Comments (4)

• Giancarlo de Vivo says:

  May 7, 2013 at 9:08 am

  In this paper, Meoqui aims at giving a precise definition and getting to a deeper understanding of the principle of comparative advantage, in order to fully appreciate the superiority of Ricardo’s formulation over Torrens’s statement in his 1815 Essay on the External Corn Trade. I find the paper is not very successful in its aim.

  One must clearly distinguish between the classical and the neoclassical comparative advantage argument for specialization. The vital difference is in the nature of the comparative advantage (or comparative cost: I would regard the two expressions as equivalent). For classical it is here meant Ricardo unless otherwise stated.

  Differences in comparative costs for Ricardo can only derive from differences in the conditions of production. Variations in wages do not affect prices [see endnote 1, below], and cannot influence relative (i.e. comparative) costs (amounts of labour necessary to produce different commodities). In the neoclassical conception of comparative costs there is instead no need for technology to be different in the two countries to have a difference in comparative costs: this difference originates in differences in relative scarcities of factors of production and acts through their prices; it may well exist between two countries which have the same production functions. In fact the usual textbook version of the so-called Heckscher-Ohlin theory assumes identical production functions in the two countries (see e.g. Bhagwati, 1969, p.9), though important discussions of the problem within neoclassical theory (e.g. Wicksell’s) assume differences in technical conditions of production.

  A first statement of Meoqui’s with which I would take issue is that “Ricardo presented the comparative-advantage proposition … not as a general … economic law … like the neoclassical theory”. I think that both Ricardo and the neoclassicals formulate a “general economic law”. But they formulate different laws, as I have explained above: one (Ricardo) states that specialization is determined (or ought to be guided) by relative labour productivity, the other (the neoclassicals) state that specialization ought to be guided by relative scarcity of factors of production.

  According to Ricardo, differences in the relative labours necessary to produce the same two commodities in two different countries make specialization convenient, in the sense that the total amount of commodities produced by the two countries rises if there is specialization. (Following Viner, Meoqui calls embodied labour the “real cost” of the commodities, I would rather avoid this expression as Viner is a bit muddled about what “real cost” means [see note 2].) It is then verily possible that a country imports a commodity which could be produced with less labour at home. Say the conditions of production are the following:

  England:
  1 unit of labour produces 1 unit of cloth
  1 unit of labour produces 1 unit of wine

  Portugal:
  1 unit of labour produces 0.1 units of cloth
  1 unit of labour produces 0.5 units of wine

  England has an absolute advantage in producing both commodities, but the advantage is bigger in the production of cloth.

  If England moves 1 unit of labour from the production of wine to the production of cloth and Portugal moves 10 units of labour from the production of cloth to the production of wine the total amounts produced will be:

  – production of cloth stays equal (1 unit more produced in England, 1 unit less produced in Portugal)
  – production of wine rises by 4 (1 unit less produced in England, 5 units more produced in Portugal).

  Thus as a whole the amounts produced will increase if England specializes in cloth, and Portugal in wine. This implies it is convenient for England to import a commodity (wine) which would require less labour to be produced at home.

  This could be tabulated thus:

  	Cloth	Wine
  England	1	1
  Portugal	0.1	0.5

  Moving 1 unit of English labour from production of wine to production of cloth, and moving 10 units of Portuguese labour in the opposite direction would give:

  	Cloth	Wine
  England	+1	-1
  Portugal	-1	+5
  	0	+4 gains from trade

  If Portugal and England exchanged wine and cloth in a proportion of 1 unit of cloth for 1 unit of wine (the relative labours necessary to produce them in England) England would have no benefit from trade, and the whole increase of production would accrue to Portugal (for each unit of labour devoted to producing the cloth to be given in exchange for the wine imported from Portugal, England would receive 1 unit of wine, exactly the amount she would have obtained if she had employed that unit of labour to produce the wine at home; Portugal would instead receive from England the same amount of cloth she has foregone in order to produce more wine, and keep the 4 extra units of wine produced). If 1 unit of cloth exchanged instead for 5 units of wine (the relative labours necessary to produce them in Portugal) the whole benefit would accrue to England (England would obtain the same amount of cloth she had before, paying the extra unit of cloth produced to obtain wine from Portugal, and 5 units of wine, in exchange for the unit of cloth she sells to Portugal, and therefore will be 4 units of wine better off; for each unit of labour devoted to producing the wine to be given in exchange for the cloth imported from England, Portugal would receive exactly the amount of wine she would have obtained if she had employed that unit of labour to produce the wine inland). Every other exchange rate (within those limits: 1W/1C, 5W/1C) would make both countries gainers from trade (i.e. the 4 units of wine which represent the gain from trade would be divided among the two countries). It is important to realize that Ricardo has no condition to determine the terms of trade, he leaves them indeterminate within the limits mentioned.

  The labour values of the two commodities within each country (i.e. the relative embodied labours in the two commodities in the two countries) give the limits within which relative prices can settle, but cannot give anything more. It is not so much that the labour value rule does not apply, as Meoqui states, but that there is no labour value rule – each commodity has two labour values: that given by the conditions of production of England, and that given by the conditions of production of Portugal. There is no theoretical proposition behind this. Meoqui states that the comparative-advantage proposition is a “corollary of the non-appliance of the labor theory of value in international transactions” and that this “derives from the fact that Ricardo could not have proven the comparative-advantage proposition if the amounts of cloth and wine traded had to be produced with the same amount of labor”. This seems to me a bit like saying that the law of gravity is a corollary of the existence of the earth because if there were no earth there would be no gravity.

  Meoqui states that the comparative advantage rule is that “a country might import a certain amount of a commodity although it could produce the same amount internally at lower real cost [i.e. with less labour]”, I would rather say that this is not the comparative advantage principle: in fact applying the comparative advantage principle does not necessarily imply that a country would import a commodity which could be produced internally at a lower labour cost. The comparative advantage principle is that it is convenient to specialize in the production of the commodity in which the country has a comparative advantage, i.e. for the production of which the country uses comparatively less labour. Criticizing Viner, who gives basically this definition of comparative advantage, Meoqui writes: “Viner’s statement … just isn’t very helpful for the purpose of defining comparative advantage, since one cannot offer a proper definition of a concept by recurring to the very same concept. What does it actually mean to enjoy a comparative advantage in terms of real costs?”. I would say it simply means to enjoy a comparative advantage in terms of the labour necessary to produce the two commodities, as in my example above; it defines comparative advantage perfectly well.

  Meoqui quotes the following statement from James Mill’s Principles [see note 3]: “If a quarter of corn is produced in England with 50 days’ labour, it may be equally her interest to import corn from Poland, whether it requires, in Poland, 50 days’ labour, or 60, or 40, or any other number. Her only consideration is, whether the commodity with which she can import a quarter costs her less than 50 days’ labour”. Meoqui claims that this passage makes it “absolutely clear” that “the comparative advantage proposition is a logical implication of the classical rule of specialization”. By “classical rule of specialization” Meoqui means what Viner had called “the eighteenth century rule”, i.e. the rule that “it pays to import commodities from abroad whenever they can be obtained in exchange for exports at a smaller real cost than their production at home would entail” (Viner, 1937, p.440). Viner adds that “the sole addition of consequence which the doctrine of comparative costs made to the eighteenth-century rule” is the “explicit statement that imports could be profitable even though the commodity imported could be produced at less cost at home than abroad … Its chief service was to correct the previously prevalent error that under free trade all commodities would necessarily tend to be produced in the locations where their real cost of production were lowest” (p.441). Meoqui accepts Viner’s position, thus it is wrong for him to say that “the comparative advantage proposition is a logical implication of the classical rule of specialization”: if it corrects a mistake of the classical rule of specialization it cannot implied in it [see note 4].

