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Financial Grounds for Free Trade in Corn: A Disregarded Aspect in Ricardo’s Essay Atsushi Masunaga (masunaga@tamacc.chuo-u.ac.jp)∗

１. Introduction

In An Essay on the Influence of a Low Corn Price on the Profits of Stock (1815; henceforth, Essay), Ricardo asserted that free trade in corn decreases the net revenue of a country by a lower proportion than the entire money value of commodities.1 In other words, such a trade policy augments the ability of a country to pay taxes through an increase in the real value of net revenue from which taxes are paid. The argument was developed as a result of his criticism to Malthus’s The Grounds of an Opinions on the Policy of Restricting the Importation of Foreign Corn (1815, henceforth, Grounds), which became more sophisticated in his Principles of Political Economy and Taxation (third edition, 1821821; first edition, 1817; henceforth, Principles). In this paper, I aim to notice relatively neglected financial grounds for free trade in corn in the Essay and to clarify their significance. Although the argument is developed in the latter half of the Essay, most former studies have centred on Ricardo’s theory of profits presented in the first half. The tendency originates from Piero Sraffa’s corn model interpretation of Ricardo’s theory before the Principles, as explained in Section 2. Recently, some studies analyse Ricardo’s arguments in the latter half of his pamphlet (Salvadori and Signorino 2015, Signorino 2015), but without noticing Ricardo’s doctrine on the relationship between the Corn Laws and the ability of a country to pay taxes. While de Vivo (2015) is a valuable paper that places the Essay in the wider perspective of arguments for or against the Corn Laws at its time, it does not include a discussion on the objective of this paper.2

As argued below, Ricardo’s doctrine of the effect of free trade in corn on the ability of a country to pay taxes is based on the distinction between the variation of corn price arising from a change in money value and that arising from a change in production conditions. The distinction is further derived from his denial, in the Essay, of Adam Smith’s theory of prices that all prices vary with corn price, although Ricardo previously accepted this theory. Former studies have traditionally connected this denial with the development of Ricardo’s theory of profits, as shown in Section 2. The reason is simple: if Smith’s theory that a rise in corn price raises the prices of all commodities through increased wages is true, it makes Ricardo’s proposition that a rise in wages reduces the general profit rate unpersuasive. While the traditional approach is reasonable, I

∗ This is the first draft. Do not quote. 1 Hereafter, I refer to Ricardo’s Works and Correspondence (1951–73, 11 vols.) by indicating volume and page numbers only (e.g. Ricardo 1951–73, IV: 10). 2 I have already published on this subject, although those studies did not deal mainly with Ricardo’s doctrine in the Essay (Masunaga 2009; 2010).

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particularly focus on the role which Smith’s theory of prices played in Ricardo’s pre-Essay theory of profits as a preamble to its more significant considerations from Section 3 onward.

The denial of Smith’s theory of prices in the Essay is not important only to the development of Ricardo’s theory of profits, but had a decisive influence on his analysis of social classes, based on the criticism of Smith’s view on rents, and the doctrine of the ability of a country to pay taxes. This change, as prior to the Essay, was partly caused by Malthus’s two pamphlets on rents, An Inquiry into the Nature and Progress of Rent, and the Principles by Which It is Regulated (1815, henceforth, Inquiry) and Grounds. The critical integration of Malthus’s theory of differential rents into his own theory of profits enabled Ricardo to construct more comprehensive theories than before. Moreover, connecting the new theory of rents with the different consequences of the two causes of change in corn price derived from the denial of Smith’s theory of price, Ricardo revealed the critical implications of Smith’s doctrine on rents and the financial grounds for the repeal of the Corn Laws. It is the relationship between the theory of rents and the denial of Smith’s theory of prices to which I particularly pay attention.

The remainder of the paper is organized as follows. Section 2 examines the role Smith’s theory of prices played in Ricardo’s pre-Essay theory of profits, surveying the interpretations of principal commentators on the subject. Section 3 analyses the argument to refuse Smith’s theory of prices in the Essay, and explores its significance. Section 4 considers Ricardo’s doctrine of the influence of a transition to free trade in corn on the ability of a country to pay taxes, as derived from the denial of Smith’s theory of prices. Section 5 presents the conclusions of this paper. 2. Ricardo’s attitudes toward Smith’s theory of prices before the Essay 2.1 Literature review on Ricardo’s pre-Essay theory of profits in connection with Smith’s

theory of prices

There is no doubt that Ricardo accepted Smith’s idea that all prices rise with a rise in corn and wages during the bullionist controversy. In Notes on Bentham’s ‘Sur les Prix’ (1810–11), Ricardo writes:‘Commodities may rise from taxation tho’ they are not subject to any direct taxation themselves. If a tax were laid on bread every commodity would rise, as there is no commodity to the production of which the labour of man is not necessary’(Ricardo 1951–73, III: 270).

It is not until in the Essay that Ricardo officially refused Smith’s theory of prices.3

3 The precise date Ricardo refuted Smith’s theory of prices is not the aim of this paper, but some scholars have referred to it. Garegnani (1982: 67–68, 67n) presumes the date as ‘some time between August 1814 and February 1815’. Peach (1993: 48) states: ‘This view of price interrelationships continued to be held by Ricardo until shortly before the publication of his

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This section examines his letters of 1814, in which Smith’s theory of prices was used. Before that, it is useful to survey the primary studies on Ricardo’s theory of profits since August 1813 in connection to Smith’s logic on the dependency of general prices on corn price.

