2017-06-12

The Fairy Tale of Capitalism: Managers, Professors and Engels


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The motifs of FTC the Fairy Tale of Capitalism give hope and value to many people.



Friedrich Engels 1820-1895 (Wikipedia)
Once upon a time, a German boy dropped out of high school. His father sent the boy to Bremen to take a job we of modern times would call an intern office clerk in a commercial business. He read the philosopher Hegel in his spare time and wrote newspaper articles. His mother begged him to stop writing such scandalous ideas. His name was Friedrich Engels, the “forgotten” Old One. At 21, he joined the army which ordered him to Berlin. Thus began his adventure. He would shake the world. The aftershocks continue even in our modern times.  

In his spare time, the young man attended university classes but never got a degree. He hung out with a group called the “Young Hegelians”. He wrote controversial articles. The editor of a political newspaper published the articles.

Engels wasn’t in Berlin long. He went to Manchester in Lancashire, England to work with his father’s partner in the Manchester office of the family business, a thread factory in that city. At the time, Manchester and the surrounding Lancashire County were the world’s manufacturing center. The city was the throbbing innovative edge of the most advanced technologies, using steam and water to power spindles and looms for manufacture of textiles. The city also hosted an array of other industries as well. It was full of factories, each employing several hundred workers, a way of working made possible by powered machinery. Manchester was a boom town.

Engels took great interest in the lives and working conditions of the factory Workers. He went down from the company office to get to know them. He visited them on the job. He wandered the streets at all hours, ate and drank with the workers, and learned their ways. He took copious notes. To his German editor, he sent several articles which he subsequently collected into the book “The Condition of the Working Class in England , both a detailed economic history and a polemic.

Engels wrote “Conditionin the style which the times favored. You may recognize this style from your reading his contemporary Charles Dickens. Long strings of words form sentences that cascade over two or three pages.

Engels documented the utter poverty in which many Workers died from starvation and disease. The Workers typically shared a bed of rags with six or eight comrades in a leaky house without furniture. He saw children, women and men working 70 or 80 hours per week for wages of pennies. He read reports of doctors, police and government agencies describing the illnesses of Workers living in squalor. In the factories, strained working postures and dangerous equipment injured Workers. Bad light and detailed work blinded makers of lace and fine threads. If they survived, infirmities often disabled them for work. They sometimes lived to 40 or 50 years of age.

The Workers, or “proletarians”, in the textile factories of Manchester had no, or very little, property from which to get income. Engels included the petite bourgeoisie, the people who owned small shops selling modest goods, among the proletarians.  Their lack of property distinguished them from the bourgeoisie, the capitalists who owned property, among whom he included the nobility. To sustain their lives, the proletarians had only their Labor. The wages of Labor sufficed to sustain their lives for at most the next few days.

Technical innovation enabled lower product prices, because the new methods could produce much more product with the same quantity of Labor. People who wove cloth by hand in their cottages fell on bad times. They couldn’t sell their product at the low prices of machine-made goods. The cottage weavers moved to Lancashire to find work in the factories.

Samuel Compton's Spinning Mule (circa 1779), image by Pezzab
The owners of property, the bourgeoisie or middle class, as Engels called them, began to receive orders for manufactured goods from distant markets, colonies and other countries where buyers couldn’t get similar goods so cheaply from local sources. To meet demand, they would activate idle factory capacity, hiring Labor from the “unemployed reserve” to operate the machines. As orders continued, owners invested Capital to buy the latest versions of automated spinning machines and hired more Labor from the reserve.

Orders grew in size and number. Commerce boomed. Workers were a bit more scarce during short periods of the boom. To to entice them to fill the last vacancies in the factory, the bourgeois owner offered a little more pay for short periods. The Workers liked the modestly improved diet and housing the higher wages made available. The slightly better pay brought more Workers to the factories of the bourgeoisie. The factory owner called for additional production in anticipation of future orders, which continued to arrive for a few years. Bourgeois neighbors, encouraged by the example of the successful factory, set up their own factories, too. Times were good.

