Opinion

Opinion | Roger Lowenstein

The economic theory that changed the world

US President-elect Donald Trump looks on while speaking during a 'Thank You Tour 2016' rally in Orlando, Florida on December 16, 2016. / AFP / JIM WATSON (Photo credit should read JIM WATSON/AFP/Getty Images)
JIM WATSON/AFP/Getty Images // Globe staff illustration

THE FIRST BUSINESSMAN president, Herbert Hoover, was widely unloved. But any comparison to the businessman in the White House now would be terribly unfair — unfair to Hoover. Hoover was an internationalist, a humanitarian, a man of letters.

But Hoover did bear one unfortunate resemblance to President Trump. Hoover and Trump each displayed a sorry ignorance of the powerful case for free trade. That argument can be summed up in two words: David Ricardo.

Two hundred years ago, Ricardo changed the world with the theory of “comparative advantage.” One modern economist called it “the most beautiful result in all of economics.” Even today, it is embraced on the right, and on the left, with near uniformity.

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Like many creative thinkers, Ricardo lived on society’s seam, the anxious edge where peoples mix. His father, a Sephardic Jew, was born in the Netherlands but emigrated to London, where he became a stockbroker. David was raised in London’s close Sephardic community and went into his father’s business. Alas, at age 21, he eloped with Priscilla Wilkinson, an auburn-haired Quaker. His trespass caused him to be banished from family and faith.

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However, Ricardo had demonstrated such prowess that London merchants staked him to capital as a broker. Betting on British government bonds, Ricardo made a fortune. It was only chance that led to his second career.

In 1799, he happened to read Adam Smith’s “The Wealth of Nations.” The experience transformed him. Now, in his spare time, he did nothing but study political economy. He corresponded extensively with leading economic thinkers, including Thomas Malthus. But by 1810, when Ricardo was 38, he had published only a narrow, if well-received, essay — rather a late start for a man destined to change the world and who would live only to 51.

Ricardo’s friend, James Mill, urged him, on their many walks through London, to write a grander synthesis of his ideas. Meanwhile, Ricardo grew richer, acquired a country estate and a coat of arms. In 1815, when England faced the return of Napoleon’s army, British securities plummeted. Ricardo made his biggest bet ever. When Wellington triumphed at Waterloo, Ricardo’s investment soared. Now immensely rich, he retired. Mill implored him to write. “I fear,” said Ricardo, “the undertaking exceeds my powers.” But Mill, faithful muse, persisted. “My friendship for you, for mankind, and for science, all prompt me to give you no rest,” Mill replied. “Your capacity is immense — only do write and astonish the world.”

In 1817, Ricardo published his opus “On the Principles of Political Economy and Taxation.” England of that day restricted grain imports, to protect the landlords who owned much of the farmland. Ricardo, as it happens, was a landlord himself. Yet against his interests he argued that all trade, indeed, every voluntary exchange between two parties, served to make both parties, and hence society, richer. If England was abundant in sheep and Portugal in grapes, it benefitted England to trade wool for wine. Yet — here was the stunner — even if England was more productive than Portugal in both products, it benefitted from trade because it was likely to have a greater “comparative advantage” in one of them. This can be illustrated with a contemporary example. Let’s say Tom Brady, the quarterback, moves next door. His neighbor offers to do his gardening. Actually, Tom knows he can do the gardening quicker than his neighbor. If you can evade oncoming linemen, you can trim a few hedges. But Tom has a greater comparative advantage playing quarterback. He would be sensible to let his neighbor mow the lawn, trading for that service with his quarterbacking or with the money he earns from it.

Ricardo’s theory of comparative advantage electrified the field of economics, and of politics, too. Within a generation, England abolished its restrictive tariffs and embraced free trade. Over the latter part of the 19th century, much of the world — the United States being a notable exception — did as well.

The years before World War I were salad days for trade, and salad days for world prosperity. After the war, nations retreated. Significantly, President Hoover — against his better judgment — signed the Smoot-Hawley tariff in 1930, raising duties on clothes pins, cordage, silk hats, glass rods, hempseed oil, paper board, zinc, and on and on for 200 pages. The bill worsened the Great Depression — especially as other nations retaliated against the United States.

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Since World War II, the world has generally embraced free trade — until, that is, Trump ripped up the Asia trade pact and threatened to put up barriers to Mexico, China, and everywhere else. His recent harangue against Germany for producing cars that Americans want to buy is only his latest display of ignorance. The presidential intellect is probably beyond repair — and two centuries out of date. The rest of us should not forget Ricardo.

Roger Lowenstein’s latest book is “America’s Bank.” This essay is adapted from a recent talk at Temple Emanuel in Newton.