David Ricardo(1772-1823) Principles of Political Economy and Taxation (1819)

Had 16 siblingsBecame Quaker and then independentMalthus’s, J. Mill’s and Bentham’s friendRich (600,000 pounds in 1823; in terms of 2017 US dollar??)Purchased the seat at the British parliamentDied from an infection of the middle ear that spread into the brain

Rent and theory of profit

Malthus’s idea of Glut

LTV

Ricardo’s Theory of Rent

I. Two Assumptions:1. Land differed in its fertility with land being arranged in a spectrum from most fertile to least fertile.

2. Competition always equalized the rate of profit among capitalist farmers who rented land from the landlords.

Net Produce = Total Q – Necessary Costs of Production

where Necessary Costs of Production = Wages + Replacement K

Rent is due to 1) scarcity of land 2) population increase

Rent is on the 1) 1st quality land2) the amount is determined

by the difference in qualityQ) Why?

Competition is between capitalist farmers.

Landlord chooses the highest rent paying capitalist farmer.

Q) Why does a capitalist farmer want to paymore rent?

Ricardo and Price Determination

Prices = Wages + ProfitsWhat about Rent?

Rent was “in all cases a portion of the profits previously obtained on the land. It…[was] never a new creation of revenue, but always a part of revenue already created.”

Ricardo and the Relationship between Profits, Rent and Prosperity.

I. “the interest of the landlord is always opposed to the interest of every other class in the community”

Economic well being is tied to Capital Accumulation:

1. Capital Accumulation → 2. Rising Labor Demand → 3. Rising Market Wages → 4. Rising Population → 5. Increased Food Demands → 6. Less Fertile Land Use → 7. Rising Food Production Cost → 8. Rising Rents → 9. Falling Profits →10. Declining Capital Accumulation

Rising Rents are an Economic and Social Constraint.

Declining profitabilityas an explanation of crisis

LTV

-- Utility is needed but plays NO role in value determination

-- Scarcity and the amount of labor expended determine the value of a commodity

-- However, scarcity is only important for certain commodities

Q) Like what?

Portugal has absolute advantage in both Cloth and Wine

90<100 and 80<120

120/100 = 1.2 100/120 = 0.83 è specializing in Cloth

90/80 = 1.12 80/90 = 0.88 è specializing in Wine

Portugal gets more Cloth by exchanging its Wine with British Cloth thanproducing it domestically.

Q) Why? A) Because only 0.83 units of Wine needed to get 1 unit of Clothrather than 1.12 units if Cloth produced domestically.

Malthus on Market DisequilibriumThe Theory of Gluts

In Times of Prosperity Capitalists will Invest in either (1) New Capital of the same Technology or (2) New Capital which embodies New Technology.

1. In the case of New Capital of the same Technology, the sudden increase in Capital would outstrip the existing labor supply causing a) some Capital to lay idle and b) wages to rise.

Whether Capital is idle or wage increases cause profits to decline, both circumstances cause the capitalist to not reinvest (hoard cash).

2. In the case of New Capital which embodies New Technology, the same quantity of output can be produced using less labor. The displacement of labor then reduces demand causing a glut.

CRISIS

Malthus’s Solution for the Problem of Gluts

Because Gluts are caused by excessive profits thereby driving the excessive accumulation of K and the subsequent glut induced economic downturn

As a result, Malthus suggests a redistribution policy toencourage an increase in income for landlords. Malthus’spolicy of choice being the Corn Laws

Whose???

Ricardo’s Response to Malthus’s Theory of Gluts

1. The idea of landlord’s being necessary to offset the appearance of gluts is considered an absurdity. The position essentially advocates that capitalists subsidize the unproductive consumption of the landlord. The capitalist may as well advocate a destruction of the available commodities.

2. Supply will create its own demand, essentially Say’s law prior to Say.