David Ricardo
1772-1823
Family of Portuguese Jewish refugees emigrated to England
A stockbroker, became independently wealthy and retired
Became a Member of Parliament for last 4 years of his life (died suddenly in his 50s)
David Ricardo
1772-1823
First writes pamphlets in response to British political crises
Then writes his master treatise
A flurry of letters between him and Malthus (1810-1823)
David Ricardo
1772-1823
Smith is extremely quotable, Ricardo is not
Ricardo was a businessman, did not have university education
Yet ironically, he wrote very abstractly and theoretically
So we will primarily understand him via his theoretical system
Britain, long an exporter of corn, with population growth was no longer self-sufficient, became a net importer of corn after 1790
Corn prices (and land rents) rising rapidly
Period | Price per quarter ton |
---|---|
1770-1779 | 45 shillings |
1780-1789 | 45 shillings |
1790-1799 | 55 shillings |
1800-1809 | 82 shillings |
1810-1813 | 106 shillings |
Britain at war with France in Napoleonic Wars (1803-1815)
Further disrupting imports of corn into Britain (and further raising corn prices)
Landlords, fearing the end of the war, petitioned Parliament to get legal protection from cheaper, imported Corn
The Corn Laws: a series of tariffs and price floors by Parliament
In 1813 nearing the end of the war, proposal to keep high price floor of 80 schillings per quarter ton
Becomes the major political issue of the day, riots in London
David Ricardo, Robert Torrens, Thomas Malthus, and Edward West enter the debate
Parliament collects facts and issues an 1814 report
Landlords argues high tariffs will keep grain prices low
Also argue that it corn prices allowed to fall, land would no longer be cultivated, leading to a greater shortage of corn than ever
If Ricardo and his allies could show:
Then they could show that high price of corn was caused by extension of cultivation and increase of labor needed to produce more marginal land
Ricardo, Malthus, West, and Torrens all formulated a concept of diminishing returns in agriculture, and a theory of differential rent
Reductio ad absurdum: if diminishing returns were not true, could grow the entire world’s food supply in a flowerpot!
Edward West’s pamphlet
Note diminishing returns and the distinction between average and marginal returns:
“each equal additional quantity of work bestowed on agriculture, yields an actually diminished return, and of course if each equal additional quantity of work yields an actually diminished return, the whole of the work bestowed on agriculture in the progress of improvement, yields an actually diminished proportionate return.”
West, Edward, 1815, Essay on the Application of Capital to Land, with Observations Shewing the Impolicy of Any Great Restriction of the Importation of Corn
David Ricardo
1772-1823
“The exchangeable value of all commodities, rises as the difficulties of their pro- duction increase. If then new difficulties occur in the production of corn, from more labour being necessary, whilst no more labour is required to produce gold, silver, cloth, linen, etc. the exchangeable value of corn will necessarily rise, as compared with those things. On the contrary, facilities in the production of corn, or of any other commodity of whatever kind, which shall afford the same produce with less labour, will lower its exchangeable value.”
Ricardo, David, 1815, Essay on the Influence of a Low Price of Corn on the Profits of Stock
Thomas Robert Malthus
1766-1834
Malthus writes a pamphlet defending the Corn laws
In process, writes a pamphlet Inquiry into the Nature and Progress of Rent (1815)
Argues that rent is due to three causes:
Rent is a useful social institution
David Ricardo
1772-1823
Ricardo strongly disagrees with Malthus
Only Malthus’ reason #3 makes any sense, rent is only paid because of the “[fickleness] of nature in providing fertile land”, and rent is only profits transferred away from capitalists to landlords
“If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation...It is only, then, because land is not unlimited in quantity and uniform in quality...that rent is ever paid for the use of it.”
Ricardo, David, 1815, Essay on the Influence of a Low Price of Corn on the Profits of Stock
David Ricardo
1772-1823
“If the interests of the landlord be of sufficient consequence, to determine us not to avail ourselves of all the benefits which would follow from importing corn at a cheap price, they should also influence us in rejecting all improvements in agriculture, and in the implements of husbandry; for it is as certain that corn is rendered cheap, rents are lowered, and the ability of the landlord to pay taxes, is for a time, at least, as much impaired by such improvements, as by the importation of corn. To be consistent then, let us by the same act arrest improvement, and prohibit importation.”
