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 1,050 bottles of wine, 750 produced locally by 90 Workers ( = 1,000 * (120 - 30) / 120 ), 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. 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

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


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)








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