Two hundred years ago, David Ricardo explained why foreign trade was beneficial; today's trade-deal opponents ignore him at their peril.
Congress recently (and begrudgingly) gave President Obama a victory by passing a bill that grants him so-called fast-track authority to negotiate trade deals. But the trade pact for which Obama sought that authority, the Trans-Pacific Partnership (TPP), remains in serious danger, with months of negotiation ahead and the possibility of congressional rejection still looming. Opponents of the 12-nation TPP offer all sorts of reasons for their stance: they say the bill was negotiated in secret, that it will heighten inequality, that it will raise the prices of certain drugs, that it will be bad for the environment, that it will tilt the scales in favor of investors in international trade disputes.
But underlying what in some cases are reasonable but sideline concerns, the bill’s opponents claim that the TPP will cost America jobs. This is the age-old populist fear of free trade, rearing its protectionist head in the 21st century.
If organized labor, along with House Democrats and anti-trade Republicans, succeed in killing the bill, they’ll be handing a defeat not only to President Obama but to the legacy of David Ricardo, one of history’s most influential economists and, not coincidentally, probably the wealthiest economic theorist who ever lived.
Ricardo, who died almost 200 years ago, has been dragged into the sometimes nasty TPP debate by economists and legislators alike. Last spring, Greg Mankiw, who teaches economics at Harvard and is a fan of the trade bill, wondered in print, “If Congress were to take an exam in Economics 101, would it pass?”
Paul Krugman, the liberal New York Times pundit, viciously rejoined, “OK Greg Mankiw has me puzzled. Has he really read nothing about TPP? Is he completely unaware of the nature of the argument?… David Ricardo is irrelevant.”
To which Mankiw, formerly George Bush’s chief economist, replied, “Oddly, Paul Krugman thinks that TPP is not really about trade.” Even Rep. Sander Levin (D-Mich.), a ranking opponent of TPP, has cloaked himself in Ricardian cloth, referring, in a peroration in which he put a hammer to the legislation, to the “classic theory of trade gains first expounded by David Ricardo.”
It was Ricardo who distilled the principle of “comparative advantage,” or the idea that two nations would each benefit by letting the other export the goods at which it was more productive. The economist Ronald Findlay has called Ricardo’s theory “the deepest and most beautiful result in all of economics.” No modern economist has done more to explicate Ricardo’s theory than Krugman, such as in his searing essay of some years ago, “Ricardo’s Difficult Idea,” in which Krugman accused intellectuals who didn’t understand free trade of “refus[ing] to sit still for the 10 minutes or so it takes to explain Ricardo.”
Hopefully, at some point before the TPP comes up for debate again, members of Congress will dedicate 10 minutes to learning about the man who, along with Adam Smith and Robert Malthus, virtually invented modern economics, and whose ideas remain relevant in discussions of everything from taxation to inequality. I have lately been reading up on Ricardo, and it turns out that his life story is as fascinating as his work. And but for a personal transformation that happened precisely 200 years ago, the world might scarcely have known of him.
A self-taught economist
British economist and lawmaker David Ricardo (1772-1823), who made a fortune on the London Stock Exchange before devoting himself to the theory of economics.Photograph by Hulton Archive/Getty Images
Ricardo was born in London in 1772, the son of a Dutch-born broker on the London Stock Exchange, and part of England’s tight-knit community of Sephardic Jews. At age 14, he joined his father’s business (he would always regret his “neglected education”).
David was a quick study, but he and his father came to a parting of the ways. In 1793, the 21-year-old Ricardo married Priscilla Wilkinson, an attractive woman of auburn hair and hazel eyes—and of the Quaker faith. The elder Ricardo, an Orthodox Jew, disowned him. David, though, had gained a reputation as a savvy trader, and London merchants loaned him capital to go into business independently. In that era, brokers on the exchange dealt mostly in government bonds, the supply of which was rising, as Britain needed funds to fight a war with Revolutionary France. Ricardo was facile with numbers and blessed with intuition. Within a few years he had become a rich man.