Sraffa (Ricardo 1951–73, I: xxxi) presented a so-called corn model interpretation as ‘[t]he rational foundation’ of Ricardo’s theory of profits before the Principles. The interpretation emphasizes that the agricultural profit rate can be calculated as the material ratio of product and capital ‘without any question of valuation’, since corn appears in both agricultural inputs and outputs. The equation to calculate it is as follows: Profit rate = The output of corn - Agricultural capital / Agricultural capital (2.1)

Considering Ricardo’s view (1951–73, VI: 104) that ‘it is the profits of the farmer which regulate the profits of all other trades’, the determination of the agricultural profit rate based on material terms has an important implication. If the unique profit rate is to exist in an economy, it is ‘the exchangeable values of the products of other trades relatively to their own capitals (i.e. relatively to corn that is regulated to establish the same profit rate as that in agricultural sector’ (Ricardo 1951–73, I: xxxi, emphasis in original). ‘Although this argument is never stated by Ricardo in any of his extant letters and papers’, as Sraffa (Ricardo 1951–73, I: xxxi) allowed, his corn model interpretation has been supported by numerous scholars (Bharadwaj 1983, de Vivo 1996; 2001, Eatwell 1975, Garegnani 1982; 1983, Prendergast 1986, Kurz and Mongiovi 2002: 372–74, Kurz 2011).4

Sraffa also comments on the relationship between Ricardo’s early theory of profits and Smith’s theory of prices. In his opinion, Ricardo did not think that his theory of profits, in terms of the material rate, is ‘inconsistent’ with Smith’s view that all prices rise with a rise in corn and wages. As he later began to explore more mature and general theories, the conflict with Smith’s view was recognizable, ‘since the supposed general rise of prices obscured the simple relation of the rise of wages to the fall of profits’ (Ricardo 1951–73, I: xxxiii).

The principal opponents of Sraffa’s corn model interpretation are Hollander (1973; 1975; 1979; 1986; 1995; 1998) and Peach (1984; 1986; 1993; 1998; 2001; 2002; 2008). While they agree that Sraffa’s interpretation has the rationality to understand Ricardo’s early theory of profits, they doubt whether Ricardo himself intended to use the corn model in formulating his theory of profits.

Unlike Sraffa, Hollander focuses on a variation of money wages to the money price of

Essay on Profits (1815)’. Watarai (2015: 481) concludes that Ricardo became emancipated from Smith’s theory of prices ‘sometime between 11 August and 18 December 1814, and very possibly between 23 October and 18 December 1814’. 4 For a recent expository comment on corn model, see Ciccone and Trabucchi (2015).

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commodities in Ricardo’s theory of profits since 1813.5 In his view, Ricardo studied the inverse relationship between wages and profits since 1813 (Hollander 1973: 260; 1979: 118). Therefore, there is no innovative transition between Ricardo’s early theory of profits and the later theory in his Principles (Hollander 1975: 189). Hollander thus regarded the adoption of Smith’s theory of prices in his letters of 1814 as a negative one. Ricardo ‘did not, evidently, realize the implications of his concession that higher wage costs might be passed on to consumers in the form of higher prices’ (Hollander 1973: 265). The concession was ‘a serious stumbling block’ to establishing the inverse relationship between wages and profits (Hollander 1973: 265, see also 1979: 127). However, the critics of Hollander argued that the acceptance of Smith’s theory of prices before the Essay suggests that Ricardo did not yet base his study on the inverse relationship between wages and profits (Bharadwaj 1983: 19, 25, Garegnani 1982: 66–68; 1983: 176).

Using the different arguments from Hollander, Peach repeatedly criticizes Sraffa’s corn model interpretation (1984: 734, 744–46; 1986: 1106–9; 1993: 54–55, 67; 1998: 598–99, 605; 2008: 172), believing that Smith’s theory of prices was the essential component to Ricardo’s pre-Essay theory of profits. His belief is different from Sraffa’s interpretation that Ricardo’s early theory of profits, based on the corn model, could coexist with Smith’s theory of prices without contradiction.

In Peach’s view, the agricultural capital in (2.1) includes other commodities besides corn. Contrary to Sraffa’s interpretation, agricultural product and capital are not homogeneous in Ricardo’s theory.6 The agricultural sector is also subject to the law of diminishing returns. The quantity of corn produced with the same quantity of capital decreases as inferior lands are successively cultivated, which suggests a decrease of the numerator in (2.1). If a rise in corn price raises the prices of other commodities, the rise moves both the numerator and the denominator in (2.1) at least in the same direction, even if agricultural capital includes commodities besides corn. This can explain a fall in agricultural profits without invoking Sraffa’s corn model. Peach thus shows that, even if product and capital in agriculture are heterogeneous, the agricultural profit rate reduces as production conditions deteriorate. To rebut this interpretation, Hollander (1986: 1093–94), Kurz and Mongiovi (2002: 374), and Prendergast (1986: 1098–1100) criticized Peach for ascribing Ricardo to the assumption that corn price proportionally increases the price of other commodities. However, Peach (1986: 1106–9; 1993: 80–81, 1998: 605n) refutes that his interpretation still holds, even if a rise in corn price does not generate a proportional rise in the price of other commodities. What is necessary is that all prices move in the same direction as corn price.

5 However, Hollander (1973: 265–66; 1979: 127–28; 1986: 1093) allows that, in his letter to Malthus of 25 July 1814, Ricardo suggested the corn model.

6 For example, Ricardo (1951–73, IV: 10) includes ‘fixed capital, such as buildings, implements, &c.’ in agricultural capital.

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2.2 The context in which Smith’s theory of prices is used in pre-Essay letters

I have hitherto surveyed the main extant studies on Ricardo’s pre-Essay theory of profits in connection with Smith’s theory of prices. I now examine the role which Smith’s view of general prices rising with corn price played in Ricardo’s pre-Essay theory of profits. In doing so, I confine the study to a consideration of contexts in which Smith’s theory of price was referred to in the pre-Essay letters. The scope of this paper is not to interpret his early theory of profits comprehensively. Moreover, it is worth noting that he used a mild version of Smith’s theory of prices: that the price of commodities increases to a lesser proportion than the price of corn (not proportionally).7

There are three pre-Essay letters that closely relate to Smith’s theory of prices.8 The first is his letter to Malthus of 26 June 1814, where Ricardo develops the following argument: a rise in corn price decreases the number of labourers employed with the same amount of capital through increasing wages. This diminishes the production of commodities and, therefore, the demand for them: ‘Demand has no other limits but the want of power of paying for the commodities demanded. Every thing which tends to diminish production tends to diminish this power’ (Ricardo 1951–73, VI: 108). This type of fall in the demand for commodities can be generated without relying on Smith’s theory of prices:

The rise of the price or rather the value of corn without any augmentation of capital must