Ricardo, David, 1815, Essay on the Influence of a Low Price of Corn on the Profits of Stock
David Ricardo
1772-1823
“To produce the wine in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England. Though she could make the cloth with the labour of 90 men, she would import it from a country where it required the labour of 100 men to produce it, because it would be advantageous to her rather to employ her capital in the production of wine, for which she would obtain more cloth from England, than she could produce by diverting a portion of her capital from the cultivation of vines to the manufacture of cloth.”
Ricardo, David, 1817, Principles of Political Economy and Taxation
David Ricardo
1772-1823
Maximum Possible Production
Wine | Cloth | |
---|---|---|
England | 5 | 10 |
Portugal | 4 | 2 |
Opportunity Costs
1 Wine | 1 Cloth | |
---|---|---|
England | 2c | 0.5w |
Portugal | 0.5c | 2w |
David Ricardo
1772-1823
Even in the presence of absolute advantage (one country is more efficient at producing all goods), still better for them to specialize
Pay others to perform a task, or purchase a good, and specialize in producing goods where you have the lowest opportunity cost
This is the principle of comparative advantage
Ricardo called this the principle of “comparative cost”; Torrens calls it “comparative advantage” (and to be fair, Torrens wrote about it first)
Another claim that high prices were caused by high rents
Ricardo concerned about how high tariffs would affect economic distribution in society: clearly favors landlords at others’ expense
Clear how the Corn Laws controversy forced Ricardo to think about these issues and build his own theory...
Corn Laws remained a huge political issue in England in 1830s-1840s
Industralization, rising population, but rising price of bread
Great Famine in Ireland 1845-1849
Radical liberals Richard Cobden & John Bright create the Anti-Corn Law League 1838
A Meeting of the Anti-Corn Law League
Richard Cobden
1804-1865
"[Repealing the Corn laws would solve four problems.] First, it would guarantee the prosperity of the manufacturer by affording him outlets for his products. Second, it would relieve the Condition of England question by cheapening the price of food and ensuring more regular employment. Third, it would make English agriculture more efficient by stimulating demand for its products in urban and industrial areas. Fourth, it would introduce through mutually advantageous international trade a new era of international fellowship and peace. The only barrier to these four beneficent solutions was the ignorant self-interest of the landlords, the "bread-taxing oligarchy, unprincipled, unfeeling, rapacious and plundering."
Robert Peel
1788-1850
Tory Robert Peel becomes P.M. 1841-1846
Repeals the Corn Laws in 1846
Price of corn plummets
Tory Robert Peel becomes P.M. 1841-1846
Repeals the Corn Laws in 1846
Price of corn plummets
David Ricardo
1772-1823
“To determine the laws which regulate this distribution [of income], is the principal problem in Political Economy: much as the science has been improved by the writings of Turgot, Stuart, Smith, Say, Sismondi, and others, they afford very little satisfactory information respecting the natural course of rent, profit, and wages.”
Ricardo, David, 1817, On the Principles of Political Economy and Taxation
David Ricardo
1772-1823
Ricardo wrote very abstractly, making heroic assumptions, to construct a theoretical model isolated from complex reality, from which he could deduce policy implications
“The Ricardian vice”: economists’ predilections towards abstract theory above all else
Very different from Smith (and later, Mill and Marshall)
Ricardo, David, 1817, On the Principles of Political Economy and Taxation
David Ricardo
1772-1823
Applying Ricardian logic beyond agriculture, we arrive at the modern law of diminishing returns
For any one variable factor (holding all others constant), increasing use will eventually yield a diminishing marginal product
Marginal product of labor (MPl): additional output produced by adding one more unit of labor (holding k constant) MPl=ΔqΔl
Average product of labor (APl): additional output produced by adding one more unit of labor (holding k constant) APl=ql
David Ricardo
1772-1823
David Ricardo
1772-1823
David Ricardo
1772-1823
“Ricardian Corn model”: models the economy as if it were a single firm, producing corn as the output
Assumptions:
q=min(l,k)
Labor and capital must be combined in a fixed proportion, a constant LK ratio
Ex: 1 worker and 1 shovel can produce 1 bushel of corn
Ricardo will talk about adding constant “doses” of labor & capital (combined)
Intensive Margin: adding an additional dose of labor & capital to an existing site
Extensive Margin: bringing new sites of land into cultivation
Extensive Margin 👉 |
||||
---|---|---|---|---|
K+L Dose | Plot A | Plot B | Plot C | |
Intensive Margin 👇 | 1 | 120 | 110 | 100 |
2 | 230 | 210 | ||
3 | 330 |
Extensive Margin 👉 |
||||
---|---|---|---|---|
K+L Dose | Plot A | Plot B | Plot C | |
Intensive Margin 👇 | 1 | 120 | 110 | 100 |
2 | 110 | 100 | ||
3 | 100 |
David Ricardo
1772-1823
“If, then, good land existed in quantity much more abundant than the production of food for an increasing population required, or if capital could be indefinitely employed without a diminished return on the old land, there could be no rise of rent; for rent invariably proceeds from the employment of an additional quantity of labour with a proportionally less return.”
