David Ricardo

I. Historical & Intellectual Context: The Poor Laws

· The Corn Laws: The Central Conflict

  · Malthus: Initially opposed, but for most of his life supported the Corn Laws.

    · Seen as protecting the interests of landlords, allowing them to benefit from high grain prices.

  · Ricardo: Opposed the Corn Laws.

    · Advocated for an international free market.

    · Saw the laws as a government-backed collusion with landlords.

· Evolution of Welfare and Labor Control (1500s - 1834)

  · The Old Poor Laws (1500s - early 1800s): Emerged alongside the enclosure of the commons, which created a landless, itinerant labor force.

    · Parish System: The local administrative unit, based on a church and its territory.

    · Progressive Parish Tax: A haphazardly administered tax where the richer paid more to support the poor.

    · Distinction of the Poor:

      · Impotent Poor: The sick and old. Considered deserving of help.

      · Able-bodied Poor: Considered lazy and undeserving. A distinction that resonates in modern "deserving vs. undeserving poor" welfare debates.

  · 1662 Act of Settlement:

    · Restricted the movement of the poor. They could only receive aid from their own parish.

    · Adam Smith's Opposition: Smith was strongly against this act because it prevented labor mobility. He believed labor should be a commodity free to move to where jobs are, a key tenet of a market society.

  · Workhouses (1700s):

    · Parish-run institutions where the able-bodied poor were put to work.

    · Goal: To be self-sufficient, profit-making "factories" for the poor.

    · Reality: Mostly failed to turn a profit and became overcrowded, terrible places (evidenced by Charles Dickens's Oliver Twist).

    · Secularization of Welfare: Over time, workhouses shifted from religious (parish) to state-run civil institutions, marking the growth of the modern state.

    · Views on Workhouses:

      · Smith: Against them; for labor mobility.

      · Malthus: Anxious; saw them as a social crisis if they didn't shrink the population.

      · Ricardo: Worried they ran at a loss and created dependency.

  · 1795 Speenhamland System (Outdoor Relief):

    · Provided wage supplements to the working poor, based on means-testing.

    · Why Classical Economists Hated It:

      · It allowed employers to pay lower wages, knowing the state would top them up.

      · It created dependency on the state for both workers and employers.

      · It interfered with the "fellow feeling" and natural logic of the labor market.

      · Even Karl Polanyi, a market skeptic, was critical because it absolved employers of paying a living wage.

  · 1832 Royal Commission & The New Poor Laws (1834):

    · Influenced by Malthus, the commission declared workhouses and wage supplements "interfered with the independence of the laborer."

    · The New Poor Laws (1834):

      · Administered nationally, not by parishes.

      · Ended wage supplements (outdoor relief).

      · Limited state charity only to the "impotent poor" (sick/old).

      · Workhouses remained and became even more unpleasant.

    · Polanyi's Analysis: 1834 marks the true beginning of modern capitalism in England, as labor conclusively became a commodity on a national scale.

II. David Ricardo: The Man and His Core Concerns

· Biography:

  · Son of a Jewish businessman; made his own fortune on the London stock exchange.

  · Married a Quaker, became a Unitarian, and broke from his family.

  · By 30, he was rich and bought a manor, becoming an English landlord himself (ironic, given his theories).

  · Bought a seat in Parliament in 1819.

  · Wrote his way to fame; corresponded with Malthus, Bentham, and James Mill.

  · Died young at 51.

· Core Concern: Distribution

  · Malthus was concerned with shortages (is there enough?).

  · Ricardo was concerned with "Who gets what?" – the distribution of wealth among the three classes:

    1. Landlords (who collect rent)

    2. Capitalists (tenant farmers, industrialists, who earn profits)

    3. Laborers (who earn wages)

  · His Central Worry: In a growing economy, landlords get wealthier without doing any work, which threatens the incentive structure of a market society. Capitalists, who do the work of investment and organization, are being "squeezed."

III. Ricardo's Economic Theories

· Foundational Concepts (from Smith):

  · Natural Price vs. Market Price: For necessities like corn, the market price tends toward the natural price.

  · Natural Wage: The wage that allows laborers to buy their subsistence. It is the long-run equilibrium for wages.

  · The Wage Fund Doctrine: An agrarian-based theory that wages are paid from a fixed "fund" of capital saved from the previous year's harvest. (Note: Modern economics has discarded this model).

· The Iron Law of Wages:

  · If market wages rise above subsistence, workers have more children, the population grows, and the increased labor supply pushes wages back down to subsistence.

  · Conversely, wages rarely fall below subsistence for long, as the population would shrink.

  · This creates an "iron law" where wages naturally tend towards the level of bare subsistence.

· Ricardo's Theory of Rent (The Core of His Argument)

  · Definition: "Rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil."

  · The Model:

    1. Land is Plentiful: When there is enough fertile land for everyone, no one pays rent.

    2. Population Grows: To feed more people, cultivation must expand to less and less fertile land.

    3. The Emergence of Rent: The less fertile land requires more labor and capital to farm. The price of corn is set by the cost of production on this least fertile, "marginal" land.

    4. The Surplus on Better Land: Since the market price is the same for all corn, farmers on more fertile land have a lower cost of production and thus a surplus.

    5. Landlords Capture the Surplus: In competition for the best land, tenant farmers (capitalists) bid against each other, and this surplus is captured by the landlord as rent.

  · Graphical Analysis (The Three Graphs):

    · Top Graph (Diminishing Returns): Shows output per unit of input (labor/capital) decreasing as less fertile land is cultivated. The last unit is the "marginal land" where no rent is paid.

    · Middle Graph (Rent): The dark triangle shows the landlord's rent. It is largest for the most fertile land and shrinks to zero on the marginal land.

    · Bottom Graph (Distribution): Depicts the squeeze on the capitalist's profit.

      · Rent (Dark Band - Top): Increases as more land is cultivated.

      · Wages (Dark Band - Bottom): Must rise slightly as the price of subsistence (corn) rises, pushing up the natural wage.

      · Profit (White Band - Middle): The residual after paying rent and wages. It is squeezed from both sides as population grows.

· The Problem & The Solution: Free Trade

  · The Problem: Economic growth benefits the idle landlord class at the expense of the productive capitalist class. This is bad for market society and capital accumulation.

  · The Solution (Opposing the Corn Laws): Import cheap corn and other subsistence goods.

    · This lowers the price of food.

    · This lowers the natural wage (since it's based on subsistence costs).

    · This increases the profit for the capitalist.

    · Conclusion: "The extension of foreign trade... [for] the food and necessaries of the labourer... will be followed by a rise in profits."

  · Trade in Luxuries vs. Necessities:

    · Importing luxuries (wine, silk) is fine, but it does not affect the price of subsistence goods, and therefore does not affect wages or boost profits. It only benefits the rich.

    · Importing necessities is crucial for the health of capitalism as it directly raises profits.

IV. Comparative Advantage

· Ricardo builds on his case against the Corn Laws to make a broader argument for international free trade.

· He provides the seeds of comparative advantage (e.g., in his example of cloth and wine trade between England and Portugal).

· The argument goes beyond Adam Smith's absolute advantage.

· Core Idea: Even if one country is better at producing everything, both countries can still benefit from trade if they specialize in goods where they have a lower opportunity cost.

· This vision supports a global, interdependent market society where all nations trade freely.