Reconciling Ricardo’s Comparative Advantage with Smith’s Productivity Theory
This paper is closed for comments.
Abstract
There are three main claims in this paper: First, there is sufficient evidence for affirming that Ricardo adhered to Smith’s productivity theory; second, Ricardo’s original demonstration of the comparative-advantage proposition is indeed compatible and complementary with respect to the latter; and third, Ricardo agreed with Smith’s multifactorial explanation of the pattern of trade, which includes increasing returns and economies of scale.
These results open the way for the reincorporation of Ricardo’s propositions into Smith’s multifactorial explanation of trade patterns. They also add a new perspective to the ongoing process of reassessment of Smith’s contributions to international trade theory, further strengthening the view that he was indeed a great international trade theorist.
This paper by Jorge Morales Meoqui deals with Adam Smith’s and David Ricardo’s theories of international trade, two theories that belong to the most misunderstood and misrepresented theories in economics. Therefore, it is worthily to discuss them and to present them in their original meaning. Both, Smith’s and Ricardo’s theories of international trade have attracted more attention in the recent decades among scholars of the history of economic thought. Morales Meoqui proclaims three goals, namely to show that “Ricardo adhered to Smith’s productivity theory”, to demonstrate that Ricardo’s proposition of comparative advantage “is indeed compatible and complementary” with Smith’s productivity theory and lastly that “Ricardo agreed with Smith’s multifactorial explanation of the pattern of trade.” Thereby, he wants to put Ricardo’s theory right and to value Smith’s contribution to the theory of international trade higher as is normally done by economists.
The issue of this article is worth pursuing. However, I see several short-coming that I will list hereafter, which do not convince me that both theories of international trade are in large parts congruent. Yet, by clarifying his arguments and correcting some short-comings, this paper might still have a justifiable claim. (All page numbers, if not otherwise stated, refer to Morales Meoqui’s paper)
1. It should be clarified what the author understands as Smith’s productivity theory. This does not become clear in the paper and could be a source of misunderstanding. Smith’s trade theory was, in my view wrongly, subdivided into three allegedly separate theories, which Blecker (1997) labels “absolute advantage, vent-for-surplus and market-widening (or ‘productivity’) theories.” Morales Mequoi is apparently only interested in the last theory. He relies on Myint (1977, 1958) for this separation, without discussion in detail what Myint means by it. This is especially important since Myint seems to have stepped back a bit from his early clear-cut separation of both theories. In his 1977 article he rather emphasises that “the ‘vent-for-surplus’ theory can be fitted in with the rest of Smith’s theoretical system to a greater extent than is generally realized” (1977, p. 243) and that “[i]t is more illuminating to regard the “vent-for-surplus” and the “productivity” theories of Smith as the twin ingredients of an “open-ended” model of the domestic economy which leaves room for the unrealized productive potentialities of a country to be brought out by the interplay between the forces of domestic economic development and the forces introduced by foreign trade” (1977, p. 245).
2. It seems in some places that Morales Meoqui assumes that a one-off increase in productivity is the same as Smith’s productivity theory (which it is not). This point especially should be clarified.
3. Additionally, Morales Meoqui should show that there really exist two or three different theories of trade in Smith’s writings and that one can reject the first while at the same time endorsing the second. This is not done. In general, the paper includes suspiciously few quotes from Smith that refer directly to international trade (the first reference that meets this requirement is given on p. 10). This is at least partly odd for a paper that wants to recover the real meaning and reputation of two often misrepresented economists.
4. Morales Meoqui claims that Ricardo adhered to Smith’s productivity theory while rejecting his vent-for-surplus theory (what about absolute advantage?). However, he gives no textual evidence that Ricardo himself first divided Smith’s trade theory in this way and that he rejected one part while endorsing the other. Rather, the term vent-for-surplus was invented after Ricardo in 1848 by John Stuart Mill (1929). Yet, the separation of vent-for-surplus and productivity theory was first done by Myint (1958).
5. One proof that Ricardo endorsed Smith’s productivity theory is, in my view, rather weak, namely the argument that Ricardo agreed to everything in Smith’s thinking that he did not criticise in his Principles. This claim is derived by a passage of the Introduction of the Principles in which Ricardo states that he “has found it necessary to advert more particularly to those passages in the writings of Adam Smith from which he sees reason to differ” (quote on p. 10). To infer from this that Ricardo necessarily agreed with everything that he does not criticise in the principles is not convincing.
6. When I think of differences in Smith’s and Ricardo’s theory of international trade, three points come to mind.
a. While Smith assumes that international trade patterns are determined by the labour theory of value, Ricardo does not. Against Smith he claims that foreign trade will not increase the value in one country.
b. Smith’s dynamic framework is opposed by Ricardo’s static analysis.
c. While Smith assumes that the rate of profits is increased by trade trade and thus increases the capital accumulation, the division of labour etc. in the first place, Ricardo claims that the rate of profits cannot be increased by foreign trade.
d. Ricardo assumes balanced trade (barter trade) and the working of the price-specie-flow mechanism which transforms comparative production advantages into absolute price advantage. Smith rejects the price-specie-flow mechanism and states that trade balances are not only common but can also persist for a long time.
It is not clear how all these points fit into the analyses of Morales Meoqui. But he might want to point out why these differences to not affect his argumentation (and why he does not mention most of those differences).
