The year 2017 is a milestone in both economic history and the history of economics. The Marx-inspired Red October coupe d’état took place in Russia one century ago. The 1st volume of Marx’s Capital, a Critique of Political Economy was published 150 years ago. David Ricardo’s Principles of Political Economy and Taxation was published 200 years ago.
Ricardo’s Law of Comparative Advantage is an application of what economists now term Opportunity Cost. Death Blow to Mercantilism
The bicentennial of Ricardo’s book is worth commemorating because this book finished a crucial debate over the merits of international trade. 18th Century Mercantilists believed that a nation could become wealthier through trade surpluses- by having exports greater than imports. Taxes on foreign goods create a surplus of exports over imports. 18th Century Economists David Hume and Adam Smith each demonstrated flaws in the economic nationalism advocated by Mercantilists. Hume demonstrated that trade surpluses just cause an inflow of money, gold back then, which makes exports more expensive. Smith proved that free trade can make all nations wealthier by allowing each nation to specialize in areas of absolute productivity advantage.
Smith and Hume dealt severe blows to Mercantilism, but Ricardo ended the debate between Mercantilists and Economists. Ricardo proved that free trade will make everyone wealthier by allowing each nation to specialize in areas of comparative productivity advantage. Ricardo pointed the way to both modern economic theory and prosperity. Ricardo’s Law of Comparative Advantage is an application of what economists now term Opportunity Cost. People who choose between goods according to the cost of not having some other real good maximize expected real wealth. The emergence of global trade in the modern world has raised productivity by allowing people to choose the most advantageous options, not just domestically.
The progress achieved from Ricardo’s insight has been limited by two factors. First, Mercantilism remains popular. Second, a third set of ideas emerged to challenge Ricardo. Smith and Ricardo both erred by thinking that the price of a good ultimately depends on labor content. Ricardo pointed the way out of this intellectual error (Opportunity Cost), but Karl Marx took a different path. Marx argued that since all value comes from labor, all profits come from exploiting labor. Marx’s initial critique of Smith-Ricardo political economy was published in 1867, with two additional volumes published posthumously. Marx argued that workers would overthrow capitalists to end misery brought on by capitalists paying them mere subsistence wages.
Problems with Marxism
Problems with Marxism were ascertained during a half-century of debate. In 1917 the leader of the Bolshevik faction of Marxists, Vladimir Lenin, admitted that the notion of capitalists exploiting workers in each in their own nations was wrong. Why did Lenin concede this point? Because it was obvious that wages and living conditions for workers in the most advanced industrial nations were rising.
Yet somehow Marxism is resurgent and popular in academia. Since wages in capitalist nations were obviously moving away from, not towards, subsistence levels, Marxists sought some new basis for justifying their belief in capitalist exploitation. Perhaps imperialist powers, like Belgium, France, and England, exploited workers in colonies. Is this theory plausible? No decent person could excuse abuses by the English, French, and especially Belgians, in their colonies.
Can Lenin’s revised Marxism explain capitalist development in the United States, Germany, or Sweden? Germany and the US accumulated capital for decades without colonies. How could the initial phases of German and American industrialization be the result of “surplus value” extracted from future colonies? Furthermore, Germany and the US acquired relatively small colonies, very small compared to ongoing industrialization in these nations. The U.S. acquired its’ colonies from the 1898 Spanish-American war. Why didn’t Spain develop more substantially while it had colonies?
Do the examples of France and the U.K. actually fit with Lenin’s imperialism theory? No. Industrial development in France and the U.K. began while these nations were just beginning to acquire colonies, and continued even after these colonies were lost around a half-century ago.
Experience over the past 200 years has also shown that Ricardo was right about Mercantilism, yet this repudiated theory remains popular today. Experience over the past 150 years has shown fatal flaws in both Marx’s original and Lenin’s revised version of Marxism, and the theoretical defects of Labor Value theory were completely exposed by Carl Menger in 1871.
The defects of Mercantilism and Marxism are hardly trivial. Red October created a wave of Marxist states, which perpetrated atrocities that dwarfed the abuses of French and Belgian colonials. Yet somehow Marxism is resurgent and popular in academia. Mercantilists stood in the way of the unprecedented economic progress achieved through globalization, yet Mercantilism is resurgent and popular in the White House. One century ago this year the rise of Bolshevism rose to threaten modern progress. Bolshevism drove many others into the extreme nationalist movements of Mussolini and Hitler. Now, a century later, the twin threats of Fascism and Marxism appear resurgent. What can we learn from the resurgence of Nationalism and Marxism? Those who have failed to learn the correct economic lessons of modern history may doom all of us to repeat its worst aspects.