The theory of value and distribution

Mill's handling of the theory of value was characteristic of the man: a hard core of filio-pietism wrapped in layers of enigma and muddle. And so the labour theory/cost-of-production theory of value was restored to a dominant place in classical economics, but hedged about with Mill's usual string of evasive and self-protective qualifications. Thus Mill accepted Bailey's demolition of Ricardo's search for an impossible invariable measure of value. But, on the other hand, Mill displayed his contempt for even the idea that consumption and utility could have any influence upon value by removing consumption from its traditional niche as a basic part of the economics text. Instead, Mill's Principles was divided into ‘Production’, ‘Distribution’, ‘Exchange’ and ‘Government’, with nary a mention of consumption.
Yet, despite Mill's inconsistency and muddle, his stance of humility suddenly dissolved into his astonishingly arrogant claim that his pronouncements would be the last word for all time on the theory of value. In a famous faux pas, Mill proclaimed that ‘happily, there is nothing in the laws of value  which remains for the present or any future writer to clear up: the theory of the subject is complete’. Now, it is true that Mill had the bad luck to be writing these words only two decades before the ‘marginalist revolution’ completely overturned value theory. But, even so, it was inexcusable for anyone as knowledgeable as Mill was supposed to be in scientific method and the history of science to be caught writing this sort of statement. And Schumpeter tells us that the same sort of hubris had marked Mill's System of Logic.7 It is an odd paradox indeed to see a thinker habitually changing course and qualifying every thought and deed, and yet insisting that his is the last conceivable word on any particular subject!

Upholding and restoring the dominance of Ricardo's theory of profit, Mill insisted on returning to the Ricardian dictum that profits are dependent on, and inversely proportionate to, wages. Cleverly paying obeisance to his friend Nassau Senior's concept of ‘abstinence’, and agreeing with Senior that profits (interest) were ‘the remuneration of abstinence’, Mill managed to weaken the concept and to return somehow to insisting on labour as the sole cause of profits.

On wages, too, Mill returned squarely to Malthus, differing only by holding out the hope of ameliorating the alleged problem of population growth by enthusiastic and determined use of birth control. The change over the half-century was the difference between the stern preacher and the ‘progressive’ feminist. Alexander Gray's comment on Mill's passion against what he considered to be excessive births is both witty and apposite:

In writing on the population question, his [Mill's] voice quivers with a righteous indignation which leads him to a violence of language nowhere to be found in Malthus. Excessive procreation is for Mill on the same level as drunkenness or any other physical excess, and those who are guilty should be discountenanced and despised accordingly.

One of John Stuart Mill's most famous moves in economic theory was his typically dramatic, emotional, and yet carefully hedged ‘recantation’ of the wages fund doctrine. In company with other classical economists, having explained the supply of labour by the quantity of population, Mill then went on to explain the demand for labour, rather sensibly, as the sum of gross savings, or circulating capital, available for paying workers until the product was produced and sold: this available amount he called the ‘wages fund’. This concept was used, again quite intelligently, to demonstrate that should labour unions be able to raise wages for one part of the labour force, this rise could only be at the expense of lowering wages somewhere else.

The wages fund analysis of the demand for labour was, in one important sense, a retreat from Say and others who emphasized that the demand for and prices of factors of production are determined by their productivity in producing consumer goods desired and demanded by the public. For Mill, this retreat was part and parcel of his orchestrated shift back to Ricardo. On the other hand, the wages fund doctrine was correct as far as it went: at any given time, there is a certain amount of gross savings to be invested in paying factors of production. Therefore, paying more in one place because of pressure by suppliers of labour will necessarily reduce demand and payment elsewhere. On the other hand, the wages fund is clearly only a first approximation: for the fund of circulating capital at any given time is not only used to pay wages, but also to pay rent to landlords and interest (profit) to capitalists.
In 1869, Mill's friend and fellow high official at the East India Company, William Thomas Thornton (1813–80), wrote a book entitled On Labour critical of Mill's wages fund doctrine. Partly this came as a needed attempt to bring consumer demand, and notably expected consumer demand, back into the analysis. But Thornton's main thrust was that the capital fund was not only a fund for wages but also a fund out of which to pay profits to capitalists (and, he might have added, rents on land).

Mill's review of Thornton's book in the Fortnightly Review was overly dramatic enough to be seized upon as a ‘recantation’, and as an indication that unions could indeed raise the average level of wages for workers. Actually Mill, as Schumpeter points out, was simply explaining the doctrine more carefully, and pointing out what should have been obvious: that yes, wages could conceivably increase at the expense of driving profits to zero, but that in the not too long run the result would be failure to maintain as well as to expand capital, and hence the impoverishment of everyone, not least of all the working class. There is nothing here contradictory to the wages fund doctrine. It should be added that Colonel Robert Torrens had made the very same ‘concession’ on the wages fund 35 years before, and had received none of the attention and noise.10 The essence of the misnamed ‘wages fund’ theory was simply a fundamental part of the solidly grounded and established Turgot-Smith theory of capital.11 How little real significance Mill attached to his ‘recantation’ is demonstrated by his failure to alter any of his discussion of the wages fund in the seventh and last edition of the Principles published during his lifetime (1871), explaining in his new preface that the discussion had not ripened sufficiently to make such a change.

As Professor Hutt has pointed out in his classic work, the prevalent idea that modifying the wages fund theory led straight to economists justifying unionism and collective bargaining was a canard and a red herring created for the occasion by Mill. Adam Smith and McCulloch had justified collective bargaining on the vague notion of labour's alleged ‘disadvantage’ in bargaining in the labour market. Indeed, Mill himself in the Principles, while continuing  to hold his original wages fund view, offered the same justification, plus the Ricardian theme that without such collective bargaining wages would be driven down to subsistence level (the iron law of wages once more!). And indeed, Henry Fawcett (1833–84), professor of political economy at Cambridge and a devoted Millian, continued to cling to the original version of the wages fund theory as well as labour's ‘disadvantage’ argument for trade unions. On the other hand, for example, Mountifort Longfield, a proto-marginal productivity theorist, took the hard line in opposing unions as never being able to effect a general wage increase.

Mill's persistent adherence to the Turgot-Smith-Ricardo theory of savings and capital is demonstrated by one of his famous ‘fundamental propositions’ on capital, that ‘the demand for commodities is not the demand for labour’. Mill was correct on the fundamental nature of this proposition, on the failure of most economists to grasp it, and in hailing Ricardo and Say as two of the economists to stress it particularly. It is no wonder that modern economists, steeped in the fallacies of Keynes, find the proposition ‘puzzling’. What it means is that at least the proximate demand for labour is supplied by savings, even though the ultimate demand may be supplied by consumers. More than that: Mill here had hold of the basic Turgot discovery of the time-structure of capital, the fact that savings pays for the factors ahead of production and sale, and that the consumers are last down the line of production. Furthermore, savings builds up a capital structure and increases funds paid to wages and other factors, which cannot get paid unless savings are first taken out of income previously supplied to producers by consumers. This theory of capital provided the building-block for the developed Austrian theory of the time-structure of capital.