7 Hollander states that the important feature of Ricardo’s letters of 1814 is the argument that the price of manufactured goods rises less than corn price (what I refer to as the mild version of Smith’s theory of prices) (Hollander 1986: 1093, see also 1979: 131), which I support. However, he regards the argument as distinct from Smith’s position that the price of manufactured goods rises proportionally with corn price (Hollander 1986: 1093n). To distinguish from Ricardo’s final position in his Principles that a rise in corn price causes not higher price for commodities but lower profits through a rise in wages, I regard his 1814 position as the mild version of Smith’s theory of prices. This interpretation is supported by Hollander’s earlier work: ‘The further development of the theory of profits during 1814 took into account the effect of corn price increases upon the wage rate, manufacturing prices tending to rise in consequence of higher wages but in lesser proportion. Thus Ricardo had by no means fully formulated his rejection of the Smithian relationship between the corn price and general profits’ (Hollander 1979: 123, emphasis added). 8 Besides, Peach (1993: 76–81) enumerates and examines his other letters as indirect proofs that Ricardo may have assumed Smith’s theory of prices, particularly a proportional change in prices between corn and other commodities. One of those letters, his letter to Malthus of 17 April 1815, has been discussed in literature. In this letter, Ricardo (1951–73, VI: 213) attempts to rebut Malthus by assuming all prices rise proportionally with a rise in corn price, although Ricardo had already denied Smith’s theory of prices in the Essay. While Peach (1984: 743; 1986: 1107; 1993: 79–80) claimed that Ricardo, before the Essay, may also have assumed that the corn price proportionally raises the price of other commodities, other commentators denied this interpretation (Hollander 1986: 1094, Prendergast 1986: 1099n).

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necessarily diminish the demand for other things even if the prices of those commodities did not rise with the price of corn, which they would (tho’ slowly) certainly do. With the same Capital there would be less production, and less demand (Ricardo 1951–73, VI: 108, emphasis added).

The second is his letter to Malthus of 25 July 1814. In Ricardo’s view, a rise in corn

price reduces the demand for commodities as per Smith’s view that all prices rise with a rise in corn and wages:

It appears to me that the difficulty and expence of procuring corn will necessarily regulate the demand for the products of capital, for the demand must essentially depend on the price at which they can be afforded, and the prices of all commodities must increase if the price of corn be increased. (Ricardo 1951–73, VI: 114, emphasis added)

What is significant here is that a rise in the price of commodities falls short of that in

wages. The reason is a fall in the demand for commodities caused by general prices rising with corn price. Consequently, the manufacturing profit rate falls.9 Although Ricardo believed that the price of manufactures ultimately rises less than the corn price, he did not deny that all prices move in the same direction as corn price, thus not completely diverging from Smith’s theory of prices.

The third is his letter to Malthus of 11 August 1814. Ricardo wrote on the effect of restricting the import of foreign corn:

If every person [woollen or cotton manufacturer] is determined to live on his revenue or income, without infringing on his capital, the rise of his goods will not be in the same proportion as the rise of labour, and consequently his percentage of profit will be diminished if he values his capital, which he must do, in money at the increased value of which all goods would rise in consequence of the rise of wages of labour. (Ricardo 1951–

73, VI: 120)

When the import restrictions on corn raise the price of corn and labour, capitalists who

9 As Prendergast (1986: 1103–4) pointed out, the decrease in demand only temporarily reduces both the price of commodities and the profits until supply diminishes in accordance with decreased demand. Therefore, such a mechanism is not related with a perpetual fall in the profit rate that interested Ricardo. Only when the ‘corn model extension’ that the price of manufactures is adjusted to match the agricultural profit rate is accepted, ‘Ricardo’s subscription to Smith’s “adding up” approach to price and his belief that the rise in other prices is not proportional to the rise in corn make sense’ (Prendergast 1986: 1104). However, Peach (1998: 605) refuted that, if Ricardo had adopted Sraffa’s corn model, he would have not needed to present arguments that the manufacturing profit rate falls because of ‘demand constraint’. See also Peach (1986: 1109).

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want to avoid encroachment on their capital must cut down their personal consumption by the rise in the wage cost. Consequently, the demand for commodities falls. Since ‘the rise of his goods will not be in the same proportion as the rise of labour’, the profit rate in the manufacturing sector falls. The argument is based not on the rigid version of Smith’s theory of prices that all prices rise proportionally with a rise in corn price, but on the mild version that all prices rise less than a rise in corn price. However, Ricardo did not deny that all prices move in the same direction with the corn price. The fall in the agricultural profit rate is thus passed to other sectors.

It is thus evident that Smith’s theory of prices (the mild version) was not necessarily incompatible with Ricardo’s pre-Essay theory of profits, and that there is no decisive proof that he fully rejected Smith’s theory of prices before the Essay.

Smith’s theory of prices was one of the components in explaining Ricardo’s pre-Essay theory of profits, as it was particularly important to pass a fall in agricultural profit rates to other sectors, which is the role Smith’s theory of prices played in Ricardo’s pre-Essay theory of profits. At this stage, the two theories were still connected. In this sense, the approach of extant studies on the relationship between the two theories is valid, although their interpretations of Ricardo are extremely different. However, the denial of Smith’s theory of prices is also to be applied to other field than profits in Ricardo’s theory by the publication of Malthus’s two pamphlets on rents in 1815, which seems to have been relatively disregarded by most commentators. In the next two sections, I cover this issue. 3. Ricardo’s theory of profits in the Essay: Escaping from Smith’s theory of

prices 3.1 A fall in the profit rate under the invariant price of corn and labour

In contrast to his letters of 1814, Ricardo completely denied Smith’s view of general prices increasing with corn price in the Essay. This section analyses the argument he used, and shows the critical implication of Smith’s doctrine on rents.

Ricardo published his Essay right after he read Malthus’s Inquiry and Grounds. According to Sraffa (Ricardo 1951–73, IV: 5), the publication order of the three pamphlets are Inquiry (3 February 1815), Grounds (10 February 1815), and Essay (24 February 1815). This suggests that Ricardo finished writing his pamphlet over a short period. Sraffa (Ricardo 1951–73, IV: 4) thus presumed that Ricardo completed his Essay ‘by using his already developed theory of profits, incorporating Malthus’s theory of rent, and adding a refutation of the protectionist arguments put forward by Malthus in his Grounds’. Ricardo’s pamphlet is thus divided into two parts: the first half argues the effects of capital accumulation on profits and rents, while the latter half is devoted to the criticism on Malthus’s argument for the Corn Laws.

