David Ricardo Vs. Gottfried Haberler: When an Austrian Mind Matches an English Classic Mind

Home , Gottfried Haberler, Johann Karl Rodbertus

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Poinsot, Flavia Gabriela

ISSN 1852-0022 / ISBN 978-987-28590-7-7

David Ricardo vs. Gottfried Haberler: When an Austrian mind matches an English classic mind

Flavia G. Poinsot1

Abstract

In many textbooks of international trade we read that the theory of comparative advantage, of Ricardo, determines its relative prices in function of the labor-cost theory. This approach, actually, emerges with Haberler by 1930s. For Haberler, the Ricardo’s theory of comparative advantage is robust, but not the labor-cost doctrine which, he assumes, Ricardo applies. Haberler, then, reformulates the theory from the Austrian outlook which rejects the classical labor theory of value. The process, epistemologically speaking, resembles that of a Lakatosian “research program”, because while the hard core, the theory of comparative advantage, does not change, the assumptions and the labor-cost theory are eliminated. However, would Ricardo agree with Haberler in that he based the theory of comparative advantage in the labor-cost hypothesis? And, why Haberler thinks, without doubt, that Ricardo adheres to the labor-cost theory? This paper is an attempt to answer these questions.

JEL classification: B31 - B53 – B25 – B12 - F10

Key words: David Ricardo – Gottfried Haberler – theory of value – theory of comparative advantage – Austrian school of thoughts – epistemology

Introduction

Gottfried Haberler, “the best horse in the Viennese stables” (Schumpeter, 2000, in Boehm, 2015), publishes Die Theorie der komparativen Kosten und ihre Auswertung für die Begründung des Freihandels in 1930, translate as The theory of international trade with its implications to commercial policy in 1933. The “known treatise of the professor von Haberler” (Schumpeter, 1954, 1971, p. 676), more than a century later of the David Ricardo’s Principles of Political Economy, makes famous the law of

1 [email protected] Universidad Nacional del Sur – Bahía Blanca – Argentina

comparative advantages of the latter. From here on, the idea that Ricardo puts forward his model in terms solely of labor is almost the norm in the most textbooks of foreign trade.

Haberler develops the analysis of international trade in two parts, the theory and the trade policy. He divides the theory into the monetary theory of international trade in the first place, and the pure theory of international trade in the second place. In the former, Haberler considers the monetary aspects of the foreign trade. The theory of comparative advantage is in the latter and “dealt with the phenomena which result from the immobility of labor and capital, i.e. with the theory of comparative cost and all that follows from it” (pp. 8-9). Although it was linked to Ricardo by 1930s, and perhaps Torrens was the first in establishing the idea, Haberler stresses that Ricardo is the first in state his ideas systematically. We can read in the introduction that “the only really systematic theory of international trade we possess is the so-called classical theory” and all its component parts “were worked out by such early writers as Hume, Adam Smith and Ricardo” (Haberler, 1933, 1950, pp. 3). The doctrine of comparative costs is its “real” components, as opposed to the monetary aspects of the foreign trade.

The problem, in Haberler view, is that Ricardo constructs the theory with the labor-cost theory, which supposes a set of unreal assumptions. Then, he argues, the theory is correct, but neither the assumptions nor the labor-cost theory is adequate. Then, he proceeds to disentangle the comparative advantage ideas of the chapter seven of the Principles (1817) of Ricardo from its assumptions, which, in turn, imply to eliminate the labor-cost theory. The picture of the theory that emerges from these considerations, “the solid theory” in Haberler’s words, resembles, I would suggest, that of a Lakatosian “research program”. We can state that the essentials underlying Ricardo explanation, his logical postulates, are the hard core of the theory, while the assumptions which support the labor-cost theory, and this theory itself, forms the protective belt.

With this picture in mind, we can observe that Haberler unquestionably accepts the logical postulates of the law of comparative advantages. However, he rejects as unreal or false the assumptions, which support the labor-cost theory. He, then, reconsider the logical structure of this protective belt. In the first place, he changes the assumption and drops the labor-cost theory. In the second place, he substitutes those structures with the

principles of the marginal utility principles and the general equilibrium theory, in an Austrian way.

However, does Ricardo state the theory of the international trade in terms of the labor theory of value? This question brings us to reconsider whether he adheres to the labor- cost theory because, if this is so, we can expect also that he would develop the trade theory in terms of this. Another question related is why Haberler thinks, without doubt, that Ricardo adheres to the labor-cost theory. This paper is an attempt to answer these questions. So that, the first section of this essay briefly displays the biography of Gottfried Haberler. In order to answer the addressed questions, the next section develops the key elements in the transformation of the theory Haberler does. In his own words, he takes the “only really systematic theory of international trade” to transform it in the theory he described as a “solid” one. So then, in the third and fourth section I give some probable answers to those questions. A final section contains some concluding thoughts.

Gottfried Haberler, “the best horse in the Viennese stables”: His biography in a few lines

Gottfried Haberler born on 20 July 1900 in Purkesdorf near Vienna. At the University of Vienna, where he studies, Ludwig von Mises and Friedrich von Wieser are his professors of economics and, since that, he belongs to the Austrian School of Economics. He is a member of the Mises circle. What’s more, with Hans Kelse, they are the witnesses of the marriage of Ludwing von Mises with Margit Sereny-Herzfeld in Geneva in 1958. This event was something strange for these two friends because Mises, of fifty-seven years old, lived with his mother until she dies a while ago, and Margit was not known for over a decade. Really, Kelse “could hardly believe he was seeing his friend at the office of the county clerk” (Schulak & Unterköfler, 2011, p. 115-16).

Haberler gains his doctorate in law in 1923 and in political science in 1925, after that he works in the chamber of commerce. In 1927 he graduates from postdoctoral studies in London, and, when returns to Vienna, he obtains his Habilitation with Der Sinn der Indexzahlen, or The Meaning of the Index Numbers, in 1928, with Friedrich Hayek and Oskar Morgenstern. A year later, he graduates from postdoctoral studies, now from

Harvard, where he gives guest lectures in 1931-32. At the University of Vienna, Haberler, with Hayek and Morgenstern, have his lectures and participates in the Mises- Privatseminar (Schulak & Unterköfler, 2011).

