Editing David Ricardo (section)

==Ricardian theory of international trade==
Between 1500 and 1750 most economists advocated [[mercantilism]], which promoted the idea of international trade for the purpose of earning bullion by running a trade surplus with other countries. Ricardo challenged the idea that the purpose of trade was merely to accumulate gold or silver. With "[[comparative advantage]]" Ricardo argued in favour of industry specialisation and [[free trade]]. He suggested that industry specialization combined with free international trade always produces positive results. This theory expanded on the concept of [[absolute advantage]].

Ricardo suggested that there is mutual national benefit from trade even if one country is more competitive in every area than its trading counterpart and that a nation should concentrate resources only in industries where it has a [[comparative advantage]],<ref>{{Cite web|url=https://www.washingtontimes.com/news/2003/aug/27/20030827-084257-6403r/|title=The trade question|author=Paul Craig Roberts|date=27 August 2003|website=The Washington Times}}</ref> that is in those industries in which it has the greatest efficiency of production relative to its own alternative uses of resources, rather than industries where it holds a competitive edge compared to rival nations. Ricardo suggested that national industries which were, in fact, mildly profitable and marginally internationally competitive should be jettisoned in favour of the industries that made the best use of limited resources—the assumption being that subsequent economic growth due to better resource use would more than offset any short-run economic dislocation which would result from closing mildly profitable and marginally competitive national industries.

Ricardo attempted to prove theoretically that international trade is always beneficial.<ref>Ricardo, David (1817) ''On the Principles of Political Economy and Taxation''. Piero Sraffa (Ed.) Works and Correspondence of David Ricardo, Volume I, Cambridge University Press, 1951, p. 135.</ref> [[Paul Samuelson]] called the numbers used in Ricardo's example dealing with trade between England and Portugal the "four magic numbers".<ref>Samuelson, Paul A. (1972), "The Way of an Economist." Reprinted in ''The Collected Papers of Paul A. Samuelson''. Ed. R. C. Merton. Cambridge: Cambridge MIT Press. p. 378.</ref> "In spite of the fact that the Portuguese could produce both cloth and wine with less amount of labour, Ricardo suggested that both countries would benefit from trade with each other".

As for recent extensions of Ricardian models, see [[International trade theory#Ricardian trade theory extensions|Ricardian trade theory extensions]].

=== Comparative advantage ===
Ricardo's theory of international trade was reformulated by John Stuart Mill in 1844.<ref>Mill, J. S. (1844) ''Essays on some unsettled questions of political economy.'' London, John W. Parker; Mill, J. S. (1848) The principles of political economy. (vol. I and II) Boston: C.C.Little & J. Brown.</ref> The term "comparative advantage" was introduced by J. S. Mill and his contemporaries.

John Stuart Mill started a neoclassical turn of international trade theory, i.e. his formulation was inherited by Alfred Marshall and others, and has both contributed to the resurrection of the anti-Ricardian concept of law of supply and demand, and induced the arrival of neoclassical theory of value.<ref>Shiozawa, Y. (2017) An Origin of the Neoclassicla Revolutions: Mill's "Reversion" and its consequences. In Shiozawa, Oka, and Tabuchi (eds.) ''A New Construction of Ricardian Theory of International Values'', Tokyo: Springer Japan, Chapter 7 pp. 191–243.</ref>