What is remarkable about Ricardo’s biography is that, into his late 20s, he had given no thought to economics. He dabbled in metallurgy and other fields, but not the “dismal science.” However, in 1799 he and Priscilla took a retreat in Bath, where Ricardo visited the library and chanced upon a copy of Adam Smith’s “The Wealth of Nations,” which had been published in 1776. From then on, Ricardo began to study political economy. But he didn’t make his views known until the ripe age of 37.
It was the bullion controversy of the early 19th century that persuaded Ricardo to publish. During the Napoleonic wars the Bank of England suspended gold payments (not unlike the way, at the height of the Vietnam War, the U.S. suspended gold convertibility on the dollar). Inflation—in each era—was the result. In 1810, Ricardo jumped into the fray with an essay, “The High Price of Bullion,” arguing that excessive note issuance had depreciated the currency. His essay had great influence on Parliament, although the inflationary policy persisted. It also brought him into contact with Malthus, then Britain’s most prominent economist.
Ricardo and Malthus agreed on little, but a rich correspondence (and friendship) ensued. In an exchange of more than 100 letters they debated the laws of the evolving science of economics—even whether it was a science. Ricardo’s friendship with another philosopher, James Mill, was perhaps more consequential. The Scotland-born Mill (father of John Stuart Mill) was an unabashed admirer who prodded Ricardo to devote more energy to his emerging career as an economist. In their walks through London, Mill urged Ricardo to publish more.
An insight during wartime
Early in 1815, Ricardo ventured into the debate on trade. The trigger was the protectionist movement swirling in Parliament. During the relative peace that prevailed during Napoleon’s exile, grain prices had weakened. Landlords, who were powerfully represented in Parliament, convinced it to enact grain tariffs (the so-called Corn Laws). Ricardo’s “Essay on the Influence of a Low Price of Corn” argued that the Corn Laws were a mistake, because they resulted in higher rents for an unproductive class (landlord aristocrats) and higher food prices for everyone, to the detriment of both ordinary workers and the industrialists who paid their wages.
What is notable is that Ricardo, by then, was a landlord himself, having purchased an estate in Gloucestershire, establishing him as a man of property and bearer of a coat of arms, but also, Downton Abbey-style, responsible for the village poor.
Mill, by then, was imploring Ricardo to write a grander synthesis of political economy. “I am satisfied,” he wrote in 1815, “that you can not only acquire…reputation, but that you can very greatly improve a science on which the progress of human happiness to a singular degree depends.”
Coincidentally, news that Napoleon had sailed from Elba, presaging a resumption of hostilities between England and France, plunged the financial district into despair. “No political event which I recollect ever occasioned so great a gloom,” Ricardo wrote on March 27, 1815. “At present we have the most dismal forebodings of war, and its consequences on our finances.”
Prices of British government securities collapsed. In June, Napoleon invaded Belgium, where a British army awaited. Ricardo chose this moment to subscribe, heavily, to government loans. Lord Wellington’s crushing victory over Napoleon at Waterloo on June 18, 1815 resulted in a bullish stampede. His biographer, David Weatherall, estimates that, thanks in large part to this windfall, Ricardo amassed a fortune of a half-million pounds (more than $1 billion today).
An artist’s depiction of the Battle of Waterloo. Britain’s defeat of Napoleon, on June 18, 1815, helped make David Ricardo a very wealthy man. (Photo by: GSinclair Archive/UIG via Getty Images)Photograph by GSinclair Archive UIG via Getty Images
Now fabulously wealthy, Ricardo fully retired from the exchange, and Mill pressed him to write his opus. Ricardo, though, was plagued with doubts. He wrote to the French economist, Jean-Baptiste Say, “I fear the undertaking exceeds my powers.”
But Mill was relentless. “My friendship for you, for mankind, and for science, all prompt me to give you no rest,” he wrote. Ricardo was warming to the task, especially as he realized that his opinions “differ[ed] from the great authority of Adam Smith, Malthus &c.”
The faithful Mill assumed the role of “schoolmaster,” advising Ricardo to write as if for readers who were “ignorant of the subject.” When his confidence flagged, his muse sweetly implored him, “Your talents are admirable; your capacity is immense—only do write and astonish the world!”
