A Step Back to Reality ?A Step Back to Reality ?

The Work of Malthus and Ricardo

The Struggle between two Wealthy The Struggle between two Wealthy ClassesClasses

The Landowners and the nouveaux rich as the Landowners viewed the Industrialist

The Industrialists were building large factories and attempting to obtain status in political arena

Landowners as the original power class controlled the political power

Industrialist complained price of food was high

Brilliance or GloomBrilliance or Gloom

The Wonderful World Adam Smith Envisioned was being embraced by some philosophers

A minister by the name of William Godwin saw the poverty around him but was convinced that the world’s future was much brighter

Brilliance or GloomBrilliance or Gloom Godwin foresaw a future where

– [t]here will be no war, no crime, no administration of justice, as it is called, an no government. Besides this there will be no disease, anguish, melancholy, or resentment

He even dared state that there would be no longer a need for a marriage contract. His ideas were controversial but due the high cost of his pamphlet very few read it and thus he was not prosecuted by the Privy Council

Privy CouncilPrivy Council

The Privy Council is one of the oldest parts of British Government, it has, over time, adapted to reflect the fact that the United Kingdom is a constitutional monarchy.

It deals with many of the legal issues the government must deal with

EconomicsEconomics

Both the theories of Malthus and those proposed by Ricardo led Thomas set a much gloomier outlook than that proposed by Adam Smith, William Godwin, and Condorcet

Dismal Science: EconomicsDismal Science: Economics

According to Heilbroner, as well as many other, Thomas Carlyle after reading Thomas Malthus book described economics as “the “dismal science”

However, recent work by David Levy, Journal of History of Economic Thought, 2001 argues that Carlyle did coin the phrase

Dismal Science: EconomicsDismal Science: Economics

However, Levy argues that Carlyle used the term to refer to the fact that classical economists’ view on race, not their views on population. He called it a dismal science because economics saw all races as equally capable of entering into trades whereas Carlyle believed that the races were different and that slavery was natural for blacks.

MalthusMalthus

•;

Food

Population

Time

Gro

wth

rat

e

Recall that Malthus’ hypothesis could be summarized simply by– The fact that while population grows at a

geometric rate, food production grew at an arithmetic rate

Thomas MalthusThomas Malthus

The ideas of Malthus influenced many of his time

Among them, Charles Darwin and David Ricardo

Darwin in the development of his theory of natural selection was greatly influenced by the observation made by Malthus that like plants and animals, humans can overproduce offspring if left unchecked.

MALTHUS AND RICARDOMALTHUS AND RICARDO

Malthus and Ricardo were above all great friends.

They disagreed with each other on many points which in reality where more an issue of style rather than substance.

However they did have one very important difference of opinion.

MALTHUS AND RICARDOMALTHUS AND RICARDO

This difference was in the fact that David Ricardo supported the so called Says Law while Malthus did not

We will discuss the Says Law in greater detail later on

David Ricardo

1772-1823

BIOBIO

Son of Jewish immigrant stock broker Broke ranks with family and became a Unitarian

to marry a Quaker woman he fell in love with took modest stake and build into a fortune invested in Securities and Real Estate In 1779, while on vacation, read The Wealth of

Nation by Adam Smith Got interested in economics as a “hobby”

House of CommonsHouse of Commons

Was elected to the House of Commons There he became highly respected He argued issues not based on the

prevailing wind but on the relevance to the structure of society

He was said to have been the man that educated Commons

Develop SystemDevelop System

Basic Assumptions:

–Classical Rent

–Population issues as presented by Malthus

–Wage-fund

Rent and Corn LawsRent and Corn Laws

During the Napoleonic wars (1790-1810), the English had a diffucult time using their porst

Thus, reduction in corn imports to England resulted in 18% annual growth rates in the price of corn

Extensive and Intensive RentExtensive and Intensive Rent1

5

8

1020

30 40 50

0

20

40

60

80

100

120

140

160

180

200

Z

Additional Labor

(INTENSIVE)

Additional Land (EXTENSIVE)

Theory of ValueTheory of Value

Use Value necessary for Exchange Value Labor theory value only for Perfectly

Competitive Markets Economic Forces change relative prices

over time

Theory of ValueTheory of Value

Short-run price changes are due to demand-supply while Long-run price changes due to labor costs

Any variation of the preceding is only temporarily and in all cases Long-run price changes are due to labor cost changes

Distribution TheoryDistribution TheoryMarginal ProductMarginal Product

A

D Rent B

Profits G H

E Q N F J

Wages M C I PDoses of Capital

Distribution TheoryDistribution TheoryMarginal ProductMarginal Product

Rent

Profits

wages

Doses of Capital

Currency

First to Deal with the Concept of First to Deal with the Concept of International Trade in Analytical International Trade in Analytical

TermsTerms

Basic Assumption of the Law of Basic Assumption of the Law of Comperative AdvantagesComperative Advantages

Each Country has a fixed endowment of resources, and all units of each particular resource are identical (i.e. homogenous factors).

The factors of production are completely mobile between alternative uses within a country factor prices identical for alternative uses.

Assumptions (Cont)Assumptions (Cont) The factors of production are completely immobile

externally (i.e. across countries) factor prices can be different across countries prior to trade

A labor theory of value is employed for the model. Thus the value of the product is determine solely by the value of its labor (a) no other input is being used, or (b) the other inputs are measured in terms of its labor cost, or (c) the other input/labor ratios.

Assumptions (cont.)Assumptions (cont.) are the same in all industries.

The level of technology is fixed in each country during the period under consideration, although the technology can differ between them.

Costs of production are constant horizontal supply curve.

There is full employment.

There is perfect competition.

No government-imposed obstacles to economic activity.

Internal and external transportation costs are zero.

We begin with a two-country and two-commodity trade

Ricardian Condition of Production in England and in Portugal

Country Wine Clothing Price under Autarky

Portugal 80 hrs/bbl

90 hrs per yard

1 w 8/9 c or 1 c 9/8 w

England 120 hrs/bbl

100 hrs per yard

1 w 6/5 c or 1 c 5/6 w

If the Autarky Price ratio is the pre-trade price ratios.– These are based on the opportunity cost– England 1 W : 1.2 C– Portugal 1 W ; 8/9 C

Who should specialize in Wine: Who should specialize in Clothing:

Comparative AdvantageComparative Advantage

Comparative Advantage

Terms of Trade between England and Portugal

Which TOT is acceptable to which country?

TOT England Portugal

1 W : 1 C

1 W : 1.2 C

1 W : 1.4 C

1 W : .89 C

1 W : .7 C

Comparative AdvantageComparative Advantage

So given the previous table:– The range of the TOT would be– 1 W : for ______ C high– 1 W : for ______ C low

Say’s LawSay’s Law

J.B. Say, James Mill, and David Ricardo Supply Creates Its Own Demand Thus, Glut in a market may exist but it will

not exist in all markets An argument against Malthus