Ricardo on international trade and long-run growth

In a letter dated 18 December 1814, Ricardo wrote to Malthus:

Accumulation of capital has a tendency to lower profits. Why? because every accumulation is attended with increased difficulty in obtaining food, unless it is accompanied with improvements in agriculture; in which case it has no tendency to diminish profits. If there were no increased difficulty, profits would never fall, because there are no other limits to the profitable production of manufactures but the rise of wages. If with every accumulation of capital we could tack a piece of fresh fertile land to our Island, profits would never fall. I admit at the same time that commerce, or machinery, may produce an abundance and cheapness of commodities, and if they affect the prices of those commodities on which the wages of labour are expended they will so far raise profits.

(Works VI, p. 162, emphasis added)

The first part of the quotation is a clear summary of the results of the previous two chapters, concerning a closed economy. The counterfac- tual of new fertile land introduces the fact that ‘commerce, or machinery’ may change the direction of profit movements. But this change is introduced with a metaphor and not yet with a proper analysis. The assimilation of commerce and machinery, of international trade and technical change, is remarkable. Modern endogenous growth theorists stress the role of technical change, whereas Ricardo assigns greater emphasis to international trade.

The counterfactual of new fertile land added to the British Isles in the process of capital accumulation was a recurring theme in the Malthus-Ricardo correspondence of late 1814-mid-1815 (see, for instance, Works VI: 168-169, 217-218 and 220). The same counterfactual was used by Ricardo in An Essay on Profits (1815; Works IV: 1-41), the first systematic work in which Ricardo publicly presented his theory of profits:

Profits of stock fall only, because land equally well adapted to produce food cannot be procured; and the degree of the fall of profits, and the rise of rents, depends wholly on the increased expense of production: If, therefore, in the progress of countries in wealth and population, new portions of fertile land could be added to such countries, with every increase of capital, profits would never fall, nor rents rise.

(Works IV, p. 18, emphasis added)

In Ricardo’s view, British growth prospects in the aftermath of the Napoleonic Wars crucially depended on an economic policy variable, the foreign corn trade legislation to be enacted by the British Parliament. Contra Malthus who endorsed a protectionist food policy in The Grounds of an Opinion on the Policy of Restricting the Importation of Foreign Corn (1815), Ricardo in An Essay on Profits argued that free-trade equilibrium is characterized by a more efficient allocation of overall British capital between the two productive sectors of the British economy (agriculture and manufactures) and by a higher rate of growth than autarky equilibrium (see Salvadori and Signorino, 2015):

we may contemplate an increase of prosperity and wealth, far exceeding that of any country which has preceded us. This may take place under either system, that of importation or restriction, though not with an equally accelerated pace, and is no argument why we should not, at every period of our improvement, avail ourselves of the full extent of the advantages offered to our acceptance - it is no reason why we should not make the very best disposition of our capital, so as to ensure the most abundant return.

(Works IV, p. 34)

As is well known, the close relationship between free international corn trade and the domestic rate of profits was later emphasized by Ricardo in Chapter VII, ‘On Foreign Trade’, of his Principles'.

It has been my endeavour to shew throughout this work, that the rate of profits can never be increased but by a fall in wages, and that there can be no permanent fall of wages but in consequence of a fall of the necessaries on which wages are expended. If, therefore, by the extension of foreign trade, or by improvements in machinery, the food and necessaries of the labourer can be brought to market at a reduced price, profits will rise. If instead of growing our own corn, or manufacturing the clothing and other necessaries of the labourer, we discover a new market from which we can supply ourselves with these commodities at a cheaper price, wages will fad and profits rise; but if the commodities obtained at a cheaper rate, by the extension of foreign commerce, or by the improvement of machinery, be exclusively the commodities consumed by the rich, no alteration will take place in the rate of profits.

(Works I, p. 132, emphasis added)

Here Ricardo abandons the metaphor for a theory. The analysis of the small open economy is introduced to show that at the current international prices, it pays England to import cheap foreign corn in order to reduce its domestic labour cost and increase its domestic rate of profits. Nevertheless, the analysis is very England-centric, so to speak. Ricardo does not seem to be interested in providing a fully developed analysis of the consequences that international trade entails and explicitly puts aside the consequences that international trade implies for the profit rate of corn-exporting countries. Even the last sentence in the above quotation concerns the fact that the importing of‘commodities consumed by the rich' does not have the same beneficial effect on the British rate of profit. Once again, the equivalence between ‘the extension of foreign commerce’ and ‘the improvement of machinery’ is remarkable.²

Ricardo, in The Funding System (1820), explicitly considered international trade as a way out of the gloomy destiny of the stationary state:

When the land of a country is brought to the highest state of cultivation, when more labour employed upon it will not yield in return more food than what is necessary to support the labourer so employed, that country is come to the limit of its increase both of capital and population. The richest country in Europe is yet far distant from that degree of improvement, but if any had arrived at it, by the aid of foreign commerce, even such a country could go on for an indefinite time increasing in wealth and population, for the only obstacle to this increase would be the scarcity, and consequent high value, of food and other raw produce. Let these be supplied from abroad in exchange for manufactured goods, and it is difficult to say where the limit is at which you would cease to accumulate wealth and to derive profit from its employment.

{Works IV, p. 179, emphasis added)

The modern reader may appreciate the reference to ‘an indefinite time increasing in wealth and population’, akin to the perpetual growth mentioned by the modern endogenous growth theorists. Ricardo is in a sense more realistic than contemporary theorists since he refers to an indefinite period of time. But this is comprehensible: Ricardo knows, of course, that his analysis is related to the given international prices, and such prices cannot be constant forever.

In the course of a session of Parliament devoted to ‘Agricultural Distress’ (May 30, 1820), Ricardo is reported to have claimed that “This would be the happiest country in the world, and its progress in prosperity would be beyond the power of imagination to conceive, if we got rid of two great evils - the national debt and the corn laws” (Works V: 55, emphasis added). Finally, in his 1822 pamphlet. On Protection to Agriculture, Ricardo warned his readers that a protectionist food policy would artificially raise the domestic price of corn and the rate of wages, thus depressing the domestic rate of profits and capital accumulation (Works IV: 235-241; see also Maneschi, 2015).

This leaves us in no doubt: Ricardo was a deep-rooted endogenous growth theorist!