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I begin with the examination of Ricardo’s theory developed in the first half of the Essay. Assume that the wheat (corn) value of the capital employed on lands is 200 quarters, and that ‘after replacing the fixed and circulating capital, the value of the remaining produce’ is ‘one hundred quarters of wheat, or of equal value with one hundred quarters of wheat’ (Ricardo 1951–73, IV: 10). From (2.1), the agricultural profit rate is 50 percent (= 200 - 100/200). Therefore, ‘the profits on all other capital […] will be also, fifty percent’ (Ricardo 1951–73, IV: 12) because ‘it is the profits of the farmer which regulate the profits of all other trades’ (Ricardo 1951–73, VI: 104).

Ricardo analyses the influence of an increase in capital and population on the profit rate for neither agricultural improvements nor a change in real wages. His analysis is subdivided into two cases. First, cultivation is extended, but the prices of corn and labour remains the same because all lands are equally fertile. Second, the prices of corn and labour increase by cultivating less fertile lands.

In the first case, if capital and population further increase after all land sited most favourably (A) is cultivated, the cultivation is extended to less favourably sited land (B). To produce the same quantity of corn as before, more capital at ‘the value of ten quarters of wheat’ must be employed on land B (Ricardo 1951–73, IV: 13). In (2.1), the wheat value of agricultural capital in the denominator rises from 200 to 210 quarters, while the numerator falls from 100 to 90 quarters. It is the conditions of production on the least fertile land (B) that determine the profit rate, which thus reduces from 50 to about 43 percent. He states what happens on Land A as follows:

On the land first cultivated, the return would be the same as before, namely, fifty per cent. or one hundred quarters of wheat; but, the general profits of stock being regulated by the profits made on the least profitable employment of capital on agriculture, a division of the one hundred quarters would take place, forty-three per cent. or eighty-six quarters would constitute the profit of stock, and seven per cent. or fourteen quarters, would constitute rent. (Ricardo 1951–73, IV: 13)

In the same way, land C, which is still sited less favourably, is taken into cultivation

as capital and population further increases. The results of the process can be summarized in Figure 3.1 (‘q’ denotes the number of quarters of wheat or corn). Figure 3.1: Effects of capital accumulation on profits and rents10

10 The ‘surplus product’ corresponds to ‘Neat Produce’ in Ricardo’s famous Table (Ricardo 1951–73, IV: 17). Regarding this, King points out: ‘The net product is the difference between the gross product and the non-labour inputs that are required to produce it, and the surplus product is the difference between the net product and the wage bill of the agricultural labour force. Confusingly, in the heading of the third column in his Table, Ricardo describes as the

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(1) First phase (Land A) Land A: Surplus product (100q) Profits = Capital (200q) ･ Profit rate (50%) = 100q (2) Second phase (Land A + Land B) Profits = Capital (200q) ･ Profit rate (43%) = 86q Land A: Surplus product (100q) Rents = Capital (200q) ･ (50% - 43%) ＝ 14q Land B: Surplus product (90q) Profits = Capital (210q) ･ Profit rate (43%) ≈ 90q (3) Third phase (Land A + Land B + Land C)

Profits = Capital (200q) ･ Profit rate (36%) = 72q Land A: Surplus product (100q) Rents = Capital (200q) ･ (50% - 36%) ＝ 28q

Profits = Capital (210q) ･ Profit rate (36%) = 76q Land B: Surplus product (90q) Rents = Capital (210q) ･ (43% - 36%) ＝ 14q Land C: Surplus product (80q) Profits = Capital (220q) ･ Profit rates (36%) ≈ 80q

The above figure shows that an increased difficulty in producing corn is the cause of lower profits or higher rents, and that higher rents involve lower profits on each type of land: ‘Rent then is in all cases a portion of the profits previously obtained on the land. It is never a new creation of revenue, but always part of a revenue already created’ (Ricardo 1951–73, Ⅳ: 18).

The conclusion of the first case is that, even if corn price and wages do not vary, increases in wealth and population lead to a fall in profit rates and a rise in rents since the extension of cultivation requires more labourers to produce the same quantity of corn as before. While the total value of corn on marginal land (corn price per quarter times output of corn) remains the same, the cost to produce it (wages rate times the number of labourers) increases. Therefore, the profit rate on which depend the production

“neat produce” –that which is left over “after paying the cost of production” –what he elsewhere correctly describes as the “surplus produce” (IV, pp. 11n, 15)’ (King 2013: 62–63, emphasis in original).

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conditions of marginal land falls while rents rise.

3.2 A fall in the profit rate under higher prices of corn and labour: Denial of Smith’s theory of prices In fact, an increase in wealth and population tends to raise both corn price and wages.

I now turn to the second case in Ricardo’s theory of profits, where he refers to the determinants of the changes in commodity values.

The exchangeable value of all commodities, rises as the difficulties of their production increase. If then new difficulties occur in the production of corn, from more labour being necessary, whilst no more labour is required to produce gold, silver, cloth, linen, &c. the exchangeable value of corn will necessarily rise, as compared with those things. […] Thus we see that improvements in agriculture, or in the implements of husbandry, lower the exchangeable value of corn; […] improvements in mining, or the discovery of new and more abundant mines of the precious metals, lower the value of gold and silver, or which is the same thing, raises the price of all other commodities. (Ricardo 1951–73,Ⅳ: 19)11

A rise in the demand for corn arising from increased wealth and population promotes

the extension of cultivation to inferior lands. On the other hand, the difficulty to produce manufactures remains the same as before. Ricardo draws the following proposition from this logic: if no improvements in agricultural or manufacturing sector take place, ‘[t]he sole effect […] of the progress of wealth on prices’ is ‘to raise the price of raw produce and of labour, leaving all other commodities at their original prices, and to lower general profits in consequence of the general rise of wages’ (Ricardo 1951–73, Ⅳ: 20, see also 37). The rise in corn price thus decreases the general profit rate.