7. Point 6c) is decisive, because it is only the increase in the rate of profits that allows for a faster capital accumulation and a more enhanced division of labour. This is a prerequisite for the productivity theory. Since Ricardo precludes such an increase, it is hard to see how and why he should believe in Smith’s productivity theory. The quotes from Ricardo on pp. 9-10 stress this difference. It is therefore not comprehensible that Morales Meoqui argues that these “references […] further indicate Ricardo’s agreement with Smith’s productivity theory” (p. 10). I would argue that the opposite is the case. Ricardo presents the gains from trade in a static why, namely “by the better distribution of labour” (p. 9) but not by an extension of the division of labour in Smith’s sense and an increase in the capital accumulation that are central in Smith’s productivity theory. This is also the case in the quote given on p. 8, states that free commerce leads to a situation in which a country “it distributes labour most effectively and most economically.” International trade leads to a one-off increase in the labour productivity. This, however, describes not what is commonly understood as Smith’s productivity theory, but rather suggests that Ricardo does not use Smith’s productivity theory. There is not a single quote from Ricardo given in the paper that would suggest otherwise.
8. Morales Meoqui does the same static analysis by stating that “[t]he economic gains of a particular international exchange can be measured for each of the participating countries by calculating the difference between the real costs of the exported commodities that have been sent in exchange for the imports, and the expected real costs of producing the imported commodities at home” (p. 13). But this is not in accordance but rather contrary to Smith’s productivity theory, in which the economic gains would be different (and possibly higher).
9. One claim looks particularly odd (especially for someone who wants to restore and defend the original theories of Ricardo and Smith), namely the interpretation of Smith as a direct predecessor of the Heckscher-Ohlin model. In my view this is nonsense. Though some ideas of Smith might sound somewhat similar to the Heckscher-Ohlin model, he does not argue with factor endowments. High or low wages are not a sign of an abundance or scarcity of labour but much more of the economic state (Smith even argues that the supply of labour adjusts to its demand). This is a misrepresentation of Smith’s theory of capital accumulation (and of Smith’s concept of the division of labour). China low wages are not the result of its high population but due to the fact that it’s economy stationary. That the North American colonies should concentrate for the time being on agricultural production is not the result of its land abundance but it is due to the fact that if capital invested in agriculture will put into motion more productive labour compared to manufacturing or foreign trade and that this will be most beneficial for the country as a whole.
10. In my understanding, the tables (and their explanations) given on pp. 15-16 do not reveal any insight that is needed for the argument. Therefore, I assume that they could be omitted without any loss for the argumentation.
11. Additionally, it stands out that Morales Meoqui does not discuss a lot of recent literature on this topic, i.e. the relation of Smith’s and Ricardo’s theories of international trade. This is a pity because by dealing with this literature, he could illustrate his position and the value added of his paper in a much better way. Two works come to my mind spontaneously that might be worth looking at are: Berdell (2002) and Negishi (2004), but doubtlessly there are doubtless more.
References:
Berdell, J F (2002), International Trade and Economic Growth in Open Economies: The Classical Dynamics of Hume, Smith, Ricardo and Malthus, Cheltenham: Edgar Elgar.
Blecker, R A (1997), The ‘Unnatural and Retrograde Order’: Adam Smith’s Theories of Trade and Development Reconsidered, Economica, 64 (255), pp. 527-537.
Mill, J S (1929) [1871], Principles of Political Economy With Some of Their Applications to Social Philosophy. 7th ed, London: Longmans, Green.
Myint, H (1958), The “Classical Theory” of International Trade and the Underdeveloped Countries, The Economic Journal, 68 (270), pp. 317-337.
Myint, H (1977), Adam Smith’s Theory of International Trade in the Perspective of Economic Development, Economica, 44 (175), pp. 231-248.
Negishi, T (2004), Adam Smith and Disequilibrium Economic Theory, The Adam Smith Review, 1, pp. 30-39.
Reply to Reinhard Schumacher
First I would like to thank Reinhard for his time and effort in commenting my paper. With regard to the alleged shortcomings of the paper, I will refer to each and every point mentioned in his review, using the same numbers.
Before that I would like to point out that Reinhard has overstated the aim of the paper, in the sense that he seems to believe that the paper pretends to assess the overall compatibility of Smith’s and Ricardo’s international trade theories. As a result, he repeatedly claims that certain aspects of these theories have been left out. The subject of the paper, though, is more limited and specific, namely to prove the following three statements: First, that Ricardo adhered to Smith’s productivity theory; second, that Ricardo’s original demonstration of the comparative-advantage proposition is indeed compatible and complementary with respect to the latter; and third, that Ricardo agreed with Smith’s multifactorial explanation of the pattern of trade.
Other issues that are not directly related to these three propositions were left out on purpose. I am convinced that an overall assessment of the international trade theories of Smith and Ricardo cannot be accomplished with the necessary rigor in the limited space of a research paper.
1) The definition of Smith’s productivity theory appears in page 5 of the paper. It deals with the crucial role of the division of labor and the extension of the market provided by foreign trade in improving the productive powers of labor.
As I have written in the same page, I just borrow the denomination “Smith’s productivity theory” from Myint. The purpose of the paper is to analyze the adherence of Ricardo to Smith’s productivity theory – not Myint’s interpretation of Smith.
Regarding the issue of separating Smith’s international trade theory into two or more parts, it was no other than Smith himself who explicitly named two distinct benefits of foreign trade in the following passage of the Wealth of Nations (Smith 1976):
“Between whatever places foreign trade is carried on, they all of them derive two distinct benefits from it. It carries out that surplus part of the produce of their land and labour for which there is no demand among them, and brings back in return for it something else for which there is a demand. It gives a value to their superfluities, by exchanging them for something else, which may satisfy a part of their wants, and increase their enjoyments. By means of it, the narrowness of the home market does not hinder the division of labour in any particular branch of art or manufacture from being carried to the highest perfection. By opening a more extensive market for whatever part of the produce of their labour may exceed the home consumption, it encourages them to improve its productive powers, and to augment its annual produce to the utmost, and thereby to increase the real revenue and wealth of the society. These great and important services foreign trade is continually occupied in performing, to all the different countries between which it is carried on (WN, IV.i.31, pp. 446-447).”
