Transcript David Ricardo - University of North Texas

A Step Back to Reality ?
The Work of Malthus and Ricardo
The Struggle between two Wealthy
Classes
 The
Landowners and the nouveaux rich as
the Landowners viewed the Industrialist
 The Industrialists were building large
factories and attempting to obtain status in
political arena
 Landowners as the original power class
controlled the political power
 Industrialist complained price of food was
high
Brilliance or Gloom
 The
Wonderful World Adam Smith
Envisioned was being embraced by some
philosophers
 A minister by the name of William Godwin
saw the poverty around him but was
convinced that the world’s future was much
brighter
Brilliance or Gloom

Godwin foresaw a future where
– [t]here will be no war, no crime, no administration of
justice, as it is called, an no government. Besides this
there will be no disease, anguish, melancholy, or
resentment

He even dared state that there would be no longer
a need for a marriage contract. His ideas were
controversial but due the high cost of his pamphlet
very few read it and thus he was not prosecuted by
the Privy Council
Privy Council
 The
Privy Council is one of the oldest parts
of British Government, it has, over time,
adapted to reflect the fact that the United
Kingdom is a constitutional monarchy.
 It deals with many of the legal issues the
government must deal with
Economics
Both
the theories of Malthus and
those proposed by Ricardo led
Thomas set a much gloomier
outlook than that proposed by
Adam Smith, William Godwin, and
Condorcet
Dismal Science: Economics
 According
to Heilbroner, as well as many
other, Thomas Carlyle after reading
Thomas Malthus book described economics
as “the “dismal science”
 However, recent work by David Levy,
Journal of History of Economic Thought,
2001 argues that Carlyle did coin the
phrase
Dismal Science: Economics
 However,
Levy argues that Carlyle used the
term to refer to the fact that classical
economists’ view on race, not their views on
population. He called it a dismal science
because economics saw all races as equally
capable of entering into trades whereas
Carlyle believed that the races were
different and that slavery was natural for
blacks.
Malthus
 Recall
that Malthus’ hypothesis could be
summarized simply by
Population
Food
Growth rate
– The fact that while population grows at a
geometric rate, food production grew at an
arithmetic rate
Time
Thomas Malthus
 The
ideas of Malthus influenced many of
his time
 Among them, Charles Darwin and David
Ricardo
 Darwin in the development of his theory of
natural selection was greatly influenced by
the observation made by Malthus that like
plants and animals, humans can
overproduce offspring if left unchecked.
MALTHUS AND RICARDO
 Malthus
and Ricardo were above all great
friends.
 They disagreed with each other on many
points which in reality where more an issue
of style rather than substance.
 However they did have one very important
difference of opinion.
MALTHUS AND RICARDO
 This
difference was in the fact that David
Ricardo supported the so called Says Law
while Malthus did not
 We will discuss the Says Law in greater
detail later on
David Ricardo
1772-1823
BIO
Son of Jewish immigrant stock broker
 Broke ranks with family and became a Unitarian
to marry a Quaker woman he fell in love with
 took modest stake and build into a fortune
 invested in Securities and Real Estate
 In 1779, while on vacation, read The Wealth of
Nation by Adam Smith
 Got interested in economics as a “hobby”

House of Commons
 Was
elected to the House of Commons
 There he became highly respected
 He argued issues not based on the
prevailing wind but on the relevance to the
structure of society
 He was said to have been the man that
educated Commons
Develop System
Basic Assumptions:
–Classical Rent
–Population issues as presented by
Malthus
–Wage-fund
Rent and Corn Laws
 During
the Napoleonic wars (1790-1810),
the English had a diffucult time using their
porst
 Thus, reduction in corn imports to England
resulted in 18% annual growth rates in the
price of corn
Extensive and Intensive Rent
200
180
160
140
120
100 Z
80
60
40
20
8
5
1
0
Additional
Labor
(INTENSIVE)
10
20
30
40
50
Additional Land (EXTENSIVE)
Theory of Value
 Use
Value necessary for Exchange Value
 Labor theory value only for Perfectly
Competitive Markets
 Economic Forces change relative prices
over time
Theory of Value
 Short-run
price changes are due to demandsupply while Long-run price changes due to
labor costs
 Any variation of the preceding is only
temporarily and in all cases Long-run price
changes are due to labor cost changes
Distribution Theory
Marginal Product
A
D Rent
B
Profits
G
H
E
Q
F
N
J
Wages
M
C
I
Doses of Capital
P
Distribution Theory
Marginal Product
Currency
Rent
Profits
wages
Doses of Capital
First to Deal with the Concept of
International Trade in Analytical
Terms
Basic Assumption of the Law of
Comperative Advantages
 Each
Country has a fixed endowment of
resources, and all units of each particular
resource are identical (i.e. homogenous
factors).
 The
factors of production are completely
mobile between alternative uses within a
country factor prices identical for
alternative uses.
Assumptions (Cont)
 The
factors of production are completely
immobile externally (i.e. across countries)
factor prices can be different across
countries prior to trade
 A labor
theory of value is employed for the
model. Thus the value of the product is
determine solely by the value of its labor (a)
no other input is being used, or (b) the other
inputs are measured in terms of its labor
cost, or (c) the other input/labor ratios.
 are
Assumptions (cont.)
the same in all industries.
 The
level of technology is fixed in each
country during the period under
consideration, although the technology can
differ between them.
 Costs
of production are constant horizontal
supply curve.
 There
is full employment.
 There
is perfect competition.
 No
government-imposed obstacles to
economic activity.
 Internal
and external transportation costs are
zero.
 We
begin with a two-country and twocommodity trade
Ricardian Condition of Production in
England and in Portugal
Country
Wine
Clothing
Price under
Autarky
Portugal
80
90 hrs
hrs/bbl per yard
1 w 8/9 c or
1 c 9/8 w
England
120
100 hrs
hrs/bbl per yard
1 w 6/5 c or
1 c 5/6 w
Comparative Advantage
 If
the Autarky Price ratio is the pre-trade
price ratios.
– These are based on the opportunity cost
– England 1 W : 1.2 C
– Portugal 1 W ; 8/9 C
 Who
should specialize in Wine:
 Who should specialize in Clothing:
Comparative Advantage
Terms of Trade between England and
Portugal
Which TOT is acceptable to which country?
TOT
England
Portugal
1W:1C
1 W : 1.2 C
1 W : 1.4 C
1 W : .89 C
1 W : .7 C
Comparative Advantage
 So
given the previous table:
– The range of the TOT would be
– 1 W : for ______ C high
– 1 W : for ______ C low
Say’s Law
 J.B.
Say, James Mill, and David Ricardo
 Supply Creates Its Own Demand
 Thus, Glut in a market may exist but it will
not exist in all markets
 An argument against Malthus