Ricardo, David, 1817, On the Principles of Political Economy and Taxation
Example adapted from Blaug (1996)
Suppose the price of corn is $1 per bushel
Price of one homogenous unit of K+L (“man-with-shovel”) is $100
Assume each farmer (A, B, C) will apply a K+L dose so long as MR>MC
Extensive Margin 👉 |
||||
---|---|---|---|---|
K+L Dose | Plot A | Plot B | Plot C | |
Intensive Margin 👇 | 1 | 120 | 110 | 100 |
2 | 230 | 210 | ||
3 | 330 |
Extensive Margin 👉 |
||||
---|---|---|---|---|
K+L Dose | Plot A | Plot B | Plot C | |
Intensive Margin 👇 | 1 | 120 | 110 | 100 |
2 | 110 | 100 | ||
3 | 100 |
Farmer on C will apply only 1 K+L dose ($100) to produce $100 of output
Competition will equalize marginal (value) product of K+L at all plots of land
Extensive Margin 👉 |
||||
---|---|---|---|---|
K+L Dose | Plot A | Plot B | Plot C | |
Intensive Margin 👇 | 1 | 120 | 110 | 100 |
2 | 230 | 210 | ||
3 | 330 |
Extensive Margin 👉 |
||||
---|---|---|---|---|
K+L Dose | Plot A | Plot B | Plot C | |
Intensive Margin 👇 | 1 | 120 | 110 | 100 |
2 | 110 | 100 | ||
3 | 100 |
A will produce $330 using 3 K+L (costs $300); profit $30
Rent: payment to landlord that equalizes profits on land of different fertilities
Competitive markets ⟹ profits to A, B, C will eventually equalize
Rent to A: $30
Extensive Margin 👉 |
||||
---|---|---|---|---|
K+L Dose | Plot A | Plot B | Plot C | |
Intensive Margin 👇 | 1 | 120 | 110 | 100 |
2 | 230 | 210 | ||
3 | 330 |
Extensive Margin 👉 |
||||
---|---|---|---|---|
K+L Dose | Plot A | Plot B | Plot C | |
Intensive Margin 👇 | 1 | 120 | 110 | 100 |
2 | 110 | 100 | ||
3 | 100 |
Rent comes from differential productivities of land
Rent to equalize the profits of plots A, B, and C
Rent on any plot = differences between marginal product of dose of L&K at intensive margin and the marginal product of earlier, inframarginal doses
David Ricardo
1772-1823
In Ricardian theory, the fixed factor of production (land) earns all inframarginal residuals, i.e. gets paid rent
Ricardo assumed land is fixed, and has no opportunity cost
Ricardo, David, 1815, Essay on the Influence of a Low Price of Corn on the Profits of Stock
David Ricardo
1772-1823
When people use the term “rent” in ordinary language, they mean “contract rent” (what you pay your landlord)
Ricardian rents or Scarcity rents: Ricardo’s careful definition of rent “the use of the original and indestructible powers of the soil”
Can apply Ricardian Rents to anything in scarce supply:
Ricardo, David, 1815, Essay on the Influence of a Low Price of Corn on the Profits of Stock
David Ricardo
1772-1823
“Corn is not high because a rent is paid, but a rent is paid because corn is high.”
Ricardo, David, 1817, On the Principles of Political Economy and Taxation
David Ricardo
1772-1823
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