Classical Economics, Lecture 2 with David Gordon - Mises Academy
Classical Economics, Lecture 2
Bentham and Ricardo
Rothbard and Ricardo
• The discussion of David Ricardo is crucial for
Rothbard’s approach to the history of economics.
• In the standard view that Rothbard challenges,
Ricardo’s Principles of Political Economy and
Taxation (1817) is the next great book in
economics after The Wealth of Nations (1776).
The standard view says Ricardo established
economics as a rigorous science. David Friedman
takes this view. He regards Ricardo’s book as one
of the all time great books.
Rothbard and Ricardo Continued
• Rothbard rejects this. It is part of the Whig
Interpretation of economics. To Rothbard, Ricardo
made disastrous mistakes. Ricardian economics is
almost all wrong.
• One of Ricardo’s fundamental mistakes was a way
in which he differed from Adam Smith. Smith was
concerned with how economies grow--- “the
wealth of nations.” Ricardo wasn’t. He wanted to
find out how income is distributed, assuming that
the economy is static.
• In Austrian economics, there aren’t separate laws
of distribution. Once all the individuals make their
production and consumption decisions, there isn’t
a remaining question about distribution.
• This leads to another of Ricardo’s mistakes. He
wasn’t much concerned with individual prices or
factors. He talked about aggregates---what
determined wages, e.g., not an individual wage.
• Rothbard thus objects to the question Ricardo
asked, how is income distributed among rent,
wages, and profit or interest, taking these as
• He also objected to way Ricardo tried to answer
his question. Ricardo set up a system of
mathematical identities. These are tautologies that
don’t tell us anything about real causal relations.
• Ricardo started from this identity:
• Total Income = Rent + Wages + Profit
• If you assume that Income and Rent are
constants, then if wages go up, profits will
go down. This is an arithmetic identity and
doesn’t tell us anything about causation.
• Before we go into the details of Ricardo’s system,
there is an objection to consider.
• Rothbard objects to the deductive way in which
Ricardo reasons. But doesn’t Austrian praxeology
reason in the same way?
• No: Austrian economics uses axioms that are true.
It doesn’t rely on arbitrary axioms. Also, it is
interested in casual relations, not mathematical
• To understand Ricardo’s equation, we have to
understand what he thinks determines rent, wages,
• For wages, Ricardo accepts Malthus on
population. ( Malthus was a friend of his). Malthus
thought that population tends to increase until no
more people can be supported at the level of food
production that prevails.
• Ricardo accepted this. He drew the consequence
that if wages rise, population will increase. This
will drive down wages. Wages cannot go below
• Thus, for Ricardo wages in his equation are fixed.
• By “subsistence”, Ricardo didn’t mean bare
physical survival. There is an element of social
• Rothbard doesn’t accept the mechanical relation
between population and wages that Ricardo does.
• Because population depends on food supply, the
wage rate depends on the cost of food. Workers
have to be able to buy enough food for
subsistence; but their wages won’t rise much
higher than that.
• Because Ricardo aggregates commodities, he talks
about the price of corn when he discusses the cost
of food. (This refers to wheat, in American usage).
• If the price of corn rises, then wages also have to
• Remember, in Ricardo’s equation, Total Income is
constant. If wages rise, something else has to go
• As we’ll see, Ricardo thought that rent would not
go down. Only profit is left. If wages rise, profits
fall. Wages and profits are in an inverse relation.
This is an arithmetic identity, if neither Total
Income nor rent changes.
• Probably the most distinctive element in Ricardo’s
system is his account of rent.
• The land in a given economic system varies in
how productive it is. People will first use the most
productive land. When that is all taken, they will
go on to the next most productive, etc.
• As population increases, less and less productive
land is used.
• If a type of land is more productive than
another, all the gains go to the landlord. The
user of more productive land, if he is not the
owner, gets no net benefit from using it.
• Land is always used until the point of zero
surplus to the landlord. In other words,
marginal land earns zero rent.
• Once rent and wages are taken out, what is
left is profit. Again, this is an arithmetic
• As more and more land comes under
cultivation, it becomes harder to grow corn.
Because workers cannot get a wage below
subsistence, wages rise---wages must cover
the cost of subsistence, which has gone up.
• The increase in wages comes entirely at the
expense of the capitalist. The landlords
don’t give up anything.
• Profit and wages are inversely related, and
there is a tendency for wages to rise.
• It follows that there is a long term trend for
profit to fall.
• Rothbard argues that Ricardo’s ideas about
distribution rest on arbitrary assumptions.
• Ricardo’s theory of rent is especially vulnerable:
why does the amount of rent for land A consist
solely of its differential productivity from other
land ? Related to this, its wrong to assume that
land would be cultivated that had zero return.
• Also, for land of superior productivity, why does
all the benefit go to the landlord?
Ricardo on Prices
• So far, we have been explaining Ricardo’s views
about the distribution of income.
• This doesn’t account for the price of individual
• Changes in supply and demand could cause prices
to fluctuate temporarily. But in the long run, the
price of something is determined by the number of
labor hours required to make it. This amount could
be converted into a money price, depending on the
quantity of money. To this, the profit rate would
• This theory requires some way to equate labor of
different kinds of skill. E.g., how is the labor of a
surgeon to be equated with the labor of a ditch
• This would later be a problem for Marx.
• Ricardo acknowledged that if a good didn’t have
utility, it couldn’t command a positive price. But
utility was a necessary condition for economic
value: it didn’t determine price.
Is There Anything Good About
• Ricardo accepted Say’s Law. Total
production can’t exceed total spending and
saving because this total just is total
production. The introduction of money
doesn’t change this.
• Ricardo really got this from James Mill.
• Usually, the law of comparative cost or advantage
is taken to be one of Ricardo’s greatest
• It’s obvious that if A is better at growing oranges
than B, and B is better than A in growing apples,
A and B together will produce more oranges and
apples combined if each specializes in what he can
do best. The can then trade with each other.
• But what happens if A is better than B at growing
both apples and oranges?
• The law of comparative cost says that trade
is still advantageous if one party is
absolutely better at producing everything
than the other. The better producer should
concentrate on producing the product in
which he enjoys the greatest amount of
superiority. The worse producer should
concentrate on producing the product where
is margin of inferiority is least.
Comparative Cost Concluded
• Although Ricardo was right about this, Rothbard
thinks he didn’t really care much about the
• It was really James Mill who developed the law.
Mill was a very tough personality, primarily an
organizer. Rothbard calls him a cadre type. Mill’s
own contributions to economic theory haven’t
been emphasized enough.
• Rothbard does give Ricardo credit for his
opposition to taxes and government.intervention
Mises on Association
• Mises generalized Ricardo’s law into the
Law of Association.
• This says that everyone benefits through
social cooperation on the free market.
• Why does Rothbard include a chapter about
Jeremy Bentham in the book? Although
Bentham wrote about economics, he wasn’t
a major theorist.
• Rothbard discusses him because he thinks
that Bentham’s utilitarianism was basic to
• The utilitarianism that Rothbard attacks is
different from the views of Mises and Hazlitt.
They simply contend that rules of morality aim to
promote human welfare.
• The free market is the best way to promote
• Bentham wanted to add up pleasures and pains.
“The greatest happiness of the greatest number.”
This view has many problems, e.g., what if
people’s pleasures and pains depend in part on
their moral views?