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David Ricardo’s Theory of Comparative Advantage: Exploring the Hidden Historical Underside of Modern-Day Competitiveness Discourse

POSTED ON July 15th  - POSTED IN Blog, Competitiveness - the history files
Matthew Watson, Professor of Political Economy, University of Warwick

Matthew Watson, Professor of Political Economy, University of Warwick

David Ricardo’s status as the first really famous economist of the nineteenth century rests on two capacities: his ability to think in pure economic abstractions and his ability to harness economic theory to a liberal political worldview. They came together most famously in his theory of comparative advantage, through which countries are encouraged to specialise in producing the goods in which their workers are relatively most efficient. Despite being two hundred years old, Ricardo’s theory is still the mainstay of the orthodox economics justification of free trade and, at one stage removed, of modern-day competitiveness discourse too. This post by Matthew Watson looks behind the façade of the numbers that Ricardo used to illustrate his theory of comparative advantage, to show that they were anything but an innocent account of essential economic relationships. It therefore helps to place modern-day competitiveness discourse in a far from flattering intellectual light.

Adam Smith and the British East India Company: a perspective on competitiveness

POSTED ON April 27th  - POSTED IN Blog, Competitiveness - the history files

Adam Smith was an arch-critic of the regime-hopping strategies of the exclusive stockholding corporations, the forerunners of today’s multinational corporations. The British East India Company, granted a Royal Charter, was supposed to be acting on behalf of the sovereign to meet the country’s commercial objectives. The free hand given to the Company would presumably be couched, in modern parlance, as a ‘competitive’ strategy for Britain.

This post by Matthew Watson, showing how rude Smith was about these corporations’ strategies, is the latest in our series exploring the intellectual history of the modern ways people talk about the ‘competitiveness’ of national economies.

Slot machine man and the origins of “Competitiveness” discourse

The ways people talk about the ‘competitiveness’ of countries so obviously relates to the economy that they must have their roots in economic theory – wouldn’t you think?

In the first of a series of pieces exploring the history of competitiveness thinking, Matthew Watson suggests that things are not quite so simple.

This article will be stored permanently in our new history section.

Matthew Watson

Matthew Watson

Slot machine man and the origins of the “Competitiveness” discourse

By Matthew Watson

In one telling, competitiveness discourse is a way of talking about the economy without the need to get too close and personal with the technicalities of economic theory. After all, however often economists-in-the-wild are invited onto our television screens to speak about how competitive the economy has become today, no self-respecting academic economist is likely to grubby themselves with a concept so utterly lacking in analytical rigour.

In an alternative telling, however, competitiveness discourse would be a way of talking about the economy which has been embedded in economic theory for as long as there has been a modern discipline of economics. All that stuff in Adam Smith with which people are most familiar – the ‘invisible hand’ metaphor and the passage about the self-interest of ‘the butcher, the brewer and the baker’ – seems to consistently invoke thoughts of competitiveness.

So, which is it to be? Is competitiveness an intellectual reference point that academic economists have conspicuously avoided — or one that they have always held in a warm embrace? Both cannot be correct at the same time.

My answer, as is so often the case when faced with a stark choice, is that neither perception is right.

There is evidence, it is true, of the use of the word ‘competition’ in The Wealth of Nations. For the Smith anoraks out there, some combination of it or its derivatives appears 155 times. However, it requires a strategic reading into Smith’s work of current concerns about competitiveness to make this mean anything more than the mundane task of ensuring that economic agents position themselves sustainably relative to market prices. It is about organising production so that selling goods at the ‘natural price,’ where all productive inputs are reasonably rewarded, does not mean having to sell at a loss.

“The results of bargaining away regulatory oversight of corporate activity certainly helps to enhance the utility that companies can extract from their productive activities. If the single goal of managing and administering modern market institutions is to embed corporate interests, then this seems to be the way ahead.

But if the goal is to make the economy react to a rather wider political agenda, then we need to explore and understand the particular intellectual origins of competitiveness discourse.”

