Further Technological Relationships in the Wealth of Nations and in Ricardo's Principles

Further Technological Relationships in the Wealth of Nations and in Ricardo's PrinciplesAuthor(s): David SimpsonSource: The Canadian Journal of Economics and Political Science / Revue canadienned'Economique et de Science politique, Vol. 33, No. 4 (Nov., 1967), pp. 585-590Published by: Wiley on behalf of Canadian Economics AssociationStable URL: http://www.jstor.org/stable/140025 .

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Notes 585

Bladen was appointed its Managing Editor-a position he held for the next twelve years-and the JOURNAL was (as it still is) published by the University of Toronto Press.4

For the seven years (1928-34) before the establishment of CJEPS in February 1935, the University of Toronto published an annual paperback volume entitled Contributions to Canadian Economics. This series contained documents and articles on Canada's economic history, employment problems, business developments, banking problems, agricultural economics, govern- mental fiscal developments, and international economics. These seven books contained some thirty articles, half from professors at the University of Toronto and the other half from professors at Queen's, McGill, Alberta, British Colum- bia, McMaster, and Dalhousie, and from senior economists in the federal civil service.

Queen's University also published a series entitled Queen's University Bulletins. These pamphlets appeared about four times a year from 1910 to 1928, and about half of them dealt with economics, including articles' on price problems, bank inspection, business cycles, federal finance, agricultural development, and so on. From 1927 to 1934 McMaster University also published frequent bulletins under the title Canadian Economic Service; most of its bulletins dealt with current fiscal and banking developments, domestic and external trade, and business and trade union problems.

Before 1935 there had been, of course, a good number of articles on economics and the political sciences printed in the Queen's Quarterly (1893+), University of Toronto Quarterly (1931+), the Dalhousie Review (1920+), and the Canadian Banker (1893+), all of which were quarterlies. The establishment of the present JOURNAL, however, provided a special forum for the work of economists, political scientists, and sociologists.

But with the increase in the number of students, the forces of specialization latent in every science, and the realization of the public value of informed opinion bearing of social problems, not only have the departments in the universities proliferated and split (as the universities have done themselves) but so also do our associations and our journals. This vigorous growth has all occurred within eighty or ninety years-the span of one long lifetime. ...

4See V. W. Bladen, "A Journal is Born: 1935," this JOURNAL, XXV, no. 1 (Feb. 1960), 1-5.

FURTHER TECHNOLOGICAL RELATIONSHIPS IN THE WEALTH OF NATIONS AND IN RICARDO'S PRINCIPLES*

DAVID SIMPSON The Economic and Social Research Institute, Dublin

A recent articlel refers to passages from The Wealth of Nations and from Ricardo's Principles in support of the general proposition that the classical economists tended to assume fixed coefficients of production. However, the article deals only with combinations between the factors capital and labour. *The author would like to thank Dr. M. D. McCarthy for his helpful comments. 1S. Hollander, "Some Technological Relationships in the Wealth of Nations and in Ricardo's Principles," this JOURNAL, XXIII, no. 2 (May 1966), 184-201.

XXXIII, no. 4, November/novembre, 1967



586 DAVID SIMPSON

The present paper discusses the combinations of land and labour which are suggested by Smith's theory of foreign trade and Ricardo's theory of rent. It proposes that the fixed factor combinations which are apparent can be explained by the form of an underlying production function which is common to both theories. Throughout the paper it is assumed that labour and capital are used in fixed proportions: accordingly, "labour" can be understood to stand for "labour-plus-capital."

Adam Smith's theory of foreign trade-sometimes known as the "vent-for- surplus" theory-has been discussed by Mill,2 Williams,3 and, most recently, Myint.4 The two following passages from the Wealth of Nations reflect this theory, which Smith develops implicitly rather than explicitly. The first (I, book II, chap. v) is:

When the produce of any particular branch of industry exceeds what the demand of the country requires, the surplus must be sent abroad, and exchanged for something for which there is a demand at home. Without such exportation, a part of the productive labour of the country must cease, and the value of its annual produce diminish. The land and labour of Great Britain produce generally more corn, woollens, and hardware, than the demand of the home-market requires.5

The second passage, quoted in Myint's article (p. 318), is

Between whatever places foreign trade is carried on, they all of them derive two distinct benefits from it. It carries out that surplus part of the produce of their land and labour for which there is no demand among them, and brings back in return for it something else for which there is a demand. It gives a value to their superfluities, by exchanging them for something else, which may satisfy a part of their wants, and increase their enjoyments. By means of it, the narrowness of the home market does not hinder the division of labour in any particular branch of art or manufacture from being carried to the highest perfection. By opening a more extensive market for whatever part of the produce of their labour may exceed the home consumption, it encourages them to improve its productive powers, and to augment its annual produce to the utmost, and thereby to increase the reial revenue and wealth of society.

