David Ricardo · Economics
Ricardo’s startling change of mind - admitting that machines, the engines of progress, can throw workers out of jobs and hurt the labouring class.
For most of his career, Ricardo held the standard optimistic view: machinery, by making production cheaper, benefits everyone - including workers - through lower prices and a larger economy. Then, in the third edition of his Principles (1821), he did something rare and intellectually courageous: he publicly reversed himself, adding a new chapter, ‘On Machinery,’ admitting he had been wrong, and that the introduction of machines could in fact be deeply harmful to the working class. It was a startling concession from one of the architects of free-market economics.
Ricardo did not become a machine-breaker. He still believed that mechanisation increased total wealth and was, on the whole, beneficial and unstoppable - that society as a whole gained. His point was subtler and more honest: that this overall gain was compatible with real and serious harm to a particular class. The owners of capital and the consumers benefit from cheaper goods; but the workers whose specific jobs the machines replace may suffer genuine, lasting injury. Progress, Ricardo conceded, can have victims - and the comforting assumption that a rising tide automatically lifts all boats was not always true.
To understand exactly why Ricardo changed his mind - and why his machinery argument was so unsettling - you have to grasp the distinction his analysis turned on: the difference between circulating capital and fixed capital. Circulating capital is the part of a capitalist’s funds used to pay wages - the ‘wage-fund,’ the money advanced to hire workers and keep them alive while they produce, which ‘circulates’ by being paid out to workers, who spend it, and then returns to the capitalist when the product is sold. Fixed capital is the part embodied in durable means of production - machines, tools, buildings - which is ‘fixed’ in physical equipment rather than flowing through workers’ hands as wages. This distinction matters enormously for employment, because it is the circulating capital, the wage-fund, that directly employs workers; the demand for labour depends on the size of the fund available to pay wages.
Here is the heart of Ricardo’s reversal. When a capitalist decides to mechanise - to install a machine - he must pay for it, and the money comes out of his capital. Crucially, capital spent on a machine (fixed capital) is capital not available to be advanced as wages (circulating capital). So the act of converting circulating capital into fixed capital directly reduces the wage-fund, the very fund that employs workers. The machine then does the work that the wages used to pay for, so the same output is produced with fewer workers, and the displaced workers find that the demand for their labour - the fund that would have hired them - has actually shrunk. Ricardo’s earlier optimism (and the ‘compensation’ theory generally) had assumed that the gross product of the economy would always grow enough to keep the wage-fund growing too, so displaced workers would be re-absorbed. His new insight was that this need not be so: the net revenue of society (profits and rent) could rise while the gross revenue, and specifically the wage-fund, could fall - so that mechanisation could increase the wealth of capitalists and landlords while simultaneously diminishing the fund that employs labour, leaving workers worse off and ‘redundant.’ This is the precise analytical mechanism behind his famous concession, and it is a genuinely uncomfortable one for free-market optimism: it shows, on the classical economists’ own terms, that there is no automatic guarantee that the gains from labour-saving machinery will be shared with the workers it displaces - that the fund which employs them can contract even as the economy as a whole grows richer. Modern economists frame the issue differently (the wage-fund theory itself was later abandoned), but Ricardo’s underlying point survives the change of vocabulary: investment in labour-saving technology can, at least for a time, reduce the demand for labour, and the re-absorption of displaced workers is a hope, not a law.
This is the opening of the lesson. The rest — the dialogue, the primary source, and the recall — is in the app.
You learned that Ricardo reversed his view on machinery. Explain what he came to admit, and the ‘compensation’ argument he was arguing against, in your own words.
Leads to John Maynard Keynes.
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