David Ricardo

(1772-1823)

PRINCIPLES OF POLITICAL ECONOMY AND TAXATION (1817)

The produce of the earth-all that is derived from its surface by the united application of

labour, machinery, and capital, is divided among three classes of the community;

namely, the proprietor of the land, the owner of the stock of capital necessary for

cultivation, and the labourers by whose industry it is cultivated.

CENTRAL ISSUE ON POLITICAL ECONOMY To “determine the laws” regulating

distribution between the various classes and their relation to the general circumstances of society.

SCOPE

The effects on the economy as a whole of the protection afforded to agriculture by the Corn Laws.

THE NAPOLEONIC WARS

A series of conflicts fought between France and a number of European nations between 1799-1815.

CORN LAWS

Trade barriers designed to protect cereal producers in the UK and Ireland against competition from less expensive foreign imports between 1815-1846.

LIFE Born in London on April 18, 1772. He was third of 17 children from a Sephardic

Jewish family. He amassed a large fortune as a member of the

London stock exchange. He greatly influenced Great Britain’s policy on

trade as member of the Parliament in 1819 when he retired from his business at the age of 42.

Ricardo was a close friend of James Mill, who encouraged him in his political ambitions and writings about economics. Other notable friends included Jeremy Bentham and Thomas Robert Malthus, with whom Ricardo had a considerable debate (in correspondence) over such things as the role of land owners in society.

Died on September 11, 1823 at his estate in Gloucestershire

THEORY OF DISTRIBUTION

Factors of ProductionLandLabourCapitalists

Three Classes of PeopleLandlordsWorkersCapitalists

NOTE:

Landlords earn rentLabourers earn wagesCapitalists earn profits

ANALYTICAL PROGRAM

that in all countries, and all times, profits depend on the quantity of labour requisite to provide necessaries for labourers on that land or with that capital which yields no rent.

ANALYTICAL PROGRAM

Rate of profit as a primary regulator of the rate of economic growth.

Agriculture was unique because it was the only sector in which the same commodity figured as both input and output (e.g. corn seed=input, corn=output)

Net return= output-input Rate of profit= net return ÷ total inputs As population grows, a need to produce more

is seen, thus they will have to need more labourers, which will in turn decrease the rate of profit.

THE ARGUMENT FOR THE ISOLATION OF RENT AND PROFIT The ‘niggardliness of nature had made land scarce and

uneven in quality. Acreages of high fertility would provide a windfall to their

owners. The size of this windfall would swell as population growth

enlarged the demand for food. As food prices rose, less fertile areas would be brought

under the plough The owners of the fertile acreages would reap higher and

higher rents The outputs of the last units, on the other hand, would be

sufficient only to cover the costs of cultivation and would fail to yield a rent.

Thus be maintained the rent and profit could be isolated by observing zero-rent land where the net return would consist entirely of the return on capital- profits

PROFIT

The profits of stock remains as the cause of the permanent alterations in the rate of interest.

LAW OF RENT

The rent of a land site is equal to the economic advantage obtained by using the site in its most productive use, relative to the advantage obtained by using marginal (the best rent-free) land for the same purposes, given the same inputs of labour and capital.

ZERO-CAPITAL RENT LAND

The best available land that is not earning rent for its owner is define as zero-rent land.

Extensive Margin Rent

Intensive Margin Rent

Rent earned from the intensive use of land (quantity).

When the rent earned by a landlord is due to the superior fertility of the land (quality).

LABOUR

Basis for the price of a product Profits would be high or low in proportion as

wages were low or high. The power of the labourer to support himself,

and the family which may be necessary to keep up the number of labourers, does not depend on the quantity of money which he may receive for wages, but on the quantity of food, necessaries, and conveniences become essential to him from habit, which that money will purchase.

NATURAL PRICE OF LABOUR

Depends on the price of food, and conveniences required for the support of the labourer and his family

Has always a tendency to risem because one of the principal commodities by which its natural price is regulated, has a tendency to become dearer from the greater difficulty of producing it.

MARKET PRICE OF LABOUR

Labour is dear when it is scarce and cheap when it is plentiful.

The price which is really paid for it.

May deviate from its natural price, it has, like commodities, a tendency to conform to it.

NATURAL VS. MARKET PRICE OF LABOUR

When market price of labour exceeds its natural price, the labourer is most satisfied.

When the market price is below its natural price, the condition of the labourer is most wretched.

LABOUR THEORY OF VALUE

Labour as the crucial common denominator. The value of a commodity could be

expressed in terms of labour inputs required in its production.

There would be divergent price results if the elements of production differ from one producer to another.

Two commodities produced with identical quantities of labour input would differ in price if one required longer commitments of capital before revenues were realized through sales than the other.

TAX

Tax on raw produce falls on the consumer, but will also diminish profits.

Tax on rents falls on the landlord Taxes on houses will be divided

between the occupier and the ground landlord

Taxes on profits will be paid by the consumer and taxes on wages by the capitalists.

RICARDO AND THE LONG-PERIOD PROSPECTS OF THE ECONOMY

The value of corn is regulated by the quantity of labour bestowed on its production on that quality of land, or with that portion of capital which pays no rent

As population growth was thought likely to accompany economic expansion, food requirements would grow higher.

The distribution of income would shift in favour of rents.

RICARDO ON ECONOMIC POLICY

Opposed government intervention in economic activity and endorsed the beneficence of a self-regulating market system.

Mainly focused on the Corn LawsSupports free trade in agricultural

products

THEORY OF COMPARATIVE ADVANTAGE

The idea holds that it is better for a country to trade for products that it can get at a lower cost from another country than producing it domestically.

Tradeoffs between nations consider the opportunity cost of each production.

When both countries specialize and trade their products, both countries gain. These gains come because each country specializes in producing the goods for which its comparative cost is lower.

COMPARATIVE ADVANTAGE

Wine (1) Bread (1)

Poorland 5 10

Richland 3 1

Is it advantageous for Richland to trade?

Think again. Poorland’s cost of producing wine, although higher than Richland’s in terms of hours of labor, is lower in terms of bread. For every bottle produced, Poorland gives up half of a loaf, while Richland has to give up three loaves to make a bottle of wine. Therefore, Poorland has a comparative advantage in producing wine. Similarly, for every loaf of bread it produces, Poorland gives up two bottles of wine, but Richland gives up only a third of a bottle. Therefore, Richland has a comparative advantage in producing bread.

.

If they exchange wine and bread one for one, Poorland can specialize in producing wine and trading some of it to Richland, and Richland can specialize in producing bread. Both Richland and Poorland will be better off than if they had not traded. By shifting, say, ten hours of labor out of producing bread, Poorland gives up the one loaf that this labor could have produced. But the reallocated labor produces two bottles of wine, which will trade for two loaves of bread. Result: trade nets Poorland one additional loaf of bread. Nor does Poorland’s gain come at Richland’s expense. Richland gains also, or else it would not trade. By shifting three hours out of producing wine, Richland cuts wine production by one bottle but increases bread production by three loaves. It trades two of these loaves for Poorland’s two bottles of wine. Richland has one more bottle of wine than it had before, and an extra loaf of bread