I’m not aware of any source that has interpreted the content of the two benefits mentioned by Smith in a different way, nor that disputes the fact that Ricardo rejected the vent-for-surplus benefit. Instead of asking me to prove something that nobody has questioned, Reinhard should name a source for an alternative interpretation of Smith’s benefits.
I try to prove in the paper that Ricardo agreed with the second benefit regarding the positive effects of an extension of foreign trade in advancing the division of labor and consequently in improving the productive powers of labor, which result in an increase of the real revenue and wealth of the society. The textual proofs of his support for this benefit can be found in the section “Ricardo’s adherence to Smith’s productivity theory”. It has been ignored in the literature for a long time as a result of the false attribution of the constant-labor-costs assumption to Ricardo.
2) It is unclear to me to which parts of the paper Reinhard is referring to and what he means by one-off increase in productivity.
3) Nowhere in the paper I have stated that Smith formulated two, three or more theories of international trade. What is so obvious that should be out of discussion is that Smith’s theory of international trade does not consist of a single monolithic proposition, but includes several propositions and statements. Each of these propositions and statements can be analyzed separately. Moreover, the eventual rejection of one or more propositions does not necessarily bring down the whole theory, nor does it preclude the agreement with the other parts. If Smith himself declared that foreign trade has two distinct benefits, it is a puzzle to me why it is not possible to analyze them separately, and reject one and support the other.
With respect to the allegedly few quotes from Smith that refer directly to international trade, Reinhard apparently believes that his insights about the positive effects of the division of labor on the productive forces of labor should not be considered as parts of his international trade theory. Such a view ignores precisely one of the crucial strengths of Smith’s productivity theory mentioned by Myint (1977, p. 246) and others, namely that it offers a unified analysis of foreign trade and the domestic economy, oriented towards the problem of long-run economic growth.
Nevertheless, if Reinhard has a specific quote in mind that I should have included in the paper, I am more than willing to consider it.
4) Reinhard cofounds here the naming of a theory with its content. Besides the denomination “vent for surplus”, there is nothing substantially new in John Stuart Mill’s critique of this benefit of foreign trade that was not already present in Ricardo’s Principles.
Besides that, the term was coined by John Stuart Mill way before 1848, since it is already present in the first of his Essays on some Unsettled Questions of Political Economy (1844). These essays were published for the first time in 1844, but were already written in 1829 and 1830.
5) Reinhard is apparently referring here to the following paragraph in my paper:
“From a methodological perspective, these biographical facts are highly relevant for an accurate interpretation of the main propositions in the Principles. These propositions cannot be accurately understood without taking into consideration the relevant passages of the Wealth of Nations. More importantly, one can generally presume that Ricardo agreed with those propositions of Smith which are not explicitly criticized and rejected in the Principles, at least until some scholar offers a convincing proof that this general presumption does not apply to a particular proposition (p. 11).”
Ricardo viewed himself as a poor writer, so when writing the Principles he decided to limit his effort to those aspects that were either new or opposed to established notions of political economy. Moreover, he explicitly announced that he would advert to those passages in the writings of Smith from which he sees reason to differ. Therefore, from a methodological perspective it seems to me a very reasonable if not necessary presumption to suppose that he agreed with those passages from the Wealth of Nations that he left out of his critique, “until someone offers a convincing proof that this general presumption does not apply to a particular proposition”.
6) Reinhard makes here several claims about alleged differences in Smith’s and Ricardo’s international trade theories. In the case of the issues 6a, 6b and 6d, he does not bother to fundament them with a single quote or reference, nor does he explain how they are related to any specific passage or idea in my paper.
As I have already stated, my paper does not pretend to make a complete assessment of Smith’s and Ricardo’s theories of international trade, nor does it make the absurd claim that Ricardo agreed with all the propositions of Smith related to international trade. It merely proves that Ricardo agreed with one of the two benefits of foreign trade mentioned by Smith, as well as his multifactorial explanation of the pattern of trade.
The only point that appears to be directly related to the purpose of the paper is 6c, which I will proceed to comment in the next point.
7) Reinhard refers here to an alleged disagreement between Smith and Ricardo regarding the effects of foreign trade on the rate of profit.
Did Ricardo actually affirm that “the rate of profit cannot be increased by foreign trade”, as Reinhard claims? A few quotes are sufficient to prove him wrong.
Ricardo (2004) wrote in page 132 of the Principles: “It has been my endeavour to shew throughout this work, that the rate of profits can never be increased but by a fall in wages, and that there can be no permanent fall of wages but in consequence of a fall of the necessaries on which wages are expended. 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. The rate of wages would not be affected, although wine, velvets, silks, and other expensive commodities should fall 50 per cent, and consequently profits would continue unaltered.”
Ricardo clearly states here that the rate of profit cannot be increased but by a fall in wages. For wages to permanently fall, though, the prices of the necessities on which wages are expended must fall too. Therefore, foreign trade can only have a tendency to raise the profits of stock when the commodities imported are the ones on which the wages of labor are expended. Ricardo does not preclude a raise in the rate of profit by the extension of foreign trade. He rather specifies when such an increase may occur.