===New interpretation===
Ricardo's four magic numbers have long been interpreted as comparison of two ratios of labour (or other input in fixed supply) coefficients. This interpretation is now considered as overly simplistic by modern economists. The point was rediscovered by Roy J. Ruffin<ref>Ruffin, R.J. (2002) David Ricardo's discovery of comparative advantage. ''History of Political Economy'' 34(4): 727–748.</ref> in 2002 and re-examined and explained in detail in Andrea Maneschi<ref>Maneschi, A. (2004) The true meaning of David Ricardo's four magic numbers. ''Journal of International Economics'' 62(2): 433–443.</ref> in 2004. The more flexible approach is now known as the ''new interpretation'', despite having been previously mentioned by [[Piero Sraffa]] in 1930 and by Kenzo Yukizawa in 1974.<ref>Tabuchi, T. (2017) Yukizawa's interpretation of Ricardo's 'theory of comparative cost'. In Senga, Fujimoto, and Tabuchi (Eds.) ''Ricardo and International Trade'', London and New York; Routledge, Chapter 4, pp. 48–59.</ref> The new interpretation affords a totally new reading of Ricardo's ''Principles of Political Economy and Taxation'' with regards to trade theory, although it does not change the mathematics of optimal resource allocation.<ref>Faccarello, G. (2017) A calm investigation into Mr. Ricardo's principle of international trade. In Senga, Fujimoto, and Tabuchi (Eds.) ''Ricardo and International Trade'', London and New York; Routledge. Tabuchi, T. (2017) Comparative Advantage in the Light of the ''Old'' Value Theories. In Shiozawa, Oka, and Tabuchi (eds.) ''A New Construction of Ricardian Theory of International Values'', Tokyo: Springer Japan, Chapter 9 pp. 265–280.</ref>

=== Protectionism ===
Like Adam Smith, Ricardo was an opponent of [[protectionism]] for national economies, especially for agriculture. He believed that the British "[[Corn Laws]]"—imposing tariffs on agricultural products—ensured that less-productive domestic land would be cultivated and rents would be driven up {{harv|Case|Fair|1999|pp=812, 813}}. Thus, profits would be directed toward landlords and away from the emerging industrial capitalists. Ricardo believed landlords tended to squander their wealth on luxuries, rather than invest. He believed the Corn Laws were leading to the stagnation of the British economy.<ref>Letter of Mill cited in ''The works and correspondence of David Ricardo : Volume 9, Letters July 1821–1823'' (Cambridge, UK, 1952)</ref> In 1846, his nephew [[John Ricardo|John Lewis Ricardo]], [[Member of Parliament (United Kingdom)|MP]] for [[Stoke-upon-Trent (UK Parliament constituency)|Stoke-upon-Trent]], advocated [[free trade]] and the repeal of the Corn Laws.

Modern empirical analysis of the Corn Laws yields mixed results.<ref>{{Cite journal |doi=10.1016/0014-4983(90)90007-L |title=The impact of the Corn Laws just prior to repeal |journal=Explorations in Economic History |volume=27 |issue=2 |page=123 |year=1990 |last1=Williamson |first1=J. G.}}</ref> Parliament repealed the Corn Laws in 1846.

=== Technological change ===
Ricardo was concerned about the impact of technological change on labour in the short-term.<ref name=":0">{{Cite journal|last=Hollander|first=Samuel|year=2019|title=Retrospectives Ricardo on Machinery|journal=Journal of Economic Perspectives|volume=33|issue=2|pages=229–242|doi=10.1257/jep.33.2.229|issn=0895-3309|doi-access=free}}</ref> In 1821, he wrote that he had become "convinced that the substitution of machinery for human labour, is often very injurious to the interests of the class of labourers", and that "the opinion entertained by the labouring class, that the employment of machinery is frequently detrimental to their interests, is not founded on prejudice and error, but is conformable to the correct principles of political economy."<ref name=":0" /> Ricardo's idea of technological change is now formulated in a modern form.<ref name="Shiozawa20">Shiozawa, Y. (2020) A new framework for analyzing technological change. ''Journal of Evolutionary Economics''. '''30''': 989–1034.</ref>