It came to pass that production outpaced the slowing stream of buyers’ orders. Overproduction resulted in glut of product. Factory owners reduced prices to clear unsold inventories. They dismissed some Workers and reduced hours of operation. The money Workers got from wages fell even below the cost of sustenance. In some cases, the owners ceased operation and closed the factory.

The bad times returned. Discharged Workers joined the “unemployed reserve”. Having no wages, they had no means to pay for rent and food. Landlords evicted many. Starvation and disease reduced the numbers of the “unemployed reserve”. New orders for goods didn’t cease entirely, but sank to low levels easily met by remaining inventories and the production from remaining factories.

A new machine would lower the cost of making product, often by more advanced automation requiring fewer Workers for operation. Initially, the owners had higher rates of profit with the new machines, even while the lower prices of product attracted more orders. A new period of good times began.

We aren’t certain Engels knew the works of Sismondi who wrote an early description of episodic economic crises. Engels traced the repetition of boom and bust in the factories of Manchester and figured it to recur every ten years plus or minus a few years. Later Economists also considered these fluctuations. A widely shared consensus view developed during the time of the Great Wars, and the Professors began singing the song “The Business Cycle Goes Up and Down”.

The Professors, and we mean the Business School Professors, studied the Tales of the unintelligible Economists. The Professors interpreted the Tales and composed their understandings in the more marketable form of songs. Some of the Professors were themselves Economists, but that’s another story.

Sir Richard Arkwright 1732-1792,
one of Lancashire's early capitalists.
Portrait by Mather Brown.
The Professors performed their songs in the business schools for the students who listened carefully so they could become Managers or Professors or Economists. Some of the students would become Supercompensated CEOs and would donate large amounts of money to their favorite business schools to employ Professors. Thus, in the songs, the CEOs were Ingenious Innovative Job Creators, great leaders, and the vital sina qua non of the Society. The Professors published their songs in the journals. Hoping for tenure, many also composed long chansons de geste (or sagas) which they published as books, not uncommonly sold to students at high prices. Few of the published chansons were ever sung at all except for a selected stanza or two. None were ever sung in their entirety.

In our modern age, the Professors’ repertoire includes songs ranging from the classic “Led by the Invisible Hand” to the recent hit “Quantitative Ease”, still popular at this writing. As a historical note, there is a list of songs, believed to be an all-time greatest hits list, compiled, we think, by a Professor “Captain” Ed Murphy of Caltech in Pasadena, California circa 1965. Per legend and rumor, at Edwards Air Force Base in California during the great wars, after a scientific experiment performed by his assistant, a Dr. Stapp, Murphy articulated the well-known natural law “If anything can go wrong, it will.” A rumored many times photocopied one-page biography bore his portrait. Unfortunately, due to a fire that destroyed department records, we know nothing more of Professor Murphy. Here is the list of songs from Murphy's list:

“...High Plateau” [Song not recognized. Initial part of the paper is burned away.]
“Growth of GDP”
“Corporations Serve the Interests of the Shareholders”
“Mark to Market”
“Led by the Invisible Hand”
“Inelastic Supply Blues”
“Total Quality Control”
“Looking for my Marginal Return”
“Debits on the Left”

But we digress. People who wanted to be Managers learned many of the songs (at least long enough to take the exam). Managers oversee the planning and operation of Firms and the direction of Workers. Peter Drucker https://smile.amazon.com/dp/0061345016, a highly esteemed Professor and composer of dozens of chansons, taught that the main job of a Manager was to choose, according to candidates’ best capabilities, the subordinates who could best do the job. The notion of Management originated early in the period of the Great Wars. Before then, there were overseers and Workers. In our modern times, four kinds of Managers have evolved.

Supervisors - Managers who manage Workers directly.

Directors - Managers of Managers. Not to be confused with the members of the Board of Directors.

Executives - A small subset of Managers, typically no more than a half-dozen per Firm. The Executives have authority over all the other Managers of the Firm.

Chief Executive Officer or CEO - Equivalent to President. The most highly ranked Manager in the Firm. The CEO can tell any of the Workers or other Managers what to do.

