1. Chapter 5: Ricardo and Malthus
Questions for Review, Discussion and Research
2, 3, 4, 5, 6, 7, 8

2. Malthusian Population Thesis
Scientific in method as well as purpose
Believed that population tends to grow geometrically while food (and other necessities) increase arithmetically

3. Checks develop to keep the growth rate of population in line with the food supply
Positive Check – increase in death rate due to wars, famine, disease, etc.
Preventative Check – postponement of marriage would lower birthrate

4. Flaws in Thesis Birth Control
No distinction between sexual desire and the decision to have children
Underestimates the impact of technology

5. Iron Law of Wages
Combination of wage fund doctrine and Malthusian population thesis shows long run wages converging to subsistence levels

6. Overview of Ricardo Stockbroker turned country gentleman
Contributions include:
Methodology
Theories of Value
International Trade
Public Finance
Diminishing returns
Economic Rent

7. Published first pamphlet in 1810
The only major publication after Smith was by Malthus in 1803

8. Methodology of Ricardo
Questions of political economy that were answered by Smith were an eclectic blend of theory with a historical narrative and the evolution of institutions
Ricardo abstracted from contemporary British economy and employed a timeless deductive approach

9. Formulation of economic policy required an understanding of the causal relationship between variables
It is non-contextual and it becomes the path of main stream economics after Marshall

10. Scope of Economics According to Ricardo
Overhead pp

11. Ricardian Model Overhead pp. 116
Landlords are nonproductive or parasitical

12. Concept of Surplus Economic Surplus

13. Assumption of Ricardian Two-Sector Model
Table 5-1
Concept of Diminishing Returns in Agriculture
First discovered by Turgot in 1763

14. Concept of Economic Rent Viewed from the Product Side
Assume a fixed quantity of agricultural land to which “doses” of capital and labour (effort) are added

15. Intensive Margin (figure 5-2)
The effects of ‘effort’ on different plots of land with variable fertility
Table 5-2

16. Distinction Between Gross and Net Marginal Product of Effort ( MPE ) Today
Gross MPE – Includes depreciation or CCA of capital inputs
Net MPE – After replacement costs of capital inputs

17. Ricardian Concepts of Gross and Net MPE

18. Importance of Diminishing Returns and Economic Rent
These concepts are the foundation of marginal productivity theory which explains the supply side determination of factor input prices
Individual owners view land rent as a cost of production equal to its opportunity cost in alternative uses

19. Ricardo considered economic rent from an aggregate point of view and therefore
Not a cost of production
Not price determining
Opportunity cost is zero

20. Ricardo’s Value Theory
Wanted to refute the prevailing cost of production theory of value that sought to explain the forces determining relative prices at a given point of time
His alternative theory was to explain the economic forces that cause changes in relative prices over time because of his interest in the income distribution consequences of the Corn Laws

21. Sought to identify a commodity that was an invariable measure of value, ie. an absolute measure of value that is invariant over time
Believed that value depends on the quantity of labour necessary for long run production

22. Production with Ricardo’s Labour Theory of Value
Measure the quantity of labour inputs
Differing skills and working conditions
Capital inputs are merely stored up labour (ie. Labour supplied in a previous period)

23. Profits are a different percentage of final price for two goods when
Total capital per unit of final output is different
Rate of turnover of capital depends on the composition of capital (ie. fixed vs. circulating capital)

24. “Corn” Model
Pure circulating capital model where a percent of previous years output of wheat is required for the years production that
Sustains labour during the period of production
Seed requirements

25. Summary of Ricardian Value Theory
Overhead pp

26. Ricardian Distribution Theory
Often called a residual theory
He subtracted the necessary payments for labour and “depreciation” from gross output to calculate the economic “surplus” shared by capitalists and landlords

27. Short Run Distribution Theory
Overhead pp. 162

28. Long Run Distribution Theory
Figure 5-3
Overhead pp. 161
Overhead pp. 136

29. Static Theory of Comparative Advantage
Voluntary trade or exchange can benefit all countries because specialization results in an increase in total output
Carefully read pp. 137 to 140 on your own

30. This static model assumes that factor inputs are exogenous while the Smithian trade model is dynamic and the
Quantity of factor inputs is endogenously determined
Increasing returns

31. Stability and Growth of a Capitalist Economy
Controversy over Say’s Law personified by Ricardo-Malthus debate
Ricardo’s views were dominant until the Keynesian Revolution

32. Smithian View of Aggregate Demand
Frugality and savings were virtues
Capital accumulation was the primary determinant for prosperity, growth and development
Rate of savings does not affect aggregate demand but only the composition of output, ie. consumption and investment goods

33. Smithian View of Aggregate Demand Cont’d

34. Classical View
Overhead pp. 146

35. Malthusian Challenge
The savings-investment process can not continue indefinitely without leading to long-run stagnation (ie. the stationary state)
Believed that there was insufficient “effectual” demand from households of labour and capitalists in the short run

36. Social function of non-productive classes was to consume without proceeding
Helped prevent depressions and eventual stagnation

37. Triumph of Say’s Law
Sufficient purchasing power is generated in the process of producing goods and services to clear all markets at “satisfactory” prices
Supply creates its own demand
Denied possibility of hoarding

38. Classical Monetary Theory
Bullionists
Early “monetarists”
Inflation is always a monetary phenomena so tight controls on money supply is required
Gold Standard

39. II. Real Bills
A flexible supply of loans is required to finance the variable transaction of commercial exchange (ie. circulating capital)
Flexible loans requires flexible money supply (ie. deposits)
The money supply should be endogenous

40. Keynes on Malthus and Ricardo
Read pp carefully on your own

41. Summary Distinct break in methodology
Smith – Combination of theory, history and institutional analysis
Ricardo – Highly abstract, deductive theory

42. Scope shifts from
Smith – economic policies to promote economic growth and development
Ricardo – implications of changes in the functional distribution of income over time