It is then not surprising that Mill also supported Say's law, to which his father had contributed so much.13 In monetary theory, Mill stood squarely in the Ricardian tradition in fervent opposition to irredeemable paper money. However, he deserted that tradition, as we have seen, in favour of the banking school. And while from his banking school mentor, James Wilson, Mill learned of the malinvestments, especially in fixed capital, that occur in business cycle booms, he also adopted the disastrous Wilsonian belief that money plays a passive and unimportant role in these cyclical booms and busts. In this belief, significantly, he harked back to his father's only difference from Ricardo. Indeed, he also adopted a pre-Schumpeterian view that these overinvestment booms, followed by corrective recessions, were necessary to economic growth.

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Mill's strategy and the success of the Principles

The proximate reason for the enormous success and influence of the Principles was the remarkable best-selling triumph of Mill's first book, A System of Logic (1843), which caught on with intellectuals and general readers of the age in a way that no tome on logic and epistemology has done before or since.1 Mill's Principles was shrewdly designed as a comprehensive, massive two-volume treatise in the Wealth of Nations mould, accessible to economists and laymen alike. It went through no less than seven editions in Mill's lifetime, as well as a cheap ‘people's’ edition, and an abridged version for the American market. The Principles continued to serve as the standard British text in economics through the early twentieth century.
In a fascinating article, Professor de Marchi contends that much of the seeming confusion, muddle and moderation permeating Mill's Principles was a deliberate strategy designed to soften up and conciliate the numerous enemies of Ricardianism and thereby to win their support for a covert re-establishment of Ricardian dominance. To put it far more bluntly than does Professor de Marchi, Mill engaged in a strategy of duplicity to confuse the enemy and to win their support for at least the essentials of the true Ricardian doctrine. If de Marchi is correct, there is far more Machiavelli in Mill's dithering ‘openness’ to all points of view than has been supposed.2 De Marchi notes that Mill had consciously adopted, since 1829, what Mill called the strategy of ‘practical eclecticism’, which amounts to lulling and disarming the opposition and, by seeming conciliation, to manipulate them into believing that they had 'spontaneously’ arrived at what Mill held to be the truth – in short, a strategy of deception and duplicity.3
It is impossible to estimate how much of John Stuart Mill's inveterate and eternal contradictions, qualifications and alterations were due to honest muddle-headedness and how much to devious and evasive intellectual broken-field running. Did Mill himself always know? At any rate, the tactic seems to have worked, as enemies from all sides of economic theory in general and of Ricardianism in particular, were charmed by Mill's middle-of-the-road benevolence to all and sundry. They might not have been converted to hard- or even soft-core Ricardianism, but they were virtually all impressed by Mill's conceding one point after another to themselves or others. (All, of course, except Marx, who, as a pre-eminent cadre type, poured out a proper vial of scorn upon Mill's 'shallow syncretism’ and ‘attempt to reconcile the irreconcilable.’) One by one, Tories, romantics,  socialists and ‘practical men’ warmed up to Mill himself and to his alleged achievements.
Thus we have seen how Mill introduced into economics, and managed to make dominant, the unfortunate hypothetical methodology of positivism, as contrasted to the praxeological system of deduction from true and complete axioms advocated and employed by Say and Senior. (Ricardo had expressed no methodological views, although his method in practice was deduction from a few unreal and deeply flawed axioms.) In the course of pursuing this method, Mill introduced the disastrous and fallacious hypothesis of the ‘economic man’, which left economics deservedly open to ridicule as false to the nature of man. But Mill's substitution of hypothetical, of at least professedly tentative and humble, positivism, charmed the enemies of deductive praxeology.
For example, there had grown up at Cambridge University a group of militant Baconian inductivists, men who angrily rejected as ‘unscientific’ any sort of abstract theory in the social sciences. These belligerent anti-theorists, who held that proper theory can only be a patient enumeration and collection of countless empirical ‘facts’, were the ancestors of American institutionalism and of the German historical school. The Cambridge group of four, who were originally friends as undergraduates, was headed by William Whewell (1794–1866), who became a fellow and then master of Trinity College, an eminent mathematician, a professor of mineralogy and then of moral philosophy at Trinity, and twice vice-chancellor of the University. Another powerful figure in this group was Richard Jones (1790–1855), who succeeded Nassau Senior as professor of political economy at King's College, London, and then succeeded Malthus as professor of political economy and history at Haileybury.4 Author of a three-volume History of the Inductive Sciences (1837) and the Philosophy of the Inductive Sciences (1840), Whewell had gushed over Bacon as ‘the supreme Legislator of the modern Republic of Science’, and ‘the Hercules’ and ‘Hero of the revolution’ in scientific method.
In the end, however, Whewell was forced to admit that the inductivist method in economics did not seem able to go beyond destructive criticism to the constructing of any sort of body of economic law. Perhaps that is why Whewell, at least, ended by toying with mathematical Ricardian models, flirting with the kind of abstract economics he had long professed to despise.5
William Whewell was not converted from inductivism to positivism by Mill, but he was moved to express approval of Mill's Principles as a whole. Others whom Mill charmed were Tory writers long hostile to political economy and to its free trade conclusions. Thus Blackwood's Magazine gave the Principles a generally favourable review for its author's ‘perpetual, earnest, never-forgotten interest,... in the great questions at present mooted with respect to the social condition of man’. And G.F. Young, in the course of a virulent  protectionist attack on economics in the Tory Quarterly Review, hailed Mill as ‘one of the most philosophical and candid of the modern school of economists’ – specifically for Mill's positivist admission that political economy was grounded not on correct but only on partially true assumptions.
Mill's most conspicuous defection from classical political economy in general, and from Ricardianism in particular, was his numerous concessions to socialism and his apostasy from laissez-faire. In general, the British classical economists had not exactly been consistent laissez-faire stalwarts, in contrast to J.B. Say and his school in France, including such people as Charles Comte, Charles Dunoyer, Frederic Bastiat, Gustave de Molinari, and their numerous followers. In Britain, consistent laissez-faire advocates were to be found rather among writers, intellectuals, and businessmen in Manchester, such as Richard Cobden, John Bright and the recently successful Anti-Corn Law League. They were also to be found in The Economist, edited by James Wilson, particularly in its editorial staff writers, Thomas Hodgskin (1787–1869) and young Herbert Spencer (1820–1903). But while the classical economists were not hard-core free market men, they at least tended strongly in that direction; if not a principle, laissez-faire was for them at least a guide or tendency to which they could at least partially orient their position. But Mill sharply broke with all that. Steeped in a high moral tone at all times, Mill originated the unfortunate intellectual tradition of conceding that socialism and indeed communism was the ‘ideal’ social system, and then drawing back by lamenting that it probably could not be attained in this cruel practical world. Pro-capitalists who begin by conceding the moral ground to their opponents are bound to lose the long-run war, if not the short-run battle, to socialism.
Small wonder, then, that various wings of socialists hailed Mill's Principles. The Owenite socialists, then the leading socialist group in Great Britain, were highly approving. In addition to words of commendation from Robert Owen (1771–1858) himself, the Owenite writer and lecturer George Jacob Holyoake (1817–1906) was particularly enchanted. The editor of The Reasoner, Holyoake hailed Mill's Principles with enthusiasm. ‘It had been held’, he proclaimed, ‘that the people were made for political economy’ but now, with Mill's Principles, ‘at length political economy [is] being made for the people’. Holyoake also praised Mill for having spoken of communism ‘with more geniality than any political economist had done before’, and he gave his working-class readers the benefit of much of that high-priced tome by printing lengthy extracts in the Reasoner. No doubt Holyoake was also happy with Mill's proclaimed ideal of a commonwealth of cooperatives, Holyoake being one of the founders and long-term agitators for the cooperative movement in Britain.
Also delighted with the Principles was the socialist Thornton Hunt (1810— 73), editor of the weekly Leader, the main socialist paper in England after  1850. Hunt, a believer in communal ownership and control, particularly welcomed Mill's claim that communism was the ideal state.
But even more important a boost to statism and socialism in Mill's Principles was his most un-Ricardian proclamation that while the processes of production were subject to the iron laws of political economy, distribution, on the other hand, was up for grabs, subject to human will and man-made arrangements. Ricardo, whose system rested on allegedly iron laws of distribution, must have turned over rapidly in his grave at that remark. This separation between ‘production’ and ‘distribution’ was wholly artificial and totally invalid, since people earn incomes on the market precisely for participating in production, and the two are intimately intertwined. But in making this distinction, Mill gave birth to the calamitous and still prevalent notion that distribution can be changed virtually at will through tax, subsidy or other statist schemes, while the market would still continue to function and produce undisturbed.
It is certainly not surprising that Mill's moral obeisances to cooperatives and communism met warm applause at the hands of the newly burgeoning Christian socialist movement. Of the troika of young Anglicans who led the Christian socialists, the Rev. Charles Kingsley (1819–1875) hailed the Principles, as did another of the leaders, the attorney John Malcolm Ludlow, in Fraser's Magazine.6 Fraser's had been purchased in 1847 by John William Parker, who became its de facto editor; Parker was a friend of Kingsley and a Christian socialist sympathizer. The fact that he also happened to be the publisher of Mill's Principles scarcely made the paean of Fraser's reviewer any less lavish.