The argument is entirely different from that in his pre-Essay letters. In 1814, to show that a rise in corn price decreases the general profit rate, he used the mild version of Smith’s theory of prices that the price of manufactures rise less than corn price due to their lower demand. We can say that Ricardo is now completely emancipated from Smith’s logic of the dependency of general prices on corn price.

The question is why did his attitude toward Smith’s doctrine change. According to Peach (1993: 72), the key is found in Ricardo’s ‘argument that money is a commodity like any other’. Watarai (2015: 480) also claims that ‘the recognition that the money is also a commodity produced by labour following the same law of value variation as the other commodities’ caused Ricardo to refute Smith’s theory of prices.12 Although his position 11 The recognition relates to the labour theory of value in his Principles. For the chronological development of Ricardo’s theory of value, see Faccarello (2015). 12 See also Peach (1984: 740n). To reinforce their view, they quote Ricardo’s letter to

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on money was already expressed from 1810–11 (Ricardo 1951–73, III: 54, 103–4; VI: 24), Ricardo finally integrated it into his explanation of prices in the Essay. A footnote added in the pamphlet implies that the opinions of Peach and Watarai are indeed persuasive:

It has been thought that the price of corn regulates the prices of all other things. This appears to me to be a mistake. If the price of corn is affected by the rise or fall of the value of the precious metals themselves, then indeed will the price of commodities be also affected, but they vary, because the value of money varies, not because the value of corn is altered. Commodities, I think, cannot materially rise or fall, whilst money and commodities continue in the same proportions, or rather whilst the cost of production of both estimated in corn continues the same. (Ricardo 1951–73, Ⅳ: 21n)

A change in money value varies not only the price of corn, but also the price of other

commodities. This is seemingly equal to the results of Smith’s theory of price. However, it is not a change in corn value but in money value that causes these results. Now, in the case that precious metals (money) also abide by the same law as other commodities and assuming that while the conditions to produce money remain invariant, the value of corn rises due to an increased difficulty in producing it. If the cost of production is measured in corn, the rise in corn value influences the costs of producing both money and commodities through increased wages, since corn is necessary to produce all commodities. While the corn prices of money and commodities thus increase together, the rate of exchange between them, or the money price of commodities, remains the same. In other words, if the change in corn price results from corn determinants, the money price of all commodities does not rise with the price of corn. This leads to a rejection of Smith’s view of general prices rising with corn price.

The explanations of Peach and Watarai serve to understand the reason Ricardo denied Smith’s theory of prices. However, the significance of his denial is not only limited to the theoretical formulation of Ricardo’s vision that the conditions to produce corn determine the general profit rate. To show this, let us examine the contexts in which Ricardo refused Smith’s view.

In the next paragraph in which Ricardo asserted that a deterioration of conditions to produce corn reduces the general profit rate through increased wages since this raises only the prices of corn and labour without raising the price of commodities, he states: ‘This fact is of more importance than at first sight appears, as it relates to the interest of the landlord, and the other parts of the community’ (Ricardo 1951–73, Ⅳ: 20). The landowners gain double benefits by the increased difficulty to produce corn. First, they can obtain more rents in terms of corn. Second, they can obtain more commodities in Malthus of 27 March 1815: ‘If money be a commodity does not corn and labour enter into its price or value? And if they do, why should not money vary as compared with corn and labour by the same law as all other commodities do?’ (Ricardo 1951–73, VI: 203).

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exchange for these rents. The reason is that the price of other commodities remains constant, while only the prices of corn and labour rise, which is derived from the rejection of Smith’s theory of prices:

If his rent be increased from fourteen to twenty-eight quarters, it would be more than doubled, because he would be able to command more than double the quantity of commodities, in exchange for the twenty-eight quarters. As rents are agreed for, and paid in money, he would, under the circumstances supposed, receive more than double of his former money rent. (Ricardo 1951–73, Ⅳ: 20)

Lower rents bring the opposite effects to landowners. It is here that Ricardo added

the footnote that denies Smith’s theory of prices (Ricardo 1951–73, Ⅳ : 21n). The argument to which his footnote is added does not directly connect with his theory of profits that a deterioration of conditions to produce corn decreases the general profit rate through a rise in wages. To understand why, it is necessary to revert to the contexts in which Smith himself applied his theory of prices.

Smith ([1776] 1976, I: 515) emphasized that, while ‘the monopoly of the home-market’ or ‘a bounty upon exportation’ of manufactured goods have beneficial effects to domestic manufacturers, similar policies for corn are not advantageous for farmers and landowners. Contrary to protectionist policies for manufactured goods, the rise in corn price caused by import restrictions or bounty on exports raises the price of all other commodities. The landowners thus cannot procure more commodities than before, even if rents increase by such policies.

But when by the like institutions you raise the nominal or money-price of corn, you do not raise its real value. You do not increase the real wealth, the real revenue either of our farmers or country gentlemen.（Smith [1776] 1976, I: 515）

If Smith’s idea that an increase in corn price causes higher prices for all commodities

is true, the real value of corn estimated by the quantity of commodities given in exchange for it does not augment by import restrictions. In this case, landowners (and farmers) gain no virtual benefits, and so do other classes. In other words, such a policy does not bring landowners benefits at the expense of other classes.

The results are greatly different from Ricardo’s position in the Essay. If a rise in corn price is caused by a fall in money value, it does not virtually influence the interest of landowners (and farmers), since it accompanies higher price for all commodities, which accords with the results shown by Smith’s theory of prices. However, if the rise in corn price is caused by restricting cheap foreign corn, it keeps the price of all other commodities except labour constant. The landowners can thus receive not only more rents but also more commodities than before. The import restrictions on corn decrease

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the general profit rate, which, in turn, diminishes the demand for labour: ‘It follows then, that the interest of the landlord is always opposed to the interest of every other class in the community’ (Ricardo 1951–73, Ⅳ: 21). Hence, the escape from Smith’s theory of prices leads to Ricardo’s social image that the interests of landowners are opposed to those of other classes, through his criticism of Smith’s doctrine on rents.