=== Criticism of the Ricardian theory of trade ===
Ricardo himself was the first to recognize that comparative advantage is a domain-specific theory, meaning that it applies only when certain conditions are met. Ricardo noted that the theory applies only in situations where capital is immobile. Regarding his famous example, he wrote:
<blockquote>it would undoubtedly be advantageous to the capitalists [and consumers] of England... [that] the wine and cloth should both be made in Portugal [and that] the capital and labour of England employed in making cloth should be removed to Portugal for that purpose.<ref name="Ricardo 1821 7.19">{{Cite book |title=On the Principles of Political Economy and Taxation |url=https://archive.org/details/onprinciplespol00ricagoog |last=Ricardo |first=David |publisher=John Murray |year=1821 |pages=7.19 }}</ref>
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Ricardo recognized that applying his theory in situations where capital was mobile would result in [[offshoring]], and thereby economic decline and job loss. To correct for this, he argued that (i) "most men of property [will be] satisfied with a low rate of profits in their own country, rather than seek[ing] a more advantageous employment for their wealth in foreign nations", and (ii) capital was functionally immobile.<ref name="Ricardo 1821 7.19"/>

Ricardo's argument in favour of [[free trade]] has also been attacked by those who believe trade restriction can be necessary for the economic development of a nation. [[Utsa Patnaik]] claims that Ricardian theory of [[international trade]] contains a logical fallacy. Ricardo assumed that in both countries two goods are producible and actually are produced, but developed and underdeveloped countries often trade those goods which are not producible in their own country. In these cases, one cannot define which country has comparative advantage.<ref>{{cite book |first=Uta |last=Patnaik |year=2005 |chapter=Ricardo's Fallacy/ Mutual Benefit from Trade Based on Comparative Costs and Specialization? |editor-last=Jomo |editor-first=K. S. |title=The Pioneers of Development Economics: Great Economists on Development |publisher=Zed books |location=London and New York |pages=31–41 |isbn=81-85229-99-6}}</ref>

Critics also argue that Ricardo's theory of [[comparative advantage]] is flawed in that it assumes production is continuous and absolute. In the real world, events outside the realm of human control (e.g. natural disasters) can disrupt production. In this case, specialisation could cripple a country that depends on imports from foreign, naturally disrupted countries. For example, if an industrially based country trades its manufactured goods with an [[agrarian country]] in exchange for agricultural products, a natural disaster in the agricultural country (e.g. drought) may cause the industrially based country to starve.

As [[Joan Robinson]] pointed out, following the opening of free trade with England, Portugal endured centuries of economic underdevelopment: "the imposition of free trade on Portugal killed off a promising textile industry and left her with a slow-growing export market for wine, while for England, exports of cotton cloth led to accumulation, mechanisation and the whole spiralling growth of the industrial revolution". Robinson argued that Ricardo's example required that economies be in static equilibrium positions with full employment and that there could not be a trade deficit or a trade surplus. These conditions, she wrote, were not relevant to the real world. She also argued that Ricardo's math did not take into account that some countries may be at different levels of development and that this raised the prospect of 'unequal exchange' which might hamper a country's development, as we saw in the case of Portugal.<ref>{{cite book |last1=Robinson |first1=Joan |title=Aspects of Development and Underdevelopment |date=1979 |publisher=Cambridge University Press |location=Cambridge |isbn=0521226376 |page=[https://archive.org/details/aspectsofdevelop0000robi/page/103 103] |url=https://archive.org/details/aspectsofdevelop0000robi/page/103 }}</ref>

The development economist [[Ha-Joon Chang]] challenges the argument that free trade benefits every country:
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Ricardo’s theory is absolutely right—within its narrow confines. His theory correctly says that, ''accepting their current levels of technology as given'', it is better for countries to specialize in things that they are relatively better at. One cannot argue with that. His theory fails when a country wants to acquire more advanced technologies—that is, when it wants to develop its economy. It takes time and experience to absorb new technologies, so technologically backward producers need a period of protection from international competition during this period of learning. Such protection is costly, because the country is giving up the chance to import better and cheaper products. However, it is a price that has to be paid if it wants to develop advanced industries. Ricardo’s theory is, thus seen, for those who accept the ''status quo'' but not for those who want to change it.<ref>Chang, Ha-Joon (2007), "Bad Samaritans", Chapter 2, pp. 30–31.</ref>
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