Haberler, Hayek and Morgenstern, “serve as a quantitative counterbalance to Spann and his circle of students for the first time in many years” with their courses alongside those of Mayer, Mises, and Strigl. In the Mayer’s circle, its students question the foundations of the “Austrian monetary business cycle theory” (Vorlesungsverzeichnis, 1929-1930, p. 12; Weber, 1966, p. 2, in Schulak & Unterköfler, 2011, p. 109), a theme that Haberler writes about and debates in the Mises’ circle. In this line of investigation, the combined contributions of Haberler, Machlup, Morgenstern and Strigl makes possible that the Austrian School presents itself in Zurich in 1928 “as the authoritative research group in monetary and business cycle theory” (Schulak & Unterköfler, 2011, p. 71). On 1934, Haberler writes a compilation of all current business cycle theories and two years later, when many of them were living outside of Austria, he completes his work on business cycle theories, “a monument to the “Austrian” contribution” (Haberler, 1937, pp. 33- 72). In the spite of the fact that the Austrian School is paralyzed by the political events of the time, its exiled members join the neoclassical mainstream, like Fritz Machlup in information economics; Oskar Morgenstern with his works on game theory, economic forecasting, and methodology; and Paul Rosestein-Rodan with his work in developing countries. Hayek points out that it is possible to have the impression that the Austrian School theories have entered into mainstream economics (Hayek, 1973, p. 13; Boettke, 1994b, p. 1, in Schulak & Unterköfler, 2011, p. 168).

At this time, when many members of the Austrian School are politically undesirable, Haberler, whose Prosperity and Depression (1937) makes possible his contacts with the most world’s well-known economists, accepts, shortly after its publication, an appointment at Harvard. Therefore, he is abroad when Hitler determines the annexation in 1938, when many lectures and professors, who were either Jewish or dislike of the Nazis, among them Schüller, Morgenstern and Winkler, loss their teaching certification. But, in spite of his situation, he “uses his excellent contacts and his organizational talents to help emigrants and exiles in many ways” (Feichtinger, 2001, p. 202-3, in Schulak & Unterköfler, 2011, p. 132). Once more, in the United States, Haberler gains an excellent reputation, became advisor to the Board of Governors of the American 4

central banking system and later is elected president of the American Economic Association in 1963. While n 1971 Fritz Machlup became an honorary senator of the University of Vienna, Gottfried Haberler receives honorary Ph. D.s from the University of Innsbruck in 1970 and the Vienna University of Economics and Business in 1980.

Being a man with a professional and critical rigor, he maintains ties with the Austrian School until his death, in 1995. While all of his work is of importance, Haberler gains international reputation early in his career, when he publishes his research on international trade in 1930, Die Theorie der komparativen Kosten und ihre Auswertung für die Begründung des Freihandels, translate as The theory of international trade with its implications to commercial policy in 1933. Is in this book where Haberler transforms the theory of the comparative advantage of Ricardo into the theory of foreign trade, which nowadays we can read in almost all the textbooks of economics. The analysis of the foreign trade between two countries in terms of the opportunity costs, using the possibilities curve as the graphics device, is due to Haberler’s work.

Haberler’s transformation of the theory: From “the only really systematic theory of international trade” to the “solid” theory of comparative advantage

“No extension of foreign trade will immediately increase the amount of value in a country, although it will very powerfully contribute to increase the mass of commodities, and therefore the sum of the enjoyments.” These are the first words Ricardo writes in the beginning of the chapter seven, on foreign trade (Ricardo, 1817, pp. 85). From here on, Ricardo tries to demonstrate the falsehood of the idea “that the great profits, which are sometimes made by particular merchants” in the foreign markets, “will elevate the general rate of profits in the country”. On the contrary, he will demonstrate that the rate of profits would diminish, rather than increasing, with the foreign trade. This foreign trade, furthermore, “increases the amount and variety of the objects on which revenue may be expended and affords, by the abundance and cheapness of commodities, incentives to saving, and to the accumulation of capital” (Ricardo, 1817, pp. 89). He firstly develops this idea a few years ago, in his Essay on the Influence of a Low Price of Corn on the Profits of Stock in 1815.

The arguments involve the monetary transactions with the rest of the world, and the real economy. Interesting enough, Ricardo’s starting point is the “eighteenth century rule”, a long tradition that states that “it pays to import commodities from abroad whenever they can be obtained in exchange for exports at a smaller real cost than their production at home would entail” (Viner, 1937, pp. 440, in Maneschi, 2004). However, he goes forward with the real theory, a few paragraphs of the chapter seven, and the monetary aspects, which represents its 85% (Caffarello, 2016, pp. 2).

The theory of comparative advantage corresponds to the real economy. Ricardo sometime between March and October of 1816 first discovered the law of comparative advantage, as a letter to James Mill evidences (Maneschi, 1998, in Ruffin, 2002, pp. 743). On the Principles (1817), he establishes this principle in a few paragraphs where he explains the exchange between the wine of Portugal and the cloth of England. This “celebrated example” (Haberler, 1933, 1950, pp. 128) contains his “four magic numbers”, as Samuelson called this (1969, in Maneschi, 2004). According to it, Portugal should export wine and import cloth from England because “though she [Portugal] could make the cloth with the labor of 90 men”, she can use her capital to produce wine and through this wine she could obtain more cloth from England. “Under a system of perfectly free commerce”, Portugal and England devote “its capital and labor to such employments as are most beneficial for each” (Ricardo, 1817, pp. 89).

Thus, these countries, looking for their individual advantages, are attaining “the universal good of the whole”. This is so because by increasing the mass of production, the general benefits diffuses, “and binds together by one common tie of interest and intercourse, the universal society of nations throughout the civilized world”. Hence, “the wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and hardware and other goods shall be manufactured in England” (Ricardo, 1817, pp. 90). On the contrary, if Portugal had no commercial connection with other countries, instead of employing a great part of her capital and industry in the production of wine, with which she purchases for her own use the cloth and hardware of other countries, she would be obliged to devote a part of that capital to the manufacture of those commodities, which she would thus obtain probably inferior in quality as well as quantity.