Did Ricardo affirm that foreign trade has no effect on the accumulation of capital? No, and the textual proof can be found in the Principles immediately after the above quote:
“Foreign trade, then, though highly beneficial to a country, as it increases the amount and variety of the objects on which revenue may be expended, and affords, by the abundance and cheapness of commodities, incentives to saving, and to the accumulation of capital, has no tendency to raise the profits of stock, unless the commodities imported be of that description on which the wages of labour are expended (p. 133).”
And as Ricardo stated two pages earlier, “there are two ways in which capital may be accumulated: it may be saved either in consequence of increased revenue, or of diminished consumption (p. 131).” Therefore, foreign trade does offer incentives to saving and the accumulation of capital even in the cases when it does not lead to an increase in the rate of profit.
In the light of these few quotes, which are not hidden in an obscure letter but belong to Ricardo’s famous chapter “On Foreign Trade” of the Principles, it amounts to a clear and significant misinterpretation of Ricardo’s theory to claim that he said that the rate of profit cannot be increased by foreign trade, or that he thought that foreign trade has no effect on the accumulation of capital.
So if this is indeed the decisive point and main obstacle for accepting my claim of Ricardo’s adherence to Smith’s productivity theory, then it can be disregarded, since it is based on an inaccurate interpretation of Ricardo’s views about the effects of an extension of foreign trade on the rate of profit and capital accumulation.
8) It is beyond my understanding how the calculation of the gains from a particular exchange amounts to a static analysis. Moreover, I am not aware of any real or potential contradiction with Smith’s productivity theory. As I have affirmed in the paper (p. 13 and footnote 16), Smith repeatedly used the classical rule of specialization in the Wealth of Nations. Reinhard does not dispute this. If both Smith and Ricardo used the same rule of specialization, then why would they differ in the calculation of the gains from trade for a particular exchange?
In my opinion, the static/dynamic dichotomy makes no sense here.
9) Reinhard is referring here to two paragraphs where I affirm that Smith preceded Eli Heckscher and Bertil Ohlin by including natural and artificial factor endowments and relative factor prices in the explanation of the pattern of trade. In the paper one can find direct quotes from the Wealth of Nations that support my statement.
Nowhere in the paper I have suggested that Smith was a direct predecessor of the Heckscher-Ohlin model. I would not even support Reinhard’s statement that some ideas of Smith may sound similar to the Heckscher-Ohlin model. In the literature there is even a debate if Heckscher and Ohlin should be seen as direct predecessors of the model that carries their name.
10) The tables intend to highlight the importance of the assumption regarding the different relative facilities to produce certain commodities.
11) Reinhard’s claim that the paper does not discuss a lot of recent literature is bogus. He can only remember two additional sources, and the most recent one was published in 2004. Moreover, it seems rather curious to me that he does not refer in his review to any new literature – or even to those two sources for that matter – to validate or refute a single idea or proposition in the referred paper.
The reference list of the paper includes 34 sources. Roughly a third of them were published in 2004 or later. This is an unusually high percentage of recent literature for a paper in the field of history of economic thought. Notwithstanding, I always appreciate literature suggestions, and certainly don’t have any objection in principle to add these or other sources to an already bloated reference list. I would appreciate though if Reinhard could be more specific in terms of why he considers that these two sources are indispensable for illustrating my position.
Finally, I would like to thank Reinhard again for his review of the paper. I hope I have been able to clarify the main points of concern and look forward to continuing the exchange with him as well as other colleagues.
References
Mill, J.S., 1844. Essays on some unsettled questions of political economy, London: Parker, John W.
Myint, H., 1977. Adam Smith’s Theory of International Trade in the Perspective of Economic Development. Economica, 44(175), pp.231–248.
Ricardo, D., 2004. On the Principles of Political Economy and Taxation P. Sraffa, ed., Liberty Fund Inc.
Smith, A., 1976. An Inquiry into the Nature and Causes of the Wealth of Nations R. H. Campbell & A. Skinner, eds., Indianapolis: Liberty Classics.
I would like to thank Jorge for his extensive response to my comments. Before I directly reply to some points, I think I should make some general remarks. My previous comment was partly thought to mention some points about Ricardo and Smith that might be helpful. Those were thoughts related to the topic, but not necessarily recommendations. I did not say that they have to be incorporated into this article but I felt I should mention them (especially point 6). Therefore, I did not expect that Jorge uses them all or responds to them. And indeed, he clarified the scope of his paper and why some points are not relevant.
In my new comment, I will concentrate on those points which I think might help Jorge to improve his argumentation and help him to avoid misunderstandings. I will, therefore, not respond to each single point.
1. I still think that a more precise definition of what is understood as Smith’s productivity theory in this article would be helpful. From Myint and more recent literature on Smith’s productivity theory, it is defined as a feedback mechanism of (foreign) trade, capital accumulation, division of labour, technological progress, extent of the market, effective demand (and population). This dynamic development is self-reinforcing and it is stimulated or encouraged by foreign trade. It contains the gains from trade, but also a pattern of trade. It is normally inferred that it leads to uneven development, because more advanced nations can specialise in manufacturing which is more beneficial (due to the fact that it allows for a more extended division of labour than agriculture). In this respect, scholars often refer to WN I.i.4 and Smith’s example of England, France and Poland.
In my understanding of Jorge’s article and of Jorge’s comment, his definition of Smith’s productivity theory differs from the one given above. First, it appears to consist only in the gain from international trade in form of a more extended division of labour and a higher productivity. If this is indeed the case, he should clarify it. That is, why I would recommend him to provide a more detailed definition of Smith productivity theory, as it should be understood in this article. Jorge could use a narrower definition of Smith’s productivity theory. But he should point it out, since modern scholars usually have a broader definition of it (at least, this is my understanding).
