The Deliberate Deception in Ricardo’s Defence of Comparative Advantage

by Steve Keen[1] and Vox Day[2]

Abstract

Ricardo’s arithmetical example of the gains from trade considers only the transfer of labour between industries, and ignores the need to transfer physical capital as well. He discusses the transfer of capital in the subsequent paragraph in Principles, but uses a textual amphiboly: whereas exploiting comparative advantage involves transferring resources from one industry to another in the same country, Ricardo speaks instead of the transfer of resources “from one province to another”. The fact that this verbal deception has escaped attention for over two centuries is in itself notable. When considered in the light of subsequent discussions of capital immobility by Ricardo, this implies that the person whose model led to the allocation of existing resources becoming the foundation of economic analysis, was aware that this foundation was fallacious.

Introduction

The theory of comparative advantage is perhaps the most influential and celebrated result in economics. Challenged by a mathematician to nominate an economic concept that was both “logically true” and “non-obvious”, Samuelson nominated the theory of comparative advantage:

That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.(Samuelson 1969, pp. 1-11)

From Ricardo’s original demonstration in 1817, to modern trade theory, the conclusion has remained constant: even if one nation is more efficient at producing everything than all others, it and its trading partners will gain from specialization and trade.

However, there is an obvious flaw in the logic: while labor can hypothetically be moved between industries at will, fixed capital cannot. Ricardo’s own text contains evidence that he knew that this reality invalidated his theory, since his defense of comparative advantage relied on an amphiboly that conflates two categorically different forms of capital mobility. Remarkably, though this evidence was hiding in plain sight, it has not been noted until now.

The Amphiboly: Province Versus Industry

In Chapter VII of the Principles, Ricardo presents his famous example of England and Portugal trading cloth and wine. Portugal has an absolute advantage in both goods but a comparative advantage in wine; England has a comparative advantage in cloth. Gains to both countries result from specialization according to comparative advantage. Portugal ceases cloth production and England ceases wine production, both countries focus their resources on the industries where they have a comparative advantage, and total output of both cloth and wine rises:

England may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time. England would therefore find it her interest to import wine, and to purchase it by the exportation of cloth. To produce the wine in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England. Though she could make the cloth with the labour of 90 men, she would import it from a country where it required the labour of 100 men to produce it, because it would be advantageous to her rather to employ her capital in the production of wine, for which she would obtain more cloth from England, than she could produce by diverting a portion of her capital from the cultivation of vines to the manufacture of cloth. (Ricardo, Sraffa, and Dobb 1951, p. 135)

Ricardo next explains that international trade means that “England would give the produce of the labour of 100 men, for the produce of the labour of 80”, something which is not sensible with domestic trade. He then states that:

The difference in this respect, between a single country and many, is easily accounted for, by considering the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the activity with which it invariably passes from one province to another in the same country. (Ricardo, Sraffa, and Dobb 1951, p. 136. Emphasis added)

“Province”? Why does Ricardo give the example of moving capital between provinces here? His model involves something categorically different: to exploit comparative advantage, capital must move between industries—from cloth production to wine production.

This is not a minor distinction. Geographic mobility of financial capital means that financial resources can flow to wherever returns are highest—a bank in London can lend to a manufacturer in Yorkshire. Geographic mobility of physical capital means moving equipment by road or canal, rather than by sea and ship. But sectoral mobility of physical capital means that the physical means of production in one industry can become the physical means of production in another—that looms can become wine presses, and vice versa. These are entirely different forms of mobility—one feasible, the other impossible.

Ricardo elsewhere in the Principles demonstrates his awareness of the distinction between physical and financial capital, and the fallacy inherent in treating physical capital as if it has the fungible characteristics of financial capital. In Chapter IV, “On Natural and Market Price,” he explains how the profit rate equalizes across industries: “the clothier does not remove with his capital to the silk trade” (Ricardo, Sraffa, and Dobb 1951, p. 89). Adjustment happens through the financial system, not through physical transformation of productive equipment. Only money moves between industries, and only relative prices change; the looms and the wine presses stay where and as they are.

