Chapter 5: Ricardo and Malthus

1. Chapter 5: Ricardo and Malthus Questions for Review, Discussion and Research 2, 3, 4, 5, 6, 7, 8

2. Malthusian Population Thesis • Scientific in method as well as purpose • Believed that population tends to grow geometrically while food (and other necessities) increase arithmetically

3. Checks develop to keep the growth rate of population in line with the food supply • Positive Check – increase in death rate due to wars, famine, disease, etc. • Preventative Check – postponement of marriage would lower birthrate

4. Flaws in Thesis • Birth Control • No distinction between sexual desire and the decision to have children • Underestimates the impact of technology

5. Iron Law of Wages • Combination of wage fund doctrine and Malthusian population thesis shows long run wages converging to subsistence levels

6. Overview of Ricardo • Stockbroker turned country gentleman • Contributions include: • Methodology • Theories of Value • International Trade • Public Finance • Diminishing returns • Economic Rent

7. Published first pamphlet in 1810 • The only major publication after Smith was by Malthus in 1803

8. Methodology of Ricardo • Questions of political economy that were answered by Smith were an eclectic blend of theory with a historical narrative and the evolution of institutions • Ricardo abstracted from contemporary British economy and employed a timeless deductive approach

9. Formulation of economic policy required an understanding of the causal relationship between variables • It is non-contextual and it becomes the path of main stream economics after Marshall

10. Scope of Economics According to Ricardo • Overhead pp 115-16

11. Ricardian Model Overhead pp. 116 • Landlords are nonproductive or parasitical

12. Concept of Surplus Economic Surplus

13. Assumption of Ricardian Two-Sector Model • Table 5-1 Concept of Diminishing Returns in Agriculture • First discovered by Turgot in 1763

14. Concept of Economic Rent Viewed from the Product Side • Assume a fixed quantity of agricultural land to which “doses” of capital and labour (effort) are added

15. Intensive Margin (figure 5-2) • The effects of ‘effort’ on different plots of land with variable fertility Table 5-2

16. Distinction Between Gross and Net Marginal Product of Effort ( MPE ) Today • Gross MPE – Includes depreciation or CCA of capital inputs • Net MPE – After replacement costs of capital inputs

17. Ricardian Concepts of Gross and Net MPE

18. Importance of Diminishing Returns and Economic Rent • These concepts are the foundation of marginal productivity theory which explains the supply side determination of factor input prices • Individual owners view land rent as a cost of production equal to its opportunity cost in alternative uses

19. Ricardo considered economic rent from an aggregate point of view and therefore • Not a cost of production • Not price determining • Opportunity cost is zero

20. Ricardo’s Value Theory • Wanted to refute the prevailing cost of production theory of value that sought to explain the forces determining relative prices at a given point of time • His alternative theory was to explain the economic forces that cause changes in relative prices over time because of his interest in the income distribution consequences of the Corn Laws

21. Sought to identify a commodity that was an invariable measure of value, ie. an absolute measure of value that is invariant over time • Believed that value depends on the quantity of labour necessary for long run production

22. Production with Ricardo’s Labour Theory of Value • Measure the quantity of labour inputs • Differing skills and working conditions • Capital inputs are merely stored up labour (ie. Labour supplied in a previous period)

23. Profits are a different percentage of final price for two goods when • Total capital per unit of final output is different • Rate of turnover of capital depends on the composition of capital (ie. fixed vs. circulating capital)

24. “Corn” Model • Pure circulating capital model where a percent of previous years output of wheat is required for the years production that • Sustains labour during the period of production • Seed requirements

25. Summary of Ricardian Value Theory • Overhead pp. 132-33

26. Ricardian Distribution Theory • Often called a residual theory • He subtracted the necessary payments for labour and “depreciation” from gross output to calculate the economic “surplus” shared by capitalists and landlords

27. Short Run Distribution Theory • Overhead pp. 162

28. Long Run Distribution Theory • Figure 5-3 • Overhead pp. 161 • Overhead pp. 136

29. Static Theory of Comparative Advantage • Voluntary trade or exchange can benefit all countries because specialization results in an increase in total output • Carefully read pp. 137 to 140 on your own

30. This static model assumes that factor inputs are exogenous while the Smithian trade model is dynamic and the • Quantity of factor inputs is endogenously determined • Increasing returns

31. Stability and Growth of a Capitalist Economy • Controversy over Say’s Law personified by Ricardo-Malthus debate • Ricardo’s views were dominant until the Keynesian Revolution

32. Smithian View of Aggregate Demand • Frugality and savings were virtues • Capital accumulation was the primary determinant for prosperity, growth and development • Rate of savings does not affect aggregate demand but only the composition of output, ie. consumption and investment goods

33. Smithian View of Aggregate Demand Cont’d

34. Classical View • Overhead pp. 146

35. Malthusian Challenge • The savings-investment process can not continue indefinitely without leading to long-run stagnation (ie. the stationary state) • Believed that there was insufficient “effectual” demand from households of labour and capitalists in the short run

36. Social function of non-productive classes was to consume without proceeding • Helped prevent depressions and eventual stagnation

37. Triumph of Say’s Law • Sufficient purchasing power is generated in the process of producing goods and services to clear all markets at “satisfactory” prices • Supply creates its own demand • Denied possibility of hoarding

38. Classical Monetary Theory • Bullionists • Early “monetarists” • Inflation is always a monetary phenomena so tight controls on money supply is required • Gold Standard

39. II. Real Bills • A flexible supply of loans is required to finance the variable transaction of commercial exchange (ie. circulating capital) • Flexible loans requires flexible money supply (ie. deposits) • The money supply should be endogenous

40. Keynes on Malthus and Ricardo • Read pp. 149-52 carefully on your own

41. Summary • Distinct break in methodology • Smith – Combination of theory, history and institutional analysis • Ricardo – Highly abstract, deductive theory

42. Scope shifts from • Smith – economic policies to promote economic growth and development • Ricardo – implications of changes in the functional distribution of income over time