Nowhere was competitiveness understood as a logic of behaviour where competent economic agents try to undercut each other to load the market environment to their own advantage. In short, this was a game that companies played solely against the structure of natural prices, not against one another. What is more, while the structure of natural prices was a meaningful baseline for companies because it told them what they needed to do to cover their production costs, the same could not be said of countries.

It required significant evolution in the underlying system of economic thought before something could emerge that is more familiar from today’s perspective. In particular, it needed successive reincarnations of a creature called homo economicus: the legendary figure of ‘economic man’ who has been used to populate economic theory. The most important developments in this regard were brought to life in the 1920s by Frank Knight, the Chicago economist who was at the forefront of the American turn towards neoclassicism.

Neoclassical economic theory always made strange demands on individual economic agents, and Knight made them stranger still. His most well known book Risk, Uncertainty, and Profit requires ‘economic man’ to live in a highly idealised mathematical world where behaviour necessarily traces out the result of a geometric equation. To do this, homo economicus must possess boundless knowledge, and infinite rationality to act on that knowledge. (This, by the way, robbed this agent of genuine intelligence: economic behaviour was reduced to automatic responses to external stimuli, and no longer needed to be thought through.)

Acknowledging this state of affairs, Knight later characterised ‘economic man’ as treating “other human beings as if they were slot machines”. This ‘slot machine man’ was the first homo economicus in the history of economic thought to have the modern meaning of competitiveness inscribed into it as a behavioural instinct. Economic man thus became the ultimate bargaining agent, able to wheel and deal in an instinctive manner to ensure that everyone automatically sells to him at the lowest possible price and buys from him at the highest possible price. By creating it this way, Knight also removed its social relevance drawn from the game that might be played against the structure of natural prices. Instead, economic theory became all about mapping the logical implications of allowing purely utility-maximising agents to compete against one another for their own ends.

Knight did not pretend that the characteristics of homo economicus could ever be captured by an actual person. But this was not the point he was trying to illustrate. This was, above all, a thought experiment: homo economicus designed specifically to act out the utopia of neoclassical economic theory. It was a caricature – but a caricature with rich political implications because it was a symbol of perfection. Slot machine man represented the highest stage of evolution of economic man within the peculiar world of neoclassical economic theory. If you wish for the sake of analytical simplicity to restrict the objective of everyday life to nothing more than chasing utility, then this is as far as it is possible to take homo economicus.

Modern competitiveness discourse – including in relation to the way that whole nations compete with each other – has its intellectual origins in exactly the same thought experiment. So it is relevant to ask whether it remains fundamentally trapped within it. The results of bargaining away regulatory oversight of corporate activity certainly helps to enhance the utility that companies can extract from their productive activities. If the single goal of managing and administering modern market institutions is to embed corporate interests, then this seems to be the way ahead. But if the goal is to make the economy react to a rather wider political agenda, then we need to explore and understand the particular intellectual origins of competitiveness discourse.

Clearly this is not just of academic interest. Today, competitiveness discourse is so ingrained into the management and administration of modern market institutions that it has become increasingly difficult to think of the latter other than through the lens of the former. So it has become a politically debilitating concept. Showing that it was not always this way demonstrates that it does not have to be this way forever, and that political alternatives are possible. There is no formal logic of competitiveness that necessarily has to be lodged at the heart of economic theory, as Knight himself made abundantly clear, when he admitted that his slot machine man was merely a convenient modelling device. Modern economics had evolved quite happily for 150 years from Smith’s Wealth of Nations to Knight’s Risk, Uncertainty, and Profit blissfully unaware of any supposedly necessary attachment to modern meanings of competitiveness.

Only in the subsequent century did the two things become forged so closely together – leaving the contemporary political imagination all the poorer for it.

Matthew Watson is Professor of Political Economy in the Department of Politics and International Studies at the University of Warwick and a Professorial Fellow at the UK’s Economic and Social Research Council.

 

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