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Balancing Austerity and Growth: September 8, 2013

The Project Gutenberg eBook of Letters of Ricardo to Malthus, by James Bonar.

Mark Thoma sends us to the Ricardo-Malthus correspondence:

My dear Malthus,

I think that the concession which I have made will not bear the construction you have put upon it. 'An increased power of production must be accompanied with an increase[Pg 188] of productive or unproductive expenditure.' This is the sentence on which you have remarked, and you say could not be true if the gross produce were diminished. Certainly not, but I have never said that with an increased power of production the gross produce would be diminished; I have never said that machinery enables you to get a greater quantity of gross produce; my sole complaint against it is that it sometimes actually diminishes the gross produce.

With respect to the particular subject of discussion between us, you seem to be surprised that I should understand you to say in your book 'that vast powers of production are put into action, and the result is unfavourable to the interests of mankind.' Have you not said so? Is it not your objection to machinery that it often produces a quantity of commodities for which there is no demand, and that it is the glut which is the consequence of quantity which is unfavourable to the interests of mankind? Even as you state your proposition in your present letter, I have a right to conclude that you see great evils in great powers of production from the quantity of commodities which will be the result, and the low price to which they will fall. Saving, you would say, would first lead to great production, then to low prices, which would necessarily be followed by low profits. With very low profits the motives for saving would cease, and therefore the motives for increased production would also cease. Do you not then say that increased production is often attended with evil consequences to mankind because it destroys the motives to industry, and to the keeping up of the increased production? Now in much of this I cannot agree with you. I indeed allow that the case is possible, to conceive of saving being so universal that no profit will arise from the employment of capital; but then I contend that the specific reason is because all that fund, which should, and in ordinary cases does, constitute profit, goes to wages and immoderately swells that fund which is[Pg 189] destined to the support of labour. The labourers are immoderately paid for their labour, and they necessarily become the unproductive consumers of the country. I agree too that the capitalists being in such a case without a sufficient motive for saving from revenue to add to capital, will cease doing so, will, if you please, even expend a part of their capital; but I ask what evil will result from this? None to the capitalist, you will allow, for his enjoyments and his profits will be thereby increased, or he would continue to save; none to the labourers, for which we should repine, because their situation was so exceedingly favourable that they could bear a deduction from their wages and yet be in a most prosperous condition. Here it is where we most differ. You think that the capitalist could not cease saving on account of the lowness of his profits, without a cessation in some degree of employment to the people. I, on the contrary, think that with all the abatements from the fund destined to the payment of labour, which I acknowledge would be the consequence of the new course of the capitalists, enough would remain to employ all the labour that could be obtained and to pay it liberally, so that in fact there would be little diminution in the quantity of commodities produced; the distribution only would be different; more would go to the capitalists and less to the labourers.

I do not think that stagnation is a proper term to apply to a state of things, in which for a time there is no motive to a further increase of production. When in the course of things profits shall be so low from a great accumulation of capital and a want of means of providing food for an increasing population, all motive for further savings will cease; but there will be no stagnation; all that is produced will be at its fair relative price, and will be freely exchanged. Surely the word stagnation is improperly applied to such a state of things, for there will not be a[Pg 190] general glut, nor will any particular commodity be necessarily produced in greater abundance than the demand shall warrant.

You say, 'We know from repeated experience that the money price of labour never falls till many workmen have been for some time out of work.' I know no such thing; and, if wages were previously high, I can see no reason whatever why they should not fall before many labourers are thrown out of work. All general reasoning, I apprehend, is in favour of my view of this question, for why should some agree to go without any wages while others were most liberally rewarded? Once more I must say that a sudden and diminished demand for labour in this case must mean a diminished reward to the labourer, and not a diminished employment of him; he will work at least as much as before, but will have a less proportion of the produce of his work, and this will be so in order that his employer may have an adequate motive for employing him at all, which he certainly would not have if his share of the produce were reduced so low as to make increased production an evil rather than a benefit to him. 'It is' (never) 'said that an increase of unproductive consumption among landlords and capitalists may not sometimes be the proper remedy for a state of things in which the motives for production fail.' I know of no one who has recommended a perseverance in parsimony even after the profits of capital have vanished. I have never done so, and I should be amongst the first to reprobate the folly of the capitalist in not indulging himself in unproductive consumption. I have indeed said that nothing can be produced for which there will not be a demand, unless from miscalculation, while the employment of stock affords even moderate profits; but I have not said that production may not in theory be pushed so far as to destroy the motive on the part of the capitalist to continue producing to the same[Pg 191] extent. I believe it might possibly be pushed so far, but we have never witnessed it in our days, and I feel quite confident that, however injurious such a state of things may be to the capitalist, it is so only because it is attended with disproportionate and unusual benefits to the labourers. The remedy, therefore, and the sole remedy, is a more just distribution of the produce; and this can be brought about only, as I said in my last letter, by an increase of workmen or by a more liberal unproductive expenditure on the part of the capitalists. I should not make a protest against an increase of consumption as a remedy to the stagnation of trade, if I thought as you do, that we were now suffering from too great savings; as I have already said, I do not see how stagnation of trade can arise from such a cause.