In Engels’ Manchester, each factory had a single manager, similar to a modern CEO, usually the owner or a relative of the owner. The only other kind of manager in the factory was the overseer, something like our modern Supervisor.

Thomas High's Spinning Jenny circa 1764
Ricardo said the value of Labor equaled the cost of subsistence. The capitalist collected the full price of the product, less the rent paid for the Land and the wages paid to Labor. The capitalist’s profit captured the value of changes in price of product. The rent on Land depended on its usefulness relative to other tracts of Land. The wages of Labor tended toward the value of necessities to sustain the Workers’ human lives, which seldom changed much. Wages and rent didn’t vary with the price of the product. If a high product price or lower cost of production occurred, neither rent nor wages would increase, but the additional value would go to Capital.

Engels saw that, at the factories of Lancashire, in the course of a business cycle, to maintain or improve their profits, the bourgeoisie would seek to reduce wages or to get more Labor for a given wage. In “Condition, Engels diagnosed the private ownership of property, lying at the core of the “factory system” or “capitalist system”, as the cause of the Workers’ distress. Since higher wages reduced Capital’s profit, Engels saw the interests of the Workers in direct opposition to the interests of the bourgeoisie. He saw that the state served the bourgeoisie who sustained and directed the state. The Workers interacted with the state only when imprisoned or beaten by the police. Engels predicted that the bourgeoisie would accord Workers no improvement of their condition, and that the Workers would, with certainty, wrest control from the bourgeoisie by violent revolt, for they had no other recourse.

Violent Workers’ revolt to effect change in the treatment of Workers wasn’t a new idea with Engels. Perhaps he had heard of the Merthyr Rising of 1831 or the Newport Rising of 1839. In any case, his writings usually mentioned violent revolt.

Engels’ Berlin editor was the Old One Karl Marx. In our story, FTC the Fairy Tale of Capitalism, these two great villains threatened the Society. The two young villians had hit it off from the start. “Conditionwas first published by Marx in a series of articles subsequently compiled as a book in 1845. Four years later, they collaborated to produce “Manifesto of the Communist Party.

“A spectre is haunting Europe”, they wrote.  The “Manifesto” encouraged Workers worldwide to overthrow the bourgeoisie with violent revolution.

“The Communists disdain to conceal their views and aims. They openly declare that their ends can be attained only by the forcible overthrow of all existing social conditions. Let the ruling classes tremble at a Communistic revolution. The proletarians have nothing to lose but their chains. They have a world to win. Workingmen of all countries unite!”

And capitalists worldwide did tremble and oppose the Communists. Engels, the scion of a bourgeois capitalist, had called out his foe. In decades to follow, capitalists, monarchies and empires fell to revolutionaries quoting Marx and Engels. In various regions of the world, some form of collective ownership of the means of production replaced the private property of the bourgeoisie.

In 1867, Engels and Marx published their collaboration, the immense book “Capital, identifying Louis Blanc’s notion of “Capitalism” as the current phase of the evolution of civilization. The Old Ones Adam Smith and David Ricardo simply described the economic system of private property and free exchange by which the world worked. Engels and Marx said there was an alternative. They called the existing system “Capitalism” and said “Communism” was an alternate and “inevitable” successor system.

In our Fairy Tale of Capitalism, no good comes from Communism, and it threatens the Society. Capitalists adopted the term “Capitalism” to describe themselves, their adherents, and the Old Ones Adam Smith and David Ricardo (who had never heard of Capitalism). Communists, said the Capitalists, were all those who challenged Capitalism, and by challenging Capitalism, they threatened the civilization on which Society depended.

Marx and Engels challenged Capitalism. They predicted a violent proletarian revolution (though Engels wrote in his preface to the 1886 English edition of “Capitalthat England might effect the revolution peacefully). Communism is the evil menace in FTC that the CEOs and Aristocracy feel called to conquer.

Notably, Engels and Marx articulated an idea that was then novel but seems quite natural in our modern times: that history has an economic basis. They said innovations in economic means of production shape social systems and the trajectory of history. But that’s another story.  