  Meoqui states that the comparative advantage principle is absent from “the most important trade-policy debate in England between 1815 and 1846: the repeal of the Corn Laws”. He writes that “Perhaps the key reason” for this is “the fact that this proposition [comparative advantage] is built upon and logically intertwined … with the classical rule of specialization”. I do not see how this could explain the alleged fact that the comparative advantage principle was not used in the Corn Law debates. Meoqui writes that “Ricardo and James Mill … considered the real cost comparison between countries – which is the one emphasized by the comparative-advantage proposition – as irrelevant for the interest of a country in a particular exchange”. This according to him is proved by Ricardo’s statement that “It can be of no consequence to America, whether the commodities she obtains in return for her own, cost Europeans much, or little labour; all she is interested in, is that they shall cost her less labour by purchasing them than by manufacturing them herself” (Ricardo, Works, II, p.383 [see note 5]). I cannot see how this statement could furnish a rationale of the alleged non-use of the comparative cost argument in the Corn Law dispute; the statement is simply another way of putting the comparative cost argument: it is of no importance to the interest of the importing country how much the imported commodity costs to produce in the country from which it is imported, the only thing which is of interest to the importing country is whether or not the imported commodity would need more labour to be produced (in the importing country) than the labour to be used to produce the commodities which are to be exported in exchange for it. Why this point would explain the non use of the comparative advantage argument in the Corn Law debate is a mystery to me.

  About the alleged non use (by Ricardo) of the comparative advantage argument in the Corn Law debates I think the following points are important, which Meoqui does not mention or take into account.

  The fiercest debates about the Corn Laws which took place in Ricardo’s lifetime took place in 1814-15 (the Corn Law bill was passed in March 1815), when Ricardo had not yet developed the comparative advantage argument [see note 6]. Later in Ricardo’s lifetime agriculture came up in the politico-economic debate mainly for the great agricultural distress felt in 1816 and at the beginning of the 1820s – which had little to do with any application of the comparative advantage principle. Ricardo however did make use of the comparative advantage argument in his speeches in Parliament, and in his 1822 pamphlet On Protection to Agriculture, where he for instance wrote: “the farmer is placed under no comparative disadvantage, in consequence of a rise of wages” (Ricardo, Works, IV, 213). This clearly refers to what he had written in the chapter on comparative advantage of his Principles, which I have quoted above (p.1 and n.1): comparative advantage is not affected by a rise in wages. Other arguments based on the comparative advantage argument are found elsewhere in Ricardo’s pamphlet. And there is no doubt that On Protection to Agriculture had quite a resonance in the politico-economic debate: it had a great success, going through four editions in a matter of days rather than weeks [see note 7], and was even quoted by Lord Londonderry, the de facto Prime Minister, opening the debate on the report of the Agricultural Committee in the Commons (see Ricardo, Works, V, 155).

  It is however important to notice that in a sense the comparative advantage argument for Ricardo was not decisive in favour of free trade: as he had pointed out, specialization according to comparative advantage increased the riches of the countries, but did not necessarily affect their rates of profits [see note 8], and for Ricardo the benchmark against which to evaluate a policy was its effect on the rate of profits. (As a matter of fact a whole section (section VI) of Ricardo’s pamphlet On protection to agriculture was devoted to the discussion ‘On the effects of a low value of corn on the rate of profits’.)

  Coming now to the Torrens question, I completely agree with Meoqui and most economists who have dealt with this matter, that in Torrens’s 1815 Essay on the External Corn Trade there was (in a single paragraph) a statement which shows that Torrens was by then already aware of the comparative advantage criterion. In this sense, it can certainly be said that Torrens preceded Ricardo (who put forward his theory in 1817, in his Principles). It does not seem to me that Meoqui’s paper adds much to what has already been argued by most economists (starting with Jacob Hollander in 1903), who ascribed the formulation of the comparative advantage theory to Ricardo rather than to Torrens, because the statement by Torrens was a very incomplete one, made almost en passant, and not really put to any use in the Essay. There are however two important points Meoqui fails to notice. First, Ricardo not only formulated the comparative advantage principle, but also showed how in a decentralized economy free competition would bring about specialization according to this principle, this implying the whole conception of the international specie-flow mechanism, which would bring about price levels ensuring that specialization would actually take place [see note 9]. Nothing of this can be found in Torrens’s 1815 Essay on the External Corn Trade. Secondly, although Meoqui quotes my introduction to a recent reprint of Torrens’s Essay, he fails to notice that in this introduction I show that the principle of comparative advantage was already present in an anonymous tract published the year before Torrens’s Essay, a tract which Torrens had known and whose influence he had acknowledged in the preface to his Essay, so that in any case if something is due to somebody for having to some (limited) extent preceded Ricardo on comparative advantage, it is due to the (anonymous) author of that 1814 tract. Nothing is due to Torrens for priority on the comparative advantage principle [see note 10].

  Endnotes
  “[E]very diminution in the wages of labour raises profits, but produces no effect on the price of commodities” (Ricardo, Works, I, p.133).
  2 Viner (1937, p.438) writes that “the ‘real’ costs are expressed as a rule in terms of quantities of labor-time, but with the implication, as throughout the classical theory of value, that these quantities of labor-time correspond in their relative amounts within each country to quantities of subjective cost”. The “implication” Viner sees is wholly unwarranted and in fact he gives no reference for its existence “throughout the classical theory of value”. Ricardo had no notion of “subjective cost”.
  3 Meoqui consistently quotes from the 3rd (1826) edition of Mill’s Elements, I think he should rather quote from the first (1821) which is by no means identical: it is the first which is relevant for his interaction with Ricardo (in 1826 Ricardo was dead).
  4 Meoqui seems to think his position is the same as Viner’s. From what is said here in the text it would appear this is wrong.
  5 Meoqui says this statement is made by Ricardo “in a footnote”: in fact it is in one of his Notes on Malthus, which are no footnotes to anything.
  6 Torrens had very briefly and incompletely put it forward a few weeks earlier, but this is basically irrelevant, as will be argued in the section on Torrens below.
  7 It was first published about the 19th of April 1822, by the 29th it had reached a thrd edition, and the fourth followed very shortly (see Works, IV, 204-5).
  8 If specialization implied that the commodities which would cost less labour (their importation being paid for by exports produced with less labour than if the imported commodities were produced at home) were not wage goods, then it would not affect the rate of profits: “if the commodities obtained at a cheaper rate, by the extension of foreign commerce … be exclusively the commodities consumed by the rich, no alteration will take place in the rate of profits. The rate of wages will not be affected, although wine, velvets, silks, and other expensive commodities should fall 50 per cent., and con-sequently profits would continue unaltered” (Ricardo, Works, I, 132). A point like this one could not be made within the neoclassical framework, and indication of the vital difference between Ricardo’s and neoclassical arguments for free trade.
  9 I may be allowed to refer the reader to what I wrote in the entry on Ricardo in The New Palgrave (de Vivo, 1987, pp.194-5).
  10 See de Vivo (2000, xviii-xix; see also de Vivo 2010, pp.98-101).