Then, the idea of the comparative advantage is that each country will produce those goods for the production of which it is especially suited, on account of its natural resources, its labor and capital factors. Every country will produce more of them than it requires and exchanges the surplus with other countries against goods which it is less suited to produce or which it cannot produce at all. Haberler takes this Ricardian notion of the theory of comparative costs and develops its original as one of the four theories of the international trade. He stresses that the Ricardian scaffolding of the international trade is more consistent than the Smithsonian one. Smith (1776), he writes, assumes that labor is completely mobile between the different branches of the industry in the country, yet “it cannot move from one industry to another if the two industries are in different countries”. Hence, since for Smith the distribution of labor between the countries “happens to be the same as that which would come about under complete mobility”, the international trade takes place “only if each of the two countries can produce one commodity at an absolutely lower production cost2 than the other country” (Haberler, 1933, 1950, pp. 127).

By contrast, Ricardo “starts from another state of affairs, apparently less favorable to Free Trade, which he considers typical”, assuming that one of the two countries can produce “both goods with a smaller expenditure of labor (cost) than the other country” (Haberler, 1933, 1950, pp. 128). Here Haberler takes the “celebrated example” of Ricardo where Portugal has a comparative advantage over England in wine than in cloth; and “England has an absolutely disadvantage in cloth, but at the same time she has a comparative advantage in cloth” (pp. 128), the “magic four numbers” as Samuelson called this (1969). Then, “in order to discuss the international division of labor”, Haberler introduces the Doctrine of Cost Differences, being the theory of comparative costs a special case of it.

The theory of the comparative advantage has a set of simple assumptions that are consistent with the labor-cost hypothesis. The “main task” of this hypothesis is to establish the exchange ratios or relative3 prices of the commodities. These prices are different, then, of the “absolute money prices” (Haberler, 1933, 1950, pp. 129).

2 Italics in the original 3 Italics in the original 7

However, the classical doctrine “simplifies reality too much to be adequate”. Its assumptions “are never true and some are not always true” (Haberler, 1933, 1950, pp. 126). In other words, its assumptions are not correct because its simplicity denies the reality. The labor is neither the unique factor nor it is homogeneous, and many means of production are specifics. Moreover, “there are many different qualities of labor and… other factors of production besides labor are available”, such as land, natural resources, and capital where he includes buildings, plant and equipment. All of them are of different qualities, and, consequently, this makes impossible to “measure all in terms of anyone common unit of quantity… they cannot all be resolved into simple unskilled labor” (Haberler, 1933, 1950, pp. 175).

This author, hence, takes the Ricardian essential ideas, stripping from these the classic simplicity and, so, from the labor-cost theory, in order to construct the “solid” theory of the international trade. Haberler has in mind a set of assumption that brings reality into the model, yet is “inconsistent with the Labor Theory of Value” which must be discarded (Haberler, 1933, 1950, pp. 132). In the first place, he introduces the money in the analysis, enlarges the model with more than two goods and more than two countries, considers the transport costs, and increasing and decreasing costs. In the second place, once the assumptions changes, the next step in his theoretical framework is to apply the general equilibrium theory. That is, the modern doctrine of economic equilibrium, associated with Menger, Böhm-Bawerk, Wicsteed, Marshall, Walras, Pareto, Schumpeter, Knight” (Haberler, 1933, 1950, pp. 175), because the classical theory “is exhibited as a special case of the more general theory” (Haberler, 1933, 1950, pp. 3, 123).

The general economic theory, he refers to, is the theory of “marginal utility, which interprets and explains the individual’s economic activity as such”. This theory must be applicable to the international trade, or, “the theory of international trade has to be regarded as a particular application of general economic theory”. Haberler proposes to “make constant use of the general propositions applying them to the specific assumptions which characterize the international trade” (Haberler, 1933, 1950, pp. 8). Hence, for him, “the general conditions which determines equilibrium are the same for both species of trade (home and domestic trade and international trade)”, in line with Edgeworth (1925, in Haberler, 1933, 1950, pp. 8). In doing so, he introduces the 8

production possibilities curve and the opportunity costs to explain the exchanges between countries, which, in turn, determine the relative prices of the commodities. The costs are measured “not by the absolute amount of labor required, but by the alternatives forgone” (Haberler, 1933, 1950, pp. 177).

The forgone use is the term Friedrich von Wieser (1851-1926), “the born thinker” (Schumpeter, 1954, p. 848), employs for the concept that later the American writers call the opportunity costs, as Haberler stresses in a footnote (Haberler, 1930, 1938, pp. 177). Wieser, admired among the “greatest stylists of academic prose” (Menzel, 1927, pp. 2, in Shulak & Unterköfler, 2011, pp. 39), refers, for the first time, to the utility of goods “at the margin of… utilization” as “marginal utility” in 1884, setting the basis for the valuation of every single good of a set of a stock. Then, he extends this principle to the “costs” which he defines as “forgone use”, also called the “Wieser’s Law” (Wieser, 1884, pp. 100, in Schulak & Unterköfler, 2011, pp. 19).

Haberler uses the forgone use to explain the determination of the exchange-ratio of the two goods by using his “substitution curve”, a device that later is known as the production possibilities curve. He assumes constant and increasing costs, which, in turn, imply a linear and a concave curve towards the origin, respectively. In addition, in a footnote he states, “The exceptional case of decreasing costs… is represented, on a diagram of this kind, by a curve which is convex towards the origin” (Haberler, 1933, 1950, pp. 176). Then, the proposition he demonstrates is that the exchange-ratio between two commodities will be determined by their substitution costs (pp. 178).

In line with the Austrian outlook, whether the costs are constant, the exchange ratio is determined “solely by the costs”, and the demand determines “only the allocation of the available factors between the two branches of production”. Whether there are increasing costs, the demand also affects the exchange ratio “since the relative costs – the substitution ratio- will vary with the relative demand” for the two goods (Haberler, 1933, 1950, pp. 177). Therefore, it is possible to introduce the other factors of production. Haberler states, then, that the demand for the first order goods affects the prices of the higher order goods, a process that is a function of the degree in which the factors can be transferred along the branches of production.

