Economists sometimes present their discipline as the queen of the social sciences, a claim staked primarily on a superificial resemblance to physics: It has universal laws! Expressed in numbers! But that confidence can go horribly wrong.

The global financial crisis of 2008 and ensuing Great Recession should have been a wakeup call, but in the interveneing years, to many have gone back to sleep. And the world of finance is hardly unique. Economics is supposed to be a science whose models tell us how to maximize general welfare — meaning the welfare of the many, not the few at the top. But in case after case, whether in dealing with the climate crisis, economic inequality or international trade — economists’ answers don’t deliver as promised. 

Something has seriously and fundamentally wrong in this so-called science, and “Ricardo’s Dream,” the new book by English writer and researcher Nat Dyer, a fellow of the Schumacher Institute and the Royal Academy of Arts, helps us understand why. Dyer's subtitle sums things up nicely: “How Economists Forgot the Real World and Led Us Astray.” But to be clear, he doesn't argue that all economists forgot the real world, and thereby seeks to point toward a more promising future.

If you studied any college-level economics, you probably remember David Ricardo’s name. He was the other founder of classic economic theory, after Adam Smith, and his “comparative advantage” model, derived from studying 18th-century trade between England and Portugal, is among the most consequential in economic history. To a large degree, it has provided the underlying rationale for the last 60 years or so of corporate globalization. But as Dyer shows, Ricardo's model was abstracted from a single historical example, and avoided discussing the importance of naval power, gold and the slave trade, all of which were part of any fuller understanding of international trade relations at the time. In other words, Ricardo's model barely even tried to describe economic relations in the real world, and was closer to ideological fantasy than to science. 

In the first third of the book, Dyer examines Ricardo's model and its relationship to historical reality in rich narrartive detail, from the diplomatic intrigues behind the Methuen Treaty of 1703 to the ghastly realities of the Brazilian gold rush, supported by the slave trade, which allowed Portugal to balance the books by sending vast quantities of gold to the Royal Mint. The second part of the book explores how Ricardo’s deductive model-based approach to economics was first challenged and eventually displaced, only to return with a vengeance much more recently, as he explores in the book’s third section.

"Ricardo's Dream" draws directly on the writings of its principal subject and other important figures in economic history, to make clear that concerns about the discipline's disconnection from reality have been raised repeatedly within the field. I spoke with Dyer by Zoom to discuss the book's main themes, but there's so much rich narrative detail and bountiful perception to "Ricardo's Dream" that one conversation can't do it justice.

This transcript has been edited for clarity and length.

In your introduction, you write that your book "is about the most consequential attempt to create a kind of physics of society: economics" and that it "investigates the dark side of this intellectual trend." More specifically, you write that Ricardo gave us "two influential intellectual traditions": his theory of comparative advantage, which shapes our thinking about international trade, and the broader tradition of "creating simple, abstract, numerical models to explain the social world." You also discuss how, even if Ricardo didn't articulate it this way, he was the origin of the concept of "homo economicus," or economic man. How do these three strands relate to one another, and why are they so important?

I would say that the issue of simple, abstract models is the overall strand, and it's what Ricardo has mainly been criticized for. Joseph Schumpeter called it the "Ricardian vice." But as I explain, we've been led by economists in the last 40 years who saw it not as a vice but a virtue, and that has got us into so much trouble. I would say the other two — the international trade and the economic man — they're both versions of that simplistic model, but they're very different in a way. 

The international trade issue has been well recognized and was repeated time and time again in the 1990s and 2000s by, as I talk about in the book, Paul Krugman, Greg Mankiw and others. What I say is, here's the fairytale version of England and Portugal and win-win, and then here's the real version. He forgot colonialism and he forgot the gold and he forgot the slavery. That's the real history. So part of that is a very well-known story. 

On "homo economicus," I think Daniel Kahneman called it the most influential theory in social science. It's very well-known, even though it's a bit more geeky. But it's not very well known that it comes back to Ricardo. People who have studied it usually say, it goes back to John Stuart Mill, but Mill learned directly from Ricardo.

Ricardo was this great stockbroker, very cool under pressure, great at doing calculations, very knowledgeable, and he essentially projected out onto the world: “Whoa, what if everyone was an amazing stockbroker like me?” Because there's a parallel between Ricardo as a stockbroker and the idea of "homo economicus." That has been mentioned by a few people in the history of economics, and was well understood about 100 years ago, but we’ve kind of ignored that.

But it seems to me a nice way of telling the story of how crazy this "homo economicus" idea is. Because even behavioral economics sometimes sees it as rational and scientific, and any deviation from it needs to be explained as some weird paradox. I'm saying, no, no, let's back up. We've got the real world, where people are very complex, and then you've got this wild imaginative leap that makes things much simpler. But essentially you're basing your entire argument on "if" rather than "is," and that's bound to get you in a lot of trouble.

