Ricardo elaborated his concern that without such free trade, rising domestic food prices would push up the subsistence wage into a long-term pessimistic forecast: “The natural tendency of profits then is to fall; for, in the progress of society and wealth, the additional quantity of food required is obtained by the sacrifice of more and more labor” on the marginal soils. Falling profits resulting from higher prices for labor’s subsistence would bring
an end of accumulation; for no capital can then yield any profit whatever, and no additional labour can be demanded, and consequently population will have reached its highest point. Long indeed before this period the very low rate of profits will have arrested all accumulation, and almost the whole produce of the country, after paying the labourers, will be the property of the owners of land and the receivers of tithes and taxes.
In the end, Ricardo argued, landlords would obtain all the surplus income over and above the economy’s bare subsistence wages. Industrial capital formation would stop:
The farmer and manufacturer can no more live without profit, than the labourer without wages. Their motive for accumulation will diminish with every diminution of profit, and will cease altogether when their profits are so low as not to afford them an adequate compensation for their trouble, and the risk which they must necessarily encounter in employing their capital productively.
Marx called this scenario “the bourgeois ‘Twilight of the Gods’ — the Day of Judgment.” Importing lower-cost food from abroad could only postpone economic Armageddon. As the American diplomat Alexander Everett observed, Ricardo’s logic implied that diminishing returns would occur in one country after another as populations grew. Soil fertility in outlying lands ultimately would decline, forcing up food prices and hence the cost of labor, squeezing industrial profits and hence capital accumulation.
From rent deflation to debt deflation
Ricardo’s labor theory of value sought only to isolate land rent, not the payment of interest. As Parliamentary spokesman for his fellow financiers, he accused only landlords of draining income out of the economy, not creditors. So his blind spot reflects his profession and that of his banking family. (The Ricardo Brothers handled Greece’s first Independence Loan of 1824, for instance, on quite ruinous terms for Greece.)
Seeing no parallel between paying interest to bankers and paying rents to landlords, Ricardo sidestepped Adam Smith’s warning about how excise taxes levied on food and other necessities to pay bondholders on Britain’s war debt drove up the nation’s subsistence wage level. His one-sided focus on land rent diverted attention from how rising debt service — the financial analogue to land rent — increases break-even costs while leaving less income available for spending on goods and services. Treating money merely as a veil — as if debt and its carrying charges were not relevant to cost and price levels — Ricardo insisted that payment of foreign debts would be entirely recycled into purchases of the paying-nation’s exports. There was no recognition of how paying debt service put downward pressure on exchange rates or led to domestic austerity.
In Parliament, Ricardo backed a policy of monetary deflation to roll back the price of gold (and other commodities) to their prewar level in 1798. The reality is that keeping debts on the books while prices decline enhances the value of creditor claims for payment. This polarization between creditors and debtors is what happened after the Napoleonic Wars, and also after America’s Civil War, crucifying indebted farmers and the rest of the economy “on a cross of gold,” as William Jennings Bryan characterized price deflation.
The financial sector now occupies the dominant position that landlords did in times past. Debt service plays the extractive role that land rent did in Ricardo’s day. Unlike the rental income that landlords were assumed to inject into the economy for luxuries and new capital investment, creditors recycle most of their receipt of interest into new loans. This increases the debt burden without raising output or living standards.
Ricardo’s critique of rent extraction was used first to oppose tariff subsidies for Britain’s landlords, and then by “Ricardian socialists,” such as John Stuart Mill, to advocate taxing away their land rent. But rentiers have always fought back, rejecting any analysis depicting their income as imposing an unearned, parasitic overhead charge on labor and industry (not to mention leading to austerity and depression).
Today, banking has found its major market in lending to real estate and monopolies, adding financial charges to land and monopoly rent overhead. The financial counterpart to diminishing returns that raise the cost of living and doing business takes two forms. Interest rates rise to cover the growing risks of lending to debt-strapped economies. And the “magic of compound interest” extracts an exponential expansion of debt service as creditors recycle their interest income into new loans. The result is that debts grow more rapidly and inexorably than the host economy’s ability to pay.
4. The All-Devouring “Magic of Compound Interest”
That terminator is out there. It can’t be bargained with. It can’t be reasoned with. It doesn’t feel pity, or remorse, or fear. And it absolutely will not stop, ever, until you are dead.
Driven by the mathematics of compound interest — savings lent out to grow exponentially — the overgrowth of debt is at the root of today’s economic crisis. Creditors make money by leaving their savings to accrue interest, doubling and redoubling their claims on the economy. This dynamic draws more and more control over labor, land, industry and tax revenue into the hands of creditors, concentrating property ownership and government in their hands. The way societies have coped with this deepening indebtedness should be the starting point of financial theorizing.
Money is not a “factor of production.” It is a claim on the output or income that others produce. Debtors do the work, not the lenders. Before a formal market for wage labor developed in antiquity, money lending was the major way to obtain the services of bondservants who were compelled to work off the interest that was owed. Debtors’ family members were pledged to their creditors. In India, and many other parts of the world, debt peonage still persists as a way to force labor to work for their creditors.
In a similar way, getting inducing landholders into debt was the first step to pry away their subsistence lands, beaching archaic communalistic land tenure systems. In this respect creditors are like landlords, obtaining the labor of others and growing richer in the way that J. S. Mill described: “in their sleep,” without working.
The problem of debts growing faster than the economy has been acknowledged by practically every society. Religious leaders have warned that maintaining a viable economy requires keeping creditors in check. That is why early Christianity and Islam took the radical step of banning the charging of interest altogether, even for commercial loans. It is why Judaism placed the Jubilee Year’s debt cancellation at the core of Mosaic Law, based on a Babylonian practice extending back to 2000 BC, and to the Sumerian tradition in the millennium before that. Calculating how money lent out at interest doubles and redoubles was taught to scribal students in Sumer and Babylonia employed in palace and temple bookkeeping.