In this respect, this is in line with Menger who establishes that the “goods-character” of every factor of production, or good of higher order, “is dependent upon complementary goods of the same order being available… to the production of at least one good of first order” (Menger, 1871, 2007, s. 3, pp. 60). Haberler states that “if a factor is specific to the production of one commodity it will have no value at all unless the amount of that commodity produced is sufficient to enable all the available units of the factor to be employed” (pp. 178). Additionally, “a further requirement for their goods-character” is the “ability to transform the goods” (Menger, 1871, 2007, pp. 61) on every order in turn, so that, in every order all the other complementary goods must exist. Moreover, the value of these higher order goods arises from the value of the lower order good they produce. This is the theory of imputation of Wieser (1914, 1924, 188-195, in Schulak & Unterköfler, 2011) that establishes that the value of the consumer goods determines the value of the higher order goods, an idea that Menger develop a few years before.

Interesting enough, Haberler introduces another Austrian issue in the international trade, the time, “which gives rise to interest”. Haberler considers that the treatment the classical economists have on this issue “is a difficulty which it cannot surmount”, but that is important in the determination of the relative prices. In the Austrian outlook, “until the latter [the goods of first order] finally brings about the state called the satisfaction of human needs, time is an essential feature” (Menger, 1871, 2007, pp. 67). In particular, the length of time, which elapses between “the old situation, represented by one point on the curve, and the new situation, represented by another”, will affect the shape of the possibilities curve. “The longer the time allowed for production to adapt itself, the flatter is the curve” (Haberler, 1933, 1950, pp. 179), hence the curve will be less flat in the short run than in the long run.

Haberler separates the short run, the long run and the very long run in the production process. Therefore, when the demand changes, in the first time it will produce “a relatively marked change in prices” in the industry whose demand has increased. This is so because time is necessary to adjust the production process. While in the industry whose demand has fallen, “output will not at once diminish by the full amount appropriate to the new situation”, because the factors of production may be specific or “capable of employment elsewhere… at a heavy loss” (Haberler, 1933, 1950, pp. 180), hence, the prices will diminish. 10

Finally, Haberler sets the exchange-ratios or relative prices using a commodity as a numeraire, “instead of a series of absolute labor-costs”. This series of relative prices “would equally represent the substitution-ratios, since these are the same as the exchange-ratios”; hence, if the exchange-ratios between the two goods are equal to their substitution-ratios, the Ricardian comparative advantage “is perfectly valid even if we discard all the simplifying assumptions of the Labor Theory of Value”. Then, changing the focus from the classical supply-side to an Austrian demand-side, he demonstrates that each country would specialize in the production of the commodity in which it has a comparative advantage, that is, “would produce those goods whose costs were relatively lowest” (Haberler, 1933, 1950, pp. 182), the essential idea of Ricardo but now shaped by the Austrian outlook.

The main purpose of this essay is to offer some likely answers to some questions among which are, to begin with, whether we can really consider that Ricardo states the theory of comparative advantages in terms of the labor-cost theory. To try to answer this question may imply we have to analyze how Ricardo develops the theory of value in his Principles, i.e., to establish what theory of value he develops in the first chapter. We should recall here that the theory of value is subject to a great debate by this time, in England as well as in Germany. Hence, if Ricardo develops only the labor-cost doctrine in the chapter on value of the Principles, we may also expect that he would develop the trade theory in terms of this doctrine. If this were the case, Ricardo would agree with Haberler, but this is so?

Would Ricardo agree with Haberler about the cost-labor theory?

In order that we can answer whether Ricardo would agree with Haberler on the topic of the doctrine of labor-cost doctrine and its application to the international trade, we must recall a subject as debated as it was at that time, the theory of value. The problem arises with Smith (1776) who, in the first book of The Wealth of Nations (1776), explains that the value of a commodity emerges from the quantity of labor embodied in it, that is, the labor-jelly or labor-cost theory, but, at the same time, this value also depends on the labor the commodity command, that is, the labor-command theory. In line with this, when labor is the unique factor of production, the labor-cost and the labor-command values are equal (see Book I, chap. V and VI).

This idea permeates the English thought for more than a century. For instance, in a letter Ricardo wrote to Trower on July 1821, Ricardo says, “I confess I do not rightly understand what meaning you attach to the words ‘exchangeable value’, when you say the labour which a commodity can command is what actually constitutes its exchangeable value.” (Works, 2004, IX, pp. 2). We can observe that Trower uses the same words of Smith in the first chapters of the Wealth of Nations (1776). Trower is talking about the labor-command doctrine. However, when the production involves capital and land, as a society develops, a contradiction arises between the labor-cost and the labor-command values. This problem is not perceived at all by Smith, but is understood by Ricardo, “who struggled in some of the most difficult and obscure pages of all economic literature to make the contradiction evident” (Douglas, in Spiegel, 1952, pp. 124), the first section of his first chapter of the Principles of Political Economy (1817).

Then, in the first section, Ricardo is trying to rehabilitate the labor-cost theory. However, as the reasoning goes on, as well as the sections of this chapter, Ricardo realizes that the commodities do not exchange according to the relative amounts of labor, that is, the labor-cost theory. Instead, he abandons his attempts “to rehabilitate” the labor jelly theory, and in the fourth and fifth section points out this difficulty. But, “in order to simplify the problem, for the rest of his discussion chose to disregard these troubling factors and to make the heroic assumption that all commodities were produced with capitals of equal duration and with equal rapidity of turnover” (Douglas, in Spiegel, 1954, pp. 125, 126).

Because of this treatment, from here on the socialists considers that Ricardo develops the labor-cost theory and the capital is embodied labor. The Cambridge line, on the contrary, considers that both Smith (1776) and Ricardo (1817), when they analyze the complex economy, they discard the labor-cost theory and replaces it with a total-money- costs theory of prices, that is, the prices of products would result from the payments to labor, capital and land (Taylor, 1960, pp. 192). Hence, Ricardo’s first chapter is originally associated with a controversy as to the extent to which the price of labor affords good standard for measuring the general purchasing power of money. In this connection its interest is mainly historical “and there is an illuminating article on it by

Professor Hollander in the Quarterly Journal of Economics, 1904” (Marshall, in Spiegel, 1954, pp. 183).

