Machinery Question, The

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Machinery Question, The

The “machinery question” was developed by the economist David Ricardo (1772–1823) in the chapter “On Machinery,” he added to the third edition of On the Principles of Political Economy and Taxation in 1821. This question related, in his words, to the “influence of machinery on the interests of the different classes of society” and particularly to the “opinion entertained by the labouring class, that the employment of machinery is frequently detrimental to their interests” ([1821] 1951). Ricardo’s argument was presented as a recantation of his “previous opinion” on this question and marks the beginning of a debate that is still going on. This argument is based on the example of “a capitalist” with a £20,000 investment and particularly on how that capital is used over three succeeding years.

During the first year, a fraction (£7,000) of this sum is “invested in fixed capital,” the remaining part (£13,000) is “employed as circulating capital in the maintenance of labour.” Under conditions of simple reproduction, the gross revenue emerging at the end of the year must be £15,000, of which a part (£2,000, if the profit rate is 10%) is the net revenue (profit) of the year. The remaining sum (£13,000) is put back into the operation as the circulating capital of the next year.

In the second year, a process of mechanization begins, and half of the laborers previously employed in producing the gross revenue (wage goods plus profit goods) are transferred to the production of new machinery. Thus, the gross revenue emerging at the end of the year is £7.500, of which £2,000 is retained as the capitalist’s profit.

In the third year, the new machinery appears and is worth £7.500, or half of the gross revenue previously produced by the given number of laborers. Thus, the circulating (wage) capital of this year cannot be greater than £7.500 (half of the gross revenue produced in the previous year) minus the £2,000 profit, so that it actually falls to £5.500 from the £13,000 of previous years. Hence, the real wage rate (the wage goods given in exchange for one labor-year) falls to less than half of what it was initially.

Ricardo’s argument cannot be understood without a number of qualifications. First, his “capitalist” is understood to be the only capitalist within a closed economy (a self-sufficient farmer or an industrial dictator) who cannot buy, but must produce, the new machinery. Ricardo’s special assumption is that this production is realized without increasing the total capital employed—that is, without extra saving out of the capitalist’s profit (which is unpro-ductively consumed).

In addition, the “introduction of machinery” has two meanings. One refers to machinery still to be built, the other to machinery already built. While the former is the meaning adopted in the example above, the latter is adopted in other chapters of the Principles as well as in Ricardo’s “previous opinion” which held that the introduction of machinery is beneficial to all classes of society. Since the two meanings reflect two equally legitimate assumptions, Ricardo’s diverging conclusions in different phases of his life (as well as in different chapters of his principles) are not contradictory, so that his latest argument is an unnecessary recantation.

Ricardo’s argument also requires that a distinction be made between national revenue (consumption goods) and national product (consumption goods plus instrumental goods), as well as between the consumption goods exchanged for productive labor (circulating capital in Ricardo’s sense, or free capital in Jevons’s sense) and the instrumental goods that assist labor in production (fixed capital in Ricardo’s sense, or invested capital in Jevons’s sense).

Ricardo’s special assumption on savings as an unchanging magnitude is reflected in his idea that machinery be “suddenly discovered and extensively used.” This assumption was designed to elucidate “a principle,” not to explain current reality. This principle relates to the different role that capital plays in the demand for labor, depending on whether it is circulating (free) or fixed (invested). It also relates to the possibility that the gross revenue of a society (wages plus profits) may not increase—and may even fall—when its net revenue (profit) increases.

One interpretation of Ricardo’s argument claims that what this is about, and what it warns against, is technological unemployment. This interpretation misses the change in the composition of national product (and of total capital) resulting from the (sudden) introduction of new machines and is focused instead on the impact on employment of a change in their technical coefficients. Ricardo’s argument holds even if the new machines were identical to those already in use, provided they be produced without additional savings.

Another interpretation regards the “Ricardo effect”—by which “machinery and labor are in constant competition, and the former can frequently not be employed until labor rises”—as the core of Ricardo’s argument. But the “Ricardo effect” deals with the causes, not the effects, of the introduction of machinery, and it is put forward, along with other qualifications, at the close of the machinery chapter in order to deny the “inference that machinery should not be encouraged.”

Searching for episodes in economic history to confirm Ricardo’s argument, the Nobel laureate John R. Hicks has alluded to the declining conditions of the working classes during the early phase of Britain’s industrialization (1969). More properly, perhaps, Ricardo’s argument could be used to explain the dramatic conditions of the working classes in the early phase of the Soviet Union’s industrialization.