“Causes of Civil War are also, that the Wealth of the Nation is in too few mens hands, and that no certain means are provided to keep all men from a necessity either to beg, or steal, or be Souldiers.”
-- William Petty 1623-1687




I wish to thank my several good friends who read prepublication drafts and offered corrections and advice.

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Images

Image: [Public domain] Sir Richard Arkwright (1732-1792) portrait by Mather Brown (1790, Wikipedia)

Image: [Creative Commons Attribution-Share Alike license] Samuel Compton’s Spinning Mule (circa 1779, image by Pezzab, Wikimedia)

Image: [Public Domain] Friedrich Engels 1820-1895 (Wikipedia)

Image: [Public Domain] Thomas Highs’ spinning jenny (circa 1764, Wikipedia), published in Edward Baines, “History of the Cotton Manufacture in Great Britain” (1835)


Sources

Daniel Brockman, “CEOs, Growth and Prosperity of Society” (Mar 31, 2017, https://daniel-brockman.blogspot.com/2017/03/ftc-ceos-growth-prosperity-society.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Land and Ricardo” (Apr 27, 2017, https://daniel-brockman.blogspot.com/2017/04/FTC-Land-and-Ricardo.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Supercompensation, Income and the Exchange” (Apr 6, 2017, https://daniel-brockman.blogspot.com/2017/04/ftc-supercompensation-income-the-exchange.html)

Daniel Brockman, “The Fairy Tale of Capitalism: Workers, GDP and Economists” (Mar 17, 2017, https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-workers.html)

Peter Drucker, “The Essential Drucker” (2001, https://smile.amazon.com/dp/0061345016)

Friedrich Engels, “The Condition of the Working Class in England” (1845, http://amzn.to/2snelK9)

Friedrich Engels, Paul Sweezy (tr), “The Principles of Communism” (1847, Creative Commons Attribution-ShareAlike 2.0 license, https://www.marxists.org/archive/marx/works/1847/11/prin-com.htm)

Andrew Hill, “The management revolution” (Jun 12, 2013, Financial Times, https://www.ft.com/content/25def0a6-d352-11e2-b3ff-00144feab7de)

Mark Hulbert, “New CEO is Ford’s Hail Mary pass” (May 23, 2017, Marketwatch, http://www.marketwatch.com/story/new-ceo-is-fords-hail-mary-pass-2017-05-23)

Karl Marx, Friedrich Engels, Samuel Moore (tr),  “Capital: Critique of Political Economy” (1867, http://amzn.to/2sEPAsr)

Karl Marx, Friedrich Engels, Samuel Moore (tr), “Manifesto of the Communist Party” (1848, Marx/Engels Internet Archive, Creative Commons Attribution-ShareAlike license, https://www.marxists.org/archive/marx/works/1848/communist-manifesto/index.htm)

Pedro Schwartz, "Capitalism and Its Names" (Nov 7, 2016, Library of Economics and Liberty http://www.econlib.org/library/Columns/y2016/Schwartzcapitalism.html)

"J.C.L. Simonde de Sismondi” (Biography.com https://www.biography.com/people/jcl-simonde-de-sismondi-37535)

Note: We regret we have mislaid our note citing the source of our information regarding Professor “Captain” Ed Murphy.


2017-05-19

Notes from the Observatory: ETF Price History Predicts Performance


In this article, I report on some recent findings from my little nonrigorous garden of stock market metrics. Due to the small number of observations (36 index ETFs and 55 individual stocks), we must consider these findings as hypotheses, rather than fully reliable assessments. I’ll be interested to know if you have confirming or contrary information.

The ten-year history of price growth for index ETFs correlates (R^2=.34) positively with future prices. A higher rate of historical growth predicts increasing price.

This contrasts with our observation in January.

We found no significant similar relationship for individual stocks.

The annualized dividend growth over the previous five years for index ETFs correlates (R^2=.24) positively with future price changes. Index ETFs with higher rates of dividend growth tend to increase in price.



We saw similar results previously in January and last July.

We found no significant similar relationship for individual stocks.

We found price to book ratio mildly correlated positively with future stock price among individual stocks with price to book ratio less than 20.

We found no significant price predictors among these metrics:
1. Price to book ratio for ETFs.
2. Market capitalization.
3. Revenue growth for individual stocks.