This bifurcation in the economic thought arises because the classical authors, in their theories, present their ideas but with not few contradictions. Sometimes their hazy ideas and vague concepts makes difficult to understand them. Ricardo is not the exception and, what is more, his abstract way of thinking and his deductive method alongside with his ambiguities and obscurities complicate the understanding of his theories. Certainly, this is the case with the international trade theory and, no doubt, with his treatment of the theory of value.

Thus, if we want to know what Ricardo is saying, we should analyze these theories in light of other passages, as well as the correspondence he has with Malthus, Say, and many others. As Marshall points out in his essay devoted to Ricardo’s Theory of Value, “when his words are ambiguous, we must give them the interpretation which other passages in his writings indicate that he would have wished us to give them”. In this way, “if we do this with the desire to ascertain what he really meant, his doctrines, though very far from complete, are free from many of the errors that are commonly attributed to them”. As to the theory of value, Marshall adds, “to understand him rightly, we must interpret him generously, more generously than he himself interpreted Adam Smith” (Marshall, in Spiegel, 1954, pp. 174).

Indeed, as far as the Principles are concerned, other passages in many letters he wrote can help us to understand its ambiguities as regards the theory of value, mainly because is a theme that bother Ricardo. As his correspondence shows, Ricardo changes his ideas through the time about the value theory. We can establish that he adopts the labor-cost theory in 1816, as new investigations points out. Ruffin (2002) states that Malthus, by April 1816, answers a letter to Ricardo, “in which he said, ‘On the subject of determining all prices by labor… I think you must have swerved a little from the right course’”. Ruffin points to, “Clearly, during Malthus’s visit, Ricardo must have informed him of his newly adopted labor theory” (pp. 736).

This becomes a recurrent theme in his correspondence until the last week of his life. In a letter to Malthus, Ricardo affirms that “M. Say has not a correct notion of what is meant

by value when he contends that a commodity is valuable in proportion to its utility” (Marshall, in Spiegel, 1952, pp. 180). This is a point to have in mind as opposed also to the Austrian outlook, because the price in Ricardo is a function solely of “the competition of the sellers”. The demand has nothing to do “because the supply would be regulated by costs of production...” (Marshall, in Spiegel, 1952, pp. 180-81). Furthermore, Ricardo writes, “it is supply which regulates value, and supply is itself controlled by comparative cost of production. Cost of production, in money, means the value of labor as well as profits” (Marshall, 1952, pp. 181).

In 1819, in another letter to Say, Ricardo writes that his idea that the labor regulates the value of commodities, “is an opinion that I do everything I can to destroy; but I say that is the relative amount of labor necessary for the production of the goods that regulates their relative value” (Works, 1964, letter 352, p. 103). In a letter to McCulloch, he stresses that if he was to write the chapter on value again, he “should acknowledge that the relative value of commodities was regulated by two causes instead of by one”. These two causes are the labor and the capital, or, in his own words “the relative quantity of labor necessary to produce the commodities in question and by the rate of profit for the time that the capital remained dormant and until the commodities was brought to market” (Works, 1964, p. 131).

In the last weeks of his life, in 1823, Ricardo writes a draft that appeared within the Mill-Ricardo’s paper first publicly in 1951. Here he writes that the measure of a value of a commodity is different from that of Malthus, which only considers the labor factor, “It is not, as the measure of Mr. Malthus, one of the extremes, it is not a commodity produced only by labor”. Neither it is a commodity whose value is generated only by utilities, instead its value is between that extreme, that is, labor and capital, cause this commodity is “more in accordance with the circumstances in which the majority of commodities are produced” (Works, 2004, pp. 282).

The theory of international trade is also subject to the ambiguity of the vocabulary he employs and the hazy ideas and sentences. As in the theory of value, Ricardo purposely omitted many things which were necessary for the logical completeness of his argument, but which they would regard as obvious. We can recall that Marshall states that the underlying cause is Ricardo, who was with difficulty induced to publish it, in

writing is, if it he had in view any readers at all, they were chiefly those statesmen and business men with whom he associated. Moreover, in a letter to Malthus, Ricardo, about his Principles, says that he was but “a poor master of language”. Marshall himself points out the fact that the Ricardo’s exposition is as confused as his thought is profound; and that he uses words in artificial senses, which he does not explain, and to which he does not adhere; and he changes from one hypothesis to another without giving notice (Marshall, in Spiegel, 1954, pp. 174).

This is the case in the famous sentences where Ricardo stresses, “The same rule which regulates the relative value of commodities in one country, does not regulate the relative value of the commodities between two or more countries”. Hence, “the quantity of wine which she [Portugal] shall give in exchange for the cloth of England, is not determined by the respective quantities of labour devoted to the production of each” (Ricardo, 1817, pp. 89, 90). Faccarello (2016) points out that Ricardo assigns this to the immobility of capital and labor between countries. Thus, “England would give the produce of the labor of 100 men, for the produce of the labor of 80”, but, “such an exchange could not take place between the individuals of the same country” (pp. 91). Faccarello (2016) then establishes that “it seems that Ricardo’s statement has been accepted as obvious” (pp. 12) and “switched to his alternative theory of natural prices”. Hence, “when reading Ricardo’s development… we must always remember the presence of two theories of natural prices–even if Ricardo thought that” the labor-cost theory “was a good approximation” of the theory of natural prices (pp. 12-13).

Furthermore, there are new investigations that can serve us to understand what Ricardo says in this respect. In this discussion, we are considering his “magic four numbers”. The traditional interpretation states that these are the amounts of labor needed to produce one unit of each commodity in each country, that is, labor input-output coefficients. Ruffin (2002), instead, offers a new interpretation that stresses that these numbers are the quantities of labor needed to produce the amounts of wine and cloth actually traded by England and Portugal. As Ruffin points out, “this is implied by Ricardo’s usage of the terms ‘the cloth’ and ‘the wine’ in the second paragraph quoted above, which refer to the amounts traded that were mentioned in the first paragraph” (pp. 741-742). This Ricardo’s proof is “simple, elegant and sublime” (pp. 742) and “with the new interpretation of the four numbers, we see that Ricardo’s method is much 15

more direct” (Maneschi, 2002, pp. 436). Furthermore, this reinterpretation “has cast a new light on it, and at the same time rescued Ricardo from the charge of inconsistency or carelessness. In fact, it shows to great advantage the revolutionary character of Ricardo’s contribution” (Maneschi, 2004, pp. 435).