We appear then not to differ very widely in our general principles, but more so respecting the applications of them. Such and such evils may exist; but the question is do they exist now? I think not; none of the symptoms indicate that they do, and in my opinion increased savings would alleviate rather than aggravate the sufferings of which we have lately had to complain. Stagnation is a derangement of the system, and not too much general production, arising from too great an accumulation of capital.

Mr. Tooke has been here since Saturday last. I am going with him to-morrow to Bromesberrow[241], from whence he will go to Ross and down the Wye to Chepstow. We have had plenty of talk on subjects of political economy, and have found out points on which there is partial difference of opinion between us. He brought with him two pamphlets, in which you are often mentioned as well as myself; perhaps you have seen them: their titles are An Inquiry into those principles advocated by Mr. Malthus relative to the Nature of Demand and the necessity of[Pg 192] Consumption[242], the other Observations on certain Verbal Disputes in political economy[243]. Mrs. Ricardo unites with me in kind regards to Mrs. Malthus and yourself. Mr. Tooke also desires to be kindly remembered.

Ever truly yours, David Ricardo. LXXVIII[244]. Gatcomb Park, 18 Sept., 1821.

My dear Malthus, Without imputing the least blame to you, I fear that I do not quite understand your 'knotty point.' You appear to me to compare things together, which cannot, under any supposable circumstances, be made the subject of comparison. You compare a commodity, in the production of which the advances in labour remain the same while the profits of stock diminish, to another commodity 'obtained by a given quantity of labour, a given quantity of capital, and a given rate of profits.' Is not this supposing two rates of profit at the same time? Perhaps this was not meant, and your question was asked on the supposition of profits varying equally in all trades. If so, I have no hesitation in answering that, if, from an increased quantity of labour on the land, corn should appear to have doubled in money price, and not from any increased facility in the production of money, we ought to say, as we always do say, that corn had risen a hundred per cent., and not that money had fallen fifty. In differing on this point we in reality come to our old dispute, whether the quantity of labour in a commodity should be the regulator of its value, or whether the value of all things should, under[Pg 193] all circumstances, be estimated by the quantity of corn for which they would exchange. You say 'we cannot surely assume that the cost of producing the necessaries of the labourer is low absolutely when the land is productive, if what is gained by the small quantity of labour employed is counterbalanced by the very high rate of profits.' I, of course, should say the cost of these necessaries was low if they were produced with little labour, but would not you, who adopt another measure and sometimes think value is to be estimated by the quantity of things generally which the commodity could command, would you not say, that the cost of these necessaries was small in value, agreeing, as you would, that they would not command an abundance of other things? I do not know what you mean by the low cost of necessaries being counterbalanced by the very high rate of profits. If a hundred quarters of corn be to be divided between my labourers and me, its cost being made up of wages and profits, its cost will be the same, whether profits be high or low, and this division will in no degree affect the price of the corn; but, if at a subsequent time eighty quarters only can be obtained with the same labour and capital, and in consequence a greater proportion of the eighty be given to the labourers than was before given of the hundred, corn will rise absolutely both in my measure and in yours. It is I who am willing to take some one or more of the external commodities[245] in the production of which, while the advances in labour increase in money value, the profits of stock diminish, as a steady measure, but which you so often reject, and insist that, whether the produce of a given quantity of labour be a hundred or eighty quarters, in either case, corn has remained a steady measure of value. In the case you have supposed, you say that the commodity, in which the same advances for labour were made, while profits diminished, 'would not only fall[Pg 194] one half relatively to corn, but it would appear to do so estimated in any common external commodity which had all along been produced by the same quantity of labour, and at the same rate of profits.' I wish you had named this commodity. In the first place I deny that it would be produced at the same rate of profits, for there cannot be two rates of profit at the same time in the same country, and secondly I contend that this commodity would also fall to one half relatively to corn, and therefore would appear invariable when compared with the other commodities.