Smith suggests that in an economy before the opening of foreign trade there exists a surplus productive capacity such that imports can be obtained without foregoing consumption from domestic production. The real cost of leisure foregone is, of course, incurred, but still the contrast with the Ricardian theory of foreign trade and its modern variants is evident. The root of the difference lies in the notion of the existence of a surplus productive capacity.

2J. S. Mill, Principles (Ashley ed.) Bk. III, chap. xvii, 579-80. 3John H. Williams, "The Theory of International Trade Reconsidered" Economic Journal (June 1929), and "International Trade Theory and Policy-Some Current Issues" American Economic Review, Papers and Proceedings (May 1951). 4H. Myint, "The Classical Theory of International Trade and the Underdeveloped Coun- tries" Economic Journal (June 1958). 5To this passage in his edition, Cannan adds the note: "But why may not the labour be diverted to the production of "something for which there is a demand at home"? The 'corn, woollens, and hardware' . . . perhaps suggest that it is supposed the country had certain physical characteristics which compel its inhabitants to produce particular commodities."



Notes 587

As an illustration of Smith's theory we may quote Myint's description of the progress of a typical self-sufficient peasant community in an underdeveloped country. With existing techniques this community has more than sufficient land and labour to produce its subsistence requirements, but without any market outlet to dispose of its potential surplus there is no incentive to produce more than its own requirements. The opening of trade then allows it to produce a crop for export in addition to the subsistence production: imported goods appear as a net gain obtainable merely for the effort of the extra labour in growing the export crop.

Myint observes6 that "The concept of a surplus productive capacity above the requirements of domestic consumption implies an inelastic domestic demand for the exportable commodity and/or a considerable degree of internal immobility and specificness of resources." To be precise two conditions are sufficient for the existence of a surplus capacity such as that described. First, there must be a perfectly inelastic domestic demand for the exportable commodity. Secondly, there must be restriction on combination of the factors of production. Either of these conditions without the other is insufficient. The nature of the first condition is obvious; the s,econd one concerns the form of the production function.

It is unlikely that Smith had in mind the notion that there was some physical restriction ruling out certain factor combinations, as Cannan suggests. It is true that land may exist in grades sufficiently different that land of one grade cannot be used to grow crops obtainable from another, i.e., the opportunity cost of land may be zero. In terms of Myint's example, this would mean that the community's "surplus" land could grow the export crop, but not the domestic subsistence crop. This explanation would fit Smith's theory, but it is not sufficiently general to be plausible.

It is more likely that the existence of surplus land in Smith's theory is to be explained by the nature of the production function. The function must be of the form such that the marginal product of land falls to zero before the supply of available land is exhausted. This point is illustrated graphically in Figure 1. Before the opening of trade, the community is producing and consuming OA of the subsistence crop. The horizontal slope of the indifference curves indicate satiation of the community demand for this crop, and thus the actual output, OA, falls short of the potential output, OB, available from the land and labour resources. Figure 1 (b) shows how the production finction limits the extent to which land can be substituted for labour. With a total labour force, ON, a maximum output of OB is attainable. But before trade begins only OA of the crop is required. This can just be produced with OF of labour, but with no less. When trade opens, output is increased to OB, and the "surplus" domestic crop AB, is exchanged for AC of imports. The community is now at the preferred position C, where it is consuming imports without reducing its previous consumption of the domestic crop.

It is interesting to compare the progress of this peasant community described by Myint with Ricardo's account of the cultivation of land by a growing community. In both cases, progress takes place under constant technology and 6"The Classical Theory of International Trade and the Undeveloped Countries," 322.



588 DAVID SIMPSON

D

O A B O F N

Domestic Goods Labour

FIGuRE 1 (a) FIGURE 1 (b)

Output Output

Second- First- grade grade Land Land

Second- First- grade grade Land Land

P Labour Labour

FIGuRE 2 (a) FiGuRE2 (b)

y ~ ~ ~ ~ ~ ~ ~ / -

Y

0

*0~~~~~~~~~~~~~l C~~~~~~~~~~~ 0~~~~~~~~~~ -4~~~~~~~~~~~~~~-

0 n X O X Labour Labour

FIGuRE 2 (c) FIGURE 2 (d)



Notes 589

fixed combinations of land and labour until the supply of land is exhausted. Whereas in the situation described by Ricardo some land is unemployed while labour is fully employed, in the situation described by Myint both factors are unemployed. To obtain the unemployment of labour it was necessary to postu- late the satiation of wants in addition to the form of the production function.