Disclosure:

Daniel Brockman owns index ETFs VOO, SLYG, XBI, SLYV, EWJ, MDYG, EWU, FEZ, VNQI, VNQ and VHT.




2017-04-27

The Fairy Tale of Capitalism: Land and Ricardo




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Often, the Staff of the Aristocrats, and sometimes the Aristocrats themselves, would mention the motifs of FTC the Fairy Tale of Capitalism. 



Phillips, Portrait of Ricardo (1821)

Once upon a time, the Old One David Ricardo (1772-1823) composed some of the earliest Tales. Modern economics emerged from Ricardo’s insights. These include the Labor Theory of Value, a correction to the Theory of Rents advanced by Adam Smith, another Old One, and another theory called the Principle of Comparative Advantage. The Professors continued singing of these Tales long after the great wars. In this story, we get acquainted with Ricardo, dash through Rents on Land, then dash through the Comparative Advantage, and wind up contemplating some omissions.

Ricardo was a trader. He looked for differences in values of financial contracts that had the same price, and differences in prices for contracts that had the same value. Taking advantage of these differences, he became quite wealthy trading on the Exchange

Since he was an Old One, we think of Ricardo as wise, though charmingly antique in his Tales. Charm would suggest that we understand the Tales clearly, but we don’t. If we were Professors, our incomes would depend on our understanding the Old Ones, so we wouldn’t likely admit we didn’t. The Professors studied and debated Ricardo’s Tales without conclusion, because of and without admitting their lacunae of understanding.

Ricardo left unexplained holes in his Tales, as though a carpenter had overlooked erecting a wall of a house, or a portrait painter forgot the eyeballs. Unintelligibility and missing parts obstruct our understanding.

Like all Old Ones, Ricardo was an Economist. Like all Economists, he was fundamentally unintelligible. His Tales often twisted into lists of cases, for example, plots of Land put under cultivation as Farms No. 1, No. 2 and No. 3 of equal area, producing respectively 180 quarters of corn, 150 quarters and 120 quarters, requiring contributions of Labor of 10 Workers each, with equal Capital contributions, and with corn selling for 6 shillings per quarter. 

Our heads fill to capacity with the tangle of numbers. Even so, at this point in his Tale, he would change something in that list. Then he would roll through the entire list again tracing out the numbers that changed and the numbers that didn’t change. We get kaleidoscopic feelings. We wonder if we’ve witnessed a magician’s sleight-of-hand illusion. So when reading the following summaries of some of Ricardo’s Tales, if the paragraph gets too dense, just skip to the next picture or table.

After the great wars, hardly anyone in the Society measured quantities of corn in quarters. Most people didn’t know what a quarter was, except maybe USD 0.25, which made no sense in understanding Ricardo. Some Professors rumored that Ricardo’s corn wasn’t like popcorn, or grits or the corn in taco chips, but rather something like wheat. Most people living in the modern Society knew a shilling was an archaic unit of currency, but nobody used them any more, because it was too difficult to explain how to count shillings.


Despite these concerns, we can understand Ricardo relatively easily for an Old One. He ran for office successfully and became a member of the British Parliament in 1818. According to a rumor among some Professors, the Parliament paid him a consulting fee to instruct them on the Principles of Political Economy, which would be the title of his greatest book.

Ricardo’s Theory of rents was perhaps his most powerful Tale. Ricardo described rents as income from Land. And Land was one of the three factors of production: Labor, Land and Capital. Adam Smith said rents are money a person can get while hardly doing a lick of work. Ricardo said that’s because the rent getter has something the nearest competitor can’t offer. Ricardo said that when the farmer establishes Farm No. 1, there aren’t any other farms around. The landlord lets the farmer cultivate the Land for a modest fraction of the crop, just a ceremonial payment to seal the contract. The Land of the prospective farm, like all the other Land around, hasn't any previous use. The farmer can just as well plow the adjacent plot of Land not under the landlord’s control, so the Land of No. 1 is worth nothing until farmed.

We will summarize the explanation of rents, but if the tangle of numbers becomes a blur, just skip to the song in italics.

