Ricardo & Malthus: Welcome to the Dismal Science

David Ricardo, 1772 – 1823Stockbroker/Dealer

Abstraction Economic Science• Championed capitalists

– Opposed Corn Law

• Advanced Say’s LawMajor contributions

– Differential rent– Labor theory of value– Theory of distribution– Comparative advantage

Thomas Malthus,1766 – 1834Parson

Intuitive approach/preacher • Championed landlords

– Favored Corn Law

• Advanced Theory of GlutsMajor contribution

– Law of population

Whoever wins, workers get dry crust

Diminishing Returns Prevail

Malthus, An Essay on the Principle of Population, as it Affects the Future Improvement of Society with Remarks on the Speculations of Mr.

Godwin, M. Condorcet, and Other Writers, 1st ed., 1798 • First principles

– Food is necessary– Passion

• Population, when unchecked, increases in a geometric ratio

• 1, 2, 4, 8, …[25 year doubling time]

• Subsistence increases in an arithmetic ratio

• 1, 2, 3, 4, …

• Subsistence checks population– Positive checks: Vice, Misery War,

pestilence, famine– Preventive check: Moral restraint

Law of Diminishing Returns• in proportion as cultivation is

extended … additions to average produce must be gradually and regularly diminishing L

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Hint of an externality in Malthus’ Law of PopulationHint of an externality in Malthus’ Law of Population

From An Essay in Population

• Famine seems to be the last, the most dreadful resource of nature. The power of population is so superior to the power in the earth to produce subsistence for man, that premature death must in some shape or other visit the human race. The vices of mankind are active and able ministers of depopulation. They are the precursors in the great army of destruction. But should they fail in this war of extermination, sickly seasons, epidemics, pestilence, and plague, advance in terrific array, and sweep off their thousands and ten thousands. Should success be still incomplete, gigantic inevitable famine stalks in the rear, and with one mighty blow levels the population with the food of the world.

• … to better the condition of the laboring classes [we should cultivate] a spirit of independence, a decent pride, and a taste for cleanliness and comfort. The effect of a good government in increasing the prudential habits and personal respectability of the lower classes … will always be incomplete without a good system of education…The benefits derived from education are among those, which may be enjoyed without restriction of numbers; and, as it is in the power of governments to confer these benefits, it is … their duty to do it.

Why no apocalypse? What did Malthus miss?

The Dismal Science of David Ricardo

… Ricardo offers us the supreme intellectual achievement, unattainable by weaker spirits, of adopting a hypothetical world remote from experience as though it were the world of experience and then living in it consistently. With most of his successors, common sense cannot help breaking in – with injury to their logical consistency.

John Maynard Keynes, The General Theory of Employment, Interest, and Money

• Ricardo, The High Price of Bullion, 1810Traced wartime inflation to emissions of paper money.– Regulate paper currency (so its value corresponds to its gold “content”– Stick to metallic money

Ricardo Currency School Monetarism

• Ricardo, Principles of Political Economy and Taxation, 1817

Ricardo’s Theory of Distribution• Differential rent: rent built up from zero-rent margin

• As push out to worse and worse land, owner of better land command bigger and bigger premiums (rents)

• Extensive margin / Intensive margin

• Wages ~ (socially determined) subsistence• Malthusian Law of Population Iron Law of Wages

» Poor Law (Speenhamland System) only increases number of poor but does not improve their well-being

» Dole (wage subsidy) Population growth Lower wage Dole

• Profits ~ equalized and eliminated by competitionDiminishing returns Profit squeezed as economy grows

Ricardo’s Labor Theory of Value: Production of commodities by means of commodities (Pierro Sraffa)– In market economy, labor is a commodity

Ricardo: Value, Distribution, and Growth

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Ricardo: Value, Distribution, and Growth

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Ricardo: Value, Distribution, and Growth

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Profit squeezed to zero Growth ceases