Important Writers:

Adam Smith (1723-1790) - Wealth of Nations, 1776. Thomas Robert Malthus (1766-1834) an Essay on the Principle of Population, 1978. David Ricardo (1772-1823) On the Principle of Political Economy and Taxation, 1817. 1817 Nassau Senior An outline of the Science of Political Economy, 1836. John Stuart Mill (1806-1873) Principle of Political Economy, 1848. Karl Marx Capital, Volume I, 1867.

DAVID RICARDO (1772-1823) A stockbroker turned economist. Economics study in 1799 28 yrs. 1810, -1st pamphlet, the high price of bullion. 1815 essays on the Corn Law controversy. His major work, Principle of Political Economy & Taxation (1817) replaced Adam Smiths Wealth of Nation (1776), as the accepted book on economic Qs. Significant contribution to economic theory: methodology, theories of value, international trade, public finance, diminishing returns and rent. Redirected economics away from the method and scope of economics advocated by Adam Smith.

 Adam Smith (i) deductive theory (ii) a descriptive, informal narrative of contemporary and historical institutions. Blended theory with historical descriptive material. Ricardo - represents the pure theorist at work. Abstracted from the economy of his time and built an analysis based on the deductive method. Applied abstract analysis to political issue of tariffs (importation grain into England). Strongly oriented toward policy.

 Economic problems of his time:

rising grain prices?????, rising rents and the relative growth of industry and relative decline of agriculture ( structure England). the policy question of free vs regulated international trade. The landlords wanted protection from foreign agricultural product, but many of the rising industrialists were advocates of free trade, particularly for British industries.

Adam Smith - concerned with the forces determining the wealth of the nations. Ricardo - the principal purpose of economics is to determine the laws that regulate the distribution of income among landlords, capitalists and laborers.

To determine the laws which regulate this distribution (income) is the principal problems in Political Economy. Observed - changes in the functional distribution of income over time in the system. Economy of 3 main groups: capitalists receiving profit and interest, landlords receiving rent and laborers receiving wages. To explain changes in the shares received by the capitalists, landlords and laborers, he developed a theory explaining profits, interest, rent and wages (at the microeconomic level of economy). Examined the forces causing changes in relative prices over time. He was primarily concerned with the effects of changes in income distribution on the rate of capital accumulation and economic growth.

Ricardos Model
The capitalists perform the essential roles in the economy the producers, directors and the most important actors. They contribute to an efficient allocation of resources because they move their capital to the areas of highest return. If perfectly competition markets prevail, consumer demands are met at the lowest possible social cost. They also initiate economic growth by saving and investing.

 Labor is essentially passive in his model. Real wage = wages fund/ labor force. The wages fund - depends upon capital accumulation, & the size of labor force is governed by the Malthusian population principle. If wages fund increases as a result of capital accumulation, real wages will rise in the short run. Increasing real wages will result in an increase in population and hence in the labor force. Long-run equilibrium will exist when the labor force has increased sufficiently to return real wages to the subsistence level (minimum level of well-being).

 Landlords are mere parasites. The supply curve for land is perfectly elastic and the social opportunity cost of land is zero. Landlords receive income, rent, merely for holding factors production without serving any socially useful function. Instead of saving and accumulating capital, the landlords engaged in consumption spending. The activities of the landowning were harmful to the growth and development of the emerging industrial society.

Wealth & econ groups the total output or gross revenue of the economy is distributed to the Ls, Ks, & Lls. The part of total output not used to pay labor at subsistence wage and to replace the capital good worn out is called net revenue of economic surplus (Gross revenue (subsistence wage+ depreciation) = net revenue). Net revenue consists of profits, rents, and wages over the subsistence level. In long-run equilibrium, wages will be at a subsistence level and net revenue will equal profits and rents.

The workers and landlords spend entire income on consumption, so profits are the only source of saving, or capital accumulation.

A redistribution of income favoring the landlord takes place over time as profits decrease and rents rise, with a consequent reduction in the rate of economic growth.

 Interest in the controversy of Corn Laws regulations placing tariffs on the importation of grain into England. Growing concern over the pressure of population on the food supply. Food price, rents, and investment in land were rising steadily. High tariff would shift the distribution of income in favor of the landlords. The period of Napoleonic wars, artificially protected British agriculture from continental grain & couple with inability agriculturally self-sufficient rising grain prices & rents.

Distribution of income over time Rejected Smiths reasons: i. Competion in L mkt w rises must fall
Refuted: Malthusian doctrine w rises pop rises L force rises w falls.

ii. Competition in the investment & commd mkt

Refuted: competition will not result in a fall in the general P level. P falls when it is not possible to sell at previous P & existence of over production.

Who are the sole beneficiaries of long-run growth process????

 The Corn Laws imposed a floor on the price of grain 50 shillings per quarter. Landlords demanded a floor of 80 shilings per quarter prompted an extensive controversy. Ricardo published pamphlets explaining higher tariffs resulted in higher grain prices. Higher tariff encourage greater Inv in agriculture, increased output supply & P fall. Higher P of grain was the results of higher rents. Rents were pricedetermined & not a cost of production.

