Robert Torrens’ model of trade and growth: genesis and implications for the discovery of comparative advantage

Abstract

This paper analyzes the evolution of Torrens’ trade theory from 1808 to 1826. Firstly, it shows that Torrens’ reflections on trade evolved considerably by comparing The Economists Refuted and the Essay on the Production of Wealth. Secondly, it offers an explanation of how and why this evolution took place by scrutinising the different editions of the Essay on the External Corn Trade. Thirdly, Torrens’ model of trade and growth is presented. Finally, by identifying the assumptions underlying the model, it is argued that, in the early 1820s, Torrens still adheres to the absolute advantage theory.

Keywords:

• Torrens
• Ricardo
• gains from trade
• comparative advantage
• absolute advantage

CLASSIFICATION CODES:

• B12
• B31
• F1

Disclosure statement

No potential conflict of interest was reported by the author(s).

Acknowledgements

I wish to thank Olivier Rossell, Carlo Benetti, Antoine Rebeyrol, André Lapidus, Michel Zouboulakis and two anonymous referees for their comments on earlier versions of this article. Obviously, I remain solely responsible for any errors the text may contain.

Notes

1 What various authors (Findlay 1984; Maneschi 1983, 1992; Gehrke 2015) stressed with respect to Ricardo’s model of trade and growth, applies also, and for the same reasons, to Torrens’ 1820 model of trade and growth—namely that a “proper reconstruction of the modelling assumptions underlying his argument (…) must, besides wages and labour, also comprise profits and capital” (Gehrke 2015, 795).

2 That Adam Smith hold the absolute advantage theory of trade was a general consensus among historians of international trade theory during the nineteenth and twentieth centuries. Only very recently, some authors argued that Smith was not a proponent of the absolute advantage theory, but rather anticipated the principle of comparative advantage (Magnusson 2004; Hont 2005; Ruffin 2005; Rassekh 2015). The supposed textual evidence upon which this revisionist interpretation of Smith’s trade theory is based consists of a single passage in the Wealth of Nations on trade between poor and rich countries (Smith 1776, 16). However, the problem with the interpretation of this passage as an anticipation of the doctrine of comparative advantage is that it is not capable to explain the entire passage, including Smith’s qualifications (“the corn of the rich country, therefore, will not always, (…) come cheaper to market than that of the poor”; “the poor country, notwithstanding the inferiority of its cultivation, can, in some measure, rival the rich in the cheapness and goodness of its corn” (ibid., my emphasis).

3 The terms “static” and “dynamic” are used here (as for instance in Maneschi 1983, 1992, 2004 and Ho 1996) for the unique purpose of distinguishing the effect of specialization and trade on per-capita net products (“wealth”) from the effect of specialization and trade on profit and growth rates; i.e., for the purpose of distinguishing different theoretical objects, and not different methods (the method used by Torrens for analyzing both the “static” and the “dynamic” gains from trade is always the method of comparative statics).

4 This argument is already present in his 1808 publication, namely in the Appendix on the Policy of Prohibiting Corn in the Distilleries, cf. Torrens 1808, 63–64.

5 In order to understand why for Torrens’ overall argument it was important to show that free trade lowers all component parts of natural price, including the rate of profits, consider the following passage in Smith’s Wealth of Nations which Torrens almost certainly had in mind: “In countries which are fast advancing to riches, the low rate of profit may, in the price of many commodities, compensate the high wages of labour, and enable those countries to sell as cheap as their less thriving neighbours, among whom the wages of labour may be lower. […] Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits” (Smith 1776, 114–115).

6 Cf. also Torrens (1815), 302: “Now, from all the principles unfolded throughout this work, it follows as a necessary conclusion, that an unfettered commerce in corn would (…) in every employment, lower natural price; or, in other words, raise the productive powers of industry. This would increase wealth and capital, and diminish the rate of interest and of profit.” For an interesting and much more favourable interpretation of the first edition of Torrens’ essay as a generalization of Smith’s analysis of international-trade induced structural change cf. Freni, Salvadori and Signorino (2019), 942–947.

7 Cf. also Ricardo’s letter to Malthus (dated 17 April 1815): “You, I think, agree with Mr. Torrens that a rise in the price of corn will be followed by a rise in the price of home commodities (…). Mr. Torrens theory however on this part of the subject appears to me defective” (Ricardo 1951–73, vol. VI, 212–213).

