOOTER TO HES POSTING ------------ For information, send the message "info HES" to [log in to unmask]