In Ricardo’s Dream, Nat Dyer examines the teachings of English economist David Ricardo (1772-1823), credited with introducing abstract models into the discipline. Dyer interrogates the assumptions of classical and neoclassical economics, influenced by Ricardo, and argues that an over-reliance on modelling has done more harm than good. According to Ivan Radanović, this book is essential reading for understanding the thinking that shapes our economies today.
Ricardo’s Dream: How Economists Forgot the Real World and Led Us Astray. Nat Dyer. Bristol University Press. 2024.
“Economics is too important to be left to economists”, said the 2019 winners of the Nobel prize in economics, Esther Duflo and Abhijit Banerjee. With this claim, they pointed to the dangers of understanding and making decisions about economic life from economists’ narrow perspective, and why trust in economics has eroded in the last several decades. For the past two centuries economists have relied too heavily on economic models to explain reality and manage policies. The problem is that models are inadequate for this, since they are abstractions and blind to key aspects of reality.
Dyer’s new book takes as its central figure David Ricardo (1772-1823), an English stockbroker who introduced the study of abstract models to economics. This was, according to the author, one of Ricardo’s two main contributions to mainstream economics. The second is his theory of comparative advantages as part of international economics.
Models as spotlights
Dyer’s book is about both. To explain the importance of models, he uses the delightful analogy of theatre spotlights. When pointed at the main action, they helpfully sharpen our understanding, but also plunge the rest of the scene into darkness. If they are pointed away from the essential elements, those who want to see more are distracted and confused. Sometimes, spotlights are intentionally used so that the audience doesn’t notice things being moved around elsewhere on stage. “Who directs the beam is important”, Dyer writes.
The same happens in economics. Theoretical models are essential when used in the right context. But when they are misused – or trusted too much – they make us blunder. The author’s argument is that some of the most consequential economic models in history have failed to focus the spotlight on what and where matter most. In that way, they have been “weapons of mass distraction” (10) from which certain individuals or groups benefit.
Neither economics nor politics alone can provide a complete understanding of global events.
The model’s journey to pre-eminence
The book has three parts. The first investigates David Ricardo’s life and influence with a focus on his theory of comparative advantage. It is often illustrated with the trade between England and Portugal, where both countries benefit by exchanging cloth and wine. But, as Dyer explains in this section, this definitive example is a façade, which hides some important details; namely that Portugal was defacto an English colony. The broader history of power, slavery and exploitation remains in darkness, which leads to the author’s argument that neither economics nor politics alone can provide a complete understanding of global events.
The second part covers classical political economy, greatly influenced by Ricardo. The early 1800s when England’s industrial revolution was in full swing were years of raw capitalism, without the slightest scruple towards the poor. Ricardo’s contribution was not only in his influence in the reppealing of the Corn Laws in 1846, but also in demanding the abolition of regulations helping the poor. The only way to help the “productive” classes, which for him were – as Mariana Mazzucato has shown – industrial capitalists – was to lower input costs. In his model, the only adjustable variable were the wages of already poor workers.
Dyer reveals the link between Ricardo’s approach and his experience as a stockbroker, from which he (and not Adam Smith) derived the concept of the homo economicus or self-interested ‘economic man’.
In the mid-1800s, Ricardo’s method was questioned by his contemporaries, such as Wesley Clair Mitchell who called his view of non-capitalist societies “deceptive”, or Jean-Baptiste Say who considered Ricardo to be “overgeneralizing his premises”. Even his closest friend, Thomas R. Malthus, could not agree with him. Consequently, economic research turned to principles that respect historical data and true realism of assumptions.
One of Ricardo’s greatest defenders was John Stuart Mill (1806-1873), whose father, James Mill persuaded Ricardo to become a member of parliament and to write his most influential work – On the Principles of Political Economy and Taxation (1817). Here, Dyer reveals the link between Ricardo’s approach and his experience as a stockbroker, from which he (and not Adam Smith) derived the concept of the homo economicus or self-interested “economic man”.
When, by the late 19th century, Ricardo’s theory was under attack from all sides, professor Alfred Marshall (1842-1924) integrated Ricardo’s teachings into what was later called the “marginalist revolution”. In his influential textbook – although based on the new, subjective theory of value – he managed to integrate Ricardian economics into the new marginalists’ theory. As J. S. Mill before him, Marshall “kept Ricardo’s flag flying from a more defendable position” (141).