8 See, in particular, the note on page 30, referring the reader to “a very able and original publication on the Profits of Stock, by D. Ricardo” (Torrens 1816, 30).

9 Already in may 1816 Torrens apparently planned a new publication, as can be inferred from Ricardo’s letter to Mathus (dated 28 May 1816): “Major Torrens tells me that he shall work hard for the next few months, so that we may expect a book on the same subject from him next year” (Ricardo 1951–73, vol. VII, 35). Cf. also Ricardo’s letter to Trower (dated 23 August 1817): “There were so[me things] in his [Torrens’] bo[ok about] which I pointedly differed from him but refrained from [noticing] them because I knew he was sensible they were wrong, and had adopted, and was going soon to publish, more correct views to the public” (Ricardo 1951–73, vol. VII, 180).

10 It is precisely this chapter that deals with the dynamic gains from trade which, as was stressed above, are at the center of the section on trade in the Production of Wealth.

11 For insertions, cf. Torrens (1820a, 324, lines 16–18) and Torrens (1826, 383, lines 8–10); Torrens (1820a, 325, lines 12–15) and Torrens (1826, 384, lines 5–9); Torrens (1820a, 328, lines 17–20) and Torrens (1826, 387, lines 19–23); Torrens (1820a, 327, lines 13–15) and Torrens (1826, 386, lines 7–10); Torrens (1820a, 328, lines 7–8) and Torrens (1826, 387, lines 8–10). For deletions, cf. Torrens (1820a, 328, line 20–329, line 6) and Torrens (1826, 387, line 23–388, line 5); Torrens (1820a, 327, lines 19–22) and Torrens (1826, 386, lines 13–15).

12 Cf. Findlay (1984), 186: “One topic (…) that was almost entirely absent from the formal literature [on the pure theory of international trade between Ricardo and Viner (1937)] was any consideration of the connection between economic growth and development and international trade (…). It is a strange irony, however, that Ricardo himself had constructed an implicit dynamic model of growth and trade, linked by the distribution of income, in his Essay on the Influence of a Low Price of Corn Upon the Profits of Stock. His interest in the repeal of the Corn Laws was motivated not so much by a static ‘gains from trade’ argument but from a ‘gains for growth’ consideration underlying the effect of the repeal in raising the rate of profit” (see also, along these lines, Maneschi 1983, 1992).

13 Thus, Torrens speaks of the “equality in the rate of profit, which the law of competition has a perpetual tendency to establish” (Torrens 1820a, 354) and points out that “the law of competition tends to equalize the rate of return upon capital” (358).

14 Torrens here footnotes as follows: “See an admirable article on the Corn Laws and [Corn] Trade [by McCulloch], in the Supplement to the Encyclopaedia Britannica.” On the assumption of international mobility of capital in McCulloch’s article on the Corn Laws and in McCulloch’s other works, see O’Brien (1970), 194–195; O’Brien concludes, therefore, that McCulloch’s theory of international trade “was fundamentally different from the Ricardian one in basing trade on absolute advantage assuming international factor mobility” (O’Brien 1970, 227).

15 Likewise, in the third edition Torrens added a new chapter (1826, 317–350) which insisted on the idea that, due to the low rate of profit, “persons possessed of disposable funds will (…) seek investment in countries where profits and interest are higher” (327); “Our redundant accumulations, deprived by erroneous legislation of advantageous employment at home, will seek for profitable investment abroad. Under such circumstances, our capital and our skilled labour will emigrate; the seats of manufactures, and the marts of commerce, may be transferred to other lands” (332). Even in the fourth edition, Torrens inserted a new passage stating that high “protecting and prohibitory duties upon the introduction of food, and of the materials of necessaries, would lower the rate of profit in England below the general level; would cause capital and skill to emigrate; would transfer to France, to the Netherlands, to Switzerland, to Germany, and, ultimately, to the United States, that manufacturing superiority which we now possess” (1827, 428).