3. Ricardo’s Self-Contradiction: Chapter XIX

The amphiboly in Chapter VII is no mere slip of the pen: it instead conceals a conundrum about which Ricardo was clearly aware. He addresses the question of capital reallocation directly in Chapter XIX, “On Sudden Changes in the Channels of Trade,” and his conclusions flatly contradict the assumption required for comparative advantage, the costless transfer of physical capital between industries. While it is possible to shift what Ricardo called circulating capital—the resources that maintain workers—between one industry and another, it is not possible to shift fixed capital—the specialized machines that each manufacturing process needs:

In rich and powerful countries, where large capitals are invested in machinery, more distress will be experienced from a revulsion in trade, than in poorer countries where there is proportionally a much smaller amount of fixed, and a much larger amount of circulating capital, and where consequently more work is done by the labour of men. It is not so difficult to withdraw a circulating as a fixed capital, from any employment in which it may be engaged. It is often impossible to divert the machinery which may have been erected for one manufacture, to the purposes of another. It is not so difficult to withdraw a circulating as a fixed capital, from any employment in which it may be engaged. (Ricardo, Sraffa, and Dobb 1951, p. 266. Emphasis added)

This is precisely the distinction between physical and financial capital that comparative advantage assumes away. The welfare gains from trade depend on resources moving from the contracting sector to the expanding sector without loss of productive capability. But “is often impossible to divert the machinery which may have been erected for one manufacture, to the purposes of another”. Gains from the reallocation of resources do not occur—in fact, losses will result.

The internal contradiction is stark. Chapter VII assumes costless sectoral reallocation of capital—implicitly rather than explicitly in his numerical example, since it pretends that labor is the sole input to production—yet justifies the assumption using geographic rather than industrial relocation of capital. Chapter XIX acknowledges that industrial reallocation is “often impossible”, and entails substantial losses. Ricardo never reconciles these positions.

Sraffa’s Silence

Piero Sraffa’s edition of The Works and Correspondence of David Ricardo (11 volumes, 1951–1973) represents the most meticulous editorial project in the history of economic thought. Sraffa spent over two decades locating manuscripts, establishing definitive texts, tracing the evolution of Ricardo’s ideas through successive editions and correspondence, and providing extensive annotations. His Introduction to Volume I remains the authoritative account of the composition of the Principles.

Sraffa’s own theoretical work, culminating in Production of Commodities by Means of Commodities (Sraffa 1960), mounted a devastating critique of neoclassical capital theory. Sraffa demonstrated that capital cannot be measured independently of the distribution of income—that the same physical equipment has different “values” depending on the wage-profit distribution, and time. This critique, which became known as “The Cambridge Controversies” (Harcourt 1972) directly concerned the heterogeneity of capital goods and the impossibility of treating “capital” as a homogeneous, freely mobile factor. Samuelson ultimately conceded defeat in this debate:

Pathology illuminates healthy physiology. Pasinetti, Morishima, Bruno-Burmeister-Sheshinski, Garegnani merit our gratitude for demonstrating that reswitching is a logical possibility in any technology, indecomposable or decomposable… There often turns out to be no unambiguous way of characterizing different processes as more “capital-intensive,” more “mechanized,” more “roundabout,” except in the ex post tautological sense… If all this causes headaches for those nostalgic for the old time parables of neoclassical writing, we must remind ourselves that scholars are not born to live an easy existence. We must respect, and appraise, the facts of life. (Samuelson 1966, pp. 582-83)

Given this background, Sraffa would seem ideally positioned to notice Ricardo’s equivocation between geographic and sectoral capital mobility. Yet his editorial apparatus is silent on the matter (Ricardo, Sraffa, and Dobb 1951, pp. xvii-xviii). Sraffa’s commentary on the Principles contains no note on the Chapter VII/XIX contradiction. The “province to another” passage (p. 136) receives extensive annotation regarding Ricardo’s views on international factor mobility, but no comment is made on the geographic-versus-sectoral confusion.

This silence indicates that Ricardo’s amphiboly was genuinely effective: even a meticulous and critical reader, immersed in Ricardo’s text for decades, apparently failed to notice that Ricardo’s case for domestic factor mobility describes something other than what his model requires.

