Myths about Ricardo
According to John Maynard Keynes (1972: 95, 98; hereafter CW X), “Ricardo was the abstract and a priori theorist” - a man “with his head in the clouds”. Ricardo did indeed defend economic theory against the “vulgar charge” of those who are “all for fact and nothing for theory.
Such men can hardly ever sift their facts. They are credulous, and necessarily so, because they have no standard of reference” (Works III: 160, 181). However, this does not mean that he did not care for facts. Ricardo was a man with a considerable practical sense, experience and financial success. A stockjobber, his knowledge about money, finance and banking came second to none in his time, and there is compelling evidence that he kept abreast with the latest technical and organizational improvements in agriculture, manufacturing, commerce and trade (see Davis 2005; Morgan 2012).Another myth says that Ricardo’s doctrine of value and distribution “is radically fallacious” since it involves more unknowns than equations (Jevons 1871 [1965]: 258-9; see also Walras 1874 [1954]: s. 368; Schumpeter 1954: 569). Yet as Knut Wicksell ([1893] 1954: 34-40) already argued, this criticism cannot be sustained. It resulted from looking at Ricardo’s surplus approach as if it was an early marginalist or demand-and-supply explanation of income distribution. Yet, Ricardo explained the real wage rate and the rate of profits asymmetrically, taking the former as given and ascertaining the latter residually, and not symmetrically, as the marginalists, in terms of the demand and supply of labour and capital.
A further myth is that Ricardo was “piling a heavy load of practical conclusions upon a tenuous groundwork” - the so-called “Ricardian vice” (Schumpeter 1954: 1171). While Ricardo frequently employed bold cases to “elucidate” the principle at hand and to draw attention to what in his view were the most important aspects of the problem under consideration, he did not seek to prevent his readers from trying out less restrictive assumptions, nor did he himself abstain from doing so.
Ricardo heralded an approach in economics that requires a clear statement of the premises from which policy recommendations are derived. What Schumpeter chastised as a vice is nowadays considered a virtue (see Kurz 2008).It is frequently contended that Ricardo was a staunch advocate of Malthus’s “law of population”. While Ricardo invoked the “law” in his discussions with Malthus about value and distribution, he did so because then the real wage rate could be taken as a given magnitude, which rendered the explanation of profits in terms of the surplus product a great deal easier. This does not mean that Ricardo endorsed the law. He rather stressed the historical and social dimensions of the natural wage (Works I: 96-7) and insisted that “population may be so little stimulated by ample wages as to increase at the slowest rate - or it may even go in a retrograde direction” (Works I: 169). “Better education and improved habits” may break the connection between population and necessaries (Works II: 115). Workers may get “more liberally rewarded” and thus participate in the sharing out of the surplus product (Works I: 48). If this happens to be the case for a longer period of time, a sort of ratchet effect may be observed: the higher real wages become customary and define a new level of “natural” wages. As early as in the Essay on Profits, Ricardo stressed that “it is no longer questioned” that improved machinery “has a decided tendency to raise the real wage of labour” (Works IV: 35; see also VIII: 171; Jeck and Kurz 1983). More generally, the concept of “natural wages” in Ricardo is defined with reference to the wealth of a society and the growth regime experienced. Ricardo thus felt the need to replace the concept of a given real (that is, commodity) wage rate by a share concept, or “proportional wages” (Sraffa 1951: lii), that is, “the proportion of the annual labour of the country... devoted to the support of the labourers” (Works I: 49). It was on the basis of this wage concept that he asserted his fundamental proposition on distribution: the rate of profits depends inversely on proportional wages (see Gehrke 2011).