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Mill's importance

The Mills, father and son, had a fateful impact upon the history of economic thought. If James Mill played a crucial and neglected role in developing Ricardian economics and its philosophical ally, Benthamite utilitarianism, and in foisting them upon the British intellectual world, his son John was by far the most important force in reimposing Ricardian dominance two decades after it had fallen into decline. It is ironic that the fate of British intellectual life in the nineteenth century should depend so closely on the psychological interplay between famous father and son, ironic since both purported to be austere ‘scientists’ above all. The two men could not have been more different in character and quality of intellect. James Mill, as we have seen, was a hard-nosed, hard-hitting, self-confident hard-core ‘cadre’ type, in intellect and action, original in carving out an architectonic system of economics, philosophy and political theory, and then supremely energetic in organizing people and institutions around him to try to put them into effect. James tried to educate John Stuart (1806–73) to follow him in leadership of this philosophic radical cadre, but the education didn't take. After John's famous nervous breakdown at the age of 20, the younger Mill emerged as almost the opposite to his father in temperament and quality of intellect. Instead of possessing a hard-nosed cadre intellect, John Stuart was the quintessence of soft rather than hardcore, a woolly minded man of mush in striking contrast to his steel-edged father. John Stuart Mill was the sort of man who, hearing or reading some view seemingly at utter variance with his own, would say, ‘Yes, there is something in that’, and proceed to incorporate this new inconsistent strand into his capacious and muddled world-view. Hence Mill's ever-expanding intellectual ‘synthesis’ was rather a vast kitchen midden of diverse and contradictory positions. As a result, Mill has ever since provided a field day for young Ph.D's caught in the game of publish or perish. Dispute over ‘what Mill really believed’ has become an unending cottage industry. Was Mill a laissez-faire liberal? A socialist? A romantic? A classicist? A civil libertarian? A believer in state-coerced morality? The answer is yes, every time. There is endless fodder for dispute because, in his long and prolific life, Mill was all of these and none, an ever-changing kaleidoscope of alteration, transformation and contradiction.
John Mill's enormous popularity and stature in the British intellectual world was partially due to his very mush-headedness. Here was this person of undoubted intellectual parts, an erudite man growing up in a circle of distinguished scholars and political activists, and yet here is this eminent man who sees good in all conceivable positions, even the reader's, whoever he may be. Add to this another unusual note: Mill's felicitous style. For in the history of thought, the style very much reflects the quality of mind; clearheaded thinkers are usually lucid writers, and confused and inchoate thinkers  usually write in the same way. Ricardo's crabbed and tortured style reflected the muddled complexities of his doctrine. But Mill was unusual in possessing a graceful and lucid style that served to mask the vast muddle of his intellectual furniture. Ricardo won at least brief popularity for his very obscurity, though he had the invaluable aid in spreading his doctrine of such clear writers as James Mill and John McCulloch. But John Mill won fame and influence partly through the grace of his writing.
If he had known the full extent of his son's defection of character and intellect, the elder Mill would surely have despaired. But he never really found out, for John learned early to dissemble, playing a double game throughout his 20s while his father was still alive. Thus he was perfectly capable of publishing an article praising his father's philosophical favourite, Jeremy Bentham, while at the same time writing an anonymous article elsewhere highly critical of Bentham. Mill's intellectual duplicity proved a sharp contrast to his father's candour.
Oddly enough, however, and weighing the totality of John's career, James might in a sense have been truly pleased. For through all the mush, through all the flabby and soggy ‘moderation’ that marked the adult John Mill and still attracts moderate liberals of every generation, in the last analysis filio-pietism triumphed. When push at long last came to shove in the mind of John Stuart Mill, he came down, albeit of course ‘moderately’, on the side of his father's two idols, Bentham and Ricardo. In philosophy, he abandoned hardcore cadre Benthamism, for soft-core ‘moderate’ Benthamite utilitarianism. And in economics, he not only was basically and proclaifnedly a Ricardian; he also gladdened his father's ghost by re-establishing Ricardianism on the throne of British economics, a feat he accomplished through the enormous popularity and dominance of his Principles of Political Economy (1848). So even though John Stuart substituted moderate for full-fledged democracy, and, still more disturbingly, moderate statism and socialism for his father's laissez-faire, James Mill might have been gladdened by his son's ability to reimpose Ricardianism upon the world of economics. Indeed, the great advances of the anti-Ricardians of the 1820s, 1830s, and 1840s were truly forgotten in Mill's re-establishment of the cost, and indeed the labour, theory of value, the Ricardian rent theory, Malthusian wage and population theory and the remainder of the Ricardian apparatus. For not the first or last time in the history of economic and social thought, error displaced truth from the post of dominance in the intellectual world. In placing Ricardo back upon the throne of economics, John Stuart was fulfilling perhaps the most cherished, although one of the most fallacious, of his father's goals and principles.
It should be realized that John Stuart's life in the shadow of his father was not only psychological or organizational. At the age of 16, John entered his father's office in the East India Company, and assisted him for many years,  succeeding to his father's high position on James's death in 1836. Mill, indeed, worked full-time at the East India Company until the liquidation of that company in 1858 bestowed upon Mill a handsome pension for the remaining 15 years of his life.