On the key passage at page 136, Sraffa provides only one footnote: “Cp. A. Smith’s taylor and shoemaker, Bk. iv, ch. ii; vol. 1, p. 422.” This is a cross-reference to Adam Smith’s analogous example of comparative advantage between two individuals. It says nothing about the substitution of “province” for “industry”, or the implicit assumption that physical capital can transmute between industries.

In his Introduction, Sraffa identifies three main propositions in the Foreign Trade chapter, drawing on James Mill’s summary of Ricardo’s manuscript: “(a) that Foreign Trade does not add to value, below, p. 128 to p. 133 (second paragraph); (b) the theory of comparative costs, below, p. 133 to p. 137 (first paragraph); (c) the redistribution of the precious metals following a change of skill in one country, below, p. 137 to p. 141.” He offers no commentary on the false assumption of the transmutation of physical capital that underlies proposition (b) (Ricardo, Sraffa, and Dobb 1951, pp. xvii-xviii).

The correspondence volumes (VI–IX) contain Ricardo’s exchanges with James Mill, Malthus, McCulloch, and others during the period when he developed the comparative advantage argument. Nowhere does Ricardo clarify what he means by domestic capital mobility. Nowhere does any correspondent press him on the distinction between geographic and sectoral movement of capital. The assumption passes without examination.

Two interpretations present themselves. First, Sraffa may have noticed the problem, but chosen not to comment on it. The editorial role conventionally focuses on textual matters—manuscript variants, sources, cross-references—rather than theoretical critique. Second, Sraffa may have genuinely missed the equivocation, despite his decades of immersion in Ricardo’s texts, and his own sophisticated understanding of capital heterogeneity. The fact that Sraffa wrote a detailed critique of James Mill’s assertions about Ricardo’s numerical calculations—in which he absolved Ricardo of fault (Sraffa and Einaudi 1930) —but he made no mention of this obvious amphiboly anywhere in his writings, makes us lean towards this second interpretation.[3]

Either interpretation strengthens our argument. If Sraffa saw the problem and did not note it, this tells us something about how foundational critiques can get buried—even the most careful scholars may pass over difficulties in canonical texts. If Sraffa missed it entirely, this demonstrates the effectiveness of Ricardo’s amphiboly.[4] The slide from “province” to “industry” is invisible, precisely because it appears innocuous. Geographic mobility is so obviously true that readers accept it as evidence for sectoral mobility, without it registering in their minds that the two phenomena are categorically different.

Ricardo’s Reasons

With no textual evidence to guide us, we are forced to speculate about the motivations behind Ricardo’s amphiboly. He surely considered using the correct word “industry” in this pivotal sentence, in which case he would have written:

The difference in this respect, between a single country and many, is easily accounted for, by considering the difficulty with which capital moves from one country to another, to seek a more profitable employment, and the activity with which it invariably passes from one industry to another in the same country.

Why did he not? We surmise that it is because the obvious absurdity of this argument would have immediately undermined the polemical case he wished to make against the Corn Laws.

Here, Schumpeter’s critical attitude to Ricardo provides a clue. “Ricardo’s was not the mind that is primarily interested in either fundamentals or wide generalizations”, Schumpeter asserted:

The comprehensive vision of the universal interdependence of all the elements of the economic system that haunted Thunen probably never cost Ricardo as much as an hour’s sleep. His interest was in the clear-cut result of direct, practical significance. In order to get this he cut that general system to pieces, bundled up as large parts of it as possible, and put them in cold storage—so that as many things as possible should be frozen and ‘given.’ He then piled one simplifying assumption upon another until, having really settled everything by these assumptions, he was left with only a few aggregative variables between which, given these assumptions, he set up simple one-way relations so that, in the end, the desired results emerged almost as tautologies… The habit of applying results of this character to the solution of practical problems we shall call the Ricardian Vice. (Schumpeter 1954, pp. 472-73)

Shorn of any concession to the fact that production required machinery as well as labour, Ricardo’s example reached the rhetorical conclusion he desired, that the Corn Laws should be abolished. This abolition would reduce the revenue flowing to landlords and increase the flow towards capitalists. Ricardo elsewhere made it obvious that this was his real motivation in calling for the abolition of the Corn Laws—and arguably, for coming up with his seminal numerical example in the first place.

