Redes Neuronales

In the half-century after Adam Smith published The Wealth of Nations, the shock of industrial revolution, as well as the American and French po lit i cal revolutions, struck Britain close to home. Not surprisingly, con-servatism launched a counter-revolution. Just as Gothic revival sought to recreate a disappearing architecture, po lit i cal conservatism sought to re-store an eroding social order. The rere-stored order would be guided not by individualism and the market but by what the Romantic poet and po lit i-cal Tory Samuel Taylor Coleridge i-called “the spirit of State.”¹ Amid revolutions and counter-revolutions, David Ricardo published The Prin-ciples of Political Economy and Taxation (1817), seeking to defend and im-prove Smith’s liberal po lit i cal economy. A look at Ricardo’s policy con-cerns seems useful before I discuss the model he developed to support them.

Historians no longer much like the term “industrial revolution,” be-cause it conjures up exaggerated scenarios of steam power and mass pro-duction inexorably obliterating a quaint past. In fact, steam power did not become a major factor in the weaving industry until the 1810s or in the spinning industry until the 1840s.² Even in the mid-nineteenth

cen-Economics When Society Matters 47 tury, London, the hub of manufacturing, produced clothing, chemicals, paper, and other goods by handcraft methods.

Yet there was an industrial revolution. It started in the country, as the rural gentry claimed and fenced off common lands that small farmers had used to graze sheep, grow crops, and collect firewood. In Smith’s era, some 60,000 acres were enclosed per de cade, according to Arnold Toyn-bee, the nineteenth-century historian of the industrial revolution, but by Ricardo’s day the rate of enclosure had risen more than tenfold.³ Toyn-bee quotes a contemporary of Ricardo as saying that, in one parish, a certain Lord Carnarvon had amalgamated a single estate from lands

“that those now living remember to have formed fourteen farms, bring-ing up in a respectable way fourteen families.”⁴

You can see the industrial revolution in the roaring furnaces and smoke-billowing factories that light up J. M. W. Turner’s industrial land-scapes. Alluding to a myth that Jesus had once come to Eng land to found a new Israel, William Blake asked, “And was Jerusalem builded here, / Among these dark Satanic Mills?” From 1780 to 1850, Eng lish pig iron output increased by a factor of thirty-five; cotton exports, by a factor of thirty-two.⁵ Farmers displaced by enclosures migrated to indus-trial towns such as Liverpool and Manchester. Boyd Hilton, a historian not given to overplaying social change, writes, “All large industrial towns had brothels, gins shops, alehouses, thieves’ dens, filthy courts, rookeries, communal privies, cesspools, middens, dung heaps, and dangerous ill-paved streets crawling with wild dogs, wolves, and rats.”⁶ In industrial parishes, those de cades “may have been the worst ever . . . for life expec-tancy since the Black Death.”⁷

The reaction against industrialization dominated politics and letters.

Coleridge, the high Tory, and Blake, the radical, were equally dismayed about the exercise of Smith’s “natural rights”—workers’ rights to leave their parishes and labor in the mill town of their choice. The mad-hat conservative essayist Thomas Carlyle, who used more exclamation marks on a page than anyone should use in a whole book, famously dubbed

po-48 the assumptions economists make lit i cal economy the “dismal science.” He used the phrase in an essay ar-guing that laissez-faire would “give birth to progenies and prodigies;

dark extensive moon-calves, unnamable abortions, wide-coiled mon-strosities, such as the world has not seen hitherto!” Whatever he meant by that list of horribles, his essay provides an unfortunate context for the famous phrase. He was not arguing for a restoration of some misty old Eng land that could at least be defended on sentimental grounds. His es-say, titled “The Nigger Question,” defended that most brutal—and not at all traditional—of social institutions: Ca rib be an slave labor.