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Nassau Senior, praxeology, and John Stuart Mill

There are few economists in any age who are self-conscious about the methodology of their craft. Even more was this true during the alleged heyday of the British classical school which, as we have seen, was an era of disintegration rather than triumph of the Ricardian paradigm. But an excellent methodologist was one of the finest economists of that epoch, Nassau W. Senior. Senior indeed took up the torch of the praxeological method that had been expounded and used by the great French economist of the early nineteenth century, Jean-Baptiste Say.

Senior began to spell out his views on methodology in his very first, introductory lecture at Oxford in 1826. With exceptional clarity, he began by stating that economic theory rests on the broadest general insights about human nature, insights that are self-evident in the sense that once stated they command universal assent. Economic theory, says Senior, ‘will be found to rest on a very few general propositions, which are the result of observation, or consciousness, and which almost every man, as soon as he hears them, admits, as familiar to his thoughts, or at least, as included in his previous knowledge’. But if these premises, or axioms, rest on general knowledge of man and the world, then conclusions deduced from them must possess equal generality: ‘Its conclusions are also nearly as general as its premises – those which relate to the nature and production of wealth, are universally true.’ It is then the task of the economist to narrow down the conclusions to those areas which are directly relevant to the problem at hand. Thus:

those [conclusions] which relate to the distribution of wealth, are liable to be affected by peculiar institutions of particular countries – in the cases, for instance, of slavery, corn laws or poor-laws – the natural state of things can be laid down as a general rule, and the anomalies produced by particular disturbing causes can be afterwards accounted for.

As specifically part of his apodictic conclusions, Nassau Senior generalized laws that other economists had been approaching or groping for. For example, Senior defined ‘wealth’ as all goods and services that possess utility and which therefore will be purchased in exchange. He then stated in his first ‘fundamental proposition’: ‘That every person is desirous to obtain, with as little sacrifice as possible, as much as possible of the articles of wealth.’ Not only did Senior thus ably generalize some important insights of universal human action: he also in that way dismissed Adam Smith's unfortunate distinction between ‘productive’ (material) and ‘unproductive’ (immaterial) labour; everything which people desired and were willing to buy was ‘productive’. It is because Ricardo at least implicitly adopted this distinction that he was able to dismiss cavalierly any explanation of the pricing of immaterial services and hence to move toward a cost theory of value.

In elaborating on this first fundamental proposition, Senior moved on to an eloquent summation of the relationship between desire, individual diversity, choice, and human effort:

In stating that every man desires to obtain additional wealth with as little sacrifice as possible, we must not be supposed to mean that everybody, or indeed anybody, wishes for an indefinite quantity of everything... What we mean to state is, that no person feels his whole wants to be adequately supplied; that every person has some unsatisfied desires which he believes that additional wealth would gratify. The nature and urgency of each individual's wants are as various as the differences in individual character. Some may wish for power, others for distinction, others for leisure... Money seems to be the only object for which the desire is universal; and it is so because money is abstract wealth...
As equal diversity exists in the amount and the kind of the sacrifice which different individuals, or even the same individual, will encounter in the pursuit of wealth.

Two decades later, on returning to the Drummond chair at Oxford, Nassau Senior, in his introductory lectures in 1847, returned to the problem of the methodology of economics (published in 1852 in his Four Introductory Lectures on Political Economy). He now denned economic science as expounding ‘the laws regulating the production and distribution of wealth, so far as they depend on the action of the human mind’ – the latter clause emphasizing that economics was a ‘mental’ rather than ‘physical’ science. Indeed, Senior saw clearly that the proper scientific method was dualistic, the physical sciences treating the properties of matter, while the mental ones study ‘the sensations, faculties, and habits of the human mind, and regard in matter only the qualities which produce them’. The methods of the two sciences must necessarily differ, for the physical sciences ‘being only secondarily conversant with mind, draw their premises almost exclusively from observation or hypothesis’. Observation may guide such strictly empirical sciences as technology, but such sciences as physics, ‘those which treat only of magnitude and number.... draw them altogether from hypothesis’. The physical sciences must rest on tentative hypotheses, precisely because they are ‘only secondarily conversant with mind’. On the other hand, ‘the mental sciences and the mental arts draw their premises principally from consciousness. The subjects with which they are chiefly conversant are the working of the human mind. And the only mind whose workings a man really knows is his own’. And of course economics was one of the mental sciences.

In this way, Nassau Senior, with brilliant clarity, developed the essentials of what Ludwig von Mises, a century later, would call ‘praxeology’. As in the case of other mental sciences, economics cannot, like the physical sciences, conduct experiments. It is true, Senior noted, that economics deals with such material matters as production, productivity and diminishing returns, but the ‘political economist dwells on them only with reference to the mental phenomena which they serve to explain’, as among the motives or sources or capital, rent, profit, etc. In short, wrote Senior,

All the technical terms, therefore, of Political Economy, represent either purely mental ideas, such as demand, utility, value, and abstinence, or objects which, though some of them may be material, are considered by the Political Economist so far only as they are the causes of certain affectations of the human mind, such as wealth, capital, rent, wages, and profits.

It is important to consider the once famous battle between Nassau Senior and John Stuart Mill on economic method, for Mill was soon to become the undeservedly towering economist for the next half-century. Mill agreed that economics, as a mental science, cannot conduct experiments; but he did not conclude, with Senior, that its premises or axioms should be complete, general and apodictic. Instead, he asserted that the foundations and premises of economics can only be ‘hypothetical’, that is, they must make assumptions that abstract from, and hence distort, reality. The axioms of economics are only partially, or hypothetically, true. In short, for Mill, since economics focuses on man's desire for wealth, it must assume, even though admittedly falsely, that man's only desire is for wealth. Thus, as Mill stated in his Essays on Some Unsettled Questions in Political Economy in 1844:

Political Economy... does not treat of the whole of man's nature as modified by the social state, nor of the whole conduct of man in society. It is concerned with him solely as a being who desires to possess wealth, and who is capable of judging the comparative efficacy of means for obtaining that end. It predicts only such of the phenomena of the social state as take place in consequence of the pursuit of wealth. It makes entire abstraction of every other human passion or motive... Political Economy considers mankind as occupied solely in acquiring and consuming wealth; and aims at showing what is the course of action into which mankind living in a state of society, would be impelled, if that motive... were absolute ruler of all their actions... Not that any political economist was ever so absurd as to suppose that mankind are really thus constituted, but because this is the mode in which science must necessarily proceed.30

Mill conceded that the founding assumption of his economics was ‘an arbitrary definition of man’. For it reasoned from ‘assumed premises – from premises which might be totally without foundation in fact, and which are not pretended to be universally in accordance with it...’.