The analysis in the Essay anticipates the following observation presented in the chapter ‘Doctrine of Adam Smith Concerning the Rent of Land’ of the Principles:

Adam Smith never makes any distinction between a low value of money, and a high value of corn, and therefore infers, that the interest of the landlord is not opposed to that of the rest of the community. […] In the first, corn and commodities continue at the same relative values; in the second, corn is higher relatively to commodities as well as money. (Ricardo 1951–73, I: 336)

The denial of Smith’s doctrine on the relationship between corn price and general

prices in the Essay caused Ricardo not only to establish his theory that the general profit rate depends on the conditions to produce corn, but also to obtain a recognition of rents different from Smith’s. 4. The ability of a country to pay taxes in the Essay: Financial ground for free trade

in corn 4.1 Malthus on the ability of a country to pay taxes in Grounds

Ricardo developed his theory of profits by incorporating Malthus’s theory of differential rents in the first half of the Essay. In the latter half, Ricardo proceeds to his criticism of Malthus’s argument for the Corn Laws. Malthus emphasized in Grounds that the Corn Laws should be maintained at the end of Napoleonic war, the principal grounds being the danger of depending on foreign corn, a loss of capital employed on lands brought under cultivation, benefits of the repeal of the law being limited to those who directly engage in foreign trade, and a decrease in the ability of a country to pay taxes. Although Ricardo criticizes all these grounds in order, I confine myself to his criticism of the last one. However, let us first survey Malthus’s view on the subject.

In the Grounds, Malthus admitted the continuance of the Corn Laws in connection with the enormous national debt at that time. A variation of ‘the values of corn or silver’, or of ‘the measure of value’ favourably or unfavourably influences ‘the industrious classes of society’ and ‘the stockholder’ (Malthus [1815b] 1986, 7: 168–69). Nevertheless, given the large amount of national debt issued during the Napoleonic war, Britain could bear the burden due to two factors. First, the continuous fall in the measure of value by which the amount of national debt was estimated, which resulted in an alleviation of the real

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burden of debt. Second, the general rise in the price level, which lead to an increase in income to pay the interest of national debt by sustained capital accumulation. However, the stockholders suffered losses due to the decrease in real value for their credits.

Conversely, the stockholders were favoured at the cost of the industrious classes under the deflationary situation at the time. Malthus explains this by making the connection with the Corn Laws. While the government has borrowed about £500 millions in the last twenty years, the interest for it is decided at roughly 5 percent. The average price of corn per quarter from 1809 to 1813 was 108 shilling (Malthus [1815b] 1986, 7: 169). Under these circumstances, he argues on the effects of abolition of the Corn Laws as follows:

But if corn should fall to 50 shillings a quarter, and other commodities in proportion, instead of an interest of about 5 per cent the government would really pay an interest of 7, 8, 9, and […] 10 per cent. (Malthus [1815b] 1986, 7: 169, emphasis added)

[A] moment’s reflection will show us, that it [the interest] can only be paid by the industrious classes of society and the landlords, that is, by all those whose nominal incomes will vary with the variations in the measure of value. The nominal revenues of this part of the society, compared with the average of the last five years, will be diminished one half; and out of this nominally reduced income, they will have to pay the same nominal amount of taxation. (Malthus [1815b] 1986, 7: 169–70, emphasis added)13

The quotations suggest that Malthus followed Smith’s view of all prices varying with

corn price. A fall in corn price arising from the removal of the Corn Laws decreases proportionally the prices of labour and all other commodities and, therefore, the nominal income from which taxes are paid. To avoid this, the Corn Laws, which keep the prices of corn and commodities high, should be maintained.

It is true that Malthus added two restrictions to his argument. First, ‘opening our ports to the freest admission of foreign corn’ will not actually reduce the corn price to 50 shilling, although such measures will greatly reduce its price. Second, for more precise discussion, he further ‘suppose[d] that corn does not effectually regulate the prices of other commodities’ (Malthus [1815b] 1986, 7: 170–71). Concretely, a change in corn price of ‘33 1/3 per cent’ varies the price of commodities by ‘25, or even 20 per cent’ (Malthus [1815b] 1986, 7: 170). The rate of decrease in the nominal income to pay a certain amount of taxes is somewhat less than the case without the two restrictions. However, there is little doubt that Malthus developed in the Grounds the argument reminiscent of Smith’s doctrine on the relationship between corn price and general prices.

It rather seems that the reason is related to the causes of change in corn price

13 Malthus ([1815b] 1986: 7, 170) also enumerates as taxpayers the labouring class, which pays ‘the taxes on tea, sugar, malt, leather, soap, candles, etc., etc.’.

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enumerated in another of Malthus’s pamphlet in 1815, the Inquiry. According to Malthus ([1815a] 1986, 7: 134–35), the corn price is raised not only by ‘the state of the mines’, but also by ‘the greater quantity of capital and labour which must be employed to produce it’. Its price thus varies by ‘direct and indirect taxation’, ‘improvements in the modes of cultivation’, ‘the saving of labour on the land’, and ‘the importation of foreign corn’. This shows that, similar to Ricardo, Malthus recognized both the money and corn causes in changing corn price. However, the following quotation implies that Malthus did not clearly understand the different consequences of these two causes:

The progressive fall, with few exceptions, in the value of the precious metals throughout Europe; the still greater fall, which has occurred in the richest countries, together with the increase of produce which has been obtained from the soil, must all conduce to make the landlord expect an increase of rents on the renewal of his leases (Malthus [1815a] 1986, 7: 142).

As seen above, ‘the increase of produce which has been obtained from the soil’ promoted

the ‘progressive fall […] in the value of the precious metals’. He thus confuses a rise in corn price resulting from the deterioration of conditions to produce it with a fall in money value. According to Ricardo, in the Essay, while the former raises only the prices of corn and labour, the latter raises the prices of all commodities.14 From the viewpoint of Ricardo, Malthus could not grasp the different consequences of these two causes of change in corn price. As such, his confusion easily leads to an argument reminiscent of Smith’s theory of prices. The assumption in the Ground quoted above that ‘corn should fall to 50 shillings a quarter, and other commodities in proportion’ (Malthus [1815b] 1986, 7: 169) can be regarded as derived from his obscure view on the causes to change corn price in the Inquiry. 4.2 Ricardo on the ability of a country to pay taxes in the Essay

Let us now analyse Ricardo’s criticism of Malthus. He recognizes that, while a fall in corn price because of free trade increases the quantity of commodities in Britain or national wealth, it decreases the entire money value of commodities. In Ricardo’s view, the decrease in the entire value of commodities is caused by the following:

It would be diminished by the whole difference of the money value of the corn consumed,

14 Although it is unclear whether he had already refuted Smith’s theory of prices, in his letter to Malthus of 23 October 1814, before the Essay, Ricardo (1951–73, VI: 146) identified the four causes to raise corn price (‘a gradual accumulation of capital’, ‘one or more bad seasons’, ‘a fall in the value of currency’, ‘[r]estrictions on importation’) and their different effects on the profit rate.

