Ricardo’s Theory of Distribution and Growth

David Ricardo (1772-1823)

“To determine the laws which regulate this distribution, is the principal problem in Political Economy.”

Ricardo’s Theory is Important for the Following Reasons:

• Provides us with vision of the future • Explains why in Ricardo’s view investment opportunities decline • Explains in simple terms the reason for rent

Historical Backdrop: Corn Laws

• Corn Laws – imposed a tariff on the importation of agricultural products • British Parliament was dominated by the landowning classes

Distribution and Production

• Ricardo sought to show how changes in distribution affect production • Ricardo contended that as the economy grows, rents rise, squeezing profits • As profits are squeezed, economic growth declines

Assumptions

• Say's law--supply creates its own demand, and whatever is saved is invested (accumulated).

• Labor theory of value, prices are proportional to the quantities of embodied labor.

• Agriculture is labor manufacturing is capital intensive.

intensive,

• Land is fixed and differs in fertility • three classes

Class Workers Landowners Capitalists Economic Function

Work No economic function

Income

wages (subsistence wage) rents

save

, accumulate capital, and organize production profits

Determination of Income

Malthusian theory of population Difference between the output on the most and least fertile lands in cultivation 1.

2.

Residual after paying wages and rents Competition among capitalists equalizes the rate of profit in all industries

Rent

• Return to an factor of production for which there are no substitutes or no “good” substitutes • Examples: land, a particular location, a living legend, etc.

Ricardian Rent

• Ricardo defined rent as follows: – different between output on the most and least fertile land in cultivation – difference between costs of production on the most and least fertile lands in cultivation

2000 1800 1600 1400 1200 1000 800 600 400 200 0 1 2 3 4 5 Wages 6 Profits 7 Rents 8 9 10

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2000 1800 1600 1400 1200 1000 800 600 400 200 0 1 2 3 4 5 Wages 6 Profits 7 Rents 8 9 10

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2000 1800 1600 1400 1200 1000 800 600 400 200 0 1 2 3 4 5 Wages 6 Profits 7 Rents 8 9 10

2000 1800 1600 1400 1200 1000 800 600 400 200 0 1 2 3 4 5 Wages 6 Profits 7 Rents 8 9 10

2000 1800 1600 1400 1200 1000 800 600 400 200 0 1 2 3 4 5 Wages 6 Profits 7 Rents 8 9 10

The End of Capitalism?

2000 1800 1600 1400 1200 1000 800 600 400 200 0 1 2 3 4 5 Wages 6 Profits 7 Rents 8 9 10

Implications?

• Why was Ricardo’s position regarding the corn laws? Explain.

• What policies did Ricardo recommend?

• What happens to economic growth over time as the population increases? Why?

• How does Ricardo’s theory reflect his class interests?