  REFERENCES

  BHAGWATI, J. (1969). Introduction to International Trade. Selected Readings, Harmondsworth: Penguin.

  DE VIVO, G. (1987). “David Ricardo”, in The New Palgrave (J. Eatwell, M. Milgate & P. Newman, eds), London: Macmillan.

  DE VIVO, G. (2000). Introduction to vol.2 of Collected Works of Robert Torrens, Bristol & Tokyo: Thoemmes Press and Kyokuto Shoten.

  DE VIVO, G. (2010). “Robert Torrens as a ‘neglected economist’ ”, in English, Irish and Subversives among the Dismal Scientists (N.F.B. Allington & N.W. Thompson, eds), Bingley (UK): Emerald Group.

  RICARDO, D. (Works). The Works and Correspondence of David Ricardo (P. Sraffa & M.H. Dobb, eds), 11 vols, Cambridge: CUP 1951-1973

  VINER, J. (1937). Studies in the Theory of International Trade, Clifton (NJ): Kelley Reprints of Economic Classics 1975.

• Jorge Morales Meoqui says:

  May 22, 2013 at 9:50 am

  Reply to Prof. Giancarlo de Vivo

  I would like to thank Prof. de Vivo for the time he has dedicated to read and comment my paper. He is a well-known expert on Torrens, so I welcome this opportunity to have a candid exchange about the paper in the Open Peer Discussion forum.

  I have written this rather lengthy reply to de Vivo’s comments not only for reciprocating his time and effort, but also because I am absolutely convinced about the multiple benefits of the open review process as implemented in this forum. Not only the author and reviewers, but also other scholars as well, can profit from the discussion and exchange of ideas prior to the publication of the paper.

  With regard to de Vivo’s comments, I have the impression that he fails to see the contribution of this paper to the authorship-debate because he has a different definition and notion of comparative advantage. Since more than half of his comments on the paper are dedicated to this point, it is necessary to analyze it here with greater detail.

  First I would like to clarify some imprecisions when referring to my definition of the comparative-advantage proposition. De Vivo states: “Meoqui states that the comparative advantage rule is that a country might import a certain amount of a commodity although it could produce the same amount internally at lower real cost [i.e. with less labour].”

  I always refer to comparative advantage as a proposition and not as a rule because Ricardo used another rule of specialization in his famous numerical example, the one I have denominated as the classical rule of specialization. He applied this rule rather consistently throughout the Principles, as I have indicated in the present paper (footnote 9).

  In addition to this, I define the comparative-advantage proposition in the same way as Ricardo indicated in the Principles and James Mill interpreted in the letter to him and which I quote in the paper. It is important to notice that Ricardo did not object Mill’s interpretation. Furthermore, it seems to me that this proposition is also the essence of Torrens’ 1815 paragraph for which he has received some credit in the past: that England would import corn from Poland, although the former might have superior land than the latter. The expression “superior land” implies of course that English cultivator would have to invest a lower amount of labor in order to obtain the same yield as the Polish cultivator.

  As for my assertion that Ricardo did not consider the comparative-advantage proposition as a general economic law, I have explicitly based it on the fact that I haven’t found until now a single evidence for this interpretation in any piece of paper written by Ricardo. In order to refute this position, thus, de Vivo needs to show a single passage in the Principles or another document where he refers to comparative advantage as an economic law for specialization. I welcome any reference that de Vivo could provide on this specific subject.
  Perhaps our disagreement on the definition may be the result of a misunderstanding. My aim is not to offer a precise definition of comparative advantage in general, as de Vivo states. Such a task would be impossible to accomplish, since there are many different and irreconcilable definitions of comparative advantage in the literature. What I do claim is to offer a definition of comparative advantage that my opinion is the closest to Ricardo’s writings. Therefore, in order to refute the claim one should refer to specific passages in the Principles that are in contradiction with the definition I’m offering. I could not find any reference to this specific subject in de Vivo’s comments. Instead, he presents his own version of Ricardo’s comparative advantage.

  De Vivo’s definition is very similar to the one offered by Viner. It is important to take into account, though, that Viner (1937, p. 445) had an incorrect understanding of Ricardo’s numerical example, as I have stated in a previous paper (Morales Meoqui, 2011, p. 749). According to de Vivo’s definition, the comparative-advantage principle is that it is convenient to specialize in the production of the commodity in which the country has a comparative advantage, i.e. for the production of which the country uses comparatively less labour. He further (p. 1) states: “According to Ricardo, differences in the relative labours necessary to produce the same two commodities in two different countries make specialization convenient, in the sense that the total amount of commodities produced by the two countries rises if there is specialization. It is then verily possible that a country imports a commodity which could be produced with less labour at home.”

  De Vivo offers then a numerical example to illustrate his point. I believe, though, that his numerical example differs rather significantly from the one Ricardo formulated in chapter 7 of the Principles. For example, de Vivo uses unitary labor costs with the explicit assumption that they remain constant (1 unit of Portuguese labor produces 0.5 units of wine, so 10 units of Portuguese labor produces 5 units of wine). This is a reminiscence of the widespread but incorrect interpretation of Ricardo’s four numbers as unitary labor costs, which is no longer accurate (Ruffin 2002). In the HOPE paper I (Morales Meoqui, 2011, p. 749) pointed out the negative consequences of using unitary labor costs: “The comparison of cost ratios is a direct consequence of taking the unitary cost of the commodities as the starting point for establishing a comparative advantage in a specific commodity, since under such an unfortunate logical construction of the numerical example no other kind of cost comparison can be established in order to make a meaningful statement. The mere fact that the unitary real cost of a commodity is lower with respect to another, without explicitly establishing the rate of exchange between the two commodities, is hardly a sufficient criterion for producing the lower-cost commodity at home rather than importing it. Ricardo avoids this error by directly taking the real labor costs for the amounts of the commodities traded in the two countries, instead of the respective unitary real labor costs.”

  Neoclassical economists have felt comfortable with the use of unitary labor costs and the associate constant labor cost assumption because they are compatible with another widespread assumption of the neoclassical school of economic thought, namely constant returns to scale. It is important to remember that this assumption was incorporated to mainstream economic thought by neoclassical economists who were trying to solve the so-called imputation problem in order to incorporate a theory of distribution to their general theory of prices that would rival and eventually replace Ricardo’s labor theory of value. They solved it by making the unrealistic assumption that the market economy is characterized by constant returns to scale, so that production functions are everywhere “linear and homogeneous” (Buchanan & Yoon 2002, pp 402-403).

  Ricardo himself never made such an unrealistic assumption, because he knew too well Smith’s praises about the positive effect of the division of labor and the extension of the market on the productive forces of labor. What’s the point in specializing and trading if it does not lead to an increase in labor productivity, economies of scale and increasing returns to scale?
  Furthermore, the setting in de Vivo’s numerical example that England moves one unit of labor from the production of wine to the production of cloth reveals a formulation of comparative advantage in terms of opportunity costs. This approach was pioneered by the neoclassical economist Gottfried Haberler (1930), with the explicit aim of eliminating the reliance of comparative advantage on the labor theory of value. The opportunity cost approach implies of course the assumption of full employment of the factors of production. But why does England have to move one unit of labor from the production of wine to the production of cloth, if her resources are not fully employed?