With this in mind, our reasoning can take another step and we can recall what Haberler thinks about the classical authors when he stresses that “the classical theorists were indeed concerned mainly with the bearing of their analysis upon questions of trade policy; they used it as a weapon to attack Protection, and this even influenced the form in which they presented it” (Haberler, 1933, 1950, pp. 121-122). This is in line with the De Pablo’s idea (2017) in the commemoration of the bicentenary of the Principles

As a ‘seller’ of his ideas, he [Ricardo] seems insurmountable. Ricardo seeks to convince his countrymen that foreign trade suits them, and for this he builds a numerical example where in England, in both goods, labor productivity is lower, ¡in absolute terms!, to that which exists in Portugal. How is it that the English should trade with another country, where the labor is more productive than in its own country? Because the difference in productivity between the two countries is not the same in both products, it is convenient for each of them to allocate their productive resources based on the principle of comparative advantage.

Finally, and in the other extreme, other new investigations stresses that Ricardo does not write these passages. Instead, James Mill inserted them or, directly, that Ricardo does take them from Robert Torrens. The idea is back in the fact that they are only a few paragraphs in the chapter, and they “seems to play little or no role in the rest of the book… thus neglecting 85% of the chapter and, unfortunately, the monetary aspects of the question” (Caffarello, 2016, pp. 2).

If we adopt the ideas of the Cambridge school, we aggregate what Ricardo wrote in his letters about the theory of value, and considers the last points, if he really wrote these passages, we must conclude that he develops the theory of comparative costs in term of the natural price theory. Alternatively, we can consider that he does not write these passages and then, he develops the theory of value of the natural prices. Consequently, the logical reasoning is that if Ricardo would agree with this school of thought, then he may reject the Haberler’s treatment of his theory of trade.

Nevertheless, it seems that Haberler has another opinion because, as the socialists, he focuses on the labor-cost theory in Ricardo, but, in line with the Austrian school, he removes this doctrine as he realizes that the assumptions, which that doctrine requires, are very simple. We must recall here that the Austrians are “socialists-averse”, i.e., they are averse to any form of socialism. Neither he adopts the natural price theory; instead, he develops the theory in terms of the Austrian thought. Then, the question is why.

Why Haberler considers the labor-cost theory in the theory of comparative advantage of Ricardo?

The way in which Haberler expresses the theory of trade is consistent with the Austrian outlook. This school of thought has its origins in Carl Menger (1840-1921), who accomplishes a radical break not only with the German Historicism, but also by the classical economists. The source of the break is, in the first case, the Menger’s methodology versus the metaphysical essentialism of the German economists’ understanding of the structure and functioning of the social universe (Milford, 1997, pp. 103, in Schulak & Unterköfler, 2011, pp. 14), which is the background of the fact that their analyses of economic phenomena were almost exclusively historical-empirical. This controversy reaches its warmest point with the Methodenstreit, as would later be known in the academic history. The source of the break is, in the second case, the theory of value. Then, so as the method leads to the break with the German Historicism, the theory of value leads to the break with the English classical economists.

We can observe these two branches also in the Haberler’s treatise of the foreign trade. As far as the method is concerned, we observe his break with the German economists, but, as the same time, how the method brings Haberler closer to the English ones, in particular with Ricardo. The former ones consider “the economy”, or the “nation”, as some kind of entities in their own right, or having an essence of their own, and that they actually exist. Furthermore, the German Historicism do not use the deductive reasoning, neither construct economic theories. On the contrary, the Austrian School derives theories, and principles, from the deductive and logical reasoning.

However, we should highlight the fact that the background of this methodology is the cuore of the Austrian school and, since, of the theory of value, that is, the “single

economizing individual” (Menger, 1871, 2007, pp. 75). This “economically acting individual” is the engine of the economy with his command of goods to satisfy his needs. This emphasis on the individual, or the “methodological individualism”, as Schumpeter called it (1908), is what moves the economy and the origins of all the values, and hence, the prices.

Haberler, for instances, remarks, “it is not, for example, Germany and England, but individuals or firms located in Germany and England, who carry on trade with one another”. Moreover, “the mere fact that a political boundary is involved and that the persons in question are nationals of different countries and, perhaps, speak different languages, is economically irrelevant”, a subject that differences him from the classics since they “believed nevertheless that there was a fundamental difference between home trade and foreign trade” (Haberler, 1933, 1950, pp. 3-4). “For a Frenchman or for a German, trade between France and Germany is foreign trade, whether capital and labour are mobile between the two countries or not”. The attitude of the government towards their own country and the rest of the world determine “the comparative homogeneity of the economic system… and its comparative isolation from other countries”. Hence, “it is, at any rate, ambiguous to speak, as some German writers have done, of the 'unity of the national economy.'” (Haberler, 1933, 1950, pp. 7).

On the contrary, Haberler states that the Ricardo’s theory “starts from the fact that in international trade, as in all other economic activity, it is the individual economic subject who buys and sells, pays and is paid, grants and receives loans”. The problem with the theory of foreign trade of Ricardo, then, from Haberler’s Austrian perspective, is Ricardo’s theory of value, which for Haberler is the labor-cost one. We can find the origin of this thought in Menger’s consideration of the “objective theory of labor cost and value” of the English economists, precisely the point of departure of the break with the English classic school.

For Menger, Smith (1776) and Ricardo (1817), in line with Quesnay (1846), Turgot, and Le Trosne, thinking that “le commerce n’estqu’un échange de valeur pour valeur égale” (pp. 305), make the mistake of regarding the quantities of goods in an exchange while not taking into account the utility. Hence, the English economists elaborate the idea that the expenditure of human labor determines the cost. For his thesis, Menger

brings up the works of Theodor Bernhardi (1849), Roesler (1869), and Komorzynki (1869), who have “presented a penetrating criticism of English price theories” (Menger, 1871, 2007, pp. 305-306). Therefore, the theory of production costs as determinants of prices is “among the most egregious of the fundamental errors that have had the most far-reaching consequences” in the economy. Then, “equally untenable is the opinion that the determining factor in the value of goods is the quantity of labor or other means of production that are necessary for their reproduction4”.