The farmer chooses this Land for Farm No. 1, because it has the best soil and drainage and other helpful attributes. The farmer’s Labor, the employees, work the Land for all it can produce, which is 180 quarters of corn in that year, worth 900 shillings at 5 shillings per quarter. With the 900 shillings, the farmer pays the wages, the return on Labor, of the employees and the costs of fencing, plows, a wagon to take the quarters of corn to market, and return on Capital which is a truly few shillings for his own pocket.

After a few years of corn production, the well-fed population grows more numerous and demands more corn. A farmer cultivates Farm No. 2 to meet the demand. Now No. 1 is on the best land, and No. 2 is less well endowed. No. 2 produces only 150 quarters with the same amount of Labor. 150 quarters at 5 shillings is 750 shillings from Farm No. 2. Plus, No. 1 still produces 180 quarters, also at 5 shillings for 900 shillings. The landlord of Farm No. 1 now demands the difference, 150 shillings ( = 900 - 750 ) as rent on No. 1, the prime Land. No. 2 produces no rent, because any rent would wipe out the return on Capital. 

The population expands further, demanding more corn. A farmer tells a merchant that with the cost of Labor and Capital such as they are, the farmer can’t plow Farm No. 3 profitably at 5 shillings per quarter, because the price wouldn’t pay the Workers and the return on Capital. The merchant, who expects to sell corn to the population, offers 6 shillings per quarter. The farmer agrees, hires some Workers and cultivates No. 3. At harvest, No. 1 produces 1080 shillings ( = 6 shillings times 180 quarters ), No. 2 produces 900 shillings ( = 6 times 150 ), and No. 3 produces 720 shillings ( = 6 times 120 ). The landlords demand from the farmers a rent of  540 shillings, which is 360 shillings ( = 1080 - 720 ) for No. 1, 180 shillings ( = 900 - 720 ) for No. 2 and nothing for No. 3. 

When the Professors rendered Ricardo’s Tale of rents as a drinking song, they roared out this chorus:


Higher rent causes higher price,
Said Adam Smith,
But his was an err-oh.
Higher price causes higher rent,
Correctly saw Ricard-oh. 

Elena House (2013) sings "Libiamo ne’ lieti calici" from "La Traviata" (1853) by Verdi

Ricardo's most penetrating insight comes down to us, gleaming like a brilliant star. In Chapter 7: On Foreign Trade, “Principles”, in a Tale tricky to relate and slippery in the understanding, Ricardo identified a country’s Comparative Advantage, that which it does best, as its best choice for export. As in all his Tales, Ricardo confounds the understanding by weaving in an additional plot line, this one concerning the mechanics of trade finance. And as in all his Tales, the source of value is the Labor required to produce it. With apologies to the Old One, and to economize your time, we shall put Ricardo’s Labor Theory of Value aside, for that’s another story. 

Again, we summarize a tangle of numbers. If it gets incomprehensible, then skip to the next picture.

In the Tale of Comparative Advantage, there are two countries, England and Portugal. England can produce 1,000 bolts of cloth with the Labor of 100 Workers in one year. Or England can produce 1,000 bottles of wine with the Labor of 150 Workers in one year. England can more easily produce a bolt of cloth than a bottle of wine. For every bottle of wine, England gives up 1.50 ( =150/100 ) bolts of cloth. So we say England has a Comparative Advantage in producing cloth.

Portugal, owing to different circumstances, can produce 1,000 bottles of wine with the Labor of only 80 Workers in one year, and 90 Workers can produce 1,000 bolts of cloth in a year. Portugal can more easily produce wine than cloth. Portugal can export wine in exchange for cloth, even though they could produce the cloth locally with less Labor than England could produce cloth. For every bottle of wine, Portugal gives up 0.89 = ( 80 / 90 ) bolts of cloth. Portugal has a comparative advantage in producing wine.