Average prices (shillings per quarter of a ton) 1770-1779 1780-1789 1790-1799 1800-1809 1810-1813 45 shillings 45 shillings 55 shillings 82 shillings 106 shillings

The higher price was in 1801 177 shillings

Corn Laws Protection of British agriculture from foreign competition caused grain imports to decline & output of grain in England to increase. Intensive and extensive margin were pushed out and profits declines as rents increased. Corn Laws accelerate the process of redistribution of income toward the landlord, slowing down economic growth & hastening the stationary state.

Theory of Land Rent

Constant return in manufacturing and diminishing returns in agriculture. The coefficient of production for L and K were fixed by technological consideration. Assume a fixed quantity of land & diminishing returns begin immediately. The quantity of land is fixed, thus increases in demand will result in higher prices (rents) with no increase in quantity supplied. The opportunity of land was zero.

Bushels (wheat)

100 90

Extensive Margin of Land

Ricardo Rents were price-determined Rents were determined by Grain Price Corn Laws or Adam Smith Rents were price-determining High price of grain was determined by higher rents Rents determined Grain Prices

Assumptions
1. 2. 3. 4. 5. 6. 7. 8. 9. Labor cost theory Neutral Money. Fixed coefficients of production for L & K. Diminishing returns in agriculture & CTS in manufacturing. Full employment. Perfect competition. Economic actors. Malthusian population theory. Wages Fund doctorine

Assumptions
1. 2. 3. 4. 5. 6. 7. 8. 9. Labor cost theory explained changes in relative prices o/t Neutral Money - Prices. Fixed coefficients of production for L & K to increase Q, L & K must be added in a fixed proportion. Diminishing returns in agriculture & CTS in manuf. - SS curve slope upward (MCs increase as Q expands). Full employment. Perfect competition. Economic actors rational & calculating, max , higher wages & rents. Malthusian population theory pop expands faster than food prod. Wages Fund doctrine real wages=wages fund/labor force, wages fund real wages .

 Higher Tariff lower grain prices (dom) encouraged more production. To increase Q demand more Lo & K in fixed prop. Q increases. Diminishing returns L fixed, land farmed more intensively, marginal physical product decreases, equivalent to say marginal cost increases grain prices rises. Also, more less fertile land were utilized (extensively farmed) relatively, fertile L is more expensive. Margin was pushed down. Opp cost of L is zero, in CM on different grades of L is uniform. Rent is the payment to l/lord that will equalize the on different grades of L (less fertile lower rent & more fertile higher rent)

 Increase in the cost of producing grains (????) Higher grain prices. Higher grain prices demand more wages for workers to maintain a subsistence std of living higher grain P . Cost of grain was a major part of L food budget. W Pop demand for more food increase grain prod demand for more Land diminishing marginal return rents & MC

 Rents were determined by Grain Prices. Higher grain prices higher rents. Grain prices is determined by labor cost theory. SS curve is upward sloping reflecting higher price as MC increases.

 Tariff is harmful to the economy. Tariff reduces profits , slower the capital accumulation & lower the growth rate. Higher Tariff higher money wages. Removing tariff on grains wld be beneficial to England. Removing tariff capital acc I growth. Protectionist: Removing tariff food Prices & w depressions.

Theory of land rent

A labor theory of value must also deal with the question of land rent. Suppose that there are 2 laborers of equal skill working on 2 plots of land of different fertility. What is the qtty of L necessary to produce a bushel of wheat????

The price of wheat depends upon the marginal cost of the wheat produced least efficient. Price is determined at the margin & at the margin there is no rent. Differing rents received by lands of differing quality will not influence changes in relative prices over time.

Ricardo Theory of Value

Rejected the prevailing cost of production theory of value (Adam Smith). What cause changes in relative Ps over time??? The value of a commodity or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labor which is necessary for its production, and not on the greater or less compensation (wages) which is paid for that labor.

Ricardos Labor Cost Theory of Value. Use value vs exchange value. Use value is essential for the existence of exchange value. The price of commodities is derived from (i) scarcity & (ii) the quantity of labor. Some commodities have a price that is determined by their scarcity alone. Not freely reproducible - perfectly inelastic ss curve picture, books, coins, wines. The value of these goods is independent of the qtty of L used to produce them.* Given a fixed inelastic ss curve, demand will determine price. Excluded from Labor cost theory of value.

Competitively Produced Goods

Freely reproducible commodities. Manufacturing constant costs & agriculture increasing costs. Qtty of labor that determines relative prices not the wages paid to labor. Qtty of L is measured by clock hours & wages measures relative productivity of labor. If differing skills remain constant over time, changes in the prices of goods will not be a result of the wages paid to labor (????).

Capital Goods
All commodities require the utilization of both L & K. What is the influence of K on the prices of goods??? K is a stored-up labor (L that has been applied in a previous period). The qtty of L in a commodity produced by both K & L is measured by qtty of L immediately applied + qtty of L stored in the K goods (time equivalent of the deprec.) e.g: 100 hours of labor + 1 hour of labor The explanation is not satisfactory.