A supporter of liberalism who sympathized with workers, Ricardo fought two sets of laws passed by the conservative Parliament. The Corn Laws, enacted in 1815, blocked wheat imports. (“Corn” properly refers to a region’s principal grain; in Eng land in Ricardo’s day it meant wheat, not American maize.) Ricardo saw those laws as giveaways to rich land-owners. The impetus for the Corn Laws goes back to 1793, when Britain entered the Napoleonic Wars, wheat imports were cut off, and landlords found that they could demand soaring rents for their estates from the farmers who actually worked the land and sold the produce. Toynbee re-ports a case in which an estate in Essex rented for 10 shillings an acre in 1793 and for 50 shillings an acre in 1812.⁸ The effect on the hired farm-worker, Toynbee laments, was “most disastrous.” The worker “felt all the burden of high prices, while his wages were steadily falling, and he lost his common-rights.”⁹ The Corn Laws, passed after the war, locked in landlords’ gains.

Whereas Smith fought merchants and manufacturers who wrested advantage from the state, Ricardo took aim at landlords for their protec-tionist Corn Laws. Today free trade, or what’s tendentiously called free trade (you need only a sentence to specify free trade, not thousand-page treatises), is often seen as bene fiting multinationals. Ricardo saw the protectionist Corn Laws as bene fiting landlords and harming workers.

Landlords are “never so prosperous, as when food is scarce and dear,” he

Economics When Society Matters 49 wrote, “whereas, all other persons are greatly bene fitted by procuring cheap food.”¹⁰

Ricardo also opposed the Poor Laws. Traditional poor laws had re-quired parishes to provide relief to the infirm, the elderly, and those who accepted make-work in the poorhouse. The ranks of the poor swelled as enclosure of common land and the decline of subsistence farming cre-ated a rural proletariat, and gave rise to industrial unemployment as we know it. After wheat prices soared during the Napoleonic Wars, villages in southern Eng land began to subsidize wages to assure families of sub-sistence.¹¹ This may well have been a reasonable anti-poverty mea sure, but at the time intellectuals and politicians saw it as a monstrosity.¹² Em-ployers might cut pay, relying on subsidies to make up the shortfall, and subsidies that leveled pay could weaken incentives to work.¹³ Families supported by subsidies, it was supposed, often landed in the poorhouse and stayed there. There has never been a more incisive or eloquent de-fender of social protection than Karl Polanyi, but in his book The Great Transformation, having based his research on commentaries by intellec-tuals and politicians of Ricardo’s day, he captures their dim view of the Poor Laws: “The decencies and self-respect of centuries of settled life wore off quickly in the promiscuity of the poorhouse.” From Blake to Carlyle, from the market apologist Harriet Martineau to the Marxist Friedrich Engels, ev ery one believed that “the very image of man had been defiled by some terrible catastrophe.”¹⁴

Ricardo’s friend Thomas Malthus essentially argued that humans’

irrepressible sex drive would cause unmanageable population growth, which would outpace society’s ability to provide food. Ricardo saw the poorhouse, which he believed promoted “early and improvident mar-riages,” as aggravating these concerns. But he showed far more sympathy for in hab i tants of the poorhouse than for landlords. Since the poorhouse had become an entrenched institution, he warned that its “abolition should be effected by the most gradual steps.”¹⁵

50 the assumptions economists make Scion of a Sephardic Jewish family, Ricardo married a Quaker and gained fabulous wealth as a stock “jobber”—a trader and market maker.

He managed to move effortlessly into London’s intellectual circles.¹⁶ His essay for the Morning Chronicle on the in fla tion of paper money drew the attention of James Mill, a po lit i cal economist and the father of John Stu-art Mill. James Mill later encouraged Ricardo to write his Principles of Political Economy. Ricardo apparently met Malthus, his eternal friend and critic, through a London club. But Piero Sraffa and Maurice Dobb, editors of the definitive edition of Ricardo’s collected works, suggest that the most im por tant in flu ence on his po lit i cal economy was his self-edu-cation in mathematics, chemistry, and geology.

Along with his practical concerns—such as ending the Corn Laws and gradually disbanding the poorhouses—Ricardo conceived an intel-lectual prob lem: to straighten out Adam Smith’s incoherent meander-ings and produce a consistent model, although he never used that term.