He asserted that only landlords benefited from the high price of corn, while the other major social classes—workers and capitalists—suffered:

the interest of the landlord is always opposed to that of the consumer and manufacturer. Corn can be permanently at an advanced price, only because additional labour is necessary to produce it; because its cost of production is increased. The same cause invariably raises rent, it is therefore for the interest of the landlord that the cost attending the production of corn should be increased. This, however, is not the interest of the consumer… Neither is it the interest of the manufacturer that corn should be at a high price, for the high price of corn will occasion high wages, but will not raise the price of his commodity… All classes, therefore, except the landlords, will be injured by the increase in the price of corn. The dealings between the landlord and the public are not like dealings in trade, whereby both the seller and buyer may equally be said to gain, but the loss is wholly on one side, and the gain wholly on the other; and if corn could by importation be procured cheaper, the loss in consequence of not importing is far greater on one side, than the gain is on the other. (Ricardo, Sraffa, and Dobb 1951, pp. 335-336)

Therefore, if the price of corn can be reduced by abolishing the Corn Laws, it will be the landlords who suffer. Workers come out even, because they must be paid the means of subsistence, while capitalists will benefit from an increase in the rate of profit:

It has been my endeavour to shew throughout this work, that the rate of profits can never be increased but by a fall in wages, and that there can be no permanent fall of wages but in consequence of a fall of the necessaries on which wages are expended. If, therefore, by the extension of foreign trade, or by improvements in machinery, the food and necessaries of the labourer can be brought to market at a reduced price, profit will rise. (Ricardo, Sraffa, and Dobb 1951, Vol I, p. 132)

This increase in profit will then cause an increase in the accumulation of capital, and hence an increase in output:

It has been my endeavour to shew in this work, that a fall of wages would have no other effect than to raise profits. Every rise of profits is favourable to the accumulation of capital… (Ricardo, Sraffa, and Dobb 1951, p. 411)

Given the desirable income-distributional and economic growth outcomes from his numerical argument in favor of free trade, why then risk exposing the flaw in the argument by highlighting the practical reality, acknowledged elsewhere in Principles, that production of specific commodities requires specific machines which cannot be repurposed?

We surmise that Ricardo decided to use a realistic but irrelevant example, of moving capital from one province to another, in the hope that no-one would notice the subterfuge, and that therefore his overarching income-distributional goal would be achieved.

Politically, it appears that this income-distributional argument, and not the efficiency argument of comparative advantage, is why the Corn Laws were ultimately abolished. As Irwin explains, Prime Minister Robert Peel’s conversion from the pro to the anti Corn Laws position was critical in their repeal:

Peel emerges as the key figure in repeal, not only for possessing the flexibility to change his opinions and the political courage to propose repeal against the tide of his party, but for having enlisted a sizable group of Tories to bring his new policy to fruition. While Tories voted 308-1 against a motion to consider repeal in 1844, two years later in the same parliament 114 Tories endorsed repeal. One of every three Tory MPs followed Peel in ending the Corn Laws. (Irwin 1989, pp. 42-43).

The key factor in Peel’s conversion was not Ricardo’s efficiency argument, but the income distributional one:

“I consider the statement that the condition of the labourer has been rendered worse by the operation of the Corn-law, a most important one, and I have no hesitation in saying, that unless the existence of the Corn-law can be shown to be consistent, not only with the prosperity of agriculture . . . but also with . . . the maintenance of the general interests of the country, and especially with the improvement of the condition of the labouring class, the Corn-law is practically at an end.” (Irwin 1989, p. 46. Quoting Peel in a speech to Parliament)

Ricardo’s subterfuge therefore did indeed succeed, and went unnoticed for over 200 years.

Allocation Versus Investment

The amphiboly identified here is not merely of historical interest: its consequences for the logical foundations of economics were both profound and utterly deleterious.

Rather than analyzing the process by which new productive capabilities are created by investment, economics has instead developed by extending Ricardo’s example of the reallocation of existing resources, on the false assumption that they can be moved between industries without loss of productive capacity. The conflation of fungible financial capital with immobile physical capital became embedded in the accepted definition of economics itself.

