Transcript Ricardo & Malthus: Welcome to the Dismal Science

Ricardo & Malthus: Welcome to the Dismal Science
David Ricardo, 1772 – 1823
Thomas Malthus,1766 – 1834
Stockbroker/Dealer
Parson
Abstraction  Economic Science
• Championed capitalists
Intuitive approach/preacher
• Championed landlords
– Opposed Corn Law
– Favored Corn Law
Whoever wins, workers get dry crust
• Advanced Say’s Law
Major contributions
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• Advanced Theory of Gluts
Major contribution
– Law of population
Differential rent
Labor theory of value
Theory of distribution Diminishing Returns Prevail
Comparative advantage
Malthus, An Essay on the Principle of Population, as it Affects the
Future Improvement of Society with Remarks on the Speculations of Mr.
Godwin, M. Condorcet, and Other Writers, 1st ed., 1798
•
First principles
– Food is necessary
– Passion
•
Population, when unchecked,
increases in a geometric ratio
• 1, 2, 4, 8, …[25 year doubling time]
•
Subsistence increases in an
arithmetic ratio
• 1, 2, 3, 4, …
•
Le
Q
c
Q  c ln L
Subsistence checks population
– Positive checks: Vice, Misery War,
pestilence, famine
– Preventive check: Moral restraint
Law of Diminishing Returns
• in proportion as cultivation is
extended … additions to average
produce must be gradually and
regularly diminishing
Q c

L L
Hint of an externality in Malthus’ Law of Population
From An Essay in Population
• Famine seems to be the last, the most dreadful resource of nature.
The power of population is so superior to the power in the earth to
produce subsistence for man, that premature death must in some
shape or other visit the human race. The vices of mankind are active
and able ministers of depopulation. They are the precursors in the
great army of destruction. But should they fail in this war of
extermination, sickly seasons, epidemics, pestilence, and plague,
advance in terrific array, and sweep off their thousands and ten
thousands. Should success be still incomplete, gigantic inevitable
famine stalks in the rear, and with one mighty blow levels the
population with the food of the world.
• … to better the condition of the laboring classes [we should cultivate]
a spirit of independence, a decent pride, and a taste for cleanliness
and comfort. The effect of a good government in increasing the
prudential habits and personal respectability of the lower classes …
will always be incomplete without a good system of education…The
benefits derived from education are among those, which may be
enjoyed without restriction of numbers; and, as it is in the power of
governments to confer these benefits, it is … their duty to do it.
Why no apocalypse? What did Malthus miss?
The Dismal Science of David Ricardo
… Ricardo offers us the supreme intellectual achievement,
unattainable by weaker spirits, of adopting a hypothetical world
remote from experience as though it were the world of
experience and then living in it consistently. With most of his
successors, common sense cannot help breaking in – with injury
to their logical consistency.
John Maynard Keynes, The General Theory of Employment,
Interest, and Money
• Ricardo, The High Price of Bullion, 1810
Traced wartime inflation to emissions of paper money.
– Regulate paper currency (so its value corresponds to its gold “content”
– Stick to metallic money
Ricardo  Currency School  Monetarism
• Ricardo, Principles of Political Economy and Taxation, 1817
Ricardo’s Theory of Distribution
• Differential rent: rent built up from zero-rent margin
• As push out to worse and worse land, owner of better land command
bigger and bigger premiums (rents)
• Extensive margin / Intensive margin
• Wages ~ (socially determined) subsistence
• Malthusian Law of Population  Iron Law of Wages
» Poor Law (Speenhamland System) only increases number of poor
but does not improve their well-being
» Dole (wage subsidy)  Population growth  Lower wage  Dole
• Profits ~ equalized and eliminated by competition
Diminishing returns  Profit squeezed as economy grows
Ricardo’s Labor Theory of Value: Production of
commodities by means of commodities (Pierro Sraffa)
– In market economy, labor is a commodity
Marginal Product
(corn)
Ricardo: Value, Distribution, and Growth
Rent
Profit
w*
Wage
Bill
K1
Capital-Labor Input
(Capital and Labor are Complements)
Marginal Product
(corn)
Ricardo: Value, Distribution, and Growth
Rent
Profit
w*
Wage
Bill
K1 K2
Capital-Labor Input
(Capital and Labor are Complements)
Marginal Product
(corn)
Ricardo: Value, Distribution, and Growth
Profit squeezed to zero
 Growth ceases
Rent
w*
Wage
Bill
K1
K*
Capital-Labor Input
(Capital and Labor are Complements)