16 Of course, Torrens’ insight that if countries specialize and trade, they always will do so according to comparative advantages, not only in an absolute advantage scenario (where each country is technically superior to the other in one sector and technically inferior in the other) but also in a comparative advantage scenario (where one country is technically superior in both sectors), is present in (at least) two earlier works with which Torrens was well acquainted: on the one hand, as de Vivo (2000, xviii–xix; 2010, 98–101) has shown, Torrens’ preface to the first edition (1815, xiv) acknowledged his indebtedness to the anonymous pamphlet Considerations on the Importation of Foreign Corn (1814) which contains a statement describing a pattern of specialization and trade according to comparative advantages both in an absolute advantage scenario ([Anon.] 1814, 7–8) and in a (weak) comparative advantage scenario (where one country is as efficient as the other in one sector and superior in the other sector; 8–9; see de Vivo 2010; Grančay and Grančay 2015; Maneschi 2017). On the other hand, already Adam Smith’s passage on trade between rich and poor nations in the first chapter of the Wealth of Nations described a pattern of specialization and trade according to comparative advantages in a (strong) comparative advantage scenario (Smith 1776, 16).

17 This may appear more clearly if we ask explicitly for the logical structure of the argument underlying the traditional interpretation, notably for the implicit premises upon which Torrens’ passage effectively supports the conclusion that it contains a statement of the comparative advantage theory rather than a statement of the absolute advantage theory. The argument seems to be as follows (see Grančay and Szikorova 2013, 51): according to the comparative advantage theory, trade takes always place in a comparative advantage scenario (first implicit premise); according to the absolute advantage theory, trade takes never place in a comparative advantage scenario, but only in an absolute advantage scenario (second implicit premise); on page 264 of the first edition, Torrens describes trade taking place even in a comparative advantage scenario (third explicit premise). Therefore, Torrens does not adhere to the absolute advantage theory, but is rather an early exponent of the comparative advantage theory (conclusion).

18 According to Parnell, the additional increase in wages resulting from a restricted corn trade would not “expose our manufacturers to be undersold in the foreign market; because (…) the price of labour has always been higher in this country, than in those countries in which we have established markets. The cause of our superiority [in manufacturing] is to be found in the greater skill, better machinery, and more extended capital, of this country, than exist in any other country in the world” (quoted in Torrens 1815, 240). Now, Torrens accepted that England is technically superior in manufacturing and also that the natural price of labour in England is higher than elsewhere, but he draw a different conclusion: if, starting from a situation where the labour coefficient in cloth production in France is twice the coefficient in England and the wages in England twice the wages in France (240–241), a restriced external corn trade leads to further increases in wages, then “we shall exclude ourselves from every foreign market” (242) and “cease to be a manufacturing and a trading people” (246).

19 The first text of Torrens containing evidence for the presence of the comparative advantage theory, though not without ambiguities, is the fourth (1827) edition of the External Corn Trade: in inserting a new section (cf. Torrens 1827, 394–428) on the factors determining “the exchangeable value of foreign commodities” (Torrens 1827, 401; my emphasis), Torrens—10 years after Ricardo’s statement—adopted Ricardo’s position that the law regulating international prices is different from the law regulating domestic prices. The first explicit statement of Torrens which explains this difference by, in particular, international capital immobility seems to be contained in his Letters on Commercial Policy (cf. Torrens 1833, 16–17). Similar explanations of this difference in terms of international capital immobility, then, appear in Torrens’ Colonization of South Australia (cf. Torrens 1835, 159–161) as well as in The Budget (cf. Torrens 1844, v–x, xl–xli, xlvi–xlvii, 329, 332–334, 342–347, 353, 404–405; see, however, Torrens 1844, 250, for a rather perplexing exception). Interestingly, in one of these passages Torrens writes that “I have elsewhere endeavoured more fully to state, and to explain, the circumstances which determine the value, in relation to each other, of commodities produced in different countries” (Torrens 1835, 161) and refers the reader explicitly to the fourth edition of the External Corn Trade. It should be added that in the late 1820s and early 1830s Torrens not only abandoned the assumption of international capital mobility, but also the assumption of exogenous wages: from the fifth (1829) edition of the External Corn Trade onwards, Torrens treated only the “minimum of wages” (1829, 460) as an exogenous variable, whereas actual real wages, between this minimum and the “moral maximum” (1829, 457), are treated as endogenous, determined by the “proportion between capital and labour” (1829, 463; see Hisamatsu 2018). With endogenous real wages, the comparative advantage theory holds regardless of whether capital is supposed to be mobile or immobile (Brewer 1985).