If Portugal shifts 16 Workers out of cloth production and into wine, then Portugal can produce and export 200 bottles to England. Those 200 bottles get 300 bolts of cloth in England to take back to Portugal. Net of exports and imports, that is, local production plus imports minus exports, Portugal now has 1,000 bottles of wine, 1200 bottles produced by 96 Workers, less 200 bottles exported to England, and 1,122 bolts of cloth, 822 produced locally by 74 Workers ( = 1,000 * (90 - 16) / 90 ), plus 300 from England.

And England shifts 30 Workers out of wine production to put 130 Workers to producing 1,300 bolts of cloth. England sends 300 bolts of cloth to Portugal and gets 200 bottles of wine. Net of exports and imports, England now has 1,000 bolts of cloth produced by 130 Workers, and 1,100 bottles of wine, 800 produced locally by 120 Workers ( = 1,000 * (150 - 30) / 150 ), plus 300 from Portugal.


Making Cloth. Photo by Louis Hine circa 1937.



Both England and Portugal have more by concentrating on their comparative advantage than they would have had by producing everything locally. Ricardo reveals the surprising and profound insight of the Principle of Comparative Advantage: Portugal benefits from trading with England even though Portugal makes both wine and cloth better than England makes either wine or cloth.   


In theory, capitalists and consumers will prefer for Labor to migrate to Portugal, there to make both wine and cloth. The returns to Capital are higher and the cost of product lower. In practice, both Capital and Labor encounter constraints in migrating among countries. 

But Ricardo left some things out. In “Principles”, an hour of Labor has the same value, whether spent making wine or cloth. In Chapter 5, “On Wages”, Ricardo clearly states the natural price of Labor, the wage, will never long remain much more nor less than subsistence, just enough to stay alive. If the wage rises unusually high, as sometimes it will, then Workers will prosper and their numbers increase. When the number of Workers increases beyond the demand for Labor, then the wage falls. When it falls even below subsistence, as sometimes it will, then privation will reduce the number of Workers, until demand exceeds the supply of Labor. So the ability of Workers to buy produce of the land changes little. We see that England has more wine when England trades with Portugal, and Portugal has more cloth. The Workers receive approximately the same wage, enough to survive, and not enough to buy more wine and cloth. Though the country has more wine or cloth, an individual Worker has no more than she had before. Ricardo’s Tale doesn’t say who gets the additional wine and cloth.

Another omission from Ricardo’s Tale concerns the fates of Portuguese cloth Workers who can’t find a vineyard to hire them because they haven’t sufficient experience at winemaking. The cloth mill has curtailed operations and demands less Labor. The Workers’ total wages from making cloth no longer suffice to maintain their families and they face privation. Ricardo doesn't tell us in any detail what becomes of the Workers. He says the privation reduces the supply of Labor. 

Ricardo, the wise Old One left out these parts. We can’t fault him for all he didn’t do, for which of us has not left something undone? Euclid didn’t discover calculus, and Newton didn’t envision Einstein’s Theory of Relativity. Euclid and Newton described great and enduring theories, and so did Ricardo.

Ricardo lived in an ancient age when Land and Labor had great importance in production and distribution of goods and services in the Society. Dr. Leigh Shaw-Taylor and his colleagues at the Cambridge Group for the History of Population and Social Structure estimated the occupational distribution of England and Wales in 1817 from baptismal records of the occupations of fathers, militia records and other sources. About 35% of the working population worked in agriculture, cultivating the Land. Another 40% were in “secondary” occupations, manufacturing goods from agricultural and mining products, including large numbers employed in textiles, construction, footwear, clothing and food. The remainder were “tertiary” roles, merchants, dealers, government and transportation. Incidentally, the statistical tables show 1.31% of occupations were “Distinguished, titled, gentleman”, and 0.03% were “Owners, possessors of capital”. Almost everyone had some understanding of agricultural Land, Labor and Capital. 

In the modern Society, after the great wars, agriculture had diminished in importance.  The United States Bureau of the Census reported that for 2012, agriculture employed 161k people, less than 0.2% of all employed persons. Most people had forgotten about farming and Land rents. In the modern Society, Capital had risen in importance, and sophisticated machines began to displace Workers.

In the modern Society, IP Intellectual Property and market domination produced rents similar to rents on Land described by David Ricardo. Some economists said that CEOs, a kind of Manager, sought rents as Supercompensation, but that is another story.  