Perhaps by external commodity, you mean a foreign commodity to be imported from abroad. If so, why should not that commodity vary in reference to corn in the same degree as any home made commodity? If a hogshead of claret were worth a certain quantity of cloth, of hats, of hardware, etc., etc., would its relative value to these things alter because it was more difficult to raise corn in England, and its price rose because we refused to import it from other countries? To me it appears most clear that claret would not vary as compared with the things which I before enumerated, and that it would vary as compared with corn. Pray think of this and tell me whether I am not right. In the postscript to your letter you ask 'In the two extreme cases of the highest profits, and the lowest profits on the land, may not corn and labour remain of the same value estimated in some external commodity, although in the interval considerable variations may have taken place from supply and demand?' I answer, no, it could not remain of the same value estimated in home commodities, and as it is by means of these home commodities that we should purchase the external commodities, I cannot see the slightest reason for supposing that these commodities so exchanged could alter in relative value. I hope I have made myself understood. I am glad you approach a little towards my views, I wish you had told me to what extent.[Pg 195] Torrens told me he should send me his book[246]; he has not done so, and I have not seen it.

Ever yours, David Ricardo. LXXIX[247]. [28 Sept., 1821.]

My dear Malthus, The case you put to me appears to me to be an impossible one. How can all countries produce their commodities with the same quantity of labour, all, except one, produce their corn with the same quantity of labour also, and yet all, the one not excepted, have their profits on capital at the same rate? The one which you suppose to raise its corn with only half the quantity of labour required in the others would in all probability obtain its labour at a much cheaper price, and consequently profits would be higher in that country. If indeed a free trade should be established between all these countries, then their profits might be all nearly at the same rate, because the price of corn and necessaries estimated in quantity of labour would be nearly the same in all. In carrying on this supposed case we must be informed whether the country in which corn is obtained with comparatively little labour can continue to obtain it on the same terms, after she is called upon to supply the markets of other countries; if she can, then the comparative prices of corn and commodities will be altered in all countries; in the country producing the cheap corn, money will be rather at a higher level than before, and therefore corn rather dearer; but commodities generally will be at no higher price;—they will be indeed rather cheaper, because they will be imported from abroad and[Pg 196] from countries where the level of currency will be somewhat reduced; and therefore the cost price of commodities in those countries will be lower, and consequently they can be sold cheaper to the country importing them. Bulky commodities and the price of labour will only be raised in this particular country, because the level of currency will be somewhat raised; labour will in the real measure of value be rather lowered, that is to say, the portion of produce paid to the labourer, manufactured and raw produce, together, will probably be rather increased, but in consequence of free trade and a better distribution of capital, the proportion of the whole produce of a given capital which the labourer will receive, will be diminished; his proportion will really be obtained with less labour.

The benefit to other countries cannot be doubted; corn and labour will fall very greatly in those countries, and consequently profits will rise, and, as part of their exports in return for corn must in the first instance be money, the general level of currency will be reduced and commodities generally will fall, not because they can be produced cheaper but because they are measured by a more valuable money. This is on the supposition that corn can continue to be produced with little labour in the excepted country; but suppose the increased demand for corn should oblige this country to cultivate poorer land, then the price of corn would rise from another cause besides the higher level of currency; and, if this difficulty should be nearly as great as in other countries, corn would be nearly as high; but, while it could afford on any terms to export corn for commodities, there would be previously to the importation of commodities an influx of the precious metals and a higher level of currency. Without such higher level of currency commodities could never be imported from countries where they were before at the same price, and[Pg 197] where they required the same quantity of labour to produce them. Your case is an impossible one, first because you suppose the profits in two countries to be the same although the cost of producing necessaries in one of them be only one half of what it is in the other, secondly you assume as a matter of course that with a free trade the price of corn in the exporting country would rise to the price of corn in the importing country whereas it would fall in the importing country to the price in the exporting country if its cost of production was not increased in that country, and if it rose it would rise only in proportion to the increased cost of production. When there is a free trade between countries it is impossible that profits can differ very much, the only cause of difference in such case will be the different modes of living of the labourers; in one country they may be contented with potatoes and a mud hovel; in another they may require a decent house and wheaten bread. You say: 'Proceeding from this point it is obvious that in the course of a hundred years (if accumulation were supposed) labour and corn might continue at nearly the same price, while domestic commodities from the fall of profits to the level of other countries would fall to half their price estimated in the money of the commercial world.' Domestic commodities are to fall, because profits fall. If profits fall, I do not see why domestic commodities should fall; but why should profits fall if corn and labour continued at nearly the same price? I know of no cause of the fall of profits but the fall[248] of labour. You say: 'A striking approximation to this case actually exists in America.' 'The only difference,' you continue, 'is that circumstances in America have made labour high'; but this is the only important feature in the case. I am however decidedly of opinion that, if in America labour was very low and profits consequently[Pg 198] much higher than they are, there would be very little fall in the domestic commodities of America.