And thus, John Stuart Mill, in this adumbration of the methodology of the deliberate creation of the fallacious ‘economic man’ – the man who is only interested in pursuing wealth – elaborated what might be called the orthodox, or dominant, ‘positivist’ methodology in economics. The positivist method, set down with such fallacious and fateful clarity by Mill, after a struggle with alternative praxeological (as well as other) methods, finally triumphed in the mid-twentieth century with the unfortunate rise to dominance of the positivism of Vilfredo Pareto and Milton Friedman.

Part of the motivation of Senior's thoughtful lectures on method in 1847 was precisely to engage in a critique and demolition of Millian positivism. Since Mill, like Smith and Ricardo before him, returned to their fallacious limitation of ‘wealth’ to material goods, the resulting distortion of value and production theory made Senior's task all the more important. Senior's assault on Mill, as well as on Ricardo, was formidable and devastating. He made their essential differences clear:

neither the reasoning of Mr. Mill, nor the example of Mr. Ricardo, induce me to treat Political Economy as a hypothetical science. I do not think it necessary, and, if unnecessary, I do not think it desirable.
It appears to me, that if we substitute for Mr. Mill's hypothesis, that wealth and costly enjoyment are the only object of human desire, the statement that they are universal and constant objects of desire, that they are desired by all men and at all times, we shall have laid an equally firm foundation for our subsequent reasoning, and have put a truth in the place of an arbitrary assumption. (Italics added.)

Senior goes on to concede that indeed we shall not now be able to infer, from the fact that a labourer may so act as to obtain higher wages, or a capitalist higher profits, that ‘they will certainly act in that manner’. But, at least ‘we shall be able to infer that they will do so in the absence of disturbing causes. And if we are able, as will frequently be the case, to state the cases in which these causes may be expected to exist, and the force with which they are likely to operate, we shall have removed all objection to the positive as opposed to the hypothetical treatment of the science’.

One danger of the hypothetical method, Senior wisely and prophetically points out, is the perpetual danger of forgetting that the premises are not complete and are only partial and even false assumptions. Another and even deeper flaw is that, since the assumptions are false from the very beginning, there is no way to bring in experience or observation to correct or even check on the conclusions of the abstract analysis. In this way, positivists, who always trumpet their method as being the only truly scientific and ‘empirical’ one, turn out to be resting on runaway and uncorrectable false premises. On the other hand, and ironically, the praxeological method, which has long been accused of a priori mysticism, is the only one that bases theory on broadly known and deeply empirical – indeed universally true – premises!
Being universally true, the praxeological method provides complete and general laws rather than partial, and hence generally false, ones. As Marian Bowley astutely sees the difference:

Thus in the question of the definition of the desire for wealth: if it is stated in Mill's form that everyone always prefers wealth to anything else [the ‘economic man’], with the added warning that it is only a hypothesis, the constant relation between the desire for wealth and all other conflicting motives is not defined completely by the general law. It remains necessary to introduce a further premise in each individual stating the general relation of other motives to that of the desire for wealth, as well as evaluating the actual variables. Now Senior's explanation of the desire for wealth includes information as to the interconnections between the variables.

Or, as Miss Bowley explains further:

Senior's substitution of net advantages for earnings is equivalent to defining in general terms the relation between all the variables which influence the distribution of resources between occupations, instead of leaving that relation to be considered afresh in each use.32

Thus, a positivist, assuming that businessmen are always and only interested in maximizing money profits, might well overlook and ignore instances of businessmen placing other motives (such as giving an executive post to one's relative) higher than profits. Or, worse still, if acknowledging such instances, he would be tempted to dismiss these cases contemptuously as ‘irrational behaviour’. Similarly, Charles Dickens, who repeatedly spoofed and attacked classical economics in his novels, had a utilitarian son refuse to help his impoverished mother on the ground that the science of political economy told him that to be rational a man must always buy in the cheapest market and sell in the dearest. And since Smith-Ricardo-Mill classical economics solely emphasized cost of production and therefore was totally blocked from even talking about the consumer, it was especially open to this Dickensian misconception.

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The law of comparative advantage

