Unit 3; David Ricardo

Where was David Ricardo born?

London, United Kingdom

When was David Ricardo born?

April 18, 1772

David Ricardo life

• grew up Jewish

• worked for his father at 14

• was Jewish —> turned Unitarian to marry a quaker girl

  • dad didn’t approve so he had to start his business at 22 from scratch and becomes very rich (also from the stock market)

    • watched events and predicted big changes in the stock market

• good friends w/ Malthus even though they disagreed about everything

• loved to host

differences between Smith & Ricardo

• Ricardo recognizes class conflict, Smith was more optimistic that everyone would benefit from the self-regulated market mechanism

• Ricardo saw the differences in the quality of life between different classes

Malthus’ Theory of Population

• thought there was too many people in the world

• population will grow quicker than resources (food & land) so people will dies from famine, hunger, disease, and humanity will be limited by nature’s scarcity

  • Malthus said it wasn’t bad to let poor people die off to regulate the population but considered himself a humanitarian

  • this made sense in England during late 1700s because there was a lack of technological advancements compared to today

  • birth rates have decreased in modern times because of birth control

  • fertility gave you social prestige back then

Ricardo’s Principles of Political Economy and Taxation

• published in 1817

• land rent grows as population increases

• assigns stereotypes to the different social classes

  • said that there is no individuality in these classes and there are different behaviors to be associated with different social classes

  • not people “prototypes'“ and not living “following laws of behavior”

• thought factory workers were “undifferentiated units of economic energy”

  • thought workers were commodities and whatever system we use to determine the price of things should be used to determine their subsistence wages

  • thought they lacked self-control and would have babies galore

• business owner’s entire purpose is to accumulate wealth

  • believes their job is not easy because they are in constant, cut-throat competition and their profit is determined by the wages they pay

• landowners gained rent at everyone else’s expense

  • they did not have to worry about competition or population

  • not all land is equally productive but all land will sell

  • rent comes from the difference of the unproductive land’s profit and the productive land’s profit

• he used Malthus’ Law of Population to further his theory

  • if population continues to increase and demand starts to outweighs supply…

  • people will have to buy more land to cultivate more grain…

  • the land will not be good quality because all the good quality land is taken…

  • the price of production goes up on those unproductive plots of land and so will the selling price (because the worst quality land determines the price of the grain)…

  • if the price of grain goes up, so does subsistence wage because the worker needs more money to accommodate the increasing price of grain

Historical context of Ricardo’s theories

• profit (for business owners) and rent (for aristocrats) was 56% of invested capital

• during Industrial Revolution

  • rapid industrial growth but class conflict

  • aristocrats annoyed that the business owners are complaining about the price of food

    • people ended up relying on exports to eat for a reasonable price

• Corn Laws

  • aristocrats were not fond of people exporting goods because it hurt their pockets

  • hurting the working class and industry but benefiting landowners

• War with Napoleon

  • brought about famine paired with the Corn Laws

• all this caused him to be pessimistic about economics compared to Adam Smith

Corn Laws

• in early stages of the Industrial Revolution

• high tariffs government put on international grain so no one would buy from countries with really low prices because it is cheaper to make grain there

• quadrupled the price of a bushel of wheat

• showed how much power aristocrats had in comparison to business owners

• business owner did not like the tariff because it meant they had to pay more wages to accommodate the number of workers

Labor Theory of Value

• the amount of labor that goes into something determines its value

Concept of Subsistence Wage

• landowners wanted to give the working class enough to buy the food that they needed (& modest shelter/clothing) and nothing more

Ricardo’s Theory hot words

• landowners

• rent

• bourgeoisie

• profit

• workers

• salary

Connection between Malthus + Keynes

• both did not believe the market naturally fixes itself

• Malthus said that population grows faster than food/resources so capitalism does not equal permanent prosperity

• Kanes argued that capitalism is not self-regulated because it can go into periods of stagnation without intervention

  • when people are financially insecure, they stop spending and businesses don’t invest so the economy stalls

• to Malthus, only capitalists could save, so saving = spending because capitalist save to invest back into their businesses but Keynes recognized that proletariat could save too

Ricardo on class conflict

• understood that the same economy affected the social classes differently

• thought only the landlord really gained

  • could still collect rent if they neglected there land

  • Ricardo understood the landlords were putting in work but they assumed high profits than any other class for the same amount/less work

  • (Malthus disagreed with Ricardo and thought the landlords’ rent was well deserved because of their wisdom and talent)

• worker is forever condemned to subsistence wage

  • and Ricardo believed the working class could not stop having children

• the capitalist found his risks were in vain

  • saving and investing was for nothing as wages were high and profits were small

Why does Heilbroner say that Ricardo’s theory did not hold up?

• workers are not uncontrollably having babies, in fact industrialization has decreased human reproduction

• industralization has made it hard to rely on agriculture