RICARDO ON ECONOMIC POLICY
On most points of public controversy in his day Ricardo accepted and extended the mainstream of classical thinking. With respect to the Poor Laws he maintained that 'every friend to the poor must ardently wish for their abolition',16 though, with Malthus, he recommended that relief payments should be withdrawn gradually.
In general, he opposed government intervention in economic activity and endorsed the beneficence of a selfregulating market system, the virtues of which he defended against Malthus's doubts about the efficacy of Say's Law.17His most important contribution to debates on policy focused on the issue that had originally inspired his investigations - the Corn Laws. Ricardo advocated repeal, but with a more powerful battery of arguments than had earlier been mustered. With the aid of his analytical model it could now be demonstrated that the Corn Laws were objectionable - not simply because they obstructed the free movement of resources - but, more importantly, because they tightened the squeeze on profits, the mainspring of sustained economic expansion.
In support of his arguments for free trade in agricultural products, Ricardo worked out the basic format of the doctrine that now enters introductory textbooks as the theory of comparative advantage. He formulated the problem in terms consistent with his general approach: by way of a comparison between the labour inputs required to obtain commodities from home production in different countries. If cost ratios of internationally tradeable
commodities (measured in terms of labour inputs) differed in the home economies of two countries, each could benefit by specializing in the production of the good in which it held a comparative advantage (and offering part of the output for export) and by importing its requirements of the other. In this fashion, gains from trade would accrue to all parties.
A greater quantum of output could be acquired than would have been possible through exclusive reliance on domestic resources.But it was not simply the general gains from specialization and trade that Ricardo wished to emphasize. It was important that British trade should flow in channels that would arrest the erosion of profits. Thus it was not a matter of indifference which goods predominated in the trading pattern. On the contrary, the national interest was best served when imports were concentrated on foodstuffs, with British manufacturers supplying the exports to pay for them. Specialization along these lines would reduce pressures on money wage rates by making subsistence goods available at lower cost than would otherwise have been possible. As Ricardo argued the point:
If, therefore, by the extension of foreign trade, or by improvements in machinery, the food and necessaries of the labourer can be brought to market at a reduced price, profits will rise. If, instead of growing our own corn, or manufacturing the clothing and other necessaries of the labourer, we discover a new market from which we can supply ourselves with these commodities at a cheaper price, wages will fall and profits rise; but if the commodities obtained at a cheaper rate, by the extension of foreign commerce, or by the improvement of machinery, be exclusively the commodities consumed by the rich, no alteration will take place in the rate of profits.18
The realization of the full benefits of international trade required, however, a sound international financial system. Ricardo's views on monetary and financial questions - which left a formidable imprint on the thought of his time - were dominated by this concern. The domestic monetary system, he maintained, should be regulated to insure against disruption in the international division of labour. Conceivably, increases in the note issue at home might threaten a country's trading position should they lead to price increases that made its exports less competitive in foreign markets and imports more attractive in home markets.
These considerations led Ricardo to adopt what was described as a 'bullionist' position in the debates of the time. He maintained that the domestic money supply should be directly tied to the country's gold supply. Under such an arrangement, the note issue of a country suffering a loss of gold through an unfavourable balance of trade would automatically be contracted. A reduced money supply would tend to depress the price level which, in turn, would encourage the desired adjustments in the international accounts. The deficit country's exports would become more attractive to foreigners while imports could compete less successfully in home markets as the prices of domestically-produced items declined. In embryonic form, Ricardo had sketched the theory of the nineteenth century gold standard.Considerations of the problems of growth also informed Ricardo's t respect to matters of taxation. Though he was at one with the mainstream tradition in his suspicion of government intervention in the economy, he re
some necessary functions could only be discharged on the public account. In the choice between various types of tax levies that might be used to finance these services, one consideration was paramount: that taxes falling on profits should be minimized, if not avoided altogether. He was aware, of course, that the impact of taxation could not always be easily ascertained. If wages were at the 'subsistence' level, for example, a tax on labourers would be shifted to capitalists; the latter would be obliged to increase money wage rates by an amount sufficient to maintain subsistence standards. From the point of view of the future expansion of the economy, taxes that threatened to choke accumulation from profits were undesirable. Far preferable were levies that fell on unproductive spenders and expenditures, particularly on the rent share of income and on luxury consumption.