  In case of applying the classical rule of specialization, as Ricardo did, one does not need the assumption of full-employment. According to the classical rule of specialization, it is just not economically wise to use more laborers in order to produce a certain amount of a commodity internally if one can obtain the same amount of the commodity from other countries in exchange for exports that cost less amount of labor.

  In addition to this, the way in which de Vivo calculates the gains from trade also differs from Ricardo’s. De Vivo (p. 2) states: “Thus as a whole the amounts produced will increase if England specializes in cloth, and Portugal in wine. This implies it is convenient for England to import a commodity (wine) which would require less labour to be produced at home.” Ricardo, however, calculates the gains from trade by applying the classical rule of specialization for each country separately. England is interested in importing the wine from Portugal instead of making it at home because it saves the labor of 20 men working for a year. England does not care nor is interested in finding out how much labor time Portugal saves with this exchange. The same is of course valid for Portugal, who gains the labor of 10 men. In Ricardo’s example, they don’t have to divide the gains from trade.

  De Vivo also argues in page 3: “The labour values of the two commodities within each country (i.e. the relative embodied labours in the two commodities in the two countries) give the limits within which relative prices can settle, but cannot give anything more. It is not so much that the labour value rule does not apply, as Meoqui states, but that there is no labour value rule – each commodity has two labour values: that given by the condition of production of England, and that given by the conditions of production of Portugal. There is no theoretical proposition behind this.” De Vivo is refuting here Ricardo – not me – who clearly stated that “the same rule which regulates the relative value of commodities in one country, does not regulate the relative value of the commodities exchanged between two or more countries (Vol. 1, p. 133). Moreover, Ricardo does not indicate any “limits within which relative prices can settle.” To the contrary, he (p. 135) states that “England would give the produce of the labour of 100 men, for the produce of the labour of 80. Such an exchange could not take place between the individuals of the same country. The labour of 100 Englishmen cannot be given for that of 80 Englishmen, but the produce of the labour of 100 Englishmen may be given for the produce of the labour of 80 Portuguese, 60 Russians, or 120 East Indians.”

  Furthermore, there is no need to guess what Ricardo might have put in place instead of his labor theory of value for the determination of international prices. John Aldrich (2004, p. 388) spots the rule in chapter 28 of the Principles, “On the Comparative Value of Gold, Corn and Labour in Rich and Poor Countries,” when Ricardo (Vol. 1, p. 375) states that “the natural price [the money cost of production] of commodities in the exporting country … ultimately regulates the prices at which they shall be sold … in the importing country.” But as I have already stated in a previous paper (see Morales Meoqui, 2011, p. 753), one can find this rule for the determination of prices in international transactions right after the famous numerical example when he states that “cloth cannot be imported into Portugal, unless it sell there for more gold than it cost in the country from which it was imported; and wine cannot be imported into England, unless it will sell for more there than it cost in Portugal” (Vol. 1, p. 137).

  So when de Vivo (p. 3) states that “it is importing to realize that Ricardo has no condition to determine the terms of trade, he leaves them indeterminate within the limits mentioned”, he should realize that he is contradicting important passages of the Principles.
  Because of the presence of the constant-labor-cost assumption, the opportunity cost approach, the use of different rules of specialization, and the differences in calculating the gains from trade, I do not regard de Vivo’s definition of comparative advantage as equivalent nor compatible with Ricardo’s numerical example in the Principles. On the contrary, I would argue that de Vivo’s numerical example reproduces a definition of comparative advantage that is deeply rooted in the neoclassical school of economic thought.
  I have analyzed de Vivo’s numerical example here with a certain degree of detail because I think it might be interesting for the reader to find out how much neoclassical theory is actually hidden beneath the misleading denomination of “Ricardo’s comparative advantage”. Therefore, I do not omit the distinction between “classical” and neoclassical definition of comparative advantage, as de Vivo affirms. I just believe that in order to formulate a truly classical notion of comparative advantage, one has to go back to what Ricardo actually wrote in the Principles.

  Let’s us turn now to the relationship between the comparative advantage proposition and two other important elements in Ricardo’s famous numerical example: (1) the proposition regarding the non-appliance of the labor theory of value to international transactions when the factors of production of not sufficiently mobile, and (2) the classical rule of specialization.
  It is important to take into consideration that I have already treated these issues extensively in a previous paper published in the journal History of Political Economy (2011). Thus, in the present paper I limit myself to offering additional evidence regarding the nature of these logical relationships, and always refer to the relevant passages of the HOPE paper in order to avoid unnecessary repetitions.

  My claim that Ricardo considered the comparative-advantage proposition as a corollary (= a proposition that follows from – and is often appended to – one already proved) of the proposition regarding the non-appliance of the labor theory of value in international transactions corresponds to the way in which Ricardo presented it in the Principles. I also refer to the HOPE paper for the proof that under the postulates of the labor theory of value he could not have formulated a numerical example in which one country has lower real costs in the production of the commodities traded and both countries gains from trade. To all this de Vivo replies that it is “like saying that the law of gravity is a corollary of the existence of the earth because if there were no earth there would be no gravity.” It seems to me that this reply is neither an appropriate nor substantive refutation to the arguments presented.
  With regard to the relationship between the comparative-advantage proposition and the classical rule of specialization, de Vivo’s refutation follows a rather tortuous path. His line of argumentation is the following: Since I accept “Viner’s position” and the later states that the doctrine of comparative costs corrects a mistake of the classical rule of specialization, I have to be wrong in calling the comparative-advantage proposition a logical implication of that rule, because if the former corrects a mistake of the later, comparative advantage cannot be at the same time an implication of the classical rule of specialization. My disagreement with Viner is well documented in the HOPE paper. I do believe though that Viner got it right when he considered comparative advantage as an addition to and possible implication of the classical rule of specialization.

  The comparative-advantage proposition does not correct the classical rule of specialization but the so-called absolute cost advantage theory. The classical rule of specialization deals exclusively with the internal cost comparison, whereas the comparative-advantage proposition deals with the external cost comparison. Therefore, the later cannot correct the former. I actually believe that Viner had the absolute cost advantage theory in mind – and not the classical rule of specialization – when he wrote that “its chief service was to correct the previously prevalent error that under free trade all commodities would necessarily tend to be produced in the locations where their real cost of production were lowest.”
  I am not convinced by de Vivo’s explanations regarding Ricardo’s non-use of the comparative-advantage proposition in the debate about the Corn Laws. This debate never ceased during Ricardo’s lifetime. In the very same pamphlet that de Vivo mentions, On Protection to Agriculture (1822), Ricardo makes at least three explicit references to the Corn Laws (See, Vol. 4, p. 244, p. 259 and p. 263).

