Ricardo’s dream: how economists forgot the real world and led us astray
Nat Dyer, Bristol University Press, £14.99

NAT DYER is a writer and researcher specialising in global political economy, a fellow of the Schumacher Institute and the Royal Society of Arts.

This exceptional book depicts the rise of bourgeois economics. Part I studies the life and influence of the stock trader and economist David Ricardo (1772-1823). Part II tells the story of the political economy created in Ricardo’s image. Part III describes its role in our time of finance capital.

Ricardo pioneered the method of creating simple models to explain the social world. Most importantly, he produced the standard theory of international trade, “comparative advantage.”
 
He imagined a world of “trade between two countries to be confined to two commodities —  wine and cloth.” England is better at making cloth, Portugal is better at making wine, so England sells cloth to Portugal, Portugal sells wine to England, everybody gains, globalisation works. 

This model, penned in 1817, ignored politics, power, and history; empire, exploitation, and slavery were modelled out. The Treaty of Commerce between Portugal and England, signed in 1703, was one of the first of many unequal treaties between an imperial power and a dependent.

In the 1690s, gold had been discovered in Brazil. It was extracted by slaves. Slavers brought 10 times more people from Africa to Brazil than to the US. England and Portugal became the dominant slave-trading powers. Portugal was the leading slaver from the 1500s to the mid-1600s, when England took the lead. In the 1700s, Britain transported 2.5 million people to the Americas; Portugal 2.2 million. 

Over half of Brazil’s gold came to Britain in the 1700s, funding the City of London’s dominance and paying for Britain’s expensive continental wars. By 1817 Portugal was effectively a British colony, under the harsh military rule of the British general Lord Beresford. The treaty wrecked Portugal’s economy. It became, as Ricardo admitted, one of the “most beggarly countries in Europe.”

All the major economists since Ricardo have accepted his approach — John Stuart Mill called him “the greatest political economist,” Alfred Marshall called him a “genius,” John Maynard Keynes praised his “supreme intellectual achievement,” Paul Samuelson called the numbers Ricardo used in his model of English-Portuguese trade the “four magic numbers.” In 2000, the World Trade Organisation tried to justify free trade and the globalisation of our time by citing Ricardo’s notion of comparative advantage, “arguably the most powerful insight into economics.”

Using Ricardo’s style of economics, Chicago University’s Eugene Fama developed the “efficient market” hypothesis. Its core idea is that the market is always right. He wrote that he “assumed throughout that all securities are traded in perfect markets.” On this assumption, it’s no surprise that he believed that market prices reflect instantly and perfectly all available present and future (!) information about all the assets traded, allowing traders infallibly to direct money to the most efficient purposes. 

When Fama was asked in 2010 what he made of the financial bubble that had just burst, he replied, “I don’t even know what a bubble means.” Bubbles and crashes were by his definition impossible. 

Robert Lucas, the most influential recent macroeconomist, admitted, “we are basically story-tellers, creators of make-believe economic systems … operating in simplified, fictional worlds.”
 
Bourgeois economics still relies on financial models with no crashes, global trade models with no state power, anti-monopoly models with no corporate power, climate models with no climate, and all kinds of economic models with no people. The stock trader’s dream creates a nightmare for workers.

Highly enlightening, and highly recommended.