If Jorge does indeed include the trade pattern in his definition of productivity theory, he should show how Ricardo agrees on this. For Ricardo, specialisation, e.g. the transformation of comparative production advantages into real price advantages (which are necessary for international trade flows), is achieved through the price-specie-flow mechanism, which is part of Ricardo’s theory of comparative advantage (Ricardo 2004a, pp. 137-141). This, however, differs from the pattern of specialisation according to Smith’s productivity theory, who actually rejects this mechanism.
Apart from this, most modern scholars who divide Smith’s theory of international trade into a vent-for-surplus theory and a productivity theory, argue, that the latter is the more significant one. Many would argue that it comprises the majority of international trade in Smith’s theory and thus includes Smith’s major explanation of international trade and its gains. Jorge argues that he does not “assess the overall compatibility of Smith’s and Ricardo’s international trade theories”. However, one could understand that he does nearly do this because of the importance given to the productivity theory. Thereto again, it would probably be best if Jorge defines what is to be understood as Smith’s productivity theory.
4. My comment was not meant to be about the timing of the naming. Rather, Ricardo must have divided Smith’s theory along the same lines in order to reject one part (vent-for-surplus theory) and to adopt the other (productivity theory). He must not have done this explicitly in reference to Smith. However, as noted by Jorge, Ricardo discussed those parts of Smith’s theory that he disagreed with. Jorge’s argument, that Ricardo actually adhered to one part of Smith’s theory of international trade, leads to the conclusion that he objected the other. I overlooked that Jorge indeed tries to proof this on p. 10: “It is also well known that Ricardo (Vol. 1, pp. 291-295) rejected the other benefit of foreign trade mentioned by Smith, which is known in the literature as the vent-for-surplus theory.” However, on pp. 291-5, Ricardo criticises Smith’s dealing of carrying trade and what Smith’s argument of “surplus capital stock”. This, however, is not a rejection of Smith’s vent-for-surplus theory which deals with foreign trade and surplus of produced goods. He only mention the vent-for-surplus notion in a footnote on page 291. This footnote, however, is more a criticism of Smith’s choice of words in one paragraph of the WN. I do not remember any other paragraph where Ricardo does in fact object to the vent-for-surplus theory. There might be one. If this the case, Jorge should refer to it (and delete is reference to pp. 291-5). This would help his argument.
7. In his comments, Jorge recites quotes in which Ricardo establishes a link between foreign trade and capital accumulation. Since this link is important in Smith’s productivity theory, I would advise him to use them in his article. In the article, the word (capital) accumulation is not mentioned ones. This could be an important part of his proof.
But I don’t think it is true that foreign trade usually raises the rate of profit. This is rather an exception, namely when, as Jorge rightly noted, wages decrease as a result of trade. Ricardo’s wording suggests, that he sees an increase in profit as an exceptional effect: “Foreign trade […] has no tendency to raise the profits of stock, unless […]” (Ricardo 2004b, p. 133). See also in Ricardo (2004a, p. 25): “can never take place but in […]”.
9. The formulation “Smith clearly preceded Eli Heckscher and Bertil Ohlin […]” could easily lead to the conclusion that Smith can be seen as a predecessor of latter two, as I understood Jorge. I wonder, if Smith and Ricardo had no connection to the theory of Heckscher and Ohlin, then why would Jorge mention them at all instead of omitting this reference.
11. Jorge clearly misread my point. I did not say that he does not use recent literature at all, which he does. However, on “the relation of Smith’s and Ricardo’s theories of international trade” (my previous comment), there is only one unpublished manuscript, if I remember rightly. My point was and still is, that Jorge could highlight his insight (or his value added) of this paper if he showed what mistakes were made by previous scholars. My two references were meant as examples that there has been a lot written about Smith and Ricardo in relation to international trade lately and many commentators see their theories as opposing or alternative theories.
Even Myint (1958, 1977) contrasts Smith’s productivity theory of international trade with Ricardo’s theory. Myint claims that for Ricardo, the productivity theory holds only domestically while it does not internationally (1977, p. 234). I think it would help if Jorge would clarify what mistake Myint (and others) commit and why they are mislead. This would help him to illustrate his point and why it is important.
Myint, H (1958), The “Classical Theory” of International Trade and the Underdeveloped Countries, The Economic Journal, 68 (270), pp. 317-337.
Myint, H (1977), Adam Smith’s Theory of International Trade in the Perspective of Economic Development, Economica, 44 (175), pp. 231-248.
Ricardo, D (2004a) [1815], An Essay on the Influence of a low Price of Corn on the Profits of Stock, In: Piero Sraffa (Ed.). The Works and Correspondence of David Ricardo: Vol. IV Pamphlets and Papers 1815-1823, Indianapolis: Liberty Fund, pp. 1-41.
Ricardo, D (2004b) [1817], On the Principles of Political Economy and Taxation, In: Piero Sraffa (Ed.). The Works and Correspondence of David Ricardo: Vol. I, Indianapolis: Liberty Fund.
Smith, Adam. (1776) 1976. An Inquiry into the Nature and Causes of the Wealth of Nations [WN]. In The Glasgow Edition of the Works and Correspondence of Adam Smith, Vol. 2a+2b, edited by R. H. Campbell and A. S. Skinner. Oxford: Oxford University Press.
Reply to Reinhard Schumacher
I would like to thank Reinhard for his additional comments and clarifications. I am very pleased that the quotes from the Principles included in point 7 of my reply have effectively removed the main obstacle for accepting Ricardo’s support of Smith’s productivity theory. A reference to them will be added to the paper.