Even the most hostile critics of the Ricardian system have granted that at least David Ricardo made one vital contribution to economic thought and to the case for freedom of trade: the law of comparative advantage. In emphasizing the great importance of the voluntary interplay of the international division of labour, free traders of the eighteenth century, including Adam Smith, based their doctrines on the law of ‘absolute advantage’. That is, countries should specialize in what they are best or most efficient at, and then exchange these products, for in that case the people of both countries will be better off. This is a relatively easy case to argue. It takes little persuasion to realize that the United States should not bother to grow bananas (or, rather, to put it in basic micro-terms, that individuals and firms in the United States should not bother to do so), but rather produce something else (e.g. wheat, manufactured goods) and exchange them for bananas grown in Honduras. There are, after all, precious few banana growers in the US demanding a protective tariff. But what if the case is not that clear-cut, and American steel or semi-conductor firms are demanding such protection?
The law of comparative advantage tackles such hard cases, and is therefore indispensable to the case for free trade. It shows that even if, for example, Country A is more efficient than Country B at producing both commodities X and Y, it will pay the citizens of Country A to specialize in producing X, which it is most best at producing, and buy all of commodity Y from Country B, which it is better at producing but does not have as great a comparative advantage as in making commodity X. In other words, each country should produce not just what it has an absolute advantage in making, but what it is most best at, or even least worst at, i.e. what it has a comparative advantage in producing.
If, then, the government of Country A imposes a protective tariff on imports of commodity Y, and it forcibly maintains an industry producing that commodity, this special privilege will injure the consumers in Country A as well as obviously injuring the people in Country B. For Country A, as well as the rest of the world, loses the advantage of specializing in the production of what it is most best at, since many of its scarce resources are compulsorily and inefficiently tied up in the production of commodity Y. The law of comparative advantage highlights the important fact that a protective tariff in Country A wreaks injury on the efficient industries in that country, and the consumers in that country, as well as on Country B and the rest of the world.
Another implication of the law of comparative advantage is that no country or region of the earth is going to be left out of the international division of labour under free trade. For the law means that even if a country is in such poor shape that it has no absolute advantage in producing anything, it still pays for its trading partners, the people of other countries, to allow it to produce what it is least worst at.
In this way, the citizens of every country benefit from international trade. No country is too poor or inefficient to be left out of international trade, and everyone benefits from countries specializing in what they are most best or least bad at – in other words, in whatever they have a comparative advantage.
Until recently, it has been universally believed by historians of economic thought that David Ricardo first set forth the law of comparative advantage in his Principles of Political Economy in 1817. Recent researches by Professor Thweatt, however, have demonstrated, not only that Ricardo did not originate this law, but that he did not understand and had little interest in the law, and that it played virtually no part in his system. Ricardo devoted only a few paragraphs to the law in his Principles, the discussion was meagre, and it was unrelated to the rest of his work and to the rest of his discussion of international trade.
The discovery of the law of comparative advantage came considerably earlier. The problem of international trade sprang into public consciousness in Britain when Napoleon imposed his Berlin decrees in 1806, ordering the blockade of his enemy England from all trade with the continent of Europe. Immediately, young William Spence (1783–1860), an English physiocrat and underconsumptionist who detested industry, published his Britain Independent of Commerce in 1807, advising Englishmen not to worry about the blockade, since only agriculture was economically important; and if English landlords would only spend all their incomes on consumption all would be well.
Spence's tract caused a storm of controversy, stimulating early works by two noteworthy British economists. One was James Mill, who critically reviewed Spence's work in the Eclectic Review for December 1807, and then expanded the article into his book, Commerce Defended, the following year. It was in rebuttal of Spence that Mill attacked underconsumptionist fallacies by bringing Say's law to England. The other work was the first book of young Robert Torrens (1780–1864), an Anglo-Irish officer in the Royal Marines, in his The Economists Refuted (1808).14 It has long been held that Torrens first enunciated the law of comparative advantage, and that then, as Schumpeter phrased it, while Torrens ‘baptized the theorem’, Ricardo ‘elaborated it and fought for it victoriously’.15 It turns out, however, that this standard viewpoint is wrong in both its crucial parts, i.e., Torrens did not baptize the law, and Ricardo scarcely elaborated or fought for it. For, first, James Mill had a far better presentation of the law – though scarcely a complete one – in his Commerce Defended than did Torrens later the same year. Moreover, in his treatment, Torrens, and not Mill, committed several egregious errors. First, he claimed that trade yields greater benefits to a nation that imports durable goods and necessities as against perishables or luxuries. Second, he claimed also that advantages of home trade are more permanent than those of foreign trade, and also that all advantages of domestic trade remain at home, whereas part of the advantages of foreign trade are siphoned off for the benefit of foreigners. And finally, following Smith, and anticipating Marx and Lenin, Torrens asserted that foreign trade, by extending the division of labour, creates a surplus over domestic requirements that must then be ‘vented’ in foreign exports.
Six years later, James Mill led Robert Torrens again in presenting the rudiments of the law of comparative advantage. In the July 1814 issue of the Eclectic Review, Mill defended free trade against Malthus's support for the Corn Laws in his Observations. Mill pointed out that labour at home will, by engaging in foreign trade, procure more by buying imports than by producing all goods themselves. Mill's discussion was largely repeated by Torrens in his Essay on the External Corn Trade, published in February of the following year. Furthermore, in this work, Torrens explicitly hailed Mill's essay.
Meanwhile, at the very time when this comparative cost ferment was taking place among his friends and colleagues, David Ricardo displayed no interest whatever in this important line of thought. To be sure, Ricardo weighed in to second his mentor Mill's attack on Malthus's support for the Corn Laws, in his Essay on... Profits, published in February 1815. But Ricardo's line of argument was exclusively ‘Ricardian’, that is, based solely on the distinctive Ricardian system. In fact, Ricardo displayed no interest in free trade in general, or in the arguments for it; his reasoning was solely devoted to the importance of lowering or abolishing the tariff on corn. This conclusion, as we have noted, was deduced from the distinctive Ricardian system, which was to be fully set forth two years later in his Principles. For Ricardo the key to the stifling of economic growth in any country, and especially in developed Britain, was the ‘land shortage’, the contention that poorer and poorer lands were necessarily being pressed into use in Britain. In consequence, the cost of subsistence kept increasing, and hence the prevailing (which must be the subsistence) money wage kept increasing as well. But this inevitable secular increase of wages must lower profits in agriculture, which in turn brings down all profits. In that way, capital accumulation is increasingly dampened, finally to disappear altogether. Lowering or abolishing the tariff on corn (or other food) was, for Ricardo, an ideal way of postponing the inevitable doom. By importing corn from abroad, diminishing fertility from corn land is deferred. The cost of corn, and therefore of subsistence, will fall sharply, and therefore money wage rates will fall pari passu, thereby raising profits and stimulating capital investment and economic growth. There is no hint in any of this discussion of the doctrine of comparative cost or anything like it.
But how about the mature Ricardo, the Ricardo of the Principles! Once again, except for the three paragraphs on comparative advantage, Ricardo displays no interest in it, and he instead repeats the Ricardian system argument for repeal of the Corn Laws. Indeed, his discussion in the rest of the chapter on international trade is couched in terms of the Smithian theory of absolute advantage rather than of the comparative advantage found in Torrens and especially in Mill.
The three paragraphs on comparative advantage, furthermore, were not only carelessly worded and confused; they were the only account, brief as they were, that Ricardo would ever write on comparative advantage. Indeed, this was his only mention at any time of this doctrine. Even Ricardo's sudden reference to Portugal and his absurd hypothesis that the Portuguese had an absolute advantage over Britain in the production of cloth, seem to indicate his lack of serious interest in the theory of comparative cost.
Furthermore, Ricardo's views on foreign trade in the Principles received almost no comment at that time; writers concentrated on his labour theory of value, and his view that wage rates and profits always move inversely, with the former determining the latter.
If Ricardo had no interest in the theory of comparative advantage, and never wrote about it except in this single passage in the Principles, what was it doing in the Principles at all? Professor Thweatt's convincing hypothesis is that the law was injected into the Principles by Ricardo's mentor James Mill, whom we know wrote the original draft, as well as the revisions, for many parts of Ricardo's magnum opus. We know also that Mill prodded Ricardo on including a discussion of comparative cost ratios. As we have seen, Mill originated the doctrine of comparative cost, and led in developing it eight years later. Not only that: while Ricardo dropped the theory as soon as he enunciated it in the Principles, Mill fully developed the analysis of comparative advantage further, first in his article on ‘Colonies’ for the Encyclopedia Britannica (1818), and then in his textbook, The Elements of Political Economy (1821). Once again, Robert Torrens tailed after Mill, repeating his discussion with no additional insights in 1827, in the fourth edition of his 1815 Essay on the External Corn Trade.16 Meanwhile, George Grote, a devoted Millian disciple, wrote in 1819 an important, unpublished essay setting forth the Millian view on comparative advantage.
And so, once again, James Mill, by the force of his mind as well as his personal charisma, was able to foist an original analysis of his own on to the ‘Ricardian system’.17 It is true that Mill was every bit a fan of the Ricardian system as Ricardo himself; but Mill was a man of far broader scope and erudition than his friend, and was interested in far more aspects of the disciplines of human action. It seems possible that Mill, the inveterate disciple and Number 2 man, was Number 1 man far more often than anyone has suspected.

