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Tuesday, July 30, 2013

Mill and the Ricardian system

Much has been recently revealed about James Mill's formative and shaping role over his friend Ricardo's system. How much of Ricardianism is really Mill's creation? Apparently a great deal. One thing is certain: it was Mill who took from J.B. Say the great Say's law and converted Ricardo to that stand. Mill had developed Say's law in his important early book, Commerce Defended (1808), written shortly before he met Ricardo. Ricardo faithfully followed Say's law, and, while in Parliament, consistently opposed expenditure on public works during the depressed year of 1819. And we have seen that Mill and Ricardo together managed to kill the publication of Bentham's ‘pre-Keynesian’ True Alarm in 1811.
In expounding Say's law, Mill was carrying on and developing the important Turgot-Smith insights on saving and investment. But most of the rest of Mill's economic legacy was a disaster. Much of it was the heart and soul of the Ricardian system. Thus, in a forgotten early work, The Impolicy of a Bounty on the Exportation of Grain (1804), Mill sets forth the essence of Ricardianism, from the actual content, to the characteristic disastrous methodology of brutal and unrealistic oversimplification, and to a holistic concentration of unsound macro-aggregates unrelated to the actions of the individual, whether consumer or businessman, in the real world. Mill churns out chunks of alleged interrelations between these macro-aggregates, all seeming to be about the real world, but actually relevant only to deeply fallacious assumptions about the never-never land of long-run equilibrium. The methodology is essentially ‘verbal mathematics’, since the statements are only the implicit churning out of what are really mathematical relations but are never admitted as such. The use of the vernacular language adds a patina of pretend realism that mathematics can never convey. An open use of mathematics might at least have revealed the fallacious assumptions of the model.
Ricardo's exclusive concern with long-run equilibria may be seen from his own declaration of method: ‘I put those immediate and temporary effects quite aside, and fixed my whole attention on the permanent state of things which will result from them.’
Unrealistic oversimplification compounded upon itself is the ‘Ricardian Vice’. Both the Ricardian and the Say-Austrian methodology have been termed ‘deductive’, but they are really poles apart. The Austrian methodology (‘praxeology’) sticks close in its axioms to universally realistic common insights into the essence of human action, and deduces truths only from such evidently true propositions or axioms. The Ricardian methodology introduces numerous false assumptions, compounded and multiplied, into the initial axioms, so that deductions made from these assumptions – whether verbal in the case of Ricardo or mathematical in the case of the modern Walrasians or a blend of both as in the Keynesians – are all necessarily false, useless and misleading.
Thus, in his essay on a bounty on grain, James Mill introduces the typically ‘Ricardian’ error of melding all agricultural commodities into one, ‘corn’ (wheat), and claiming corn to be the basic commodity. With corn now adopted as a surrogate for all food, Mill makes the sweeping statement that the most scientific principle of political economy is ‘that the money price of corn, regulates the money price of everything else’. Why? Here, Mill introduces a typically and brutally drastic variant of Malthusianism. Not just that there is a long-run tendency for population to press on the means of subsistence so that wage rates are pushed down to the cost of subsistence. But more, in a typically Ricardian confusion of the non-existent long-run equilibrium with constant, everyday reality, that wage rates are always set by the price of corn (a surrogate for food, or subsistence, in general). Mill lays down the proposition that wage rates are always set directly by the price of corn as ‘so obviously necessary, that we need spend no more time proving it’. That takes care of that] He concludes therefore that the wage rate is ‘entirely regulated by the money price of corn’.
Mill's extreme version of Malthusianism can be seen in his statement that ‘no one... will hesitate to allow... that the tendency of the species to multiply is much greater than the rapidity with which there is any chance that the fruits of the earth will be multiplied’. Mill even goes so far in wild extremes as to say that ‘raise corn as fast as you please, mouths are producing still faster to eat it. Population is invariably pressing close upon the heels of subsistence; and in whatever quantity food be produced, a demand will always be produced greater than the supply’.
Another unfortunate notion contributed to Ricardo by Mill in his 1804 essay is an overriding focus on the behaviour of a few aggregate macro-shares. Labour was assumed to be of uniform quality; therefore, all ‘wages’ were pushed down to subsistence level by the price of corn. There are only three macro-distributive shares: ‘wages’, ‘profits’ and ‘rents’ in the Ricardian scheme. There is no discussion whatever of individual prices or wage rates -the proper concern of economic analysis – and no hint of the existence of or the need for the entrepreneur. Say's brilliant analysis of the entrepreneur's central role is completely forgotten; there is no role for a risk-bearing entrepreneur if all is frozen into a few aggregative chunks in long-run equilibrium, where change is slow or non-existent, and knowledge is perfect rather than uncertain. ‘Profits’, therefore, are the net returns aggregatively received by capitalists, which could well be called ‘interest’ or ‘long-run profits’.
If wages, profits and rents exhaust the product, then, tautologically and virtually by definition, if one of the three increases, and the total is frozen, one or both of the other shares must fall. Hence, the implicit Ricardian assumption of inherent class conflict between the receivers of the three blocs of distributive shares. In the Mill-Ricardian system, wages are fixed by the price of corn, or the cost of food. The cost of food, for its part, is always increasing because of the fixed supply of land and the alleged Malthusian necessity to move to ever less productive land as the population increases and presses on the food supply. Thus: rents are always slowly but inexorably increasing, and money wage rates are always rising in order to maintain the real wage at subsistence level. Therefore – hey presto! – aggregate ‘profits’ must always be falling.
Schumpeter's blistering critique of the Ricardian system is highly perceptive and perfectly apt:

... he [Ricardo] cut that general system [of economic interdependence in the market] to pieces, bundled up as large parts of it as possible in cold storage – so that as many things as possible should be frozen and ‘given’. He then piled one simplifying assumption upon another until, having really settled everything by these assumptions, he was left with only a few aggregative variables between which, given these assumptions, he set up simple one-way relations so that, in the end, the desired results emerged almost as tautologies. For example, a famous Ricardian theory is that profits ‘depend upon’ the price of wheat. And upon his implicit assumptions, and in the particular sense in which the terms of the proposition are to be understood, that is not only true, but undeniably, in fact trivially, so. Profits could not possibly depend upon anything else, since everything else is ‘given’, that is, frozen. It is an excellent theory that can never be refuted and lacks nothing save sense.

Austrian Perspective on the History of Economic Thought (2 volume set)

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