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―it would be augmented by the increased exchangeable value of all those commodities which would be exported in exchange for the corn imported. The latter would, however, be very unequal to the former. (Ricardo 1951–73, IV: 39)

The quotation is concise enough that the interpretation is considerably difficult. The

fall in price arising from importing cheap foreign corn also influences the price of domestic corn. While the total amount of the consumption of domestic and imported corn does not change, the entire money value of corn, or ‘the whole difference of the money value of the corn consumed’ (α) is: α= Total amount of consumption (Corn price before free trade − Corn price after free trade)

(4.1)

The capital employed on lands no longer cultivated by importing cheap foreign corn moves to the manufacturing sector: ‘The capital withdrawn would be employed in the manufacture of such commodities as would be exported in return for the corn. Such distribution of part of the capital of the country, would be more advantageous, or it would not be adopted’ (Ricardo 1951–73, IV: 32). A more efficient use of capital enables only part of it to produce the commodities exported in exchange for corn. Since free trade in corn generates a rise in the profit rate by reducing prices of corn and labour, saved capital increases manufacturing profits, which represent ‘the increased exchangeable value of all those commodities which would be exported in exchange for the corn imported’ (β) (Ricardo 1951–73, IV: 39). β= Capital saved by capital transfer ･ Higher profit rate (4.2)

Capital drawn from inferior lands is thus divided into: (1) that producing commodities exported in exchange for corn and (2) that producing commodities not exported. Part (1) above is equal to the value of imported corn. Moreover, capital drawn from inferior lands was the part of capital producing the total amount of corn for consumption. Therefore, it is reasonable that the value of α is larger than that of β. Therefore, the entire money value of commodities after free trade in corn decreases by ‘the whole difference of the money value of the corn consumed’ (α) , increases by ‘the increased exchangeable value of all those commodities which would be exported in exchange for the corn imported’ (β), and decreases overall (Ricardo 1951–73, IV: 39).

In this case, the entire money value of commodities after free trade in corn does not fall in the same proportion as the corn price. This is thus the decisive difference between Ricardo and Malthus (Malthus [1815b] 1986, 7: 169). From (4.1), α diminishes in the same proportion as the rate of decrease in the corn price. However, a change in the entire money value of commodities is calculated by α and β, the latter factor increasing the

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overall value. Hence, in Ricardo’s case, the whole money value of commodities diminishes to a lesser proportion compared to corn price. This reflects that, in contrast to Malthus, Ricardo clearly distinguished the different consequences of the two causes of change in corn price.

Ricardo further continues his argument on the ability of a country to pay taxes:

But, though it is true, that the money value of the mass of our commodities would be diminished, it by no means follows, that our annual revenue would fall in the same degree. The advocates for importation ground their opinion of the advantages of it on the conviction that the revenue would not so fall. And, as it is from our revenue that taxes are paid, the burthen might not be really augmented. (Ricardo 1951–73, IV: 39)

The revenue in the quotation above means net revenue, consisting of profits and rents

in an economy. Free trade in corn causes capital transfers from the agricultural to the manufacturing sector, which reduces rents by drawing capital from inferior lands. However, the decrease in rents in terms of corn is counterbalanced by the increase in profits, as shown in Figure 3.1. In fact, Ricardo (1951–73, VI: 173) believes that ‘rents are in no case a creation of wealth, they are always a part of the wealth already created’. In the same letter to Malthus of 6 February 1815, Ricardo declares:

Viewing rents in this light it follows that I must withdraw the concession which I was inclined to make when you first started the question “whether in importing corn at a cheaper price than we could grow it the whole difference of price was saved, or whether some abatement should not be made from the advantage for the loss of rent?”, as I now decidedly think that the whole difference of price would be gained without any deduction whatever. The arguments then of those who contend for a free trade in corn remain in their original full force, as rents are always withdrawn from the profits of stock. (Ricardo 1951–73, VI: 173)

Although the total amount of profits and rents in terms of corn is the same as before

the free trade in corn, the corn price falls. For example, assume that it falls by 20 percent, from £5 to £4. Moreover, assume that the other values before free trade in corn necessary to understand the above quotation are as follows. The entire value of commodities is composed of wages, profits, and rents: Net revenue in agricultural sector (profits and rents) £5 million Net revenue in manufacturing sector (profits) £5 million Entire money value of commodities (corn) in agricultural sector £10 million Entire money value of commodities in manufacturing sector £10 million

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The fall in corn price from £5 to £4 after free trade changes these values by assuming that the increase in manufacturing profits shown in (4.2) is £0.5 million. Net revenue in the agricultural sector £5 million → £4 million Net revenue in the manufacturing sector £5 million → £5.5 million Entire money value of commodities in the agricultural sector £10 million → £8 million Entire money value of commodities in the manufacturing sector £10 million → £10.5 million

The values in the agricultural sector fall proportionally to the rate of decrease in corn price. In the Essay, a variation in corn price varies the price of labour only, ‘leaving all other commodities at their original prices’ (Ricardo 1951–73, IV: 20, see also 37). Therefore, the values in the manufacturing sector augment by the increase in manufacturing profits. By summing the values in each sector, the overall net revenue of the economy (γ) and the entire money value of commodities of the economy (δ) are calculated. Both values change before and after free trade in corn as follows: γ: £10 million → £9.5 million (= £4 million + £5.5 million) δ: £20 million → £18.5 million (= £8 million + £10.5 million)

While the rate of decrease in γ, or the net revenue, is 5 percent (= £9.5 million - £10 million/£10 million), the rate of decrease in δ , or the entire money value of commodities is 7.5 percent (= £18.5 million - £20 million/£20 million). Therefore, ‘our annual revenue’ (γ) does not decrease in the same proportion as ‘the money value of the mass of our commodities’ (δ) (Ricardo 1951–73, IV: 39).