I agree indeed with you that in the progress of the cultivation of America her corn must rise with the increased difficulty of producing it; this circumstance must have a tendency to reduce the relative quantity, or rather lower the level of American currency, which will not fail by increasing the value of money to lower the value of those commodities in America which are too bulky to be exported[249]. The commodities which America exports will not be similarly affected. Nothing is to me so little important as the fall and rise of commodities in money; the great enquiries on which to fix our attention are the rise or fall of corn, labour, and commodities, in real value, that is to say the increase or diminution of the quantity of labour necessary to raise corn and to manufacture commodities. It may be curious to develop the effect of an alteration of real value on money price; but mankind are only really interested in making labour productive, in the enjoyment of abundance, and in a good distribution of the produce obtained by capital and industry. I cannot help thinking that in your speculations you suppose these much too closely connected with money price.

I have read a very good critique on Godwin in the Edinburgh Review[250]; and I am quite sure that I know the writer. It is very well done and most satisfactorily exposes Godwin's ignorance as well as his disingenuousness.

Ever yours, David Ricardo. [Postscript.] I cannot agree with you that in the progress of the cultivation of America a mean between her corn and[Pg 199] labour will remain nearly at the same price as it now is, estimated in money or in hogsheads of claret; it will in my opinion rise. Let me take your own supposition. A country produces her corn with half the labour of another country; consequently she employs only half the capital in producing a given quantity[251]. In this country corn will be at only half the price at which it is in another; 100 quarters will sell for £200, while in another it sells for £400. Suppose profits in both countries to be 20 per cent.; in one a capital of £166 will be employed in the raising of 100 quarters of corn, in the other £333 will be so employed, and 20 per cent. on each of these capitals will be on one £33, and on the other £66. To get £33 the one must have 16½ quarters for his share of the 100 quarters, the other must have precisely the same quantity, and consequently 83½ quarters are paid in both cases for wages and other charges. But the farmer in the fertile country employs only half the labour that the other employs, and consequently with the same money wages each labourer will have the command of double the quantity of corn, he will have what you call double real wages.

Now suppose that in the progress of the fertile country it [will] at last arrive at the state in which it is necessary to [emplo]y £333 instead of £166 to raise 100 quarters of corn; it is indeed possible, under the extravagant supposition with which we have commenced, that labour might continue at the same money price; but it is quite impossible that corn should not be doubled in money price, for twice the quantity of labourers at these uniform money wages would be required to produce it. If corn doubles in price and wages remain stationary, the mean between the two must necessarily rise, and consequently, estimated in claret or in money, a mean between her corn and labour[Pg 200] cannot as you say remain nearly the same. If (as I had a right to suppose) labour in such a country was at a low money price, when corn could be produced with so much facility, the conclusion, when corn rose, would be much more in my favour.

I cannot allow that hats would fall in a progressive country because of a fall of profits. How can it be said that the cost of producing hats is reduced by a fall of profits, if a fall of profits must be accompanied by a rise of wages? Show me that a fall of profits may take place without a rise of wages in any fixed measure of value, and then I will yield this point. But you have no right to talk of a fall of profits; your case is that of a progressive country with low profits and enormous wages. If of every 100 quarters of corn, where it can be produced with little labour, eighty-three be given to the labourers, while no more is given in countries where double the quantity of labourers are employed to produce 100 quarters of corn, you are bound to say that wages are enormously high. In my measure of value they would not be enormously high: but the commodity on which wages were expended would be extravagantly low; at any rate we should both agree that profits in such a state of things would be very moderate.

It is hardly fair to tax you with so long a letter and so soon too!