I’m also pleased to read that my comments regarding the scope of the paper have clarified why some topics mentioned by Reinhard were not included in the paper. I will certainly give a serious consideration to all of his recommendations for improvement. Notwithstanding, I would like to share here some ideas that came to my mind when reading them.
1) The emphasis on the feedback mechanism in Smith’s productivity is in part a direct response to the sporadic criticism that Smith put too much emphasis on the division of labor as the main explanation of economic growth and progress. Schumpeter (1954, p. 187 affirms for example that “nobody, either before or after A. Smith, ever thought of putting such a burden upon division of labor. With A. Smith it is practically the only factor in economic progress. (…) Technological progress, inventions of all those machines — and even investments — is induced by it and is, in fact, just an incident of it.”
Since the present paper contains a vindication of Smith as an important international trade theorist, it should be clear that I agree with those who came in defense of Smith by referring to the fact that in Smith’s theory the division of labor is not isolated but logically connected with other important factors like accumulation, technical progress, foreign trade etc. Between all these factors exist a mutually reinforcing mechanism, that some have called feedback mechanism. However, Smith’s defenders should not commit the error of removing the concept of the division of labor from the central position in Smith’s productivity theory and replacing it with the feedback mechanism. In this case, the division of labor could be interpreted as simply one of several equally important factors. Such a view would be a significant misinterpretation of Smith. After all, it is not by accident that the Wealth of Nations starts with the famous dictum: “The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour” (WN, I.i.1, p. 13).
Moreover, I do not agree with the interpretation that Smith’s insights regarding the division of labor contain and/or imply a pattern of trade that leads to uneven development. If such an interpretation were accurate, then it would have openly contradicted and undermined Smith’s case for free trade. It seems to me quite improbable that both Smith and Ricardo could have overseen such an important implication.
Finally, I cannot agree with Reinhard’s view that the price-specie-flow mechanism is part of Ricardo’s demonstration of comparative advantage. As has been stated by most authors who have written about this topic recently, the comparative advantage section in the Principles starts on page 133 and ends on page 137 (see Ruffin 2002; Aldrich 2004; Morales Meoqui 2011). More importantly, Ricardo’s proof is based on an example of barter trade. The section with the price-specie-flow mechanism starts immediately after the comparative advantage section.
4) Regarding Ricardo’s rejection of the vent-for-surplus benefit, as far as I know it has never been questioned in the literature.
The footnote of p. 291 of the Principles criticizes the following paragraph of the Wealth of Nations:
“When the produce of any particular branch of industry exceeds what the demand of the country requires, the surplus must be sent abroad, and exchanged for something for which there is a demand at home. Without such exportation, a part of the productive labour of the country must cease, and the value of its annual produce diminish. The land and labour of Great Britain produce generally more corn, woollens, and hard ware, than the demand of the home-market requires. The surplus part of them, therefore, must be sent abroad, and exchanged for something for which there is a demand at home. It is only by means of such exportation, that this surplus can acquire a value sufficient to compensate the labour and expence of producing it” (WN, II.v.33, p. 372).
It is quite evident that the above paragraph deals with the vent-for-surplus argument, which Smith also mentions in other parts of his famous book.
Ricardo’s passage (291-295), and the footnote in page 291 in particular, have been cited by several scholars dealing with the vent-for-surplus debate like Kurz (1992), Naldi (1996), Elmslie (1996), Elmslie & Sedgley (2002) and Gomes (2003), among others.
That being said, the paper does not analyze whether Ricardo’s critique of Smith’s vent-for surplus benefit is accurate or not. It merely refers briefly to his critique in order to ask a simple question: If Ricardo would have indeed disagreed with both benefits of foreign trade mentioned by Smith, then why did he explicitly criticize and reject only one of them? The question is directed to those who still may have some doubts about Ricardo’s adherence to the productivity benefit. It is up to them to find a convincing answer to this puzzle.
9) Any statement can be misinterpreted if one does not read or quote the whole sentence as well as the paragraph in which it is embedded. The purpose of the reference is to draw attention to the fact that although Heckscher and Ohlin are sometimes credited for incorporating relative factor abundance and factor prices into the explanation of trade patterns, these issues were already present in the explanation of the pattern of trade provided by Smith and Ricardo.
11) I welcome Reinhard’s clarification with regard to the literature. I also appreciate his recommendation regarding the critique of other scholars, but I have doubts about its practicability. The space of a research paper is limited. Therefore, the author has to carefully select the objectives and scope of the paper.
Any effective critique towards alternative interpretations has to be preceded by a detailed and bulletproofed exposition of the preferred interpretation. And since I am convinced that it is not possible to properly accomplish both tasks in one and the same paper, I have decided to limit myself here to the initial task of proving that Ricardo agreed with Smith’s productivity theory and the respective benefit of foreign trade. Therefore, the paper emphasizes the analysis of the primary sources: Smith’s Wealth of Nations and Ricardo’s Principles. Given the space constraints, a critique of even a few scholars who have proclaimed the incompatibility of Ricardo’s theory of international trade with Smith’s productivity theory would be necessary superficial and incomplete, and could be interpreted as an unnecessary polemic.
That being said, the paper already contains a general explanation for the competing interpretation that Ricardo did not agreed with Smith’s productivity theory. In my opinion, this interpretation is the result of an erroneous attribution of the constant labor-costs assumption to Ricardo. This error is a consequence of the failure to distinguish more precisely between the so-called Ricardian trade model of contemporary textbooks and what Ricardo actually wrote in the Principles. The explanation applies to Myint as well other scholars.
References
Aldrich, J., 2004. The Discovery of Comparative Advantage. Journal of the History of Economic Thought, 26(3), pp.379–399.
