Chapter 5: Ricardo and Malthus Questions for Review, Discussion and Research 2, 3, 4, 5, 6, 7, 8.

Chapter 5: Ricardo and

Malthus

Questions for Review, Discussion and Research

2, 3, 4, 5, 6, 7, 8

Malthusian Population Thesis

Scientific in method as well as purpose

Believed that population tends to grow geometrically while food (and other necessities) increase arithmetically

Checks develop to keep the growth rate of population in line with the food supply Positive Check – increase

in death rate due to wars, famine, disease, etc.

Preventative Check – postponement of marriage would lower birthrate

Flaws in Thesis

1. Birth Control2. No distinction between

sexual desire and the decision to have children

3. Underestimates the impact of technology

Iron Law of Wages

Combination of wage fund doctrine and Malthusian population thesis shows long run wages converging to subsistence levels

Overview of Ricardo

Stockbroker turned country gentleman

Contributions include: Methodology Theories of Value International Trade Public Finance Diminishing returns Economic Rent

Published first pamphlet in 1810

The only major publication after Smith was by Malthus in 1803

Methodology of Ricardo

Questions of political economy that were answered by Smith were an eclectic blend of theory with a historical narrative and the evolution of institutions

Ricardo abstracted from contemporary British economy and employed a timeless deductive approach

Formulation of economic policy required an understanding of the causal relationship between variables

It is non-contextual and it becomes the path of main stream economics after Marshall

Scope of Economics According to Ricardo

Overhead pp 115-16

Ricardian Model

Overhead pp. 116 Landlords are

nonproductive or parasitical

Concept of Surplus Economic Surplus

Assumption of Ricardian Two-Sector Model

Table 5-1

Concept of Diminishing Returns in Agriculture

First discovered by Turgot in 1763

Concept of Economic Rent Viewed from the Product Side

Assume a fixed quantity of agricultural land to which “doses” of capital and labour (effort) are added

Intensive Margin (figure 5-2)

The effects of ‘effort’ on different plots of land with variable fertility Table 5-2

Distinction Between Gross and Net Marginal Product of Effort ( MPE ) Today Gross MPE – Includes

depreciation or CCA of capital inputs

Net MPE – After replacement costs of capital inputs

Ricardian Concepts of Gross and Net MPE

Importance of Diminishing Returns and Economic Rent

These concepts are the foundation of marginal productivity theory which explains the supply side determination of factor input prices

Individual owners view land rent as a cost of production equal to its opportunity cost in alternative uses

Ricardo considered economic rent from an aggregate point of view and therefore1.Not a cost of production2.Not price determining3.Opportunity cost is zero

Ricardo’s Value Theory

Wanted to refute the prevailing cost of production theory of value that sought to explain the forces determining relative prices at a given point of time

His alternative theory was to explain the economic forces that cause changes in relative prices over time because of his interest in the income distribution consequences of the Corn Laws

Sought to identify a commodity that was an invariable measure of value, ie. an absolute measure of value that is invariant over time

Believed that value depends on the quantity of labour necessary for long run production

Production with Ricardo’s Labour Theory of Value

1. Measure the quantity of labour inputs

2. Differing skills and working conditions

3. Capital inputs are merely stored up labour (ie. Labour supplied in a previous period)

Profits are a different percentage of final price for two goods when

I. Total capital per unit of final output is different

II. Rate of turnover of capital depends on the composition of capital (ie. fixed vs. circulating capital)

“Corn” Model

Pure circulating capital model where a percent of previous years output of wheat is required for the years production that

I. Sustains labour during the period of production

II. Seed requirements

Summary of Ricardian Value Theory

Overhead pp. 132-33

Ricardian Distribution Theory

Often called a residual theory

He subtracted the necessary payments for labour and “depreciation” from gross output to calculate the economic “surplus” shared by capitalists and landlords

Short Run Distribution Theory

Overhead pp. 162

Long Run Distribution Theory

Figure 5-3 Overhead pp. 161 Overhead pp. 136

Static Theory of Comparative Advantage

Voluntary trade or exchange can benefit all countries because specialization results in an increase in total output

Carefully read pp. 137 to 140 on your own

This static model assumes that factor inputs are exogenous while the Smithian trade model is dynamic and the

I. Quantity of factor inputs is endogenously determined

II. Increasing returns

Stability and Growth of a Capitalist Economy

Controversy over Say’s Law personified by Ricardo-Malthus debate

Ricardo’s views were dominant until the Keynesian Revolution

Smithian View of Aggregate Demand

Frugality and savings were virtues

Capital accumulation was the primary determinant for prosperity, growth and development

Rate of savings does not affect aggregate demand but only the composition of output, ie. consumption and investment goods

Smithian View of Aggregate Demand Cont’d

Classical View

Overhead pp. 146

Malthusian Challenge

The savings-investment process can not continue indefinitely without leading to long-run stagnation (ie. the stationary state)

Believed that there was insufficient “effectual” demand from households of labour and capitalists in the short run

Social function of non-productive classes was to consume without proceeding

Helped prevent depressions and eventual stagnation

Triumph of Say’s Law

Sufficient purchasing power is generated in the process of producing goods and services to clear all markets at “satisfactory” prices

Supply creates its own demand

Denied possibility of hoarding

Classical Monetary Theory

I. Bullionists Early “monetarists” Inflation is always a

monetary phenomena so tight controls on money supply is required

Gold Standard

II. Real Bills A flexible supply of loans

is required to finance the variable transaction of commercial exchange (ie. circulating capital)

Flexible loans requires flexible money supply (ie. deposits)

The money supply should be endogenous

Keynes on Malthus and Ricardo

Read pp. 149-52 carefully on your own

Summary

Distinct break in methodology

I. Smith – Combination of theory, history and institutional analysis

II. Ricardo – Highly abstract, deductive theory

Scope shifts fromI. Smith – economic

policies to promote economic growth and development

II. Ricardo – implications of changes in the functional distribution of income over time