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The Iron Law of Wages of David Ricardo Icon

January 1, 2015

Adam Smith said that the differences in wages are due to five factors (agreeableness, trust, constancy, risk, cost of learning) and 3 states (backward, stationary, advancing).

In contrast, David Ricardo simplistically said that wages are based on the supply and demand of workers and the cost of goods and services which wages are spent on . Because of this simplicity, Ricardo concluded that wages must fall ( Iron Law of Wages ). This is similar to that or Marx, who was also very simplistic.

In contrast, Smith would simply say that human innovation and morality naturally counters the materialistic tendency of wages to fall.

Ricardo advocated that the poor should not be supported by government, opposite of Malthus who advocated government intervention.

By deregulating the poor, Ricardo said that the poor will work and improve productivity to get out of low wages. Malthus said the poor should be controlled so that they don’t become so many in the first place.

This was fully tested in the Corn Laws and Irish Famine. Malthus won in the beginning when the government fed the Irish. But in time, the government got tired and went Ricardian – they simply imported food from the US, to the detriment of British agriculture.

The Fatal Flaw in Ricardo’s Theory

The World Wars then exposed the flaws of Ricardo’s theory when German U-boats nearly starved Britain.

After that, they reversed and went Malthusian again with the EU Common Agricultural Policy which put British agriculture under oppressive controls.

Eventually, the farmers got tired again and opted for Ricardo’s laissez faire by going for Brexit.

All the while, no one consulted Smith who would’ve gone on the middle path — there would be government agricultural investment to prevent society from going hungry, but there still would be freedom to import certain produce from overseas. For example, the British government might have protectionist policies for wheat, but have free trade for rice and corn. In this way:

  • a collapse of British wheat can be solved by imports of rice and corn
  • a collapse of foreign rice and corn will not affect British food supply so much