Economics textbooks teach students that economics is “the study of how society manages its scarce resources” (Mankiw 2009, p. 4), “the study of how societies use scarce resources to produce valuable goods and services and distribute them among different individuals” (Samuelson and Nordhaus 2010, p. 4). This paraphrasing of Lionel Robbins’ canonical formulation leaves out one critical qualification which is related to Ricardo’s amphiboly. Robbins’s actual definition was:

Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses. (Robbins 1935, p. 15. Emphasis added)

Hammers, nails, and computers, have alternative uses; they can be costlessly moved from one industry to another. But the critical machines that make each industry possible do not have “alternative uses”; a wine press cannot be used to make cloth; a loom cannot be used to make wine. There is no “alternative use” for a blast furnace, or a semiconductor plant. If economics were in fact restricted according to Robbins’s full definition, then it would be a discipline of vanishingly small relevance.

Remarkably, Robbins himself acknowledged the problem. In a footnote to the same essay, he observed that:

it is only when contemplating the conditions of isolated man that the importance of the alternative applicability of scarce means... leaps clearly to the eye. In a social economy of any kind, the mere multiplicity of economic subjects leads one to overlook the possibility of the existence of scarce goods with no alternative uses.” (Robbins 1935, p. 20. Note 2)

The “alternative uses” condition that makes comparative advantage possible is precisely what Robbins concedes economists systematically “overlook”. This has become embedded in the foundations of economic theory by the casual omission of Robbins’s qualifying condition. The false assumption that scarce means are fungible across uses has become the discipline’s foundational self-deception.

Consequences for Trade Theory

Ricardo’s undefended assumption persists in contemporary trade theory, though often in a mathematically complicated disguise. The Heckscher-Ohlin model (Heckscher et al. 1991), which became the dominant framework for trade theory in the twentieth century, assumes that factors of production (capital and labor) are perfectly mobile between industries within a country but perfectly immobile between countries. The assumption is stated explicitly—but never defended.

The Heckscher-Ohlin model, the Stolper-Samuelson theorem, and computable general equilibrium models of trade all inherit the assumption of mutable physical machinery. When economists advise developing nations to liberalize trade, they are implicitly assuming that factors displaced from import-competing sectors will find employment in domestic or export sectors. The extensive literature on “adjustment costs” treats “frictions” as a deviation from the benchmark, when in fact, immobility between industries, far more so than mere “friction”, is the normal condition.

The empirical record confirms that Ricardo’s Chapter XIX is closer to reality than his Chapter VII. Autor, Dorn, and Hanson document persistent, localized unemployment following the “China shock”—exactly what Ricardo predicted would occur when “the channels of trade” change suddenly (Autor, Dorn, and Hanson 2013). Capital does not flow smoothly from declining industries to expanding ones; it is “wholly lost.” Workers whose skills pertain to specific capital equipment do not retrain and relocate; more commonly, they exit the labor force, or are “dumbed down” to the level of unskilled workers in another industry.

This is not to say that trade has no benefits, but that the confident assertion of mutual gains from a simple model conceals an empirical question that the model cannot answer. Whether the gains from specialization exceed the losses from stranded capital and displaced labor is a matter for investigation, not assumption.

Standard textbook presentations treat factor mobility as a simplifying assumption, analogous to the assumption of perfect competition or full information. But unlike those assumptions, which can be relaxed to generate more realistic models, the assumption of perfect sectoral capital mobility is essential to the welfare conclusions of trade theory. Without it, the demonstration that free trade benefits all nations collapses.

Consider what perfect sectoral mobility implies. When trade opens between two countries and comparative advantage dictates that Country A should specialize in good X while Country B specializes in good Y, the theory requires:

• Capital currently employed in Country A’s Y-industry must costlessly transform into X-industry capital

• Capital currently employed in Country B’s X-industry must costlessly transform into Y-industry capital

• This transformation must occur without loss of value, employment, or productive capacity

In reality, none of these conditions obtain. A textile mill cannot become a semiconductor fabrication facility. An automobile assembly plant cannot become a pharmaceutical laboratory. The skills of textile workers do not transfer to chip manufacturing. The transformation that comparative advantage requires is not merely costly, it is impossible—exactly as Ricardo himself acknowledged in Chapter XIX.

Some trade models do incorporate adjustment costs. The “specific factors” model allows for short-run factor immobility while assuming long-run mobility. But “long-run” in these models means “after all adjustment has occurred”—a tautology that provides no guidance about how long adjustment takes or whether the losses during adjustment outweigh the eventual gains.