  With regard to Ricardo’s alleged use of the comparative-advantage argument mentioned by de Vivo in his comments, I am actually curious to find a concrete evidence for this affirmation. The quote from the pamphlet that de Vivo presents is incomplete. If you look at the whole paragraph, it becomes clear that by the term “comparative disadvantage” Ricardo (Vol. 4, pp. 213-214) meant the effects of a rise of wages on farmers in comparison to other classes:
  “This whole argument is fallacious, — the farmer is placed under no comparative disadvantage, in consequence of a rise of wages. If, in consequence of taxes paid by the labouring class, wages should rise, which they, in all probability, would do, they would equally affect all classes of producers. If it be deemed necessary, that corn should rise in order to remunerate the growers, it is also necessary that cloth, hats, shoes, and every other commodity should rise, in order to remunerate the producers of those articles. Either then corn ought not to rise, or all other commodities should rise along with it.”
  I cannot figure out the way in which the above quote is related to Ricardo’s definition of the comparative-advantage proposition.

  De Vivo states: “It is however important to notice that in a sense the comparative advantage argument for Ricardo was not decisive in favour of free trade: as he had pointed out, specialization according to comparative advantage increased the riches of the countries, but did not necessarily affect their rates of profits, and for Ricardo the benchmark against which to evaluate a policy was its effect on the rate of profits. (As a matter of fact a whole section (section VI) of Ricardo’s pamphlet On protection to agriculture was devoted to the discussion ‘On the effects of a low value of corn on the rate of profits’.)”

  As one can see in the following quote from the Principles, the effects on the rate of profits is not Ricardo’s benchmark for evaluating the effectiveness of an economic policy. The benchmark is the increase of the mass of commodities. Ricardo states (Vol.1, p. 132): “It is not, therefore, in consequence of the extension of the market that the rate of profit is raised, although such extension may be equally efficacious in increasing the mass of commodities, and may thereby enable us to augment the funds destined for the maintenance of labour, and the materials on which labour may be employed. It is quite as important to the happiness of mankind, that our enjoyments should be increased by the better distribution of labour, by each country producing those commodities for which by its situation, its climate, and its other natural or artificial advantages, it is adapted, and by their exchanging them for the commodities of other countries, as that they should be augmented by a rise in the rate of profits.”

  De Vivo also states: “Meoqui consistently quotes from the 3rd (1826) edition of Mill’s Elements, I think he should rather quote from the first (1821) which is by no means identical: it is the first which is relevant for his interaction with Ricardo (in 1826 Ricardo was dead).”
  Why? Their interaction obviously ended with Ricardo’s death, but the effects of their close collaboration resonated in James Mill’s later writings as well. Of course we will never know whether Ricardo might have objected the passage from the 3rd edition of the Elements that I am quoting. I don’t believe he would, though, since it is consistent with Ricardo’s note on Malthus.
  With regard to the assessment of Torrens’ merits, I’m happy to read that de Vivo agrees with me that Ricardo deserves the bulk of the merit for the formulation and proof of the comparative-advantage proposition. De Vivo points out that I fail to notice two important points. With regard to the first point, I think that we both agree that Ricardo was the foremost economist of his generation. For the purpose of this paper, though, I decided to abstract from this fact and analyzed the merits of both statements of the comparative-advantage proposition independently from other considerations. Notwithstanding, I have not found a single evidence in Ricardo’s writings where he affirms that in a decentralized economy free competition would bring about specialization according to the comparative-advantage proposition, as de Vivo affirms. Regarding the second point, I have actually read the anonymous tract recently, but I could not find any passage there that states something equivalent to the comparative-advantage proposition. It seems to me that it is all about the classical rule of specialization. I welcome any specific reference that would help me clarify these two points.

  Finally, I would like to thank again Giancarlo de Vivo for his valuable comments. They have been useful in improving some parts of the paper. Our disagreement on the definition of comparative advantage does not take me by surprise since I am familiar with his writings on comparative advantage. The bulk of his writings on the topic, though, were published before Ruffin (2002) came up with the correct interpretation of Ricardo’s numbers in the famous numerical example. Therefore, they should be perhaps revised and updated in the light of the new interpretation.

  References

  Aldrich, J., 2004. The Discovery of Comparative Advantage. Journal of the History of Economic Thought, 26(3), pp.379–399.
  Buchanan, J.M. & Yoon, Y.J., 2002. Globalization as Framed by the Two Logics of Trade. The Independent Review, 6(3), pp.399–405.
  Haberler, G., 1930. Die Theorie der Komparativen Kosten und ihre Auswertung für die Begründung des Freihandels. Weltwirtschaftliches Archiv, 32, pp.349–370.
  Morales Meoqui, J., 2011. Comparative Advantage and the Labor Theory of Value. History of Political Economy, 43(4), pp.743–763.
  Ricardo, D. (2004). The Works and Correspondence of David Ricardo. (P. Sraffa, Ed.) Indianapolis: Liberty Fund, Inc.
  Ruffin, R.J., 2002. David Ricardo’s discovery of comparative advantage. History of Political Economy, 34(4), pp.727–748.
  Viner, J., 1937. Studies in the Theory of International Trade, London: Allen & Unwin.

• Giancarlo de Vivo says:

  September 3, 2013 at 8:49 am

  What follows is a reply to Meoqui’s rejoinder to my original comment on his paper. As the topic has already taken up a lot of space I will be as brief as possible, at the cost of sounding blunt. No discourtesy is meant; on the contrary, I should like to thank Meoqui for the attention he has given to my comments.

  1) Meoqui writes that perhaps there is a misunderstanding between us. To try and make things clearer I think I can say the following:

  there is a (classical) specialization rule (whose definition Meoqui attributes to Viner) – specialization is advantageous if each country specializes in the production for which she enjoys an advantage, i.e. the real cost of producing this commodity(= quantity of labour necessary) in the country is less than the real cost of producing it in the other country.

  Suppose that in England to produce a certain amount of wine it is necessary to employ 110% of the labour required to produce the same amount of wine in Portugal, and 80% of that required to produce a certain amount of cloth. In an obvious notation, if

  LWE = 110% LWP

  and

  LCE = 80% LCP

  it is convenient for England to specialize in the production of cloth and import wine from Portugal. This is rather trivial and was already known to XVIII century writers. Here each country has an absolute advantage in the production of the commodity in which she specializes.

  If there were improvements in the conditions of production of wine in England so that now

  LWE = 90% LWP

  it would still be convenient for England to specialize in the production of cloth, where her advantage is greater, and import wine from Portugal. In this second situation England has an absolute advantage in the production of both commodities, but the advantage is greater in the production of cloth.

  The latter point was apparently unknown to XVIII century writers, who seem not to have seen that what really counts is the comparative advantage, i.e. that specialization pays even when it implies that a country imports a commodity which could be produced at home at a lesser real cost (= quantity of labour necessary).

  I presume Meoqui and I agree on the above points.

  2) Meoqui observes that my reasoning contains the assumption that unitary labour costs are the same before and after specialization takes place. He is right (with the proviso that I make the assumption only with reference to the two levels of production – pre- and post-specialization, not for the full range of the abstractly possible production levels), but he is wrong in thinking that one could argue about specialization without making some assumption on returns: an assumption on how (unitary) labour costs change (including the one I make, that they do not change) has to be made if the levels of production in the two countries change (as they do change when specialization takes place). For the sake of simplicity I assume that unitary labour costs do not change at all when the levels of production in the two countries change. An assumption that they change will also do, but an assumption has to be made.

