Ricardo’s method of analysis
The theory Ricardo sought to elaborate shared with Adam Smith’s important features. First, the theory had to be general in the sense that it had to deal with the economic system as a whole and the interlocking of its various parts.
Second, it had to come to grips with the capitalist economy’s inherent dynamism, a system that is continually changing from within because of capital accumulation, population growth, the scarcity of renewable (land) and exhaustible (mines) resources, and technological change. What are the laws governing the system and, especially, what are the laws governing the distribution of a growing social product among the different strata of society - workers, capitalists and landlords? Third, Smith and Ricardo studied the system in terms of what is known as the long-period method. It focuses attention on a comparison of situations in which, in the ideal case of free competition, a uniform rate of profits and uniform rates of wages and of rents for each particular quality of labour or of land are obtained. Competitive forces are taken to let “market prices” and the distributive variables gravitate towards (or oscillate around) their “natural” levels. The latter were seen to reflect the persistent and systematic forces at work in the economic system, whereas the former also reflect the impact of temporary and accidental forces. Natural prices, wages and so on are the theoretical magnitudes on whose explanation the classical authors focused attention on the grounds that market prices would commonly not deviate by too much and for too long from their “centres of gravitation”, that is, their natural levels (see Works I: 92).In a first step of the analysis Ricardo typically studied the situation of an economy in a given place and time. In a second step he then investigated the path the economy would take according to the “natural course of things”.
By this he meant the path the system would hypothetically follow, if there were no further technological progress or “improvements”. The order according to which lands of different “fertility” will be cultivated upon the first settling of a country, as discussed in his chapter II, “On Rent”, reflects well Ricardo’s method of counterfactual reasoning: the system expands, but technical knowledge is taken to be frozen. In a third step he then expounded the effects of different types of technical progress on income distribution and economic growth.The focus of much of Ricardo’s analysis is on steps one and two. Setting aside technical progress was motivated by the fact that little can be known today about future technical breakthroughs. What could at most be done was to assess the impact of different well-specified forms of improvements on the economic system. This procedure appears to have misled some commentators to see in Ricardo a technical pessimist, who expected the stationary state to lurk around the corner - which is another myth (see Kurz 2010: 1184, 1195).