Ricardo’s On the Principles of Political Economy and Taxation was published in 1817. “I have endeavoured,” he wrote, “to shew that all trade, whether foreign or domestic, is beneficial.”
Ricardo’s “difficult idea,” which he illustrated with the example of trade in cloth and wine between Portugal and England, went a step beyond Smith, who was also a free-trade proponent. For one thing, Ricardo’s more theoretical approach anticipated the mathematical formulae of modern economists.
Moreover, he flushed out the theory of comparative advantage, which leads to the surprising conclusion that trade distills benefits to, say, both England and Portugal even if one country (let’s say Portugal) is more productive at making both cloth and wine. The reason is that Portugal is likely to have a greater comparative advantage in one of these products.
LeBron James dunking during Game Six of the 2015 NBA Finals in Cleveland. No matter how good James may be at mowing his lawn, comparative-advantage theory says he should pay someone else to do it. (Photo by Nathaniel S. Butler/NBAE via Getty Images)Photograph by Nathaniel S. Butler — NBAE/Getty Images
To add a current spin to the classic textbook illustration, even if LeBron James can cut his grass more quickly than the boy next door, he is better off hiring his neighbor to mow the lawn because James has a greater comparative advantage playing basketball. Cutting the grass would waste his time. Krugman has observed that comparative advantage is closely related to the notion of specialization: since it requires great effort to become either a professional athlete or a brain surgeon, the surgeon and the athlete are better off trading skills than trying to master each.
Ricardo’s Principles were immediately recognized as a major work. At Mill’s urging, in 1819 Ricardo purchased (as was the practice) a seat in the House of Commons. He consistently argued for free trade, against the interests of his class. In 1823, at the age of 51, he fell sick with an ear infection and died. Twenty-three years later, England repealed the Corn Laws and adopted a free-trade agenda.
Ricardo wrote as a pure economist, without the social breadth of Adam Smith or John Stuart Mill. Because he saw society as riven by competing classes, and argued, specifically, that the Corn Laws were a regressive form of redistribution, his theories were later applied by Karl Marx. Nonetheless, he was a proponent of the free market and a critic of public expenditure, and argued that taxes diminished growth. He believed that profits for the capitalist (though not for the landlord) were to society’s good, as they fostered investment. He also demonstrated that new machinery would depress the wages of workers (though he did not oppose such innovations). One of his most important insights was that rising wages do not result in higher prices; rather, they eat into profits.
His most relevant contribution today is comparative advantage. According to Mankiw, “Ricardo’s insights remain the starting point for understanding both the global economy and the local one. In other words, his theory explains why we live in an interdependent world, whether among nations or among individuals.”
Ricardo and the TPP
The TPP would lower tariffs and harmonize trade rules for twelve Pacific nations including the U.S., Japan, Peru and Vietnam. It also has a strategic purpose: to promote trade under an American umbrella, rather than one directed by China, which is negotiating a regional pact that excludes the U.S. The spat between Mankiw, who supports the trade deal, and Krugman, who has described himself as a “lukewarm” opponent, is not about whether they agree with Ricardo (both do). It is about whether the various sideline issues being negotiated, involving overseas patent and intellectual property protection, environmental rules, and so forth, are related to trade.
Peter Petri, a Brandeis University economist, has estimated that if the agreement were adopted it would benefit the U.S. economy by $77 billion a year. Critics have charged that the beneficiaries would tend to be among the already well-off. It is truism that while trade benefits society, it does not benefit everyone equally or simultaneously. This is why President Obama has properly insisted that the legislation also include retraining and support for the victims of trade.
In the TPP, only a minority of the gains would derive from reduced tariffs on traditional manufactured goods. Rather, the deal would liberalize exchanges in service industries and strengthen patent and intellectual property protections. The U.S. auto industry, and perhaps other conventional manufacturers, could suffer; on the other hand, farmers should benefit, and so should film studios, software engineers, financial advisors, and pharmaceutical firms. Come to think of it, those are precisely the sorts of industries in which America enjoys a comparative advantage. If Ricardo were in the U.S. Congress, it’s not hard to imagine how he would vote.
This article has been updated.