II

According to Ricardo,7 the cultivation of land by a growing community pro- ceeds in the following stages. At first, only a fraction of the abundant land of the first grade is cultivated. As population expands, an equal additional quantity of labour is applied to an additional fraction of the land to produce the same output per unit of labour as was obtained at first. These fixed combinations of factors continue to yield a constant average output until the supply of land of this grade is exhausted, i.e., when p units of labour have been applied in Figure 2 (b). Intensive cultivation then begins on the best land and rent sets in with the fall in the marginal product of labour. Eventually, cultivation of the second grade of land begins when the marginal product of labour on the best land has fallen sufficiently. Ricardo's account, however, does not indicate how much land will be used.

Although Ricardo does not specify how the factor combinations are deter- mined on the different grades of land, efficiency considerations suggest that land will be added to a given quantity of labour until the marginal productivity of land is just zero, i.e., at K, where JDy > 0 if Y / X < K. One possible form of the production function which would fit the situation described by Ricardo is illustrated in Figure 2 (d). This is the same form of production function8 as that used in Figure 1 (b) to illustrate Smith's theory of foreign trade: outside a certain area (demarcated by the lines from 0') of the production surface, the constant product curves, while convex to the origin, are no longer downward- sloping but turn back and slope upwards.

This more general type of production function can be contrasted with that shoNwn in Figure 2 (c) in which the constant product curves are downward- sloping and convex to the origin at all points. This is a property of the class of production functions whose elasticity of substitution is constant but not zero.

It is instructive to consider the consequences of applying a production function of the latter type to the situation described by Ricardo. One of the properties of the function is unlimited factor substitution such that, when one factor is fixed, increases in output can always be obtained by adding more of the second factor. In the present example, if this; form of production function prevailed on land of all grades, then it would follow that unlimited quantities of land could always be combined with a given quantity of labour to produce a constant average (marginal) output of wheat per unit of labour. In other words, nx acres of inferior land could always be substituted for x acres of 7David Ricardo: Principles of Political Economy and Taxation (London 1817), chap. 2. The nature of Ricardo's production function was suggested to me by Professor Wassily Leontief. Professor Leontief bears no responsibility for the way in which the point is developed. 8See, for example, R. G. D. Allen, Mathematical Analysis for Economists (London, 1956), 289, Fig. 80.



590 DAVI SIMPSON

better land to produce the same output of wheat in combination with a given quantity of labour. Among the conclusions to be drawn from the use of this type of production function in this context are: (1) At any time, the entire supply of land of a given grade would be under cultivation. (2) Differential rent between lands of different grades could not arise, because the marginal product of labour would be the same on all grades of land. (3) Accordingly, from the point of view of efficiency, it would not matter whether cultivation began on the best land or the worst land.

This situation can be illustrated by the total output curves of Figure 2 (a), where the equal slopes of the output curves indicate the equality of the marginal products of labour applied on each type of land.

These conclusions, which depend upon the property of the production function that the marginal product of land never falls to zero no matter how much land is combined with a given quantity of labour, clearly does not cor- respond to the situation described by Ricardo. The appropriate Ricardian total output function is shown in Figure 2(b).

III

The foregoing discussion lends support to the notion that Smith and Ricardo tended to think in terms of fixed combinations of factors of production. How- ever, it is suggested that these combinations may arise from a more general type of production function than either the fixed coefficient production function or any of the class of production functions characterised by constant non-zero elasticity of substitution.

It might be supposed that the evolution of the contemporary advanced indus- trial economies has led to an enormous expansion of the possibilities of factor substitution since the time of Smith and Ricardo. Williams,9 however, finds Smith's theory quite relevant to post-war Europe, and even suggests that it helps to explain the movement towards economic integration.

9"International Trade Theory and Policy-Some Current Issues," 427.

MEASUREMENT OF DISGUISED UNEMPLOYMENT IN PUNJAB AGRICULTURE

J. S. UPPAL State University of New York at Albany

In this paper an effort is made to estimate the extent of disguised unemployment in the agriculture of Punjab, India.' By disguised unemployment I mean the number of labour units that can be removed from farms without reducing the total output by making simple changes in farm organization, i.e., consolida- tion of small and fragmented pieces of land. For estimating the magnitude of tlhe phenomenon, we have to find the difference between the number of labour II am greatly indebted to Professor Hans J. A. Kreyberg, visiting Professor of Economics at the University of Minnesota, from the Institute for Socialokonomi Norges Tekniske, Trond- heim, Norway, for his valuable suggestions in applying this method.

XXXIII, no. 4, November/novembre, 1967



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Further Technological Relationships in the Wealth of Nations and in Ricardo's Principles