More fundamentally, these models continue to assume that adjustment will eventually occur—that displaced capital and labor will find new employment in the expanding sector. This assumption lacks both theoretical foundation and empirical support. The experience of deindustrialized regions suggests that capital destruction is often permanent: factories close and are never replaced; skills atrophy and are never redeployed; communities decline and do not recover.

Policy Implications

The undefended assumption of sectoral capital mobility has underwritten two centuries of trade policy. If the assumption fails, so do the welfare conclusions derived from it. We identify three further domains where this failure has significant negative consequences.

Structural Adjustment

International Monetary Fund and World Bank structural adjustment programs have routinely required developing countries to liberalize trade on the assumption that resources will reallocate to sectors of comparative advantage. The theory predicts that removing protection from inefficient industries will release capital and labor for more productive employment elsewhere in the economy.

The historical record shows otherwise. Trade liberalization has frequently destroyed domestic industry without generating comparable employment in export sectors. The capital embodied in protected industries—factories, equipment, worker skills—does not transform into export-sector capital. It is simply lost. The pattern Ricardo described in Chapter XIX, of “considerable distress,” “fixed capital unemployed, perhaps wholly lost” has repeated across Latin America, Africa, and Asia—though Asian countries have also featured notably amongst those countries who have benefited from trade by deviating from the trade liberalization mantra (Rodriguez et al. 2001; Klein and Pettis 2020; Lane 2025; Hausmann et al. 2023).

Deindustrialization

The deindustrialization of advanced economies presents the same pattern in different form. Trade theory predicted that workers displaced from manufacturing would find employment in expanding service sectors, with overall welfare gains. The assumption was that labor (and the human capital it embodies) would reallocate across sectors.

Empirical research has documented persistent negative effects on workers and communities exposed to import competition. The “China shock” literature finds that regions experiencing manufacturing job losses did not see offsetting employment gains elsewhere (Autor, Dorn, and Hanson 2013). Workers did not move to thriving regions; they remained in declining communities with reduced earnings and elevated rates of disability, mortality, and social dysfunction.

These outcomes would be inexplicable if capital (including human capital) were sectorally mobile. They are predictable because Ricardo’s Chapter XIX description is correct: adjustment is costly, protracted, and incomplete.

Development Strategy

Comparative advantage theory implies that developing countries should specialize in whatever they currently produce most efficiently—typically primary commodities or labor-intensive manufactures. The theory explicitly counsels against industrial policy that attempts to develop new sectors.

Yet the historical record of successful development shows the opposite pattern. Every country that has industrialized—Britain, the United States, Germany, Japan, South Korea, China—did so behind protective barriers that allowed infant industries to develop. These countries did not follow their static comparative advantage; they created new industrial advantages through deliberate policy.

The success of industrial policy makes sense once we recognize that capital is not sectorally mobile. A country that specializes in primary commodities cannot smoothly transition to manufacturing because the capital required for manufacturing does not exist and cannot be conjured from agricultural capital. Development requires the deliberate construction of new productive capacity—precisely what comparative advantage theory, with its assumption of costless factor reallocation, renders invisible.

Conclusion

The risibly false assumption that physical capital is fungible is the Original Sin of Economics—and remarkably, the two original sinners, Ricardo and Robbins, knew they were sinning. It is their followers who have blindly followed a false assumption—a domain assumption, to use Musgrave’s definition, which determines the realm of applicability of a theory (Musgrave 1981), but which, if challenged, they pretend is merely a simplifying one. Only on a planet where magic ruled could machinery be costlessly transferred between different industries.

The phrase “the activity with which [capital] invariably passes from one province to another” shows that Ricardo knew this assumption was both necessary for his argument, and obviously false, as he later asserted. We believe that he knew his argument was false, but he used it for polemic rather than logical reasons. The failure of Piero Sraffa to perceive Ricardo’s deception, despite his decades of work on Ricardo’s texts and his own sophisticated understanding of capital heterogeneity, shows how effective Ricardo’s deception was.

