Ricardo's Doctrine

Ricardo’s doctrine fundamentally believes that:

• the aggregate demand function can be safely neglected
• it is impossible for effective demand to be deficient.

Malthus vehemently opposes this.

• But he was unable to explain clearly how and why effective demand could be deficient or excessive.
• He failed to furnish an alternative.

Ricardo totally conquered England as the Holy Inquisition conquered Spain.

Malthus had wrestled the great puzzle of Effective Demand which vanished from economic literature. You will not find it in the works of:

• Marshall
• Edgeworth
• Pigou

These 3 formed the classical theory.

Effective Demand only lived on furtively, below the surface, in the underworlds of:

• Karl Marx
• Silvio Gesell
• Major Douglas

The Ricardian doctrine reached conclusions quite different from what the ordinary uninstructed person would expect.

• Its teaching, translated into practice, was austere and often unpalatable. This lent it virtue.
• It carried a vast and consistent logical superstructure, giving it beauty.
• It could explain much social injustice and apparent cruelty as an inevitable incident in the scheme of progress.
• It acquired authority from it saying that the attempt to change* such things will do more harm than good on the whole.
• It justified the free activities of the individual capitalist, commended it to social forces.

But although the doctrine itself has remained unquestioned by orthodox economists up to a late date, its signal failure for purposes of scientific prediction has greatly impaired, in the course of time, the prestige of its practitioners.

The professional economists after Malthus were unmoved by the lack of correspondence between the results of their theory and actual facts.

Candides teaches that all is for the best provided we will leave it alone. This then led to a celebrated optimism of traditional economic theory. This had led economists to neglect the drag on prosperity by a reduction of effective demand.

A classical economy would natural tend towards the optimum employment of resources. But to assume* that it actually does so is to assume our difficulties away.

Author’s Footnotes

1. A precise definition of user cost will be given in Chapter 6

2. Not to be confused (vide infra) with the supply price of a unit of output in the ordinary sense of this term.

3. The reader will observe that I am deducting the user cost both from the proceeds and from the aggregate supply price of a given volume of output, so that both these terms are to be interpreted net of user cost; whereas the aggregate sums paid by the purchasers are, of course, gross of user cost.

The reasons why this is convenient will be given in Chapter 6.

The essential point is that the aggregate proceeds and aggregate supply price net of user cost can be defined uniquely and unambiguously; whereas, since user cost is obviously dependent both on the degree of integration of industry and on the extent to which entrepreneurs buy from one another, there can be no definition of the aggregate sums paid by purchasers, inclusive of user cost, which is independent of these factors.

There is a similar difficulty even in defining supply price in the ordinary sense for an individual producer; and in the case of the aggregate supply price of output as a whole serious difficulties of duplication are involved, which have not always been faced. If the term is to be interpreted gross of user cost, they can only be overcome by making special assumptions relating to the integration of entrepreneurs in groups according as they produce consumption-goods or capital-goods which are obscure and complicated in themselves and do not correspond to the facts.

If, however, aggregate supply price is defined as above net of user cost, thew difficulties do not arise. The reader is advised, however, to await the fuller discussion in Chapter 6 and its appendix. 4.

An entrepreneur, who has to reach a practical decision as to his scale of production, does not, of course, entertain a single undoubting expectation of what the sale-proceeds of a given output will be, but several hypothetical expectations held with varying degrees of probability and definiteness.

By his expectation of proceeds I mean, therefore, that expectation of proceeds which, if it were held with certainty, would lead to the same behaviour as does the bundle of vague and more various possibilities which actually makes up his state of expectation when he reaches his decision.

5. In Chapter 20 a function closely related to the above will be called the employment function. 6. Defined in Chapter 10, below.