From the 1950s, Friedman fought against criticism of classical economics, arguing that the only criterion on which economic theories should be judged is the quality of their prediction, not their assumptions.
Although economic realities of the period between the 1930s and 1950s shook the Marshallian tradition, including criticisms from John Maynard Keynes and Joseph Schumpeter, its position was strenghtened by Paul Samuelson (1915-2009), who intended to solidify the mathematical foundations of economics. Calling himself Keynesian without really being so, he wanted to make economics more mathematical – and more Ricardian.
In the book’s third part, Dyer describes the context of modelling in economic science and its impact on the real world from the 1960s onwards. This was when the term “model” was transferred from physics by a Dutch mathematical economist Jan Tinbergen. These economists wanted more quantification, criticising earlier economics as a “measurement without theory” and gained mainstream influence: both Tinbergen (1969) and Samuelson (1970) were awarded a Nobel prize in economics.
The power of unreality
Samuelson updated Ricardo’s trade theory for the 20th century. Building on work by two Swedish economists – Eli Heckscher and Bertil Ohlin – he created a two-country, two-product model. In comparison to Ricardo’s Anglo-Portugese model, Samuelson’s innovation was to introduce capital as a second factor. Even though Wassily Leontief later concluded that this new Heckscher-Ohlin-Samuelson (HOS) model is incorrect (157), few economists abandoned it. Abstract economics was again becoming irresistible.
Its full affirmation was led by Chicago School of Economics, which denounced Keynesianism for being unable to solve persistent economic issues in the 1970s. Milton Friedman (1912-2006) was an iconic member of this right-wing stream which smashed the idea that assumptions had to be grounded in reality. From the 1950s, Friedman fought against criticism of classical economics, arguing that the only criterion on which economic theories should be judged is the quality of their prediction, not their assumptions. Economists were thereby given licence to develop models on assumptions wildly disconnected from reality. This coincided with the advent of neoliberalism in the 1980s and so-called New classical economics under the influence of Nobel laureate Robert Lucas, which provided a broadly shared methodology for both right-wing and centre-left economists.
The final chapters focus on the past 40 years when this methodology had its greatest popularity and impact. The author explores how abstract financial economics – which surged with the influential work of Eugene Fama – led to a boom in risky derivatives trading, despite being socially destructive. Dyer also shows how the intellectual consensus around the benefits of free trade – strongly promoted by another Nobel laureate, Paul Krugman – was hijacked in support of imperialist appropriation in the world economy.
Too many economists led us astray by forsaking the real world – always for the sake of capital.
Although economists (including Leontief) warned of the potential inaccuracy of the mainstream theory of international trade, it was adopted by key international organisations, such as the World Bank. In this way, former colonies and post-socialist countries followed recommendations for fierce trade liberalisation and specialisation in the export of low-value-added goods. This locked most of these countries into a permanently subordinate position, with the countries of the Global North as eternal teachers on a never-ending path of “economic development”.
Perhaps the most critical takeaway from this book is how influential economists such as William Nordhaus oversimplified their analysis of climate change and therefore underestimated its impacts. As Dyer writes, there were plenty of “financial models with no crashes, global trade models with no state power within, anti-monopoly models with no corporate power, and even climate models with no climate” (252). Too many economists led us astray by forsaking the real world – always for the sake of capital.
Yet Dyer’s book is optimistic. He devotes the last paragraphs to the potential normalisation of academic economics. The pivotal moment came in 2014, with Thomas Piketty’s Capital in the Twenty-First Century. After him, other scholars challenged the economic mainstream and the concentrated economic and political power it was justifying. “What, concretely, can we do differently?”, Dyer asks. The first task is to see the important issues – from inequalities to the climate emergency – in their multifaceted complexity, and to ask better questions about how we can address them. To that end, this book is, indisputably, an essential read.
Note: This review gives the views of the author, not the position of the LSE Review of Books blog, or of the London School of Economics and Political Science.
Main image credit: Portrait of David Ricardo by Thomas Phillips; print made by Thomas Hodgetts © The Trustees of the British Museum. License: CC BY-NC-SA 4.0
Print made by: Thomas Hodgetts after: Thomas Phillips © The Trustees of the British Museum. License: CC BY-NC-SA 4.0
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