Ricardo and Malthus • David Ricardo and Thomas Malthus are prominent names in the classical economics, which in addition to Smith also comprises: • Jean-Baptiste Say 1767-1832 • James Mill 1763-1836 • (Jeremy Bentham 1748-1832) • John Ramsey McCulloch 1789-1864 • Robert Torrens 1780-1864 • John Stuart Mill 1806-1873 while other contemporary economists comprise • J.C.L. Simonde de Sismondi 1773-1842
David Ricardo 1772-1823 Stockbroker, M. Parliament, speculator and businessman. Gathered a large personal fortune, allowing him to retire from business 1814. Tremendous influence on developments in economics, with highly logical arguments he set a standard for reasoning in economics. Schumpeter coined the expression Ricardian vice, by which he meant that rigorous logic was applied but conclusions being drawn did not logically follow from the theories used.
Two major works of Ricardo • On the Principles of Political Economy and Taxation, 1817 http://www.econlib.org/library/Ricardo/ricP.html • An Essay on the Influence of a low Price of Corn on the Profits of Stock; shewing the inexpediency of Restrictions on Importation with remarks on Mr. Malthus’ two last publications, 1815http://onlinebooks.library.upenn.edu/webbin/book/lookupid?key=olbp27046
The contributions of David Ricardo we should know about • The Theory of Rent • The Labour Theory of Value and the Distribution Problem • The Monetary Standard • Comparative Advantage • Ricardian Equivalence
Thomas Malthus 1766-1834 • Studied Cambridge U. 1784-91. • Anglican country curate 1798 • Professor of History and Pol.Economy at the East India Company College
Malthus’ principle of population • An Essay on the Principle of Population as it affects the future Improvement of Society with remarks on the Speculation of Mr. Goodwin, M. Condorcet and others, 1798 • An Essay on the Principle of Population; or, a View on its Past and Present Effects on Human Happiness, 1803 Malthus’ two postulata: • Food is necessary to the existence of man. 2. The passions between the sexes is necessary and will remain in its present state. … a strong and constantly operating check on population … necessarily severly felt by a large portion of mankind Two types of checks for holding population within resource limits: positive checks raising the death rate, and preventative ones lowering the birth rate.
The Ricardian theory of rent • «Rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.» • «Whenever, then, the usual stock and ordinary rate of the profits of agricultural stock, and all the outgoings belonging to the cultivation of land, are together equal to the value of the whole produce, there can be no rent.» Let us try to figure out the essentials of Ricardo’s theory of rent here between famous quotes about the external limit of cultivation (above) and the ultimate fall of profit (below). • «Thus, by bringing successively land of worse quality, or less favourably situated into cultivation, rent would rise on land previously cultivated, and precisely in the same degree would profits fall; and if the smallness of profits do not check accumulation, there are hardly any limits to the rise of rent, and the fall of profit.»
The labour theory of value and the distribution problem • «The produce of the earth – all that is derived from its surface by the united application of labour, machinery, and capital, is divided among three classes of the community; namely the proprietor of the land, the owner of the stock or capital necessary for its cultivation, and the labourers by whose industry it is cultivated.» • «To determine the laws which regulate this distribution, is the principal problem in Political Economy; much as the science has been improved by the writings of Turgot, Steuart, Smith, Say, Sismondi, and others, they afford very little satisfactory information respecting the natural course of rent, profit, and wages.» • Utility and exchange value • An ultimate standard of value? • Exchange value and rent • The dominant position of land owners
The monetary standard • The high price of Bullion a Proof of the Depreciation of Bank Notes, 1810 • Reply to mr. Bosanquet’s practical Observations on the report of the Bullion Committee, 1811 • Proposals for an Economical and Secure Currency; with Observations on the Profit of the Bank of England as they Regard the Public and the Proprietors of Bank Stock, 1816 • The advantages of paper currency • Metallism versus commodity standard • The currency principle • Ricardo on gold bullion standerd
Comparative advantage • It costs more in England to produce both commodities than in Portugal. • However, England will not be excluded from international trade in Ricardo's theory of comparative advantage (unlike Smith's absolute advantage), as England has comparative cost advantage in producing cloth and Portugal in producing wine. • Since Portugal gains by producing wine and importing cloth, and England the reverse, Portugal should specialize in the production of wine and England in cloth. Labour per year needed in autarchic production of cloth and wine in England and Portugal England Portugal Cloth 100 90 Wine 120 80
Ricardian equivalence (RE) • RE states that it does not matter whether a government finances its spending with debt or taxes, the effect on total level of demand in an economy being the same. • Extra government spending through deficits will suggest to taxpayers higher taxes in the future and they would put aside savings accordingly. The effect on aggregate demand would be the same as if the government had chosen to tax now. • Ricardo’s Essay on the Funding System 1820 studied financing a war with £20 million in current taxes or government bonds with infinite maturity and annual interest payment of £1 million in all following years • Ricardo had limited belief in the RE proposition: ” It would be difficult to convince a man possessed of £20,000, or any other sum, that a perpetual payment of £50 per annum was equally burdensome with a single tax of £1000.” (Ricardo, 1820) • The modern concern with RE is due to Robert J. Barro in 1974 [“shifts between debt and tax finance would have no first-order effect on the real interest rate, volume of private investment, etc.”, Barro 1979] and belongs in the New Classical Macroeconomics with emphasis on rational expectations.
Controversy over underconsumptionism • Ricardo disagreed with Malthus's "theory of gluts" which suggested that overproduction arises due to insufficient aggregate demand. Ricardo rejected this theory because of a strong belief in an automatic and compelling drive of the market forces of supply and demand to adjust and restore prices to their market equilibrium level where supply and demand would once again equate. To Ricardo, a temporary glut for one commodity could possibly arise on occasion, but this could not be the case with respect to all commodities at the same time. Hence, all such crises and losses during adjustment periods were just temporary problems.
Smith, Ricardo and others on growth • Adam Smith relied on the process of increasing division of labour driven by competition among the capitalists themselves as the main force propelling growth through rising labour productivity , while his observation that the extent of the division of labour is limited by the size of the market, suggests that he assigned to demand the role of setting the limit to productivity growth . In this scheme, the constraint of natural resources or primary factors of production have a limited role to play. David Ricardo looked at the problem from almost the opposite angle. For him, land, which we may consider as a symbol for all primary factors not produced within the system, sets the limit to growth . Being subject to diminishing returns, the share of rent in national income increases continuously at the expense of profit, as the margin of cultivation extends over time. This sets the limit to growth , and drives the economy towards its ultimate stationary state because Ricardo assumed that all profit but no rent will be saved.