Ricardo Definition Policy, Method and Scope

Ricardo's influence on the development of economic thought extends beyond his contributions to pure theory. He also redirected economics away from the method and scope of economics advocated by Adam Smith, and he applied his abstract analysis to the burning political issue of his times, tariffs.

Ricardo's Method

Adam Smith had dealt with questions of political economy in two ways: (1) by using deductive theory to analyze the economy of his time, and (2) by presenting a descriptive, informal narrative of contemporary and historical institutions. Smith's method blended theory with historical descriptive material. Ricardo, on the other hand, represents the pure theorist at work. He abstracted from the economy of his time and built an analysis based on the deductive method. His skill was so great that he is admired by pure theorists today even though his mathematical technique was somewhat clumsy. Though Ricardo's method might give the superficial observer the impression that he was a purely theoretical, impractical economist, Ricardian economics is strongly oriented toward policy. The burning issue of his time was the tariffs on the importation of grain into England and their effect on the distribution of income, and Ricardo was keenly aware of this question. He steadfastly maintained, nevertheless, that theory was a prerequisite to concrete analysis of the policy issues of the real world.

Ricardo and Economic Policy

Ricardo was absorbed by the compelling economic problems of his time: rising grain prices, rising rents, and the more general but extremely important issues that were a result of the changing structure of England's economy—the relative growth of industry and relative decline of agriculture. The changing economic structure had obvious implications for and interconnections with the compara­tive political power of manufacturing and agricultural interests. One key point at which all these issues converged concerned the policy question of free versus regulated international trade. The landlords wanted protection from foreign agricultural products, whereas many of the rising industrialists were becoming advocates of free trade, particularly for British industries in which costs were less than on the Continent and/or for which cheaper raw materials could be im­ported.

Ricardo's approach to policy had significant influences on the development of the manner in which subsequent economists have engaged the making of policy. The way to formulate good policy, using Ricardo as a model, is to abstract from the nonessential and build a highly theoretical model that will reveal the causal relationships between variables. In order to achieve strong theoretical conclusions it may be necessary to abstract from, or to freeze, variables that would significantly influence outcomes when the theoretical model is used as a basis for making economic policy. The difficulty with this Ricardian noncontex-tual theoretical policymaking is that, in the real world of policymaking, these "frozen" givens often become unfrozen and have unintended results.

In Chapter 1 we drew a distinction between positive economics, or the science of economics, normative economics, and the art of economics. We saw in Chapter 4 that Adam Smith was rather clumsy in formulating rigorous abstract theories but was a master at the art of economics; his policy recommendations'depended on more than merely theoretical conclusions and were made in the context of how the policies were likely to work in practice given the institutional arrange­ments of his time. In contrast, Ricardo was a very able theoretician whose policy recommendations were noncontextual; they were based on purely theoretical considerations. Ricardo's method (highly abstract) and his approach to policy (noncontextual) ultimately became the path followed by mainstream economic thinking. But Ricardo's abstract method and noncontextual approach to eco­nomic policy did not become mainstream until well into the twentieth century, as J. S. Mill and Alfred Marshall were decidedly Smithian, not Ricardian, on these issues. Many heterodox economists, from the German historical school to the American institutionalists, believed that even Mill and Marshall were too abstract and noncontextual.

Two components of Ricardianism remain today: highly abstract theory, which by assumption eliminates so many variables that the final conclusion is indisput­able, and noncontextual policymaking based on abstract models. Some would regard this as a dubious heritage from a master theoretician. Others would argue that an important part of the art of economics is being able to abstract from reality and to formulate policy options in a noncontextual framework. A review of the history of economic thought and policy does not give a clear answer to the complex issues surrounding the degree of abstraction and contextual analysis appropriate to understanding the economy and the making of economic policy.

The Scope of Economics According to Ricardo

Ricardo represents a turning point in the conception of the basic task of economics. Whereas Adam Smith had continued the mercantilist concern with the forces determining the wealth of nations, Ricardo maintained that the principal purpose of economics is to determine the laws that regulate the distribution of income among landlords, capitalists, and laborers:
To determine the laws which regulate this distribution [of income], is the principal problem in Political Economy: much as the science has been improved by the writings of Turgot, Stuart, Smith, Say, Sismondi, and others, they afford very little satisfactory information respecting the natural course of rent, profit, and wages.

Ricardo was preoccupied with what is now called the functional distribution of income, the relative shares of yearly output going to labor, land, and capital. In modern national income accounting, national income is defined as the payments to the factors of production at factor prices. When modern theorists analyze the functional distribution of income, they often use the concept of an aggregate production function for the economy. Though studies of the functional distribu­tion of income do not really fit into the conventional macro-micro division of modern economics, they are generally considered to be a part of macroeconomic theory.

Ricardo was particularly absorbed by changes in the functional distribution of income over time, a part of macroeconomics in his system. He considered this problem in the context of a society made up of three classes: capitalists receiving profits and interest, landlords receiving rent, and laborers receiving wages. In order to explain changes in the shares received by the capitalist, landlord, and laborer, he found it necessary to develop a theory explaining profits, interest, rent, and wages. Like Smith, Ricardo was obliged to formulate theories at the microeconomic level of the economy (although Ricardo did consider many other macroeconomic questions, such as population theory, wages fund doctrine, size of the labor force, general level of prices, and short- and long-run stability of the economy). In particular, his interest in the forces causing a change in the distribution of income over time led him to examine the forces causing changes in relative prices over time. However, he was primarily concerned with the effects of changes in income distribution on the rate of capital accumulation and economic growth. Thus, it was contrary to his intent that his work had the effect of directing subsequent economic investigation toward microeconomic issues rather than macroeconomic issues. Nevertheless, his intensive examination of a labor theory of value became the starting point for subsequent attempts to explain the formation of relative prices. On the other hand, Ricardo's victory over Malthus concerning the macroeconomic stability of the economy closed this issue to further debate by orthodox theorists for nearly a century.