Book review: Ricardo’s Dream by Nat Dyer

Nat Dyer’s excellent book takes a deep dive into what lies behind simple economic theories and simple models, and their impact on the real world.

David Ricardo died more than 200 years ago. His 1817 book, “On the Principles of Political Economy and Taxation” introduced the concept of comparative advantage. The concept was frequently brought up as a justification for the globalisation drive of the 1990s.

Nat Dyer’s book “Ricardo’s Dream: How economists forgot the real world and led us astray” digs into the historical background of Ricardo’s writing and influence.

Dyer previously worked at Rainforest Foundation UK and at Global Witness. In his book he writes that,

When I used to investigate corrupt natural-resources deals the first question to ask was: who was behind the agreement and did they have anything to gain personally.

He takes the same investigative approach to the ideas introduced by Ricardo more than 200 years ago. The research for the book took him to the National Archives, the Bank of England Archives, to mines that were hand dug by African slaves in Brazil, as well as reading what he calls a “ridiculously heavy pile of books”.

Wine and cloth

Dyer starts with a detailed look at the concept of comparative advantage. The example that’s often given to explain comparative advantage is that of English cloth being trading for Portuguese wine.

According to the comparative advantage theory, both countries are better off as a result of the trade. Even if England is worse at producing both cloth and wine.

This simple idea neglects the history of English and Portuguese trade in these two products.

On 16 December 1703, a treaty was signed between Portugal and England to remove tariffs on cloth and wine. Trade boomed following the signing of the treaty.

But the treaty was only agreed on after two military treaties between the two countries. The treaty was only possible because of a British Royal Navy victory. And the cloth that England exported was worth far more than the wine that it imported from Portugal.

The trade deficit was made up with gold from Brazil mined by slaves from Africa. About two-thirds of the huge amount of gold mined in Brazil ended up in England.

Exploitation, extractivism, and colonialism lay hidden beneath the surface of Ricardo’s win-win story of comparative advantage.

The book also investigates how Ricardo started the idea that simple abstract models can be used to provide answers about the complex and messy reality of the world.

Dyer uses the analogy of theatre spotlights, which can either highlight the key actors on stage, or plunge them into darkness if they are pointed in a different direction.

While modern economic models are not the same as Ricardo’s models, they can create similar problems of over-simplification and can obscure awkward or difficult aspects of the problem being looked at.

Climate economics

My favourite chapter in this excellent book is the one on climate economics. Dyer compares the UNFCCC, created in 1992 Earth Summit in Rio de Janeiro, with the World Trade Organisation that started a few years later, in 1995. The WTO has binding rules, backed by one of the most active international dispute settlement mechanisms in the world. (The US is in the process of undermining the WTO’s dispute settlement.)

The UNFCCC has no enforcement mechanisms. The Paris Agreement is voluntary. And, as Dyer notes, “rules without consequences are just good advice”. (The US is also in the process of undermining the Paris Agreement.)

Dyer writes about the early days of REDD, which he observed in detail while he was working for Rainforest Foundation UK from 2009 to 2013. The scheme was supposed to be a “cheaper and more efficient way of combatting climate change than polluting industries directly reducing their own emissions”.

In his book he highlights some of the problems with REDD:

• Indigenous peoples and forest communities are often marginalized and have little political power.

• In Africa and South East Asia, few have legal rights to the land on which they live (so do not officially own the carbon in areas they may have lived in for generations).

• Many forest communities have been removed from their land due to agriculture or a ‘guards and guns’ approach to conserving nature.

• As the potential financial windfalls from REDD were talked up, dodgy businessmen — whom we called ‘carbon cowboys’ — convinced Indigenous peoples in many parts of the world to sign away rights they had to the carbon in their trees.

Then there’s the problem of knowing whether carbon credits from REDD projects actually result in reduced emissions. Junk credits result in an increase in global emissions when they are used as offsets.

REDD credits are calculated based on an estimate of what would have happened without REDD compared to what actually happened. “The process is wide open to abuse,” Dyer writes, “ as there is an incentive, for both the creator and buyer of the credits, to exaggerate the difference between the two scenarios.”

Dyer uses the example of a report by consulting firm McKinsey about the Democratic Republic of Congo to illustrate this counterfactual baseline problem. McKinsey suggested a REDD programme in DRC that would reduce the intensity of logging from 15 cubic metres per hectare to 10 cubic metres per hectare by 2030. That may sound good, except that the current legal volume of logging harvest in DRC was between 3 and 5 cubic metres per hectare.

McKinsey assumed a high baseline level of deforestation to allow DRC to increase logging intensity and still get paid for carbon credits.

Dyer writes that,

Despite the good intentions of many, the promise of a forest carbon market has failed. It has fed the idea that corporations and industrialized countries can essentially continue on the same old dirty development path by paying a small fee for someone else to reduce polluting gases.

Dyer is correct, of course. But REDD, and other carbon trading mechanisms, were resuscitated yet again with the gavelling through of Article 6, the Paris Agreement carbon trading mechanism, at COP29 in Baku.