His Principles of Political Economy formulated the clearest articulation of what has come to be known as classical po lit i cal economy. Principles could hardly have been a more different kind of book from The Wealth of Nations. Smith’s fertile vision drew a panorama of world economies laced with acute perceptions and contradictions. Ricardo’s writing is not so el-egant, but is focused, sharp, rigorous.

Ricardo never described his economic model in equations, but he presented such clear numerical examples that you can almost visualize the underlying algebra. Piero Sraffa spelled out the algebra in a short, im por tant book in 1960. Unlike Smith’s brilliant but often contradictory perceptions, Ricardo’s model of classical economics led him robustly to-ward his conclusions.

Ricardo’s Assumptions

It helps to compare the assumptions Ricardo uses to build his classical economics model with standard contemporary assumptions used to build

Economics When Society Matters 51 the so-called neoclassical model. First, a word about the term “neoclassi-cal.” Neoclassical theory, as it’s known, initially shaped by late nine-teenth-century academics in Britain and on the Continent, evolved into today’s textbook economics. A more appropriate name would have been

“anticlassical” economics, because the theory constituted a reaction against Ricardo. But the term used is “neoclassical”—and on this point, as elsewhere, I prefer to avoid confusion by following standard usage, rather than reinventing it. I should add that, as a rigorous theory, neo-classical economics underwent im por tant changes in the twentieth cen-tury. But the sim pli fied neoclassical models that have been taught in textbooks and mostly applied in practice changed far less. Unless I indi-cate otherwise, what I say about neoclassical economics refers to this textbook version.

One of Ricardo’s key assumptions, also adopted in the neoclassical model, is called Say’s “law,” after the French economist Jean-Baptiste Say, who popularized it. (This is another misnomer since it’s an assump-tion, not a law.) It assumes that all income, both cap italists’ profits and workers’ wages, is spent to purchase goods. A useful way to see the im-plications of Say’s law is to consider what would happen if all income were not spent—in particular, if instead of spending all their profits to purchase investment goods, cap italists hoarded a portion of them, per-haps stashing pounds sterling in safe-deposit boxes. The result would be what classical economists called a “general glut” of goods. The amount of money spent in the economy would fall short of the value of goods pro-duced. Because of the shortfall, goods would either sit on the shelves or would have to be sold at steep discounts. Businesses that weren’t selling goods or that were forced to sell at steep discounts would reduce their investment and cut payrolls. The economy would contract.

A modern version of this scenario occurs when banks hoard cash by depositing it as reserves with the central bank, rather than lending it out.

For example, the cash reserves that U.S. banks held at the Federal Re-serve Bank, over and above legal requirements, soared from about a

bil-52 the assumptions economists make lion dollars in January 2008 to a trillion dollars in June 2010.¹⁷ The banks hoarded cash out of fear that they might need it to stay solvent, or that borrowers were not creditworthy. When potential borrowers, both firms and consumers, spend a trillion dollars less than they would have spent in other circumstances, the economy contracts.

Say’s law claims that no general glut of goods can occur. It concedes that there can be an oversupply of goods in one sector or another (de-mand for land-line telephones drops as consumers switch to cell phones), forcing businesses out of that sector and into another. But no general, economy-wide glut can occur.¹⁸ Adam Smith, who posited Say’s law well before Say, explains the idea well: “In all countries where there is tolera-ble security, ev ery man of common un der stand ing will endeavour to em-ploy whatever stock he can command in procuring either present enjoy-ment or future profit.” A rational man employs his “stock” for present enjoyment by buying consumer goods. He employs it for future profit by investing it directly in production or lending it to someone else who will do so. “A man must be perfectly crazy who, where there is tolerable secu-rity, does not employ all the stock which he commands, whether it be his own or borrowed of other people, in some one or other of those three ways.”¹⁹ Since all income is spent, ev ery thing that has been produced is sold at its normal, or “natural,” price. The economy proceeds without a hitch, and no recessions or depressions occur.