No doubt, for Menger Adam Smith and David Ricardo use the labor-cost theory, as does the socialists. This explains the phrase of Haberler, “it is common knowledge that the classical economists used the Labor (Cost) Theory of Value. This theory asserts that goods are exchanged against one another according to the relative amount of labor embodied in them” (pp. 126), in another passage, he indicates, “the Theory of Comparative Costs… developed out of the classical Labor Theory of Value” (pp. 122).

Hence, the Austrian theory of value is one of the key issues of the theory that supposes the definitive break with everything that has to do with it, may be the classical theories or the socialist ones. For instance, Menger states that Johann Karl Rodbertus (1805- 1875) makes “the erroneous assumption that the entire result of a production process must be regarded as the product of labor”, hence the “owners of capital and land to take a part of the product of labor away from the laborers, and thereby live without working”.

Nevertheless, “labor services are only one of the factors of the production process, however, and are not economic goods in any higher degree than the other factors of production including the services of land and capital”. The land and the capital, as labor, have value, “both to individuals and to society”, the “capitalists and landowners do not, therefore, live on what they take away from laborers, but upon the services of their land and capital” (Menger, 1871, 2007, pp. 168). A few years latter Böhm-Bawerk, in his History and Critique of Theories of Interest, subjected the socialist labor theories of value by Rodbertus and Karl Marx (1818-1883) “to a detailed and consistently

4 Italics in the original

deprecatory criticism, thus laying the foundation for the critique of Marxism in the Austrian school tradition” (Böhm-Bawerk, 1884, 1890, pp. 328-392, in Schulak & Unterköfler, 2011, pp. 34).

We can also consider the fact that, for Haberler, the classical theorists use the labor-cost theory in order to present the foreign trade theory in such a way that it can serve in their battle against the Merchantile ideas, so popular by the time. As he points to, “the classical theorists were indeed concerned mainly with the bearing of their analysis upon questions of trade policy”. Then, “they used” the theory of foreign trade “as a weapon to attack Protection, and this even influenced the form in which they presented it”. At this point he recalls the work of Viner, The Doctrine of Comparative Costs (1932), where this author “even believes that their choice of analytical tools, namely of “real cost” theories was dictated by their politico-economic aim”. Then, he stressed, “this theory developed out of the classical Labor Theory of value” (Haberler, 1933, 1950, pp.121- 122).

Many other ideas Haberler displays in his work help us to understand his position about the labor-cost theory. One of the key subjects he relates to that theory is the mobility of factors. Haberler states that, although many of the these authors have in mind particular movements of labor and capital, as Smith, J. S. Mill, Cairnes or Taussig, “it can, perhaps, be maintained that… they paid too little attention to the significance of these phenomena” (pp. 4). In addition, the classical theory assumes that labor is completely mobile between the different branches of the industry in the country, yet “it cannot move from one industry to another if the two industries are in different countries” (pp. 127). This assumption, in Haberler opinion, is “accepted quite naively by the classical school as the criterion of the international trade” (pp. 4).

What we should note is that, for Haberler, this implies the danger of sub estimate the theory of comparative advantage or, worse, to reject it. He, apparently, has this idea in mind because he remarks that “somebody or other is always trying to show that the Law of Comparative Cost is valid only under the simple assumptions upon which it was originally formulated” (pp. 131). Even more, he adds that this theory, while is generally accepted in England and America by 1930s, has not sympathetic reception in Germany and France, “owing to its close association with the Labor Theory of value, but most

Italian economists accept it” (pp. 122-123). Then, his argument is that the problem is not the theory but the labor-cost theory and the assumptions related to this doctrine. Actually, the theory is robust, or in his words, “this in no way robs that theory of its scientific character”, and he tries to demonstrate the robustness of the Ricardo’s theory.

Then, if we try to answer why he considers Ricardo develops the theory in terms of the labor-cost doctrine, we should say that, ¡because he is Austrian! For an Austrian, the classic English-speaking economists work with the objective theory of value. However, we can ask ourselves why Haberler does not try to understand the Ricardo’s theory in terms of the Cambridge line. It follows from his arguments that he assumes that the classical assumptions are only consistent with the labor-cost theory. However, let me say that, either Ricardo considers the labor-cost theory or the theory of natural price is irrelevant, since for the Austrians the right theory is a demand side one. None price is determinate by the supply-side. Whether be the theory of production costs or the labor- cost theory, both are “among the most egregious of the fundamental errors that have had the most far-reaching consequences” in the economic theory (Menger, op. cit.), to adopt them may represent an unforgivable sin!

Why we can assert this? Because the cuore of the Austrians is the economically acting individual, and the value has its origins in his appreciation of the goods, as they satisfy his needs. Jaffé (1976) describe the Menger’s individual as one of perpetual needs and a delusional conceit, who is susceptible to errors and persistently worried about the future. The causality, then, goes to the individual to the production process, and so does the value process. When Menger uses the term “economizing”, he refers to the terms “wirtschaftender Mensch,” “wirtschaftendes Individuum,” and “wirtschaftende Person”. As the traductor points out, “the adjective “wirtschaftend” does not refer to the properties or motives of individuals, but to the activity in which they are engaged. More specifically, it does not refer to “the profit motive” or to “the pursuit of self-interest,” but to the act of economizing” (Menger, 1871, 2007, pp. 48).

For this reason, unlike Jevons and Walras, points out Peter Klein in the foreword of the Principles, Menger “favored an approach that was deductive, teleological, and, in a

primary sense, humanistic5… He was primarily interested in explaining the real world action of real people”. Then, the “trade is thus the result of people’s deliberate attempts to improve their well-being, not an innate ‘propensity to truck, barter, and exchange’, as suggested by Adam Smith” (pp. 7). Furthermore, the tendency of the classical economists to tackle the economy from the supply side, leads them “to group factors of production into broad categories -land, labor, and capital- leaving them unable to explain the prices of discrete, heterogeneous units of these factors”. In this sense, Menger “realized that the actual prices paid for goods and services reflect not some objective, ‘intrinsic’ characteristics, but rather the uses to which discrete units of goods and services can be put, as perceived, subjectively, by individual buyers and sellers” (pp. 8).