  3) It is possible that in my last point Meoqui will see another proof of my compromising with neoclassical theory, but I repeat what I have said in my original comment, and on which I do not know if Meoqui agrees (I suspect not, but he has not reacted to this point of my comment): the crucial difference between the classical and the neoclassical conception of specialization based on comparative advantage is that in the former the comparative advantage is determined by differences in (relative) labour costs of production of the tradeable commodities, in the neoclassical conception they derive from differences in the (relative) scarcities of “productive factors”, which determine differences in (relative) costs of production. In the classical conception, distribution – in particular the level of wages in the two countries – has no influence on relative costs of production – hence on comparative advantage.

  4) Meoqui alleges that my example assumes full employment (which Ricardo of course did not). This would be so because my reasoning would be of the “opportunity cost” kind. But I think that of my reasoning the same can be said as what Meoqui says of the ‘correct’ reasoning: “In case of applying the classical rule of specialization, as Ricardo did, one does not need the assumption of full-employment. According to the classical rule of specialization, it is just not economically wise to use more laborers in order to produce a certain amount of a commodity internally if one can obtain the same amount of the commodity from other countries in exchange for exports that cost less amount of labor”.

  5) Meoqui asserts that “the way in which de Vivo calculates the gains from trade also differs from Ricardo’s. … In Ricardo’s example, [the two countries] don’t have to divide the gains from trade”. Meoqui will agree that how the gains from trade are divided between the two countries can only be seen when the terms of trade are determined. I have argued that Ricardo does not determine the terms of trade, Meoqui denies this point. My refutation of his denial (in point 6) will therefore also refute him on the gains from trade.

  6) According to Meoqui, John Aldrich would have “spot[ted] the rule [for Ricardo’s determination of international prices]… Ricardo (Vol. 1, p. 375) states that ‘the natural price [the money cost of production] of commodities in the exporting country … ultimately regulates the prices at which they shall be sold … in the importing country’ ”. Now, it is obvious that whatever is produced in England must sell at its natural price, otherwise in England there would not be uniformity of the rate of profits (and/or uniformity of the rate of wages); for the same reason whatever is produced in Portugal must sell at its natural price. This rule can only determine the natural price in English currency for what is produced in England and the natural price in Portuguese currency for what is produced in Portugal. It is not sufficient to determine the terms of trade (i.e., the price at which English and Portuguese products exchange with each other). To determine the terms of trade it is necessary to determine the relative price of the two currencies, i.e. the rate of exchange. Meoqui’s “rule” is by no means sufficient for this. As already said, this also settles point (5).

  7) Meoqui denies my point that the rate of profits is for Ricardo the benchmark of a policy measure; according to him “the effect on the rate of profits is not Ricardo’s benchmark for evaluating the effectiveness of an economic policy. The benchmark is the increase of the mass of commodities”. But Ricardo writes: “There are two ways in which a country may be benefited by trade – one by the increase of the general rate of profits, which … can never take place but in consequence of cheap food … – the other the abundance of commodities… . In the first case, the revenue of the country is augmented – in the second the same revenue becomes efficient in procuring a greater amount of the necessaries and luxuries of life. … The facility of obtaining food [i.e. the policy which raises the rate of profits] is beneficial in two ways to the owners of capital, it at the same time raises profits and increases the amount of consumable commodities. The facility in obtaining all other things, only increases the amount of commodities” (Works, IV, 25-6; italics added). It is clear that Ricardo regards the former as the better policy.

  8) Meoqui writes: “I have not found a single evidence in Ricardo’s writings where he affirms that in a decentralized economy free competition would bring about specialization according to the comparative-advantage proposition, as de Vivo affirms”. It is not that Ricardo “affirms” that in a decentralized economy competition would bring about specialization according to comparative advantage, Ricardo does better: he shows how this happens. Meoqui should reread Principles, pp.137 ff.

  9) I had argued that in an anonymous tract (Considerations on the importation of foreign corn…), published the year before Torrens’s 1815 External Corn Trade, one can find a formulation of the comparative advantage proposition (and that this is most probably the source for Torrens’s own formulation in 1815). Meoqui writes: “I have actually read the anonymous tract, but I could not find any passage there that states something equivalent to the comparative-advantage proposition. It seems to me that it is all about the classical rule of specialization [i.e. absolute advantage]. I welcome any specific reference that would help me clarify these two points”. I am hereby giving a long quotation from the tract, which I think speaks for itself. (Of course I am not claiming that the statement is as full and clear as Ricardo’s, but certainly not less full than Torrens’s.)

  “all commerce, although perhaps in some instances more beneficial to one country than to the other, is, however, necessarily beneficial to both. Climate, soil, a more perfect skill, or other accidental circumstances, may give to one country advantages which another cannot, or does not possess. Their exchanges must consequently be mutually beneficial. If two countries can exchange one with the other any articles, whether of manufacture, or raw material, or sustenance … for other articles, whether of manufacture, raw material or sustenance, which have relatively been produced with less labor and capital, the mutual advantage must be evident. If England exchanges with Germany a piece of cotton cloth, which has been made with the labor of ten persons, for ten days, (allowance being made for the value of the cotton wool imported), for a quantity of iron or wheat, which could not have been produced in England, but with the labor of double the number of persons for the same time, it must be evident, that England is more advantaged than she could have been in the application of her own double labour to its production: and consequently, that English capital must be augmented by the exchange, beyond what it would have been by the direct application of its labour and means to the production of the iron or wheat. Also, if on the other hand, Germany could produce with ten days’ labor of the ten persons, the iron or wheat she exchanges for the piece of cotton cloth, which, although made in England with the ten days’ labor of the ten persons, the iron or wheat she exchanges for the piece of cotton cloth, which, although made in England with the ten days’ labor of the ten persons, could not have been made in Germany but with double the labor and capital, or at double the price of them, Germany too is in this manner advantaged. Also, if one of the two countries, equally capable of producing the same things by means of the same labor and capital, should however be able to direct that labor and capital to more advantageous pursuits, the advantage to that country in so doing must be not less apparent, although it should thereby be obliged to receive from the other country the things which it could otherwise have produced within itself. Supposing England and Germany both capable of producing the iron and wheat at the same expense of labor and capital, yet if England at the same time can by superior ingenuity, convert this labor and capital to the manufacture of cotton cloth, producing a quantity of it greatly beyond what Germany might be able to produce by the similar application of its labor and capital, then must both countries still be benefited by the exchange … Germany obtains more cotton cloth than it could have fabricated for itself, by means of the same labor and capital employed in the fabrication of the cotton cloth” (Considerations on the importation of foreign corn …, London 1814, pp. 7-9).

  10) Last, a minor point. I had quoted a passage from Ricardo’s pamphlet On Protection to Agriculture where Ricardo discusses whether the farmer is at a “comparative disadvantage” following a rise of wages. According to Meoqui my quotation is incomplete, and if completed it would show that Ricardo’s point has nothing to do with external trade, the question being that of the farmer’s “comparative disadvantage” with respect to other classes of the same country. Meoqui writes: “If you look at the whole paragraph, it becomes clear that by the term ‘comparative disadvantage’ Ricardo (Vol. 4, pp. 213-214) meant the effects of a rise of wages on farmers in comparison to other classes”. Let us then quote a little more from On Protection to Agriculture. Ricardo is refuting the argument that “protecting duties on the importation of corn … were necessary to protect the farmer against the effects of high wages in this country … This argument – Ricardo goes on to say – proceeds on the assumption, that high wages tend to raise the price of the commodities on which labour is bestowed. If the farmer, they say, could, before taxation, and the high wages which are the consequence of it, compete with the foreign grower of corn, he can longer do so now he is exposed to a burthen from which his competitor is free. This whole argument is fallacious, – the farmer is placed under no comparative disadvantage, in consequence of a rise of wages” (Works, IV, 213). So the question is the alleged “comparative disadvantage” of the English farmer with respect to “the foreign grower of corn”. Meoqui is plainly wrong.

