Classical Political Economy. Part III. D. Ricardo

Transcription

1 Classical Political Economy Part III D. Ricardo Sandelin et al. (2014, Chapter 3) [S] + Others [See the references] 2018 (Comp. by M.İ.)

2 Classical Political Economy

3 David Ricardo [1] David Ricardo was born into a wealthy family in London in 1772 [He was the third of seventeen children]. His parents were immigrants from Amsterdam. His father was a stockbroker, and at the age of fourteen David began working with him. Seven years later he broke with his parents as he left Judaism [the way of life of the Jewish people] and married a Quaker [ a member of a group with Christian roots]. His own energy and help from his friends at the Exchange made it nevertheless possible for him to continue as a successful stockbroker, and he soon became wealthy. In 1819 he became a member of Parliament.

4 At age twenty-seven, after reading Adam Smith s The Wealth of Nations, Ricardo got excited about economics. He wrote his first economics article at age thirty-seven and then spent the following fourteen years his last ones as a professional economist. [2] David Ricardo was perhaps less pioneering than Smith, on whose ideas he largely based his theory. His reputation as an economist is nevertheless at least as good as Smith s

5 Ricardo, QTM and English Inflation In the 1810s he was an influential participant in discussions on monetary policy, where he explained the English inflation with an excessive issue of banknotes. In short, Ricardo was an early believer in the quantity theory of money, or what is known today as monetarism. [2]

6 Ricardian equivalence Another idea associated with Ricardo is Ricardian equivalence, an argument suggesting that in some circumstances a government's choice of how to pay for its spending (i.e., whether to use tax revenue or issue debt and run a deficit) might have no effect on the economy [This is due to the fact the public saves its excess money to pay for expected future tax increases that will be used to pay off the debt] Economist Robert Barro is responsible for its modern prominence. [3] Government intervention As a Classical economist, Ricardo is obviously against government intervention in the economy. More important is his justification for the ineffectiveness of this intervention. At his time, Parliament was debating whether to increase taxes to invest in the economy. Ricardo demonstrated that any such investments would have little effect in stimulating the economy. [4]

7 OPPET {INTRO} Ricardo s most important work is On the Principles of Political Economy, and Taxation (1817). Essential parts of the book are devoted to the functional distribution of income, i.e. the distribution between workers, capitalists and landlords. The theory of value is an important related element. Ricardo s theory of the rent of land has marginalistic elements which heralds neoclassical thought. Ricardo also analyzed the employment effects of technical progress HOWEVER, Ricardo s most celebrated contribution is probably his theory of comparative advantages in international trade. YET his greatest legacy to modern economics is perhaps his method of reasoning (He developed the deductive method within economics, usually starting with a number of assumptions, from which he deduced his theorems in clear logical steps. ) The rigorous re-examination of Smith s insights with his deductive method lets Ricardo stand out as the second great protagonist [the main character] of the classical school.

8 Context matters! Economist, David Ricardo By David Wang /watch?v=rv0jj26pjac

9 Details + Qualifications

10 According to some people Ricardo s theory of the rent of land is historically interesting because it is an early elaborate example of the marginal principle and diminishing returns, which later on became central in neoclassical thought. e.g. it holds that as more and more resources are combined in production with a fixed resource for example, as more labor and machinery are used on a fixed amount of land the additions to output will diminish. [2] There is one difference, however. While neoclassical analysis mainly deals with the result of a marginal change of an input factor of constant quality, Ricardo set the focus on inputs, especially land, of different quality.

11 According to his definition, [r]ent is that portion of the produce of the earth, which is paid to the landlord for the use of the original and indestructible powers of the soil (p. 67). If there were an abundance of fertile land at an excellent location, only a small portion of it would be cultivated. Land would be a free good; no rent would be paid. However, when population grows, land of inferior quality will have to be cultivated, and rent will be paid for the better land.

12 Let us take a look at Ricardo s basic example. Suppose there are three plots of land: Nos 1, 2 and 3, each of equal size, but different quality. With an equal amount of capital and labour on each plot, a net produce of 100, 90 and 80 quarters of corn could be harvested on each respective plot (see Table 2). when population grows, land of inferior quality will have to be cultivated, and rent will be paid for the better land.

13 The same principle can be applied to other natural resources of various qualities. If they can be appropriated, and if the access to each quality is limited, they afford a rent, as the successive qualities are brought into use. Beyond natural resources Ricardian rent theory can be extended to explain, for example, price differences between identical types of buildings (private housing, offices, shops, etc.) in different locations.

14 On foreign trade Ricardo regarded free international trade as highly beneficial for a country. His analysis of comparative advantages (or comparative costs) shows that it is practically always feasible to specialize and trade with each other. His concrete example is still found in modern textbooks. To begin with, it is assumed that both Portugal and England would be able to produce their wine and cloth In Portugal the production of wine might require the labour of 80 persons for one year, i.e. 80 person years, and cloth the labour of 90 persons. In England the production of the same quantity of wine and cloth might require 120 and 100 person years, respectively. Portuguese producers are thus more efficient than English producers in both branches.

15 If labour and capital would move freely between countries, it would undoubtedly be advantageous to the capitalists of England, and to the consumers in both countries, that under such circumstances the wine and cloth should both be made in Portugal, and therefore that the capital and labour of England employed in making cloth, should be removed to Portugal or that purpose (p. 136). But labour and capital do not move freely between countries. Concerning labour, Ricardo seems to have regarded its immobility as self-evident. With regard to capital he, like Smith in his paragraph on the invisible hand, invoked a home bias argument: for the capitalist it is safer and easier to invest his money in the domestic economy, even if it yields a lower rate of profit there than abroad (pp ).

16 Note that: <Portugal have an absolute advantage in the production of cloth [& wine], but England have a comparative advantage in cloth > Given the limited mobility of production factors, it is advantageous to England to export cloth to and import wine from Portugal, and this trade will even benefit Portugal. So the exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England (p. 135). In comparison with Portugal, England is comparatively more efficient in producing cloth than wine, as 100/90, the relative cost of producing cloth, is less than 120/80, the relative cost of producing wine. Portugal is comparatively more efficient in producing wine, as 80/120 is less than 90/100. This leads to the conclusion that total production could be increased by specialization and trade. If Portuguese produce only wine and Englishmen produce only cloth, the production of both wine and cloth is increased.

17 The Labor theory of value To properly understand the value of a good, like Smith, Ricardo believes that it is necessary to take into consideration the amount of labor and skill required to produce the good, or the amount of labor and skill that is necessary to make the money to procure the good. But, unlike Smith, Ricardo also takes into consideration the labor that is incorporated into the capital that was necessary to produce the good (tools, machines, raw materials, etc.). A worker may spend the same amount of time producing a quantity of grain and a piece of furniture, but since the furniture requires machines and tools, this product will be worth more than the grain, which can be produced with very little investment. [This notion of incorporated capital will be a fundamental component of Marx s philosophy. ] [4] Value Ricardo divided products into reproducible and non-reproducible goods. The latter being by definition rare (works of art, diamonds, etc.), it is the demand that determines the value for these goods. Most goods, both agricultural and industrial, however, are reproducible. Although they are often essential for humans (food, clothing, shelter, etc.), because they can be reproduced in large quantities, their abundance keeps their market value low.

18 References [1] Unless otherwise stated, the texts are taken from Sandelin et al. (2014, Chapter 3) [2] [3] Wiki [4] HET in Context by R. Braid