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THE Global Justice Movement Website
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Wednesday, October 6, 2021

Ricardo’s Detour

      No, we’re not talking about a Cuban band leader or even someone who plays one on television, even if we do love Lucy.  What we’re talking about today is the more-than-a-little-confusing way that the economist David Ricardo explained how to have your cake and eat it, too.


In the previous posting on this subject, we looked at the differences between the labor theory of value according to Adam Smith and that of Ricardo.  Very briefly, for Smith, the value of something in the market is determined by the consumer, who weighs what it cost him to obtain in terms of his own labor what he is using to exchange for what he wants.  That is, if it cost me two hours of work to obtain the dollar I use to buy bread, I value the bread at two hours of my labor.

To Ricardo, however, a thing is valued in terms of the human labor it took to produce it . . . and human labor is the only input to production.

. . . except when it isn’t . . . such as when using land and other natural resources to produce something.

David Ricardo


Avoiding the issue of production without utility or value (i.e., economically useless goods or services), Ricardo dealt with the question of how to account for land, etc., with his infamous “detour.”  This has baffled economists and others for over two hundred years.

According to Ricardo, land is at one and the same time not a factor of production at all because it is not produced with human labor, and a cost-free factor of production because it clearly can produce without the addition of human labor.  Violating the first principle of reason (nothing can both be and not be at the same time under the same conditions), whether land is a factor of production depended on whether Ricardo was discussing his labor theory of value, or actual production of marketable goods and services.

Karl Marx


Half a century after Ricardo in Das Kapital (1867), Karl Marx attempted to resolve the issue of human labor being used to produce something that has no utility or value.  After arguing that all value derives from human labor, Marx added that “nothing can have value, without being an object of utility.  If the thing is useless, so is the labour contained in it; the labour does not count as labour, and therefore creates no value.” (Karl Marx, Das Kapital, I.1.2.)

Marx’s error is more subtle than that of Ricardo, but it still violates reason.  By raising the question of utility to the consumer, Marx shifted the discussion away from the producer and human labor, and back to the consumer — all the while claiming he was talking about the producer.

Marx thereby invalidated Ricardo’s argument that assumed labor alone gives value because labor alone produces.  Where Ricardo’s conclusion was that labor alone is productive except when it is not, Marx’s conclusion was that labor alone gives value except when it does not.  Both Ricardo and Marx separated production and consumption, nullifying Say’s Law of Markets.

John Maynard Keynes


John Maynard Keynes attempted to resolve the paradox of Ricardo’s labor theory of value (while still rejecting Say’s Law in his General Theory of Employment, Interest and Money (John Maynard Keynes, The General Theory of Employment, Interest and Money, I.3.i).  Keynes argued that producing economically useless goods and services is of immense utility because it provides people with jobs and creates demand without increasing supply.  It also allows the accumulation of savings for new capital investment . . . to create jobs.  This presumably brings an economy back into balance. (Ibid.,, IV.16.iii.)

What Keynes failed to mention is the fact that the only way non-useful production — production not intended for consumption — can be turned into money savings for investment is by putting it to use, that is, by consuming it!  That is, people must be provided with the means to purchase what they do not want or need just to ensure that the wealthy have enough money to create jobs for others.

To turn waste and surplus production into wealth to make the rich richer — concentrated wealth being a cornerstone of Keynesian theory (Cf. Keynes, The Economic Consequences of the Peace, loc. cit.) — the government must go ever-deeper into debt.  This creates demand not backed by production to stimulate consumption of production specifically created for non-consumption.

Harold Glenn Moulton


Similarly, the Great Reset diverts business income from reinvestment to consumption.  This requires that governments continue to create new money backed only with their own debt to fund new capital investment to produce wasteful goods instead of creating new demand to stimulate wasteful consumption.

The past savings assumption thereby creates a paradox.  If business profits are used for consumption, there is insufficient financing for new capital investment.  If, on the other hand, business profits are used to finance new capital investment, there is insufficient consumer demand.  In either case, governments are forced to continue creating vast amounts of money backed only with their own debt. (Moulton presented this past savings conundrum as “the Economic Dilemma”: “The dilemma may be summarily stated as follows: In order to accumulate money savings, we must decrease our expenditures for consumption; but in order to expand capital goods profitably, we must increase our expenditures for consumption.”  Harold G. Moulton, The Formation of Capital.  Washington, DC: The Brookings Institution, 1935, 28.)

As Harold Glenn Moulton implied in The Formation of Capital (1935) and Louis Kelso argued in his theory of binary economics (Robert Ashford and Rodney Shakespeare, Binary Economics: The New Paradigm.  Lanham, Maryland: University Press of America, Inc., 1999, 100-101, 275-278, 286-296.), however, by restoring Say’s Law and reconnecting production and consumption, the question of creating demand to stimulate consumption of production intended for non-consumption becomes moot.  By financing new capital investment with future savings instead of past savings, promoting waste and consumerism to turn intentional over-production into money savings becomes a non-issue.