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Ricardo and the Ricardian system, II: the theory of value

This brings us to Ricardo's theory of value, or price. While Ricardo formally admitted that supply and demand determine day-to-day market pricing, he tossed that aside as of no consequence, and concentrated solely on long-run equilibrium, i.e. ‘natural’ price and the alleged macro-distribution of income in that equilibrium. Utility Ricardo brusquely disposed of as ultimately necessary to production but of no influence whatever on value or price; in the ‘value paradox’ he embraced exchange value and abandoned utility completely . Not only that: he frankly and boldly discarded any attempt to explain the prices of goods that are not reproducible, that could not be increased in supply by the employment of labour. Hence Ricardo simply gave up any attempt to explain the prices of such goods as paintings, which are fixed in supply and cannot be increased. In short, Ricardo abandoned any attempt at a general explanation of consumer prices. We have arrived at the full-fledged Ricardian – and Marxian – labour theory of value.

The Ricardian system is now complete. Prices of goods are determined by their costs, i.e. by the quantity of labour hours embodied in them, trivially plus the uniform rate of profit. Specifically, since the price of each good is uniform, it will equal the cost of production on the highest-cost (i.e. zero-rent) or marginal land in cultivation. In short, price will be determined by cost, i.e. the quantity of labour hours on the zero-rent land used to work on the product. As time goes on, then, and population increases, poorer and poorer soils must be brought into use, so that the cost of producing corn continues to increase. It does so because the quantity of labour hours needed to produce corn keeps increasing, since labour must be employed on ever poorer soil. As a result, the price of corn keeps increasing. Since wage rates are always kept precisely at the subsistence level (the cost of growing corn) by population pressure, this means that money wage rates must continue to increase over time in order to keep real wage rates in pace with the ever-rising price of corn. Wage rates must increase over time, and hence profits must keep falling until they are so low that the stationary state is reached.

To return to the idea of rent as not entering into cost: if we focus, as we should on the ‘micro’ – on the individual farmer or capitalist – it should be clear that the individual must pay rent in order to gain use of any particular plot of land in the productive process. To do so, he must outbid other firms in his own as well as other industries. Ricardo's refusal to even consider the individual firm, and his focus on holistic aggregates, enables him to overlook the fact that rents, even if differentials, enter into costs the way every expense on factors of production enters into them. This is the only way that is real and that counts in the real world: the point of view of the individual firm or entrepreneur. There is, in fact, no ‘social’ point of view, since ‘society’ as an entity does not exist.

can only increase at the expense of another. But the point of the free market in the real world is that generally production increases, so that the total pie tends to keep rising. And, second, if we focus on individual factors and on how much they earn, as does the later marginal productivity theory (and as did J.B. Say), then each factor tends to earn its marginal product, and we need not even concern ourselves with the alleged but non-existent laws and conflicts of macro-class income distribution. Ricardo kept his eye unerringly on the radically wrong problem – or rather, problems.

Ricardo's system is both gloomy and rife with allegedly inherent class conflict on the free market. First, there is tautological conflict because, given the fixed total, the income shares of one macro-group 

But there is even more class conflict here than implied by Ricardo's tautological macro-approach. For if value is the product solely of labour hours, then it becomes easy for Marx, who was after all a neo-Ricardian, to call all returns to capital exploitative deductions from the whole of ‘labour's’ product. The Ricardian socialist call for turning over all of the product to labour follows directly from the Ricardian system – although Ricardo and the other orthodox Ricardians did not of course make that leap. Ricardo would have countered that capital represents embodied or frozen labour; but Marx accepted that point and simply riposted that all labour producers of capital, or frozen labour, should obtain their full return. In fact, neither was right; if we wish to consider capital goods as frozen anything, we would have to say, with the great Austrian Böhm-Bawerk, that capital is frozen labour and land and time. Labour, then, would be earning wages, land would earn rent, and interest (or long-run profits) would be the price of time.

Recent analysts, in an attempt to mitigate the crude fallacy of Ricardo's labour theory of value, have maintained, as in the case of Smith but even more so, that he was attempting not so much to explain the cause of value and price but to measure values over time, and labour was considered an invariable measure of value. But this hardly mitigates Ricardo's flaws; instead, it adds to the general fallacies and vagaries of the Ricardian system another important one: the vain search for a non-existent chimera of invariability. For values always fluctuate, and there is no invariable, fixed base of value from which other value changes can be measured.

Thus, in rejecting Say's definition of the value of a good as its purchasing power of other goods in exchange, Ricardo sought the invariable entity, the unmoved power:

A franc is not a measure of value for any thing, but for a quantity of the same metal of which francs are made, unless francs, and the thing to be measured, can be referred to some other measure which is common to both. This, I think, they can be, for they are both the result of labour; and, therefore, labour is a common measure, by which their real as well as their relative value may be estimated.

It might be noted that both products are the result of capital, land, savings, and entrepreneurship, as well as labour, and that, in any case, their values are incommensurable except in terms of relative purchasing power, as Say had in fact maintained.

Part of Ricardo's impassioned quest for an invariable measure of values undoubtedly stemmed from his deep-dyed scientism. Ricardo was almost as interested in the natural sciences as in economics. From his early youth, Ricardo was keenly interested in the natural sciences, in mathematics, chemistry, mineralogy and geology. He joined the Geological Society in his 30s shortly after it was founded. It is probable that Ricardo's quest for an invariable measure of values was based on the physical science model; if ‘scientific’ in the physical sciences meant measurement, then surely this would be required in the human sciences as well. As Emil Kauder wrote, ‘I venture to say that Ricardo and his contemporaries believed that economics could only reach the dignity of a science if it could be based on objective measures like the Newtonian Physics’.8

An even stronger and more direct class struggle than that implied by the labour theory of value stemmed from Ricardo's approach toward landlords and land rent. Landlords are simply obtaining payment for the powers of the soil, which, at least in the hands of many of Ricardo's followers, meant an unjust return. Furthermore, Ricardo's gloomy vision of the future held that labour must be kept at subsistence level, capitalists must see their profits inevitably falling – these two classes doing as badly as ever (labour) or always worse (capital) while the idle and useless landlords keep inexorably adding to their share of worldly goods. The productive classes suffer, while the idle landlords, charging for the powers of nature, benefit at the expense of the producers.9 If Ricardo implies Marx, he implies Henry George far more directly. The spectre of land nationalization or the single tax absorbing all land rent follows straight from Ricardo.

One of the greatest fallacies of the Ricardian theory of rent is that it ignores the fact that landlords do perform a vital economic function: they allocate land to its best and most productive use. Land does not allocate itself; it must be allocated, and only those who earn a return from such service have the incentive, or the ability, to allocate various parcels of land to their most profitable, and hence most productive and economic uses.

Ricardo himself did not go all the way to government expropriation of land rent. His short-run solution was to call for lowering of the tariff on corn, or even repeal of the Corn Laws entirely. The tariff on corn kept the price of corn high and ensured that inferior, high-cost domestic corn land would be cultivated. Repeal of the Corn Laws would enable England to import cheap corn, and thereby postpone for a time the use of inferior and high-cost land. Corn prices would for a while be lower, money wage rates would therefore immediately be lower, and profits would rise, adding to the accumulation of capital. The dread stationary state would be put further off on to the horizon.

