April 26, 2017

Ricardian vice and Keynesian confusedness

Comment on Lars Syll on ‘The Ricardian Vice’

Blog-Reference and Blog-Reference on May 3

Ricardo is the traditional boogeyman of Heterodoxy: “Ricardo literally invented the technique of economics. … His gift for heroic abstractions produced one of the most impressive models, judged by its scope and practical import, in the entire history of economic theory: seizing hold of a wide range of significant problems with a simple analytical model involving only a few strategic variables, he produced dramatic conclusions oriented to policy action. In short, he was the first to master that art that brought success to Keynes in our own day. Not everyone will consider this praiseworthy. Even Schumpeter calls Ricardo’s habit of applying severely simplified abstractions to the solution of practical problems ‘the Ricardian Vice’. And to the Historical School and the American Institutionalists, Ricardo has always stood for everything they detest in orthodox economics.” (Blaug)

In April 1817, David Ricardo published The Principles of Political Economy and Taxation, where he laid out ― among others ― the idea of comparative advantage which serves until this day as the ultimate rationale for free trade. Heterodoxy criticizes Ricardo for 200 years. Time enough, one should think, to spot Ricardo’s pivotal blunder and to come up with a superior alternative.

This did not happen. Keynes, for one, complained that Malthus “failed to furnish an alternative construction; and Ricardo conquered England as completely as the Holy Inquisition conquered Spain”. But Keynes, too, failed to furnish an alternative construction. Keynes subscribed to the Cambridge School of Loose Verbal Reasoning and established himself in the scientific no man’s land where ‘nothing is clear and everything is possible.’#1

The common blunder of Keynes and Ricardo is the profit theory. Both got the foundational concept of economics wrong: “His [Keynes’s] Collected Writings show that he wrestled to solve the Profit Puzzle up till the semi-final versions of his GT but in the end he gave up and discarded the draft chapter dealing with it.” (Tómasson et al.)

In his chapter On Profits Ricardo stated that “profits would be high or low in proportion as wages were low or high.” This relationship holds for a single firm but is false for the business sector as a whole. Ricardo committed the classical logical Fallacy of Composition.#2 Overall profit does NOT depend on wages.

What Keynes and Ricardo had in common was a false profit theory and this is the worst thing that can happen to an economist. In 200 years of critique of the Ricardian vice neither Orthodoxy nor Heterodoxy has made any progress. As the Palgrave Dictionary summarizes: “A satisfactory theory of profits is still elusive.” (Desai, 2008) The state of economics 200 years after Ricardo is this: the four major approaches ― Walrasianism, Keynesianism, Marxianism, Austrianism ― are mutually contradictory, axiomatically false, and materially/formally inconsistent.

Since Ricardo, the root of methodological vice and intellectual confusion is scientific incompetence.

Egmont Kakarot-Handtke

#1 Marshall and the Cambridge school of plain economic gibberish
#2 When Ricardo Saw Profit, He Called It Rent: On the Vice of Parochial Realism

For details of the big picture see cross-references Profit.