Transcript Some forerunners

Ricardo and Malthus
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David Ricardo and Thomas Malthus are prominent names in the classical
economics, which in addition to Smith also comprises:
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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, 1815
http://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
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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
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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:
1. 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
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«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
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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
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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
Cloth 100
Wine 120
Portugal
90
80
Ricardian equivalence (RE)
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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
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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
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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.
A well known ”minor postRicardian”