Capital accumulation, technical progress and economic growth
Say’s law Ricardo advocated what is known as Say’s law, but it is important to see precisely what he meant by it. He stated that there cannot “be accumulated in a country any amount of capital which cannot be employed productively, until wages rise so high in consequence of the rise [of the prices] of necessaries, and so little consequently remains for the profits of stock, that the motive for accumulation ceases” (Works I: 290; see also Gehrke and Kurz 2001).
In this regard Ricardo followed Adam Smith who had insisted that any act of savings will swiftly lead to an act of investment of the same magnitude, so that there cannot be a lack of aggregate effective demand and a corresponding “general glut” of commodities that would depress profits, as Malthus had contended. There may be disequilibria in single markets, “but this cannot be the case with respect to all commodities” (Works I: 291).Say’s law in this conceptualization applies only to commodities whose production is motivated by the aim of making profits, but does not apply to labour as in later theory, beginning with the wage fund doctrine and leading up to the marginalist concept of the labour market. It thus does not imply any tendency towards the full employment of labour. This becomes very clear in the famous chapter “On Machinery”, added to the third edition of the Principles (1821), in which Ricardo discussed a form of technical progress that is detrimental to the labouring class, because it is accompanied by lasting unemployment. The latter can only be removed, if due to an increase in profitability capital accumulation accelerates and increases the “demand for hands”.
A falling tendency of the rate of profits Setting aside improvements in agriculture and elsewhere in the system and assuming a given and constant real wage rate, an extension of the cultivation of land, while increasing the surplus product, involves an ever larger part of it being appropriated as differential rent and an ever smaller one as profits.
The landed gentry benefits from economic growth to the detriment of the capitalist class. Ricardo emphasized that the “natural tendency” of the rate of profits therefore is to fall (Works I: 120). This fall is neither due to an intensified “competition of capitals”, as Smith had contended, nor to an increase in the real wage rate. It is rather due to diminishing returns in agriculture (and mining). This does not mean that Ricardo was a technological pessimist; he in fact saw improvements in all sectors of the economy as thwarting time and again this “natural tendency”. This brings us to Ricardo’s view of the technological dynamism of modern society.Different types of technical progress Ricardo was clear that technical change was an essential part of the development of modern society and that different types of it have to be distinguished because they typically have different effects (see also Schefold 1976). He saw the historical course of an economy as largely shaped by two opposing forces: the “niggardliness of nature”, on the one hand, and man’s ingenuity and creativity reflected in new methods of production and new commodities, on the other. Ricardo also saw clearly that new technical knowledge may at first not be adopted, because it would not be profitable to do so, but may be adopted at a later time as a consequence of the economic environment having changed from within: this is the case of what later was called “induced technical change”.
Already in The Essay on Profits of 1815 Ricardo wrote: “we are yet at a great distance from the end of our resources, and... we may contemplate an increase of prosperity and wealth, far exceeding that of any country which has preceded us” (Works IV: 34). In a letter to Hutches Trower on 5 February 1816 he concluded from a fall in grain prices since 1812 that “we are happily yet in the progressive state, and may look forward with confidence to a long course of prosperity” (Works VII: 17). Also, in his entry on the “Funding System”, published in September 1820, he stressed with regard to England that “it is difficult to say where the limit is at which you would cease to accumulate wealth and to derive profit from its employment” (Works IV: 179). The widespread view (see, for example, Rostow 1990: 34, 87; and more recently Blaug 2009; Solow 2010) that Ricardo saw the stationary state lurking around the corner cannot be sustained.
It seems to mistake Ricardo’s method of counterfactual reasoning for factual statements about economic development.Ricardo studied various types of technical progress and their effects. In chapter II of the Principles the focus is on land and capital alias labour-saving forms of improvements in agriculture (see Gehrke et al. 2003). In the machinery chapter the emphasis is on improvements in the production of necessaries (see Eltis 1984; Kurz 2010). While Smith had seen the manufacturing sector as essentially producing only luxuries, Ricardo can be said to have glimpsed its key role in economic development. He even contemplated the limiting case of a fully automated system of production and observed: “If machinery could do all the work that labour now does, there would be no demand for labour. Nobody would be entitled to consume any thing who was not a capitalist, and who could not buy or hire a machine” (Works VIII: 399-400).
Technical progress, Ricardo was clear, was not an unambiguous blessing for all members of society. The system, he now maintained, may experience prolonged periods of what later was called “technological unemployment”. In short, maximizing profits and maximizing employment levels are different things, contrary to what Ricardo had thought before the third edition of his magnum opus. He explained:
My mistake arose from the supposition, that whenever the net income [profits] of a society increases, its gross income [net income plus wages, which equal a year’s labour] would also increase; I now, however, see reason to be satisfied that the one fund, from which... capitalists derive their revenue, may increase, while the other, that upon which the labouring class mainly depend, may diminish, and therefore it follows... that the same cause which may increase the net revenue of the country, may at the same time render the population redundant, and deteriorate the condition of the labourer. (Works I: 388)
In the chapter “On Machinery” Ricardo constructed an example that was designed to illustrate precisely this possibility.
Since the progressive replacement of labour by fixed capital is a characteristic feature of modern economic development, the case under consideration is of great relevance. Marx translated Ricardo’s particular case into a rising “organic composition” of capital - the ratio between dead labour incorporated in capital goods and living labour actually performed - and interpreted it as the form of technical progress induced by the capitalist mode of production (see Kurz 1998: 119). The labour displacing effect is taken to give rise to an “industrial reserve army of the unemployed”. Marx contended that this particular form of technical progress is also responsible for a falling tendency of the general rate of profits, because by increasing the organic composition it decreases the maximum rate of profits. However, Marx’s reasoning cannot be sustained.As regards induced innovations, Ricardo pointed out that “Machinery and labour are in constant competition and the former can frequently not be employed until labour rises” (Works I: 395). According to the natural course of things, necessaries (in particular corn) tend to become more expensive and, for a given real wage rate, money wages tend to rise. However, “The same cause that raises labour [money wages], does not raise the value of machines [which are produced under constant or even increasing returns], and, therefore with every augmentation of capital, a greater portion of it is employed in machinery” (Works I: 395). An endogenous change in relative prices and the money wage rate may eventually induce the adoption of an invention, which at first had fallen flat to the ground.