Historically Diminishing Returns

In the Ricardian model, the key element that is fundamental to Ricardo's economic analysis and to the policy conclusions flowing from it is the rate at which diminishing returns occur in agriculture as compared with the rate of increase in agricultural productivity resulting from technological progress. Ri-cardo maintained that with a fixed quantity of land, the marginal product of added doses of capital and labor would decrease as the margin was extended.

Technological improvements in agriculture could just offset, fail to offset, or more than offset short-run diminishing returns; therefore, it is possible in the long run to have historically constant, decreasing, or increasing returns in agriculture. Ricardo, and most of the writers in the post-Ricardian period, believed that technological development would not offset short-run diminishing returns and therefore predicted historically diminishing returns. The issue is not theoretical, however, but empirical.

All the available data for the British economy indicated that the Ricardian predictions based on historically diminishing returns were wrong. During the first half of the nineteenth century, empirical evidence indicated that the growth of population in England greatly exceeded the growth of labor employed in agriculture. Most economists, particularly McCulloch and J. S. Mill, interpreted these data as indicating that returns had not, in fact, diminished during the period. Yet curiously, despite their awareness of this evidence, the Ricardians continued to hold to their model and its prediction that returns would eventually diminish.

As Mark Blaug, who is arguably the most astute modern scholar of this period, has said, "The divorce between theory and facts was probably never more complete than in the heyday of Ricardian economics."5 This divorce was embedded in Ricardian methodology. As practiced by Ricardo and articulated by Senior, the methodology exclusively emphasized the deductive process of rea­soning from a given set of assumptions; thus, it allowed the Ricardians to ignore the contradictions between their model and fact and to busy themselves with refining the elegance of their theoretical structure. There is some question as to whether the lesson to be learned from a study of economic thinking during the Ricardian period has been absorbed by present-day economists. We will see later that one common element in most non-Marxian heterodox economic thinking is the assertion that orthodox economic theory manifests precisely those faults displayed by Ricardian economics: a conflict between orthodox models and facts and an obsession with refining the deductive process and the internal consistency of its theoretical structure.

The Road Not Taken: Charles Babbage and Increasing Returns

Ricardo built his economic theory around decreasing returns and the distribution of income. He did this even as the economy around him was changing—growing much faster than he thought possible. It was beginning the transition from a primarily agricultural economy to a primarily industrial economy. His theory did not account for this change. Instead, he focused on the economy of Adam Smith—an economy in which agriculture was central and small producers, small-scale production, and simple production techniques, such as described by Smith's famous pin factory, were the norm. The economy around him was more and more becoming one of large-scale production using new technologies—steam engine driven machines were changing the nature of production and society, driving costs of production much lower than had previously been thought possible. One writer's work discussed this change and developed an analysis of the economy focusing on that new technology. That economist was Charles Babbage.

Babbage is best known as the inventor of the mechanical calculator, the basis of the modern computer. But he also was a keen observer of the economy and he wrote a book describing the nature and implications of mass production much better than did Ricardo's work. Babbage's work has been discussed by technology expert and economist Nathan Rosenberg, who points out that Babbage captured the cost savings that could be accomplished by repetitive actions and mass production, and saw that increasing returns would be the driving force in industry. Rosenberg suggests that Babbage can be seen as the father of the complexity approach to modern industrial economics. Had economics followed Babbage rather than Ricardo, it likely would have presented a quite different vision of the future.