Then, once Haberler strips the theory of comparative advantage of that “fundamental error”, changing the protective belt in a Lakatosian way, he constructs the “solid” theory. In doing this, Haberler, as Böhm-Bawerk many years before, demonstrates a pragmatic-eclectic attitude since he does not reject the equilibrium theory, when many Austrians did, and mix the reality features with a tendency to create highly abstract aggregates, something unlike other key works of the Austrians. Perhaps, Ricardo would not accept what Haberler has to say about the labor-cost theory in the comparative advantage theory. Nevertheless, as Haberler could understand the essence of Ricardo, no doubt, Ricardo would understand the essence of Haberler, if Ricardo were alive, because the two are two brilliant minds.

Some concluding thoughts

It is common knowledge that from Haberler’s works in 1930s, the comparative advantage theory of Ricardo is mainly associated with the labor-cost theory. In nearly all textbooks of international trade, the traditional interpretation of the theory is that the quantities of commodities represent the amounts of labor needed to produce one unit of them in each country, that is, that they are labor input-output coefficients (Maneschi, 2004). The questions we try to answer in this essay are, firstly, whether Ricardo would

5 Italics in the original

agree with Haberler in that issue, and, secondly, why Haberler considers that Ricardo elaborates his ideas only considering the labor-jelly theory.

When Ricardo states the law of comparative advantage thorough his famous “four magic numbers” (Samuelson, 1969, in Maneschi, 2004), the principal idea is that each country will produce those goods for the production of which it is especially suited on account of its natural resources, its labor and capital factors, producing more of them than it requires and exchanges the surplus with other countries against goods which it is less suited to produce or which it cannot produce at all. Haberler understands this essential idea, but considers that the problem is the assumptions which Ricardo uses, as the labor-cost theory implied by them. He develops the theory of Ricardo in his famous work, The theory of international trade with its implications to commercial policy, published by 1930s.

In a way that resembles a Lakatosian “research program”, Haberler changes the assumptions and the labor-cost theory, the protective belt, but maintain the hard core, the essential idea of Ricardo. This way is an Austrian way. Evidently, some considerations about the problem that generates the labor-cost theory in the rejection of the Ricardo’s theory may urge him to do this. Nevertheless, as we develop in the last section, is his Austrian outlook what pushes him to reconsider the theory.

If we consider what others said about these authors, we observe that they were respectable and admired by the others. For instance, McCulloch states that Ricardo was a man trained to habits of profound thinking, inflexible in his principles, and he never made a speech or give a vote which he was not well convinced was founded on just principles (see McCulloch, in Spiegel, 1954, pp. 168-69). In England, many theories of Ricardo became laws, his opinion was valuable, and he acquired influence and consideration. Marshall admires Ricardo. Ruffin (2002) makes this point also, when he cites “The genius which enabled Ricardo. . . to tread his way safely through the most slippery paths of mathematical reasoning, though he had no aid from mathematical training, had made him one of my heroes” (quoted in Keynes 1924b). John Maynard Keynes expressed that “Ricardo was the greatest [most distinguished] mind that found economics worthy of its powers” (Harrod 1951, 467; see also 328; 1946, 182; and Samuelson 1962; in Ruffin, pp. 745).

Haberler taught seven generations of Harvard students. Samuelson, who participated in Haberler’s first international trade seminar in 1936, reminds us his receptiveness, despite his “stubborn consistency”, to new methods and ideas in the light of new evidence (Samuelson 1990, in Boehm, 2015, pp. 114). Schumpeter (1954) underlines the ability of Haberler in occasion of writing about the German economists, who, in his opinion, had problems with the “existing scientific apparatus”; he quotes, among other authors, the professor Gottl-Ottilienfeld, who held a prominent position and had many supporters. Then, Schumpeter aggregates that, “to judge him… we must read his work. The psychic cost of this reading can be significantly reduced, however, by reading instead the review by Professor Haberler of Gottl's methodological writings, reissued in 1925” (1954, pp. 934).

Probably, Ricardo would not agree with Haberler in the idea that the foreign trade is only based on the labor-cost theory. The theory of value bothers Ricardo throughout all his academic life. And certainly, we can affirm that Haberler thinks Ricardo do work with the labor-cost theory, because he is an Austrian. Nevertheless, as Haberler catches the essence of Ricardo, no doubt, Ricardo would catch the essence of Haberler if they could discuss their ideas with each other. Why we can be sure of this? Because both are two brilliant minds. And a proof of this is that the theory of foreign trade in almost all the textbooks, is the theory of Ricardo and Haberler.

References

Boehm, S. (2015). The best horse in the Viennese stables: Gottfried Haberler and Joseph Schumpeter. J. Evol. Econ 25. Pp. 107-115 Caffarello, G. (2016). A calm investigation into Mr Ricardo’s principles of international trade. European Journal of the History of Economic Thought. DOI: 10.1080/09672567.2015.1086011 Jaffé, W. (1976). Menger, Jevons, and Walras Dehomogenized. Economic Inquiry 14, pp. 511-523 Maneschi, A. (2004). The true meaning of David Ricardo’s four magic numbers. Journal of International Economics 62, 433– 443 Menger, C. (1871, 2007). Principles of economics. Ludwig von Mises Institute Ricardo, D. (1817, 1821, 2001). On the principles of political economy and taxation. Canada: Batoche Books. Ricardo, D. (2004). The works and correspondence of David Ricardo. V, IX, X. Edited by Piero Sraffa and M. Dobbs. US: Liberty Fund Inc. Ruffin, R. J. (2002). David Ricardo’s discovery of comparative advantage. History of Political Economy. 34:4, pp. 727-748 24

Schulak, E. M., & Unterkofler, H. (2011). The Austrian school of economics. A history of its ideas, ambassadors & institutions. US: Ludwig von Mises Institute. Schumpeter, J. A. (1954, 1971). Historia del analisis economico. España: Ariel Spiegel, H. W. (1954). The development of economic thought. Great economists in perspective. US: John Wilwy & Sons, Inc. Taylor, O. H. (1960). A history of economic thought. Social ideals and economic theories from Quesnay to Keynes. US: McGraw-Hill Von Haberler, G. (1933, 1950). The theory of international trade with its implications to commercial policy. London: William Hodge and company, LTD.