Elmslie, B., 1996. The role of joint products in Adam Smith’s explanation of the vent-for-surplus doctrine. History of Political Economy, 28(3), pp.513–523.
Elmslie, B. & Sedgley, N., 2002. Vent for Surplus: A Case of Mistaken Identity. Southern Economic Journal, 68(3), pp.712–720.
Gomes, L., 2003. The Economics and Ideology of Free Trade, Edward Elgar Publishing.
Kurz, H.D., 1992. Adam Smith on Foreign Trade: A Note on the “Vent-for-Surplus” Argument. Economica, 59(236), pp.475–481.
Morales Meoqui, J., 2011. Comparative Advantage and the Labor Theory of Value. History of Political Economy, 43(4), pp.743–763.
Naldi, N., 1996. Adam Smith’s vent-for-surplus argument as a case of rhetorical discourse. History of Economic Ideas, 4(1-2), pp.205–223.
Ricardo, D., 2004 [1817]. On the Principles of Political Economy and Taxation P. Sraffa, ed., Liberty Fund Inc.
Ruffin, R.J., 2002. David Ricardo’s discovery of comparative advantage. History of Political Economy, 34(4), pp.727–748.
Schumpeter, J.A., 1954. History of Economic Analysis, New York: Oxford University Press.
Smith, A., 1976 [1776]. An Inquiry into the Nature and Causes of the Wealth of Nations R. H. Campbell & A. Skinner, eds., Indianapolis: Liberty Classics.
Morales Meoqui’s paper deals with an important, interesting and difficult subject. First of all, I agree with one of the the main claims of the paper: that the interpretation of Ricardo in the neoclassical “Ricardian model of trade” is erroneous in the sense that Ricardo did not adhere to the hypotheses of a constant labor cost throughout his “Principles of Political Economy”. In that regard, Ricardo, just like Marx, followed Smith in interpreting capitalism as systematically augmenting labor productivity through capital accumulation and the division of labor. Therefore, the comparative advantages theory is not in itself incompatible with economies of scale and, more broadly, the connection among capital accumulation and productivity increases.
That being said, I believe that there are a few issues in the narrative constructed that should be addressed by the author:
1)The idea that Ricardo was not primarily concerned to show that even when a country did not have absolute advantages it would automatically benefit from free trade in a competitive market seems odd (page 4).Because this demonstration is crucial to advocating the benefits of free trade, and the rational distribution of labor among countries associated, despite productivity differential, it seem to be contradictory the claim that this was not Ricardo’s main point. Ricardo’s explanation of relative prices changes among countries that were not proportional to amounts of labor was the means through which specialization would come about, and not an end in itself.
“As I have argued in a previous paper (Morales Meoqui, 2011), the main purpose of the numerical example was to prove the new proposition that the labor theory of value does not regulate the relative value of commodities in international trade when the factors of production are immobile between countries. Ricardo then mentioned the associated corollary regarding comparative advantage, i.e. that a country might import a certain amount of a commodity although it can produce these commodities internally with less amount of labor than the exporting country” (page 4).
2)The author proposes that the idea that Ricardo did not believe in economies of scale necessarily stems from interpreting the numbers in Chapter VII as constant costs of production (page 7). The idea that when explaining comparative advantages Ricardo did not consider economies of scale but he did consider this elsewhere in his book can be soundly defended based on textual evidence and stands as a counterproof to the relationship advanced below.
“The mistaken association of Ricardo with this unrealistic assumption is the consequence of the widespread but inaccurate interpretation of the four numbers in the famous demonstration of the comparative-advantage proposition in the Principles as unitary labor costs, which are assumed to remain constant” (page 7).
3) I could not grasp the advantage of the modified example presented over Ricardo’s original example (14-20). In Ricardo´s Chapter VII example he discusses changes in the relative prices related to technological differences. If the country has a higher productivity, gold gests cheaper and the prices of the products in terms of gold are augmented until this higher productivity is compensated. This enables commerce to be made by countries with very different labor productivities. His point is clear and can be interpreted with no problem imagining the numbers are labor directly and indirectly used in the production of a determined (fixed) amount of the commodities. But in the interpretation advanced in the paper there is not a word about relative prices. I believe the original example is clearer than the one advanced in the paper.
4) The usage of the numerical example as a proof of Ricardo’s adherence to Smith’s theory of productivity is not necessary to the argument that Ricardo did not adhere to a constant cost of production throughout his “Principles” (page 4). This can be grasped elsewhere in Ricardo’s principles, not necessarily in the explanation of comparative advantage on Chapter VII (Chapter XX being a great example).
5) The idea of Adam Smith being a precursor to the Hecksher-Ohlin (H-O) neoclassical model of commerce lacks substance. The H-O model is based on a general equilibrium model where a difference in the endowments of production factors lowers the prices of the commodities that are produced with the relatively abundant factor. In Smith there is no general equilibrium or substitution mechanism. Smith’s “model of trade” is based on the fact that is better to buy cheap and sell dear because the increase in wealth will most likely augment capital accumulation. The specialization in agriculture for the colonies and poor countries stems from other considerations regarding the value added in agriculture as opposed to commerce and manufacture, an ill-conceived argument criticized by Ricardo.
6) The idea that Smith was an outstanding trade theorist appears to me as an overstatement, and is also unnecessary for the three main arguments of the paper. Also, the idea that this will be accomplished by showing that economies of scale and comparative advantages (page 5) are compatible does not seem clear to me. Smith’s theory of commerce was subordinate to his theory of capital accumulation. Commerce was good inasmuch it was conductive to capital accumulation and division of labor, which was commercial´s society true source of wealth. The better productivity could arise from different natural sources but would always increase with capital accumulation. Now, it is true that Smith was more realistic than the neoclassical “Ricardian” model.