• Jorge Morales Meoqui says:

  September 26, 2013 at 1:03 pm

  I would like to thank once again Prof. de Vivo for his time and dedication in responding to my reply. It would be a discourtesy from my side not to reciprocate his effort, so I will proceed to respond to his ten points following the same order.

  1. I very much appreciate Prof. de Vivo’s disposition to find some common ground on the definition of comparative advantage. Although I share his disposition, I find it rather difficult to agree with him on the subject as long as he keeps formulating numerical examples with logical constructions and assumptions that do not correspond to those which Ricardo used in his original numerical example in the Principles.

  I don’t understand why it is necessary to formulate numerical examples based on a different logical construction and definition of the numbers to support his views on the subject, when the task of my paper is to compare Ricardo’s with Torrens’ proof of comparative advantage in order to asses the relative merits of each.

  Furthermore, Prof. de Vivo’s definition of the classical rule of specialization is incorrect. The classical rule of specialization establishes a cost comparison of two different commodities within a country, whereas absolute advantage – as well as the comparative-advantage proposition – compares the costs of the same type of commodity in different countries. Thus, the classical rule of specialization is about an internal cost comparison, whereas absolute and comparative advantage refer to an external cost comparison. The difference between the former and the other two concepts is quite clear.

  As I have already stated in the HOPE paper (Morales Meoqui, 2011, pp. 745-750), the classical rule of specialization is the one that is relevant for specialization. It is also the one that Ricardo used for establishing the interest of England in importing wine and that of Portugal in importing cloth.

  As a result of this error in the definition of the classical rule of specialization, it seems to me that Prof. de Vivo has some difficulties in distinguishing more precisely between this rule, an absolute cost advantage and the comparative-advantage proposition. This leads him to occasionally suspect the use of the later by Ricardo or other authors when they are actually referring to the classical rule of specialization. I will provide specific examples for this in point 8 and 9.

  2. I appreciate that Prof. de Vivo recognizes the use of the constant labor costs assumption in his first example. He justifies this by saying that one has to make an assumption on returns when arguing about specialization. Sure, but for the sake of simplicity one should not use the least reasonable and least realistic assumption with regard to the effects of specialization on returns, namely constant returns. Ricardo assumed exactly the opposite to constant labor costs in the Principles, as the can be seen in the following quote:
  “An alteration in the permanent rate of profits, to any great amount, is the effect of causes which do not operate but in the course of years; whereas alterations in the quantity of labour necessary to produce commodities, are of daily occurrence. Every improvement in machinery, in tools, in buildings, in raising the raw material, saves labour, and enables us to produce the commodity to which the improvement is applied with more facility, and consequently its value alters. In estimating, then, the causes of the variations in the value of commodities, although it would be wrong wholly to omit the consideration of the effect produced by a rise or fall of labour, it would be equally incorrect to attach much importance to it; and consequently, in the subsequent part of this work, though I shall occasionally refer to this cause of variation, I shall consider all the great variations which take place in the relative value of commodities to be produced by the greater or less quantity of labour which may be required from time to time to produce them” (Ricardo, Vol. 1, pp. 36-37).

  One may call Ricardo’s assumption that the quantity of labor necessary to produce commodities is changing on a daily basis as the hyper-variable-labor-costs assumption.

  If Prof. de Vivo would use Ricardo’s original example or perhaps another one based on the same logical construction, he would avoid the need of making the constant returns assumption for the pre- and post-specialization levels of production. Ricardo already showed us the way for avoiding the constant returns assumption, namely by not taking unitary labor costs as the basis for the numerical example and by referring to an already existing trade between England and Portugal.

  3. There are indeed several crucial differences between Ricardo’s comparative advantage and the neoclassical conception of comparative advantage. I don’t know any scholar of international trade theory who would deny this.

  Notwithstanding, for the purpose of my paper – to figure out which economist should receive the bulk of the merit for the original proof of comparative advantage – the neoclassical notion of comparative advantage is completely irrelevant. As Prof. de Vivo knows, the neoclassical notion of comparative advantage was developed during the first half of the 20th century, approximately 50 years after the death of John Stuart Mill, the most recent economist who has been credited for comparative advantage. Therefore, I consider that the distinction between the classical and the neoclassical notion of comparative advantage is rather irrelevant for figuring out whether the bulk of the merit for the comparative-advantage proposition should go to Ricardo, Torrens, James Mill or John Stuart Mill, which are all representatives of the classical school of economic thought.

  4. I am not sure if Prof. de Vivo is recognizing here that his formulation of comparative advantage is indeed based on the opportunity costs approach and does assume full employment. If that is the case, then his notion of comparative advantage should indeed be classified as neoclassical. Or is he affirming here that the use of the classical rule of specialization is the same as the opportunity costs approach?

  I would like to avoid commenting based on a misunderstanding, so I will rather wait for the necessary clarification by Prof. de Vivo before commenting this point any further.

  5. With respect to the need of determining the terms of trade in order to calculate the gains from trade, it is necessary to take into consideration that Prof. de Vivo used in his numerical example (where this is indeed a requirement) a different logical construction than the one used by Ricardo in his proof of comparative advantage. Ricardo starts with the terms of trade right from the beginning by indicating the amounts of labor time required in England to produce some amounts of cloth and wine traded. Due to this clever logical construction, he is not required to indicate how many bottles of Portuguese wine can be bought with a meter of English cloth in order to calculate the gains from trade. Moreover, he is able to establish the interest of England in acquiring the wine from Portugal as well as to calculate her gains from trade (120-100=20) without taking into consideration Portugal’s labor time requirements. Ricardo calculates the gains from trade for each country separately right from the beginning. There is no need to divide them. Furthermore, there is no need to determine the terms of trade in order to calculate the gains from trade, as it is required in Prof. de Vivo’s numerical examples. By using different logical constructions to explain the same thing one can reach very different conclusions.

  6. Prof. de Vivo mentioned in his first review of my paper that “Ricardo has no condition to determine the terms of trade, he leaves them indeterminate within the limits mentioned.”
  If his statement applies merely to the numerical example, then I have explained in the previous point why such a determination is not required.

  If it is intended as a general statement, then I think it is necessary to point out that Ricardo referred in the Principles at least twice to a rule for determining the relative value of commodities produced in different countries when his labor theory of value is not valid. Prof. de Vivo mentions one of the quotes but conveniently omits to mention my second quote which can be found immediately after the numerical example:

  “Gold and silver having been chosen for the general medium of circulation, they are, by the competition of commerce, distributed in such proportions amongst the different countries of the world, as to accommodate themselves to the natural traffic which would take place if no such metals existed, and the trade between countries were purely a trade of barter. Thus, cloth cannot be imported to Portugal, unless it sell there for more gold than it cost in the country from which it was imported; and wine cannot be imported into England, unless it will sell for more there than it cost in Portugal” (Vol. 1, p. 137).