Say’s law does not seem realistic for any cap italist economy. The in-dustrial revolution ushered in booms and depressions. The usual response to the evidently implausible assumption that all savings are necessarily invested, as well as the obvious fact of business-cycle booms and reces-sions, is that these are short-term phenomena and do not affect the economy’s long-run trajectory. Say’s law, this response maintains, holds, on average, over the business cycle. During booms, cap italists (and con-sumers in a modern economy) may borrow and spend more than their in comes; during recessions, they may increase saving and spend less than their in comes on investment and other goods; but the cycle averages out.

Economics When Society Matters 53 On average, Say’s law is said to capture long-run economic performance.

Let’s leave this debate for the moment, and return to it later.

Ricardo’s classical model departs from the neoclassical model in two principle assumptions. First, a key assumption he shares with Smith, which I think has some plausibility and which I will examine further in connection with recent models that adopt it, sees long-run, or “natural,”

wages as determined not by markets but by social custom. It bears re-peating that this assumption is about social custom, not biological sub-sistence:²⁰

It is not to be understood that the natural price of labour, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country, and very materially differs in different countries. It essentially depends on the habits and customs of the people. An Eng lish labourer would consider his wages under their nat-ural rate, and too scanty to support a family, if they enabled him to purchase no other food than potatoes, and to live in no better habita-tion than a mud cabin; yet these moderate demands of nature are of-ten deemed suf fi cient in countries where “man’s life is cheap,” and his wants easily sat is fied. Many of the con ve niences now enjoyed in an Eng lish cottage, would have been thought luxuries at an earlier period of our his tory.²¹

The idea that wages are fixed by social convention is accepted by many noneconomists. For example, Senator Byron Dorgan, Democrat of North Dakota, argued in a Senate committee hearing in 1994 that U.S.

wage levels had been determined by “enormous battles between labor and those who employ labor [regarding] the proper apportionment of the income streams that go to rents and profits and wages.” The resulting

“po lit i cal equilibrium” had settled how to apportion national income.²² Dorgan must have had some other theory about rents, but he agreed with Ricardo about profits and wages. Likewise, Louis Uchitelle, a New York Times economics reporter, suggested in 2003 that profits had risen as a percentage of GDP (gross domestic product) because labor had

54 the assumptions economists make grown “too weak to prevent many companies from pocketing virtually all the gains from productivity.”²³ Though most contemporary economists have long been reluctant to accept the idea that institutions such as unions, minimum-wage laws, and executive pay boards fundamentally determine wage levels, the extraordinary and persistent worsening of in-come inequality in the United States and several other countries since the 1970s has led some, such as economists Frank Levy and Peter Temin of MIT, to rethink views on the matter more along Ricardo’s lines.²⁴ Ricardo’s assumption about the social determination of wages means that society and markets are inextricably intertwined in an economy.

Markets play an im por tant role, but there is no exclusive market sphere.

An economy, however ef fi cient or in ef fi cient it might be, cannot even be imagined outside of a social framework. By contrast, neoclassical theory admits only individual preferences working through markets. Each indi-vidual knows what gives him or her more utility or less utility: which goods are preferable to which other goods. Not only may individuals dis-agree with one another, but their views about utility cannot be compared.

Thus, neoclassical theory sees markets alone as creating an economy and does not even admit the concept of society.

Furthermore, Ricardo differs from the contemporary mainstream in his concept of technology. He assumes that, at any given “state of the art,” essentially only one technique for producing goods is known. An accounting firm hires accountants, each equipped with a state-of-the-art computer and software embodying the latest accounting rules. One firm’s techniques may differ somewhat from another’s—perhaps they use dif-ferent software—but the differences are assumed to be minor enough that the model can ignore them. By contrast, most neoclassical models assume that, even at a given state of the art, each firm has access to a wide range of techniques. A firm can employ more labor and less cap ital, or vice versa, to produce the same output. Presumably, an accounting firm could hire more accountants and employ less information technol-ogy, or vice versa, though I have no idea concretely how. The neoclassical

Economics When Society Matters 55 assumption about technology, envisioning firms as shopping for more cap ital and less labor, or vice versa, supports the idea that supply and

Economics When Society Matters 55 assumption about technology, envisioning firms as shopping for more cap ital and less labor, or vice versa, supports the idea that supply and