RICARDO & GLOBALIZATION:Ricardo’s Assumptions, Conclusion

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LESSON 18

RICARDO & GLOBALIZATION

Ricardo's Assumptions

Ricardo's ingenious argument has been hailed as the single "most important" and "most

meaningful" economic discovery ever made. Some have said it is the most "surprising" and

"counterintuitive" concept in economics. It is, without a doubt, the most important concept in

international trade theory today and is at the heart of the most significant economic arguments

people propose today when they argue in favor of globalization. Ricardo makes a number of

simplifying assumptions that clearly do not hold in the real world, such as that there are only

two countries making only two products with only a fixed number of workers. But these are

merely simplifying assumptions Ricardo made to get his point across more easily and Ricardo's

conclusion could still be proved without these assumptions.

There are other assumptions, however, that are not so easy to get around. First, Ricardo

assumes that the resources used to produce goods (labor, equipment, factories, etc.) do not

move from one country to another. Yet today multinational companies can, and easily do, move

their productive capital from one country to another. Second, Ricardo assumes that each

country's production costs are constant and do not decline as countries expand their production

or as they acquire new technology.

Third, Ricardo assumes that workers can easily and unreservedly move from one industry to

another. Yet when a company closes down because it cannot compete with imports from

another country that has a comparative advantage in those goods, the company's workers are

laid off, suffer heavy costs, need retraining, and often cannot find comparable jobs.

Finally, and perhaps most importantly, Ricardo ignores international rule setters. International

trade inevitably leads to disagreements and conflicts, and so countries must agree to abide by

some set of rules and rule-setters.

Marxism and its influence on Markets and Trade

Karl Marx offers the most critical view of modern private property and free market institutions.

Marx claims that free-market capitalism necessarily produces extremes of inequality. Since

capitalist systems offer only two sources of incomeowning the means of production and

selling one's laborworkers cannot produce anything without the owner of the productive

forces. But owners do not pay the full value of the workers' labor; they pay workers what they

need to subsist, keeping the rest for themselves and gradually becoming wealthier as a result.

The result for workers is increased alienation. Rather than realizing their human nature and

satisfying their real human needs, they are separated from what is actually theirs in four ways:

1. In capitalist societies, the products that the worker produces by his or her labor are

taken away by the capitalist employer and used for purposes that are antagonistic to

the worker's own interests.

2. Capitalism forces people into work that they find dissatisfying, unfulfilling, and that is

controlled by someone else.

3. Capitalism alienates people from themselves by instilling in them false views of what

their real human needs and desires are.

4. Capitalist societies alienate human beings from each other by separating them into

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antagonistic and unequal social classes that break down community and caring

relationships namely the Bourgeois and proletariat.

Conclusion

Though utilitarians claim that people would be lazy without private property, Marx counters

that by this argument the bourgeois owners should long ago have wasted away: they do not

work, while those who do cannot acquire any real property.

The real purpose of government, according to Marx, is to protect the interests of the ruling class

of owners. The forces of production of a societyits substructurealways have, historically,

given society its class and its superstructure (or government and popular ideologies). Those in

power promote the ideologies that justify their position of privilege. This view of history is

called historical materialism.

The result of unrestrained free markets and private ownership will be a series of disasters for

working people, leaving them immiserated. Three general tendencies will combine to bring this

about:

First, modern capitalist systems will exhibit an increasing concentration of industrial

power in relatively few hands. As self-interested private owners struggle to increase the

assets they control, little businesses will gradually be taken over by larger firms that

will keep expanding in size.

Second, capitalist societies will experience repeated cycles of economic downturns or

crises. Because workers are organized into mass assembly lines, the firm of each owner

can produce large amounts of surplus.

Third, Marx argues, the position of the worker in capitalist societies will gradually

worsen.' This gradual decline will result from the self-interested desire of capitalist

owners to increase their assets at the expense of their workers.

Though many of Marx's predictions have turned out to be correct, the immiseration of workers

has not occurred. Still, many claim that unemployment, inflation, alienation, and false desires

do characterize much of modern capitalist society.

Defenders of free markets counter that Marx makes an un-provable assumption that just means

equality or distribution according to need. They claim that justice really means distribution

according to contribution (which requires free markets). Even if private ownership causes

inequalities, defenders of free markets still maintain that the benefits of the system are greater

and more important than the incidental inequalities.

Whether the free market argument is persuasive depends ultimately on the importance one

gives to the rights to liberty and property as opposed to a just distribution of income and

wealth.

Conclusion: The Mixed Economy

Which side, free markets or government intervention, will ultimately win? Neither the collapse

of the Soviet Union nor the rise of strong collectivist governments like Japan proves one side or

the other. Indeed, it may be the case that neither side by itself presents a complete picture of

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how the modern economy ought to run.

Many economists now advocate retaining the market system and private property while

modifying their workings through government regulation, a mixed economy that attempts to

remedy the deficiencies of a free market system. Such policies can be very successful, as they

have been in Sweden, Japan, Norway, and many other countries. Even though the U.S. is more

successful economically than most other countries, studies do indicate that mixed economies

have some advantages.

New technologies are also firing the debate over the balance between Lockean private property

and collective ownership. Modern technologies, especially computers, create new forms of

intellectual property that, unlike other types of property, can be copied and consumed by a

number of different individuals at once. Locke's view, and the view of some utilitarians, is that

the mental labor that creates the property creates the property rights over that product.

Socialists point out that artists, writers, and thinkers have always created works without any

financial incentive.

Should new scientific and engineering discoveries be protected as private property? Should

these things be shared by the society that made their discovery possible? The debate continues.

Still, though critics of Marx contend that Marxism is dead, many socialist trends and theories

remain influential. Locke and Smith's form of capitalism has the upper hand, but many

nevertheless maintain that a mixed economy comes closest to combining the utilitarian benefits

of the market economy with a proper respect for human rights, caring and justice.

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