This means an increase in the real value of net revenue from which taxes are paid.

Contrary to Malthus’s view in the Grounds, the repeal of the Corn Laws rather increases the ability of a country to pay taxes. Ricardo concludes his argument as follows:

Suppose the revenue of a country to fall from ten to nine millions, whilst the value of money altered in the proportion of ten to eight, such country would have a larger neat revenue, after paying a million from the smaller, than it would have after paying it from the larger sum. (Ricardo 1951–73, IV: 39–40)

Ricardo’s arguments had important policy implications on the British situation at the

end of Napoleonic war. As Malthus stated, a large amount of national debt was issued during the war. Taking account of the burden, Malthus regarded the repeal of the Corn Laws as impolitic. In the same situation, the results of Ricardo’s analysis recommend the opposite policy. Moreover, the desirability of repealing the Corn Laws was greater than before, since such measures could mitigate the financial difficulties in Britain by

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increasing the ability of the country to pay taxes. This concludes the consideration of Ricardo’s doctrine in the Essay on the relationship

between the abolition of the Corn Laws and the ability of a country to pay taxes. The financial grounds for repealing the Corn Laws also appear in his Principles. However, there are at least four differences between the two writings as follows.

First, although Ricardo assumed in the Essay that a change in corn price does not vary the price of other commodities except labour, he allows in the Principles that the price of commodities varies due to a change in corn price, since corn or raw produce enter into the production of commodities as materials (Ricardo 1951–73, I: 418). This change of view may operate the effect of a fall in corn price on the entire money value of commodities, which is part of the analysis on the ability of a nation to pay taxes. Second, the effect of a change in corn price resulting from a change in money value on the ability of a country to pay taxes is discussed in more detail in the Principles (Ricardo 1951–73, I: 422–23). This makes more the comprehensive criticism of Malthus possible. Third, while the net revenue in the Essay was entirely composed of profits and rents, Ricardo is to emphasize in the third edition of the Principles that part of the wages can also be a component of the net revenue (Ricardo 1951–73, I: 348n, 421–22, 424–25). This alteration in the third edition further reinforces the desirability of the increased ability of a country to pay taxes through the abolition of the Corn Laws. Finally, while the net revenue after free trade in corn decreases in the Essay, it remains the same in the Principles (Ricardo 1951–73, I: 423). This augments the real value of net revenue, which suggests a further increase in the ability of a country to pay taxes. The detailed comparison between these two writings is beyond the scope of this paper and will be discussed in future studies. 5. Concluding remarks

I have considered Ricardo’s doctrine in the Essay on the effect of free trade in corn on the ability of a country to pay taxes, which was based on the distinction between a variation of corn price resulting from a change in money value and that resulting from a change in the conditions to produce corn. These were further derived from his denial of Smith’s idea that all prices rise with a rise in corn price and wages.

Ricardo still accepted Smith’s theory of prices in his letters of 1814, being one of the component factors of Ricardo’s pre-Essay theory of profits. In his letters of 1814, Ricardo asserted that the profit rate in other sectors is regulated by that determined in agricultural sector, relying on the mild version of Smith’s theory of prices, according to which the price of manufactures rises less than the price of corn due to decreased demand for manufactures (Section 2).

In the Essay, Ricardo evidently denied Smith’s theory of prices. While the progress of society raises the prices of corn and labour, it keeps the price of other commodities invariant. Invoking this new position on the relationship between corn price and general

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prices, he concluded that an increased difficulty to produce corn causes a fall in the general profit rate. However, the denial of Smith’s logic on the dependency of general prices upon the price of corn is important not only to the development of Ricardo’s theory of profits, but also to the establishment of his social vision based on the criticism of Smith’s doctrine on rents. In fact, Smith derived the proposition that landowners do not have real benefits under import restrictions on corn from his theory of prices. Even if such a trade policy raises both corn price and rents, the real purchasing power of landowners does not increase because all prices rise with corn price. Conversely, Ricardo, refuting Smith’s theory of prices, emphasized that landowners obtain more commodities as well as more corn rents under such a protectionist policy. The rejection of Smith’s theory caused Ricardo to acquire a different view from Smith on the effect of corn trade policy on the interest of landowners (Section 3).

Moreover, the refusal of Smith’s theory of prices that all prices rise with corn price gave Ricardo the financial grounds to advocate free corn trade. Malthus argued in the Grounds that Britain would not be able to bear the burden of its enormous national debt due to the proportional fall in the price of other commodities arising from the repeal of the Corn Laws. According to Ricardo, who was emancipated from Smith’s theory of prices, the fear was groundless. Instead, a free trade in corn decreases the net revenue from which taxes are paid by a lower proportion than the entire money value of commodities. The real purchasing power of the net revenue consequently augments, which means an increase in the ability of a country to pay taxes. Under the financial difficulties at the end of Napoleonic war, the reasonableness of abolishing the Corn Laws was greater than previously. Therefore, the consideration of Ricardo’s doctrine on the ability of a country to pay taxes is useful to reveal his vision on the compatibility between free trade in corn and improvement of the financial situation (Section 4). The conclusion of this paper is as follows. The denial of Smith’s theory of price in the Essay has at least three significances to Ricardo. First, it made it possible to present a more comprehensive theory of profits that depends on the conditions to produce corn. Although the path to this theory in his Principles was still immature, the theory of profits in the Essay took big step towards it. Second, the denial of Smith’s theory of price also led to the denial of Smith’s doctrine on rents. Ricardo could consequently derive a different social image from Smith in that the interest of landowners is opposed to that of other classes concerning corn import restrictions. Finally, the denial of Smith’s theory of prices, together with the critical acceptance of Malthus’s theory of differential rents, gave Ricardo the financial grounds for repealing the Corn Laws. This further reinforced his theory of free trade by showing that the transition to it was never incompatible with financial sustainability. While former studies have traditionally focused on the first significance, they have not sufficiently drawn attention to the last two significances of the denial of Smith’s theory of prices in the Essay. This paper serves to fill this gap.

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