Ricardo is now irrelevant

The celebrated theory of international trade proposed by the English economist David Ricardo (1772-1823) is logically impeccable.

It has several weaknesses, however. One of them is that it uses the classical comparative static approach and consequently ignores the dynamic aspects, which are decisive and constitute the subject matter of development economics.

The weakness I now address is, on the other hand, not inherent to Ricardo’s methodology, but instead a unique and unforeseeable outcome of the financialization process that has beset world capitalism during the last four decades.

Ricardo’s theory of international trade is based on prices of manufactured goods. Quite naturally, Ricardo based market prices on manufacturing costs. And there's the rub.

Because the self-evident maxim that market prices are based on manufacturing costs is no longer  valid in general terms.

Deregulation of commodities markets has enabled purchase of commodities – petroleum, for example -- by parties that are unrelated to the  industry in which such commodities are used as inputs in manufacturing processes.  The ensuing and  by now commonplace practice of stockpiling raw materials and other goods for the sole purpose of speculation, i.e. without any intention of ever actually using the wares as inputs in an industrial production process, means that demand is no longer related to the use value of the wares, but is instead largely determined by trends on the financial markets. 

Source: How commodities became financial assets, from The Great American Bubble Machine, by Matt Taibbi

http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405?page=5

To the  extent that market prices are no longer determined by production costs but by financial market trends or other factors extraneous to the  production process, Ricardo’s theory of international trade has become irrelevant.

To what extent have production costs been trumped by expectations of speculative profits as determinants of market prices?

Deviation of market price from manufacturing cost cannot  exceed certain bounds in the long term.

That is all I can say at this stage without doing serious empirical research, which is a somewhat unlikely prospect.