Ricardo's original model of comparative advantage involved two countries and two commodities, cotton and wine. But it was abstracted from actual history. So what did his model say, and how did it compare with actual history? 

Economic historians will say Ricardo's model is not like a modern model, it was more like a proto-model. Essentially it said, OK, two countries, two commodities: England and Portugal, trading cloth and wine. There were four numbers that Ricardo gave, measuring how productive each country was at each commodity. In the model, Portugal was better at producing both things than England. But still, if you crunch the numbers it works out that it's in both countries' interests to exchange what they're least worst at. So even though England, in the model, is worse at producing both cloth and wine, it makes sense for them to exchange. And it leads to this theory that essentially became part of the self-image of what it means to be an economist: Trade lifts all boats, trade is win-win. So that's the model. 

The historical reality is that for about a hundred years before Ricardo wrote, Portugal was a very important trading partner of England. Adam Smith, who inspired Ricardo, writes about this, and Smith was much more realistic. There was a booming trade in cloth and wine, and it was essentially part of a military alliance between England and Portugal, which needed the power of the Royal Navy to protect itself against France and Spain. Portugal never exported enough wine to make up for the cloth that it imported from England, so it made up the difference with Brazilian gold. Portugal colonized Brazil at the time and there was a massive gold rush: Nothing like it had been seen before and nothing like it would be seen again until 1849 in San Francisco. Two-thirds of that gold ended up in London, where Isaac Newton among other people, benefited from it.  

That gold helped to supercharge the transatlantic slave trade at the time. Brazil topped the list for the number of enslaved Africans. So instead of this win-win model, you have a more realistic story of exploitation and colonialism. I think there are many parallels with today. This fairytale version has been used to say, oh, trade benefits everyone. But there's a more realistic version. And the thing that drives me crazy, or at least makes me very annoyed, is that the unrealistic fairytale is called science, and the other one is ignored. That's what I'm trying to expose in the book. 

So the more complete model would involve four nations, or at least four entities, and four commodities — one of those being enslaved human beings. What's to be learned by contrasting this more complete model with Ricardo's original?  

I have a map which tries to set it in a different context. Every element of it was bound up with the Atlantic economy and the slave trade. Even the cloth that was exported from England to Portugal, in some years up to 85% of it was re-exported to the African coast, to be exchanged for men, women and children purchased for the slave trade. So it's a radically different picture that emerges, and that essentially shows that power matters, military might matters. It shows a massive difference between what some economists would call the "core countries" in the north and the periphery. 

It's not news that there's exploitation in the world. What is news is that the canonical example that has been used time and again for why trade benefits everyone basically missed out the whole lower half of the picture, whereby millions of people were either displaced or exploited for the benefit of a few. 

You write that Ricardo "took the England–Portugal story from Adam Smith" but that the two men "drew radically different lessons." How did Smith see it differently?

Reading Smith in the original, I have a much more positive view of him. He is seen as this neoliberal, laissez-faire, "invisible hand" theorist, but that’s a caricature of the real Adam Smith. He was much more interested in poor people flourishing and issues of power and empire. Smith essentially used the alliance between England and Portugal to show trade deals were a bad idea. Smith said the Methuen Treaty in 1703, which essentially codified the exchange between England and Portugal, was a bad deal, because Portuguese wine was less good and probably more expensive than French wine. He essentially wanted freer trade by allowing the British to buy cheaper French wine, but at least he acknowledged that gold from Portugal was one of the benefits for England, and that gold came from Brazil. 

So he had a much more realistic point of view. He also thought that these free trade deals would essentially be corrupted by the people who make the deal, which he called the mercantile system. He thought it would benefit a few and disadvantage the many. I want to update Smith's critique and say that's actually similar to what we seen with many free-trade agreements in the last 20 to 30 years. The people in the room — often the corporations and the business lobbies — have benefited, whether from increasing patent rights or from investor-state disputes settlements, shadow courts, things like that. You can see that critique in Adam Smith. 

In time Ricardo's dominance was challenged and overturned by William Whewell and Richard Jones, who had a very different understanding of science, captured by Francis Bacon's analogy of the ant, the spider and the bee. What was meant by that, and how did they begin to challenge Ricardo's understanding of science? 

This is another story that's been largely buried in the history of economics, the fact that the person who coined the term "scientist," as well as other terms like "physicist" and "consilience," William Whewell, was actually a huge critic of the great classical economist David Ricardo. He thought Ricardo had taken the science of political economy off on the wrong track and was going to damage the standing of all science and all people of expertise. This is the contrast between how Whewell and Jones saw deduction and induction, and, as you say, that is explained through Francis Bacon's analogy.

