Ricardo

1
Ricardo Malthus Welcome to the Dismal Science

• David Ricardo, 1772 1823
• Stockbroker/Dealer
• Abstraction ? Economic Science
• Championed capitalists
• Opposed Corn Law
• Advanced Says Law
• Major contributions
• Differential rent
• Labor theory of value
• Theory of distribution
• Comparative advantage

• Thomas Malthus,1766 1834
• Parson
• Intuitive approach/preacher
• Championed landlords
• Favored Corn Law
• Advanced Theory of Gluts
• Major contribution
• Law of population

Whoever wins, workers get dry crust
Diminishing Returns Prevail
2
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,
• 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

Hint of an externality in Malthus Law of
Population
3

• 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
  educationThe 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?

4
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

5
Ricardos 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
• Ricardos Labor Theory of Value Production of
  commodities by means of commodities (Pierro
  Sraffa)
• In market economy, labor is a commodity

6
Ricardo Value, Distribution, and Growth
Rent
Marginal Product (corn)
Profit
w
Wage Bill
K1
Capital-Labor Input (Capital and Labor are
Complements)
7
Ricardo Value, Distribution, and Growth
Marginal Product (corn)
Rent
Profit
w
Wage Bill
K1
K2
Capital-Labor Input (Capital and Labor are
Complements)
8
Ricardo Value, Distribution, and Growth
Marginal Product (corn)
Profit squeezed to zero ? Growth ceases
Rent
w
Wage Bill
K
Capital-Labor Input (Capital and Labor are
Complements)
K1