7) I agree with the three main statements, but disagree with their implications as stated in the paper. First of all, they per si do not establish Smith as an outstanding trade theorist. Also, Ricardo could have used constant labor costs of production when discussing comparative advantages, which does not mean that he denied the relation among scale of production, capital accumulation and productivity of labor. It only means that in the specific example in Chapter VII he did not integrate these two principles, the contrary being true: in his example the increase in productivity comes exogenously in the production of English wine when England had specialized in fabric.
8) In the passages cited in pages 9 and 10 that show Ricardo was not supposing constant labor costs, Ricardo was arguing with Smith’s idea that commerce can alter the rate of profit which was based on the explanation of profit by the competition of capitals which Ricardo denied based on his new theory of rent. It cannot be directly applied to the example that explained the principle of comparative advantages.
9) The paper would benefit from a clear definition of “Smith’s multifactorial explanation of the pattern of trade” (page 4) and also the opposed (implied) single-factorial explanation on the pattern of trade.
My final remark is that I agree with one of the main claims of the paper :that comparative advantage principle and economies of scale are not incompatible and that Ricardo did not think they were. But I think that he did not coherently integrate both, especially in the example given in Chapter VII.
References:
Ricardo, D., 2004. The Works and Correspondence of David Ricardo. Vol. I-XI. Edited by P. Sraffa, Indianapolis: Liberty Fund Inc.
Smith, A., 1976. An Inquiry into the Nature and Causes of the Wealth of Nations R. H. Campbell & A. Skinner, eds., Indianapolis: Liberty Classics.
Reply to Alexandre Laino Freitas
I would like to thank Alexandre for his general appreciation and valuable comments about my paper. I am pleased to read that he agrees with the main statements. He seems to disagree however with a few implications derived from those statements. In order to clarify the issues, I will go through all nine points mentioned by him in the same order as they appear in his review.
1) I agree with Alexandre that the notion that Ricardo did not consider the comparative-advantage proposition as the main insight in the numerical example seems a bit odd at first sight, but only so because it contradicts the interpretation propagated by the so-called Ricardian trade model. It is however the most plausible interpretation of the main purpose of the famous numerical example based on what is actually written in the Principles.
Right in the preface of the Principles Ricardo declared that he considers the laws which regulate the distribution of wealth as the principal problem of Political Economy. It is therefore understandable that he would regard an important qualification to one of these laws of distribution (the labor theory of value) as an issue of paramount importance. I have already explained this interpretation in the HOPE paper, so I just made a brief reference to it in the present paper.
2) Alexandre seems to suggest here (also in point 7) that Ricardo could have assumed constant labor costs in the numerical example, notwithstanding the fact that he did not make this assumption elsewhere in the Principles. I cannot find any trace of evidence for the presence of the constant labor costs assumption in the relevant passage of chapter VII. Moreover, the constant-labor-costs assumption is not needed for the original purpose of the numerical example. It has been wrongly attributed to Ricardo as a result of the misinterpretation of the four numbers as unitary labor costs. Since this assumption is so alien and in contradiction to what he wrote about foreign trade in the Principles, one should expect to find at least some explicit reference or explanation for this unrealistic assumption from him.
3) The purpose of the two numerical examples in page 15 and 16 is to illustrate the importance of having distinct relative facilities in producing certain commodities for the application of the classical rule of specialization in both countries. They should not be interpreted as an attempt of formulating a clearer or superior numerical example than Ricardo’s.
4) The famous numerical example has been used as the most important (and perhaps only) evidence for the claim that Ricardo disagreed with Smith’s productivity theory. In proving that the numerical example does not contradict Smith’s productivity theory because it does not assume constant labor costs, the paper removes the main obstacle for appreciating this essential agreement between Smith and Ricardo.
I don’t see any disagreement Alexandre and me here, since I stated in the paper (pp. 8-9) that the best textual proof of Ricardo’s adherence to Smith’s productivity is indeed in chapter XX.
5) I did not mean to say that Adam Smith was a precursor of the Hecksher-Ohlin model. I merely affirm in the paper that Smith preceded Eli Heckscher and Bertil Ohlin by including natural and artificial factor endowments and relative factor prices in the explanation of the pattern of trade. The purpose of this reference is to draw attention to the fact that although Heckscher and Ohlin are sometimes credited for incorporating relative factor abundance and factor prices into the explanation of international trade patterns, these issues were already present in Smith and Ricardo.
I will add a footnote in order to make this clear.
6) and 7) Alexandre seems to disagree with the vindication of Smith as a great international trade theorist. In the paper I claim that Ricardo deployed the same rule as Smith (the classical rule of specialization) for determining the interest of a country in a certain exchange. Ricardo also agreed with Smith’s multifactorial explanation of the pattern of trade. Furthermore, Ricardo expressed his support for free trade not in terms of the Ricardian trade model but more in lines with Smith’s productivity theory. Because of the paramount influence of Smith on Ricardo’s as well as other economists’ views on free trade and international trade in general, one can certainly consider him as a great international trade theorist.
8) The quotes in page 8 and 9 are meant to prove that Ricardo adhered to Smith’s productivity theory (division of labor, extension of the market, etc.) – not that he did not assume constant labor costs in the numerical example.
9) In the pages 16 to 20 one may find a description of the factors mentioned by Smith and Ricardo for explaining international trade patterns.
Finally I would like to express my gratitude to Alexandre for taking the time to read and comment my paper. His valuable remarks will be certainly helpful in clarifying some parts of the paper.