So essentially, the spider spins webs from itself. They thought Ricardo was like this, spinning out theories without any real content of the external world within those theories. They might have an impact on the external world, but they don't have much external world in them. The ant is like the researcher who is interested in minute facts in small areas. He collects them but doesn't bring it all together. The bee is the fusion of both: It goes out to the flower and collects the pollen, but transforms that with its own thoughts and its own processes and comes up with something new. 

So Whewell and Jones challenged Ricardo. Jones did it by showing that Ricardo had made these universal rules that he said were as certain as the principle of gravitation. Jones said no, these might correspond to just 1% of what's happening in the world, but you actually ignored the other 99%.

This was to do with rents, right? About the actual way that rents work, versus Ricardo's theory of them. 

Yes. Ricardo's theory of rents is really interesting. I describe Ricardo punching up against the landlord class, because he was this merchant, this stockbroker. But he also punched down on the working class, he's got a very multifaceted legacy. He influenced Karl Marx, and he also influenced very capitalist thinkers. His theory of rents was part of his punching up against the landlord class. It has continued to be quite interesting for critics of capitalism today when they think, oh, maybe financial markets are not generating profit, they're generating rents, which means they’re just extracting money rather than doing anything productive. 

But what Jones and Whewell showed was that, specifically related to agricultural land, Ricardo had crafted a huge generalization that didn't map onto the reality of the situation. He focused on the landlord-tenant relationship within a capitalist economy, but there were many relationships that weren't based on market transactions, that were based on culture or more feudal relationships. And Ricardo's laws broke down in that situation. 

The story of Ricardo's waning influence is complicated and fascinating. I could ask tons of questions about it, but what would you pick out as the most significant factor in undermining his influence? 

I think that was a general reckoning at the end of the 1800s. For a start, the term "Industrial Revolution" was coined. People knew this thing had happened, but there wasn't a name for it. There was a general reckoning with some of the darker sides of what had happened within the Industrial Revolution, and an increasing awareness that you needed government intervention — whether that be with progressive taxation, with pensions, with recognizing unions, with anti-monopoly laws like the Sherman Act in the U.S. in 1890. So there was a general recognition that essentially laissez-faire didn't work by itself, and that people demanded more. That wasn't an environment in which Ricardo's theories would thrive.

---

Want a daily wrap-up of all the news and commentary Salon has to offer? Subscribe to our morning newsletter, Crash Course.

---

There was also a tilt toward economic thinkers who were interested less in the physics of society and more in studying real history and institutions and power. That was a massive trend. In the U.S. — there's a great book about this, "Social Thought in America: The Revolt Against Formalism" — that included pragmatic thinkers like John Dewey, William James, Louis Brandeis and others, who basically said these abstractions and general laws don't capture the essence of the situation. I think it was that a complex of factors. The reason I wanted to tell that story is because it gives us hope today that the current economic orthodoxy can go the way of classical political economy. 

Within a year of each other, Joseph Schumpeter coined the term "Ricardian vice," which you mentioned earlier, and Milton Friedman launched his campaign to revive it as a cardinal virtue. You write, "It would prove almost impossible, with Friedman’s method, for empirical evidence to throw out a theory: it led to a mantra that it takes a model to beat a model." What enabled Friedman to turn Ricardian vice back into a virtue? 

Friedman was an exceptionally talented polemicist, but he also struck the moments right. He was sort of in the wilderness, but when economic orthodoxy faltered in the 1970s, his style of economics came in. He wasn't alone. He was was working with a group of people who were trying to raise the standard of economics to what some called the "Newton stage," in other words to be more scientific. But as I say in the book, this was criticized time and time again by major figures who went on to win the Nobel Prize. Herbert Simon said, "If you go down this path you're basing all of economics on the principle of unreality." That's another line I've never seen quoted anywhere. 

Yet Friedman's argument did win out. I think it allowed young economists and theoreticians coming through the system to make a huge splash and to make their mark — and not have to read the old authors. There was this feeling, with new computer technology coming through, that those guys in the past didn't know what they were doing. I think it was hubris, essentially: Now we have this cutting-edge equipment and we can see into the future. There was a lot of demand from politicians and the media for this kind of stuff, and I think Friedman's methodology of not worrying about the assumptions helped lots of different models blossom in economics. 

You have chapters devoted to explaining how Friedman's revival of Ricardo's vision has misled us in three major areas — in finance, in "free trade" and in environmental economics. Could you pick one of those and sketch out what the central problem is?