  In the above quote there is no need for any exchange rate when gold and silver is the currency in the two countries.

  7. Prof. de Vivo refers in this point to a quote from Ricardo’s Essay on Profits (1815) in order to counter my quote from the Principles that denies his claim that the effects on the rate of profits was Ricardo’s benchmark for evaluating the effectiveness of an economic policy.

  Let us add those passages that have been omitted in order to appreciate more clearly what Ricardo actually wrote:

  “There are two ways in which a country may be benefited by trade — one by the increase of the general rate of profits, which, according to my opinion, can never take place but in consequence of cheap food, which is beneficial only to those who derive a revenue from the employment of their capital, either as farmers, manufacturers, merchants, or capitalists, lending their money at interest — the other by the abundance of commodities, and by a fall in their exchangeable value, in which the whole community participate. In the first case, the revenue of the country is augmented — in the second the same revenue becomes efficient in procuring a greater amount of the necessaries and luxuries of life.

  It is in this latter mode only that nations are benefited by the extension of commerce, by the division of labour in manufactures, and by the discovery of machinery, — they all augment the amount of commodities, and contribute very much to the ease and happiness of mankind; but, they have no effect on the rate of profits, because they do not augment the produce compared with the cost of production on the land, and it is impossible that all other profits should rise whilst the profits on land are either stationary, or retrograde.

  Profits then depend on the price, or rather on the value of food. Every thing which gives facility to the production of food, however scarce, or however abundant commodities may become, will raise the rate of profits, whilst on the contrary, every thing which shall augment the cost of production without augmenting the quantity of food, will, under every circumstance, lower the general rate of profits. The facility of obtaining food is beneficial in two ways to the owners of capital, it at the same time raises profits and increases the amount of consumable commodities. The facility in obtaining all other things, only increases the amount of commodities (Vol. 4, pp. 25-26).”

  What seems pretty obvious to me is that Ricardo would have favored an economic policy which augments the amount of commodities available to the whole community and contribute to the ease and happiness of mankind, even if this policy does not increase the rate of profits, by which only the owners of capital are benefitted.

  8. I took Prof. de Vivo’s advice by heart and reread the recommended passage in which, according to him, Ricardo showed how competition in a decentralized economy would bring about specialization according to comparative advantage. Right in page 137 Ricardo states:

  “If the trade were purely a trade of barter, it could only continue whilst England could make cloth so cheap as to obtain a greater quantity of wine with a given quantity of labour, by manufacturing cloth than by growing vines; and also whilst the industry of Portugal were attended by the reverse effects.”

  Ricardo is applying here the classical rule of specialization – not comparative advantage. He makes an internal cost comparison for England, and indicates that for this barter trade to continue the same rule (but in the case of wine) has to be valid for Portugal.

  In the next pages I could not find any reference to the comparative-advantage proposition, so I welcome any specific reference to the presence of this proposition in those pages of the Principles.

  9. Let us assess whether the long quote does indeed contain any trace of the comparative-advantage proposition, as Prof. de Vivo claims.

  “If England exchanges with Germany a piece of cotton cloth, which has been made with the labor of ten persons, for ten days, (allowance being made for the value of the cotton wool imported), for a quantity of iron or wheat, which could not have been produced in England, but with the labor of double the number of persons for the same time, it must be evident, that England is more advantaged than she could have been in the application of her own double labour to its production: and consequently, that English capital must be augmented by the exchange, beyond what it would have been by the direct application of its labour and means to the production of the iron or wheat.”

  internal cost comparison for England = classical rule of specialization

  “Also, if on the other hand, Germany could produce with ten days’ labor of the ten persons, the iron or wheat she exchanges for the piece of cotton cloth, which, although made in England with the ten days’ labor of the ten persons, the iron or wheat she exchanges for the piece of cotton cloth, which, although made in England with the ten days’ labor of the ten persons, could not have been made in Germany but with double the labor and capital, or at double the price of them, Germany too is in this manner advantaged.”

  internal cost comparison for Germany = classical rule of specialization

  “Supposing England and Germany both capable of producing the iron and wheat at the same expense of labor and capital, yet if England at the same time can by superior ingenuity, convert this labor and capital to the manufacture of cotton cloth, producing a quantity of it greatly beyond what Germany might be able to produce by the similar application of its labor and capital, then must both countries still be benefited by the exchange … Germany obtains more cotton cloth than it could have fabricated for itself, by means of the same labor and capital employed in the fabrication of the cotton cloth” (Considerations on the importation of foreign corn …, London 1814, pp. 7-9).

  In the last part of the quote the anonymous author wants us to suppose that England and Germany are capable of producing iron and wheat at the same expense of labor and capital, but England is superior than Germany in the production of cotton cloth. One may say then that England has an absolute cost advantage over Germany in the production of cotton cloth.

  Where does it say that England is the superior producer of all three commodities? Where does it say that either country might import a commodity from abroad although it could produce it internally with less expense of labor and capital than the exporting country?
  In the last sentence (the one which starts with Germany obtains…) the author applies again the classical rule of specialization for Germany.

  I cannot see in the above quote any trace of the insight for which Ricardo has rightly earned the bulk of the merit.

  10. The last point is indeed a minor point, but since I appreciate every opportunity to improve by learning from my mistakes, I took a closer look at this alleged error.

  The issue at stake here is whether Ricardo used the comparative-advantage proposition in the pamphlet. In my first reply I stated that I couldn’t figure out the way in which this quote is related to Ricardo’s definition of the comparative-advantage proposition, not that the point has nothing to do with external trade. How could I? After all, the title of the pamphlet is “On Protection to Agriculture”.

  Even if Prof. de Vivo is right and the term “comparative disadvantage” of the English farmer is with respect to the foreign grower of corn, I still cannot figure out how this interpretation of the term amounts to a proof for the use of the comparative-advantage proposition by Ricardo. If Prof. de Vivo provides this proof, I am more than willing to make this minor correction to the paper.

  Final remarks
  In resume, I highly appreciate that Prof. de Vivo is willing to recognize some claims I made in my first reply with respect to his formulation of comparative advantage. Moreover, I also appreciate that he is trying to formulate a definition of comparative advantage that is closer to Ricardo’s original definition.

  Unfortunately, his second numerical example still differs from the one used by Ricardo in terms of logical construction as well as the definition of the numbers. More importantly, it does not define the classical rule of specialization correctly nor mentions the proposition regarding the labor theory of value. Therefore, I cannot consider his second numerical example as equivalent or compatible with Ricardo’s original example. His approach of trying to understand what Ricardo wrote by using a very different numerical example bears the high risk of misinterpreting him.

  I think that my reply in point 3 has clarified the misunderstanding with regard to the definition of comparative advantage that I was referring to in my first reply. The distinction between the classical and the neoclassical notion of comparative advantage is not necessary for the purpose of my paper.

  I hope that this exchange of opinions between Prof. de Vivo and me has been as useful for him as it has been for me. I am not aware of any issues left, but I would be more than happy to receive any further comments on my paper from him or any other colleague.