Ricardo's other anti-landlord action was political: by entering Parliament by joining Mill and the other Benthamite radicals in calling for democratic reform, Ricardo hoped to swing political power from the grip of the aristocracy, which meant in practice the landlord oligarchy, to the mass of the people.

But if Ricardo was too individualistic or too timorous to embrace the full logical consequence of the Ricardian system, James Mill characteristically was not. James Mill was the first prominent ‘Georgist’, calling frankly and enthusiastically for a single tax on land rent. In his high office in the East India Company, Mill felt able to influence Indian government policies.

Before obtaining this post, Mill had characteristically presumed to write and publish a massive History of British India (1817) without ever having been in that country or knowing any of the Indian languages. Steeped in the contemptuous view that India was thoroughly uncivilized, Mill advocated a ‘scientific’ single tax on land rent. Mill was convinced as a Ricardian that a tax on land rent was not a tax on cost and therefore would not reduce the incentive to supply any productive good or service. Hence a tax on land rent would have no bad effect on production – it would only have the effect of eliminating the ill-gotten gains of the landlords. In effect, a tax on land rent would be no tax at all! The land tax could be up to and including 100 per cent of the social product caused by the differential fertility of the soil. The state, according to Mill, could then use this costless tax for public improvement, and largely for the function of maintaining law and order in India.

We see now the pernicious implications of the fallacious view that any part of the expense of production is in some way, from a holistic or social point of view, ‘really’ not a part of cost. For if an expense is not part of cost, it is in some sense not necessary to the factor's contribution to production. And therefore this income can be confiscated by the government with no ill effect. Despite the deep pessimism of Ricardo about the nature and consequences of the free market, he oddly enough cleaved strongly, and more firmly than Adam Smith, to laissez-faire. Probably the reason was his strong conviction that virtually any kind of government intervention could only make matters worse. Taxation should be at a minimum, for all of it cripples the accumulation of capital and diverts it from its best uses, as do tariffs on imports. Poor laws – welfare systems – only worsen the Malthusian population pressures on wage rates. And as an adherent of Say's law, he opposed government measures to stimulate consumption, as well as the national debt. In general, Ricardo declared that the best thing that government can do to stimulate the greatest development of industry was to remove the obstacles to growth which government itself created.

While Adam Smith's free market views concentrated on the sinister nature of predatory government action, Ricardo was particularly struck by government's pervasive ineptness and counterproductivity. A typical and charming note was struck in a letter from Germany by Ricardo to James Mill in 1817: ‘We were very much delayed by the dilatoriness of the German Post, which being a monopoly, is of course very much mismanaged...’.

The paradox of Ricardo's gloom about the alleged class conflict on the free market and his determined opposition to virtually all government intervention was best and most wittily described by Alexander Gray:

Such is the Ricardian scheme of distribution; in place of the old harmony of interest, he has placed dissension and antagonism at the heart of things. ‘The interest of the landlord is always opposed to that of the consumer and manufacturer;’ So also the interests of the worker and the employer are eternally and irreconcilably opposed; when one gains, the other loses. Further, the outlook for all, except the landlord, is a process of continual pejoration.... Yet Ricardo remains immovably non-interventionist. ‘These, then’, he says, ‘are the laws by which wages are regulated’; and he adds inconsequently, ‘like all other contracts, wages should be left to the fair and free competition of the market, and should never be controlled by the interference of the legislature’. In a world of Ricardian gloom one might ask, and did in effect ask, why there should not be interference. An optimist carolling that God's in his Heaven, and that all's right with enlightened self-interest has a right to nail the laissez-faire flag to the mast, but a pessimist who merely looks forward to bad days and worse times ought not in principle to be opposed to intervention, unless his pessimism is so thorough-going as to lead to the conviction that, bad as all diseases are, all remedies for all diseases are even worse.10

Finally, a fundamental and fatal flaw in Ricardo's whole approach in his system was that he started at the wrong end. He began with his overriding focus on the laws of macro-income distribution; his theory of value and price was only a subsidiary appendage, enabling him to maintain that wages are not a part of cost, and therefore that the only influence of rising wages was to cause profits to fall. Ricardo, in short, never grasped the crucial point understood by his continental counterpart, J.B. Say: that there are no laws of macro-income distribution. Economics only establishes ‘micro’-laws determining price, including the prices of the various factors of production. In a sense, of course, the distribution of income in practice is a spin-off of market-determined factor prices; but this ‘distribution’ also depends on entrepreneurial profits and losses, in short on entrepreneurial responses to risk and uncertainty, and on the supplies at any time of the respective factors. None of the latter can be determined by economic theory. Once again, David Ricardo was pursuing a chimera, and in doing so took British economic theory off on a detour, or rather into a dead end.

Put another way, the French (Cantillon-Turgot-Say) analysis of the free market demonstrated that on the market there is no separate ‘distribution’ of income process, as there indeed would be under a state-controlled, or socialist economy. ‘Distribution’ is the indirect consequence of free production, exchange, and price determination.11

All of this escaped David Ricardo, who had little or no conception of the economy as a web of ‘micro’-relations linking together individual utilities, exchanges and prices. As Frank Knight has pointed out, Ricardo, in a letter to his disciple McCulloch, denied that ‘the great questions’ of macro-income distribution were ‘essentially connected’ with the theory of value. And further, Ricardo and his followers gave ‘practically no hint of a system of economic organization worked out and directed by price forces’.12

There is another point that needs to be made about Ricardo's basic economic goal. Chiding Adam Smith for being primarily interested in the total wealth of the nation rather than in the macro-distribution of income, Ricardo pursues his Malthusian hostility to population growth by asking what is the point of looking at gross rather than net income. As Ricardo puts it, in a famous and astonishing passage:

similar? Provided its net real income, its rent and profits be the same, it is of no importance whether the nation consists of ten or of twelve millions of inhabitants.

what would be the advantage resulting to a country from the employment of a great quantity of productive labour, if, whether it employed that quantity or a smaller, its net rent and profits together would be the same... To an individual with a capital of £20,000, whose profits were £2000 per annum, it would be a matter quite indifferent whether his capital would employ a hundred or a thousand men... provided, in all cases, his profits were not diminished below £2000. Is not the real interest of the nation. 

The difference between ten and twelve million may not make any difference to David Ricardo, but it makes a considerable difference, I should think, to the two million who would not have been around, and to their parents, friends and relations. There is no better example of the aggregative utilitarian economist looking upon the economy from the holistic viewpoint of a social slavemaster, rather than from the point of view of individuals on the market. As Alexander Gray, in his witty and perceptive way, puts it:

[Ricardo's] logic would lead to the desirability of the population being reduced to one, and that last remnant producing a vast net surplus with the aid of sorcery and mechanical contrivances. The repellent doctrine that man exists for the production of wealth, rather than that wealth exists for the use of man, here finds its classical utterance.

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