Constructing a Myth that Ricardo Was the Father of the Ricardian Model of International Trade: A Reconsideration of Torrens’ Principles of Comparative Advantage and Gain-from-trade Taro Hisamatsu September 2016 Discussion Paper No.1630 GRADUATE SCHOOL OF ECONOMICS KOBE UNIVERSITY ROKKO, KOBE, JAPAN Torrens’ Principles of Comparative Advantage and Gain-from-trade 1 Constructing a Myth that Ricardo Was the was resolutely opposed by Jacob Hollander (1910) Father of the Ricardian Model of who held the view that it was Ricardo’s discovery. A International Trade: controversy ensued in The Economic Journal, one of A Reconsideration of Torrens’ Principles of the most authoritative publications in the field of Comparative Advantage and economics (Seligman and Hollander 1911). Gain-from-trade† Seligman’s claim gained the support of later distinguished economists, such Gottfried Haberler Taro Hisamatsu (1933), Jacob Viner (1937), Joseph Schumpeter (1954), Lionel Robbins (1958), John Chipman (1965), Paul Samuelson (1969), Douglas Irwin (1996), Marry Abstract Kemp, and Masayuki Okawa (2006), not to mention Historians of economic thought have often pointed out Roy Ruffin (2002; 2005), who insisted on “debunking that Ricardo’s famous England-Portugal model differs a myth” of Torrens’ 1815 anticipation and declared from the “Ricardian model” presented in modern Ricardo’s 1816 discovery. Ruffin was overwhelmingly international economics textbooks. This paper argues in favor of the view that what Torrens described in that the erroneous belief that David Ricardo was the 1815 was the concept of absolute advantage.2 father of the Ricardian model might have arisen from “The myth,” Ruffin (2005, 711) wrote, “was started Robert Torrens’ own explanations of comparative by Torrens himself in 1826 [in the third edition of advantage and his repeated claims. The principle of External Corn Trade] and was given a boost when comparative advantage put forward by Torrens has John Stuart Mill (…) reported Torrens’s claim in a much in common with the modern Ricardian model. In footnote” of the chapter on international trade, in the the early twentieth century, distinguished writers of 1862 edition of the Principles of Political Economy. international trade theory devoted their attention to a However, Torrens’ 1826 and 1857 claims, the latter of great controversy among famous economists in the which was reported by J. S. Mill, give rise to some authoritative The Economic Journal about who should questions that should be reconsidered. be considered the true father of comparative advantage, Giancarlo de Vivo (2010) argues that there is “a Ricardo or Torrens, and concluded that Ricardo, in his fuller statement” of the principle of comparative text, proposed the same principles of comparative advantage “than the rather cursory one we find in advantage as Torrens had presented. Torrens’s 1815 External Corn Trade” in a pamphlet entitled Considerations on the Importation of Foreign Corn published anonymously in 1814. In the preface 1. Introduction to the first edition of External Corn Trade, Torrens An enduring controversy in the century-long history of (1815, xiv) did acknowledge that he had read the economic thought is who discovered the principle of pamphlet. Therefore, it has been pointed out that comparative advantage. Edwin Seligman (1903), who Torrens “might have borrowed” the principle from it in 1903 was president of the American Economic (Grančay and Grančay 2015, 71). However, there is no Association, first stressed that Robert Torrens reference to the pamphlet in the preface to the 1826 (1780?-1864) in 1815 anticipated David Ricardo’s edition of Torrens’ External Corn Trade. Is it true then 1817 principle of comparative advantage.1 The claim that Torrens might have borrowed the comparative advantage arguments from the pamphlet? † A part of the paper is based on Hisamatsu (forthcoming) One must also wonder why, despite having read all written in Japanese. The author has been supported by JSPS the editions of Ricardo’s Principles (1817-23), Torrens Grant-in-Aid for Scientific Research (B): 25780144 and (B): did not claim priority until 1826. 16K17095. 1 More correctly, Leser (1881) first mentioned Torrens’ 1815 discovery, but his “comment attracted no notice” (Viner 1937, 2 For details of the debate, see Grančay and Grančay (2015, 441-2). 