Some Workers in the modern Society worried that trade with foreigners would shift them from their source of wages. They became suspicious of the songs of the Professors. They became suspicious of theories. Good children who listened to their parents learned some version of the quote attributed to Jan L. A. van de Snepscheut


In theory, there is no difference between theory and practice, 
but in practice, there is.  



I wish to thank Dr. Dennis Martin for his alert correction of my arithmetic, and Dr. Leigh Shaw-Taylor for his advice on source materials. I also wish to thank several good friends who read prepublication drafts and offered corrections and advice.



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Images


Image: [Permission requested] Elena House, soprano, “Libiamo ne’ lieti calici” (performed 2013) from “La Traviata” (1853) by Giuseppe Verdi, https://youtu.be/V3ochPOtbyM?t=1m12s Image: [Public domain] Making cloth, Louis Hine (1874-1940), “Paterson, New Jersey - Textiles. [Man working at machines.]” (1936-1937, National Research Project, NARA), https://commons.wikimedia.org/wiki/File:Paterson,_New_Jersey_-_Textiles._(Man_working_at_machines.)_-_NARA_-_518626.jpg Image: [Public domain] Thomas Phillips, Portrait of David Ricardo (1821, National Portrait Gallery), downloaded from https://en.wikipedia.org/wiki/David_Ricardo#/media/File:Portrait_of_David_Ricardo_by_Thomas_Phillips.jpg Apr 2017. While the National Portrait Gallery has claimed ownership of photographs of the portrait, itself a work of art in the public domain, the Intellectual Property Office cited in Nov 2015 the opinion of the European Court of Justice that rights may attach to original works, and not to photographs of original works, and US law (Bridgeman v. Corel, 1999) is consistent with the European Court. Image: [Public domain] Shilling.



Sources

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Daniel Brockman, “The Fairy Tale of Capitalism: Supercompensation, Income and The Exchange” (Apr 2017), https://daniel-brockman.blogspot.com/2017/04/ftc-supercompensation-income-the-exchange.html


Daniel Brockman, “The Fairy Tale of Capitalism: The Buyer of Labor and the Nine Percent” (Mar 2017), 
https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-buyer-of.html


Daniel Brockman, “The Fairy Tale of Capitalism: Workers, GDP and Economists” (Mar 2017), https://daniel-brockman.blogspot.com/2017/03/the-fairy-tale-of-capitalism-workers.html


Anthony Caruso, “Statistics of U.S. Businesses Employment and Payroll Summary: 2012; Summary Statistics by NAICS Sector and Enterprise Employment Size: 2012; Appendix Table 1” (Feb 2015, U.S. Census Bureau), https://www.census.gov/content/dam/Census/library/publications/2015/econ/g12-susb.pdf


Debasish, “Adam Smith Theory of Development in Economics (Main Features)” (downloaded Apr 2017), http://www.economicsdiscussion.net/economics-2/adam-smith-theory-of-development-in-economics-main-features/4514


Jason Furman and Peter Orszag, “A Firm-Level Perspective on the Role of Rents in the Rise in Inequality” (Oct 2015), https://obamawhitehouse.archives.gov/sites/default/files/page/files/20151016_firm_level_perspective_on_role_of_rents_in_inequality.pdf


P. M. Kitson, L. Shaw-Taylor, E. A. Wrigley, R. S. Davies, G. Newton, and M. Satchell, “The creation of a ‘census’ of adult male employment for England and Wales for 1817” (May 2010, Cambridge Group for the History of Population and Social Structure, Department of Geography, University of Cambridge), http://www.geog.cam.ac.uk/research/projects/occupations/britain19c/papers/paper2.pdf


David Ricardo, “On the Principles of Political Economy and Taxation” (1823) http://amzn.to/2ogjuFs

Wikiquote, “Jan L. A. van de Snepscheut” (retrieved Apr 2017), https://en.wikiquote.org/wiki/Jan_L._A._van_de_Snepscheut



Daniel Brockman, "Venus over Diamond Head" (Apr 2017)