Modern trade theory inherits Ricardo’s undefended assumption. The welfare conclusions of the Heckscher-Ohlin model, the gains-from-trade theorems, the case for free trade—all depend on capital being able to costlessly transform between industries. When this assumption fails, as it does in reality, the conclusions do not follow. Trade liberalization may destroy capital without creating new productive capacity. Specialization according to static comparative advantage may lock countries into low-productivity activities. The mutual gains that theory promises may accrue entirely to one party while the other experiences permanent loss.

This does not mean that trade is always harmful or that autarky is optimal. It means that the presumption in favor of free trade—the claim that liberalization benefits all parties—lacks the theoretical foundation that economists have historically claimed for it. Policy must be made on the basis of empirical assessment of actual costs and benefits, not on the basis of a theorem whose key assumption is known to be false.

The definition of economics developed by Robbins as an extension of Ricardo’s reallocative model must also be abandoned. If economics is to be generally applicable, then it cannot be “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”. It should instead be “the science which studies human behaviour as a relationship between ends and scarce means which do not have alternative uses”.

References

Autor, David H., David Dorn, and Gordon H. Hanson. 2013. ‘The China Syndrome: Local Labor Market Effects of Import Competition in the United States’, The American Economic Review, 103: 2121–68.

Harcourt, G. C. 1972. Some Cambridge Controversies in the Theory of Capital (Cambridge University Press: Cambridge).

Hausmann, Ricardo, César A. Hidalgo, Sebastián Bustos, Michele Coscia, Sarah Chung, Juan Jimenez, Alexander Simoes, and Muhammed A. Yıldırım. 2023. The Atlas of Economic Complexity: Mapping Paths to Prosperity (The MIT Press: Harvard).

Heckscher, Eli F., Bertil Ohlin, Henry Flam, and M. June Flanders. 1991. Heckscher-Ohlin trade theory / Eli F. Heckscher and Bertil Ohlin ; translated, edited, and introduced by Harry Flam and M. June Flanders (MIT Press: Cambridge, Mass. ;).

Irwin, Douglas A. 1989. ‘Political Economy and Peel’s Repeal of the Corn Laws’, Economics & Politics, 1: 41–59.

Klein, Matthew C., and Michael Pettis. 2020. Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace (Yale University Press: Yale).

Lane, Nathan. 2025. ‘Manufacturing Revolutions: Industrial Policy and Industrialization in South Korea*’, The Quarterly Journal of Economics.

Mankiw, N. Gregory. 2009. Principles of Microeconomics (South-Western College Publishers: Mason, OH).

Musgrave, Alan. 1981. ‘‘Unreal Assumptions’ in Economic Theory: The F‐Twist Untwisted’, Kyklos (Basel), 34: 377–87.

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Rodriguez, Francisco, Dani Rodrik, Ben S. Bernanke, and Kenneth Rogoff. 2001. ‘Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence.’ in, NBER macroeconomics annual 2000 (Volume 15. Cambridge and London: MIT Press).

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———. 1969. International economic relations : proceedings of the Third Congress of the International Economic Association [held in Montreal, 2-7 Sept. 1968] / edited by Paul A. Samuelson (Macmillan: London).

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[1] Distinguished Research Fellow, University College London, and Visiting Scholar, University of Amsterdam

[2] Independent scholar and Principal of Castalia House

[3] Sraffa writes that “Professor Einaudi has raised an interesting question in his note on “James Pennington or James Mill: An Early Correction of Ricardo,” … In the present note are offered, as an answer to his question, the results of a comparison of the relevant texts, some of which were not accessible to Professor Einaudi. The conclusion reached is somewhat surprising, for it appears that Ricardo did not commit the error, and that neither Pennington nor James Mill corrected it first… Thus the account given by J. S. Mill in the Essay of 1844, according to which James Mill made the correction but not the error, must be exactly reversed.” (Sraffa and Einaudi 1930, pp. 539-44)

[4] Einaudi himself notes the problem, which he calls “the usual trap”: “In transmitting the above note by Professor Piero Sraffa, I beg leave to plead guilty to having fallen into the usual trap, from which I would earnestly warn all students, that of believing in quotations made by big men. In the present case, the big man, who made the bad interpretation, was John Stuart Mill.” (Sraffa and Einaudi 1930, p. 544). Sraffa evidently made the same mistake himself with Ricardo.