I'll pick finance, because it's so incredibly powerful and pervasive in our world. Essentially, the study of finance was taken over by theoretical economists, from about the 1960s onward, who were armed with a whole load of highly abstract theories and models, the capstone of which is the "efficient markets" hypothesis, which says that prices are always right, essentially. It allowed finance to shrug off old concerns about its association with gambling and about causing instability. It helped to give an aura of scientific legitimacy to the activities of Wall Street firms and traders. 

But what the model missed — I use the analogy sometimes that a model is like a spotlight in the theater, and the spotlight picked out elements about the price being right, but it missed the power and politics. That's actually what some people said, including Simon Johnson, who recently won the Nobel Prize in economics. After the 2008 financial crisis, he said that what we'd just witnessed was a quiet coup, that the power of Wall Street firms had grown so hugely due to the back-and-forth between Washington and Wall Street, and that had been facilitated by these abstract theoretical economists. Also, the abstract theoretical economists have — I use the term "theory-induced blindness," which comes from Daniel Kahneman. They have blinded many people, too many elites, to the downsides of letting financial markets rip. 

In the chapter "New Hope," you describe ways in which economists are developing new approaches. Thomas Piketty and his colleagues work on economic inequality, Alan Krueger and David Card work on minimum wage, Kahneman works on behavioral economics. There's the work, mostly of non-economists, on monopoly power, the New Brandeis movement. Their diversity of approaches, under the umbrella term of "heterodox economics," has been seen as a weakness, because their work can't come together into a coherent whole to challenge orthodox economics. But your book stands that on its head, viewing that diversity as a strength, not a weakness. 

To be honest, I haven't seen it in exactly those terms, but you raise an important point. Even some heterodox economists themselves have not wanted to be associated with it, and I don't actually love the term. I'm not an academic myself, and I generally think that economics scares people and jargon just shields what's actually happening. So one thing I've tried to do in my book is to write as plainly as I can, and to use vivid analogies. But I think your point is valid. We shouldn't expect there to be one theory that explains everything, because the world is multifaceted. Perhaps we should see this range of approaches as a positive strength. 

I guess it comes back to the ant, the spider and the bee, in that the ant just gathering things and not seeing how they fit together is itself a weakness. It's like the Golden Mean of Aristotle, you don't want one extreme or the other. So while we need to escape from this theoretical fantasy world — even if the fantasies are highly quantitative, they're still fantasies — I don't think we should go all the way to a completely incoherent picture of the world. But clearly, we need to have more tolerance for a less unified picture. Having said that, I do try and draw some general ideas for how we can understand things.

That's what I was going to ask next. What do you see as hopeful ways forward? 

I am really interested in approaches that look at the world as it really is and ask really tough questions about it. One thing I see is that mainstream economists have created great-looking answers at the cost of changing the question, essentially by asking much simpler and less interesting questions. I wanted to stick to the really difficult questions, even if the answers are a bit messier, because that's more interesting and more useful. Otherwise you just get the illusion of certainty and the illusion of precision. 

I didn't have space to include all the different approaches that I liked in the conclusion. I try to update Adam Smith's mercantile system, calling it a corporate system, to explain how the global system that we have inherited is one where corporations have outsized benefits and have twisted both international law but also economic logic itself to benefit themselves. I think that's really important. 

I'm a big fan of a global political economic thinker called Susan Strange. She has a view that there are four structures in the world: finance, production, security and knowledge. In the '70s, she said that the world was changing hugely and the economists didn't understand it, because they ignore power and politics, but the political people are obsessed with nuclear weapons and security, and kind of ignore financial markets and economics. We need to bring these two together. So we need to recapture the realm of political economy, but not the political economy that Ricardo envisioned. 

Finally, what's the most important question I didn't ask? And what's the answer?

You could have asked something more personal. You know, why should we listen to you? You don't have a PhD in economics.  Essentially the story of how I came to this book is that I used to investigate corruption in mining and oil deals in Africa and I saw how so many of them were linked to offshore companies, and to the goings-on of companies listed in Toronto and London and elsewhere. I was interested in digging away at what Mary Midgley calls the philosophical plumbing, the conceptual pipes that are underneath our civilization's feet.

I drew on my academic background in history and international political economy, international politics, and I've tried to do a very close reading of economic thinkers themselves, to show that the critique that I raise, of economics built on unreality or economists forgetting the real world, isn't something that's coming from the outside. It's an argument that's been woven through the history of economics for the last 200 years. Almost from when Ricardo first came out with his theory, people have been making this critique. But unfortunately, if you read a textbook or most histories of economics, that history would be completely sidelined. Economics is too important to be left just to the economists. If we're serious about caring about democracy, people need to understand more about how the economic system works, and become less fearful and more confident talking about it. I hope my book can contribute to that.