70-1). See also Aldrich (2004). Torrens’ Principles of Comparative Advantage and Gain-from-trade 2 Furthermore, Torrens implicitly recanted his James Pennington’s criticism of James Mill’s early previous claims between April 22 and November 17, theory of gain-from-trade and James Mill’s correction 1843, and in 1852 accepted Ricardo’s contributions to thereof in the third edition of the Elements of Political the theories of international trade (Torrens 1843a; Economy. Torrens’ 1843 revocation of his previous 1843b; 1852, 17). Why did Torrens re-claim his claim and his new claim in 1857 are dealt with in priority in 1857? Section 5, which also examines his early theory of On the other hand, one should note the following gain from trade. We show that he himself never tried concerning Ricardo’s trade model of comparative to claim priority of his discovery of comparative advantage. Yukizawa ([1974] 1988), Ruffin (2002), advantage; it was posterity that misunderstood Mill’s and Maneschi (2004), following Sraffa’s (1930) footnote to the explanation of comparative advantage. interpretation, were the first seriously to point out that Section 6 concludes the paper. Ricardo’s famous England-Portugal model differed from the “Ricardian model” presented in modern 2. The Principle of Comparative Advantage: international economics textbooks. It is also argued Ricardo and Later Developments that Ricardo shed light on the savings of labor rather 2.1 The Ricardian model of international trade than on the amount of use value in considering gains It is well known that Ricardo, in the chapter on foreign from trade (Tabuchi 2006), and that his model only trade of his Principles, presented the famous “four explains the extension of what Viner (1937, 440) magic numbers” (Samuelson 1969, 4) of 80, 90, 100, called the “eighteenth-century rule” (Faccarello 2015b, and 120. Many textbooks of international economics 758; Gehrke 2015, 811). Faccarello (2015b), interpret these numbers as constant input coefficients furthermore, argues that Ricardo did not always state of labor and, following this interpretation, proceed to the international immobility of capital and labor; that, explain the modern “Ricardian model” of international for him, there were no significant differences between trade. The basic assumptions in these textbooks are as domestic and international trade, and that his follows: discussion of comparative advantage was not a The world consists of two countries of almost the “principle.” Some historians of economic thought have same economic scale, England (퐻) and Portugal (퐹), said that the explanations given by James Mill and/or and two kind of goods, cloth (푋) and wine (푀), which his son led modern economists to believe that Ricardo are produced using a single factor, labor. Labor can was the father of the modern Ricardian model move freely between industries in the home (Yukizawa [1974] 1988, 124; Tabuchi 2006, Chapter country―so that the labor force is fully employed in 4). However, one cannot ignore the possibility that this the domestic market―but not between nations. Trade erroneous interpretation might have arisen from requires no cost of carriage of goods. Each good is Torrens’ own explanations of comparative advantage produced by the technology of constant returns to and his repeated claims. scale and thus the four numbers refer to input This paper examines Torrens’ 1826 and 1857 claims, coefficients of labor for the production of one unit of considering how he was involved in the dissemination 푗 good 푖 (푖 = 푋, 푀) in country 푗 (푗 = 퐻, 퐹): 푎푖 (> of an erroneous interpretation that Ricardo was the 0). Both countries have an identical utility function father of the Ricardian model. Section 2 discusses how (indifference curve) with homothetic preference, Ricardo’s England-Portugal model, as well as James which means the gains from trade are directly Mill’s gain-from-trade theory, was viewed. Section 3 expressed by the amount of utility (use value). 3 considers Torrens’ 1826 claim, his 1815 discussion, and his 1827 principle with respect to comparative 3 advantage. Section 4 indicates that he might not have Denoting the outputs of cloth and wine by 푦푋 ∈ ℝ+ and borrowed the comparative advantage arguments from 푦푀 ∈ ℝ+, respectively, we may, for example, consider the use value function which is shown as the real-value function of the1814 anonymous pamphlet and argues that, in early 2 these two variable ( 푢: ℝ+ → ℝ+ ): 푢(푦푋, 푦푀) with strong 1826, he could have learned of the principle from monotonicity: for any sets of outputs, (푦푋, 푦푀) and (푦̃푋, 푦̃푀), Torrens’ Principles of Comparative Advantage and Gain-from-trade 3 England has a comparative advantage in producing independently of Portuguese production conditions, cloth, while Portugal has a comparative advantage in while Portugal’s pattern is fixed independently of wine, as Table 1 shows. England’s circumstance (Ricardo 1817, 158-9; see Chipman 1965, 479-80). Table 1 Ricardo’s four numbers based on the These points were resolved by Sraffa’s (1930) traditional interpretation interpretation of Ricardo’s four numbers, based on England Portugal (Country 퐻) (Country 퐹) which Yukizawa ([1974] 1988), Ruffin (2002), and Cloth Maneschi (2004) proposed a new interpretation of 푎퐻 = 100 푎퐹 = 90 (Good 푋) 푋 푋 Ricardo’s two-county, two-good model. Wine 푎퐻 = 120 푎퐹 = 80 (Good 푀) 푀 푀 2.2 New interpretation of Ricardo’s four magic numbers In this case, if the terms of trade lie in the Assume cloth is produced with constant returns to range 푎퐻⁄푎퐻 < 푝∗ ⁄푝∗ < 푎퐹⁄푎퐹 , both countries 푋 푀 푋 푀 푋 푀 labor while wine is produced with diminishing returns.