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A Step Back to Reality ? The Work of Malthus and Ricardo.

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Presentation on theme: "A Step Back to Reality ? The Work of Malthus and Ricardo."— Presentation transcript:

1 A Step Back to Reality ? The Work of Malthus and Ricardo

2 The Struggle between two Wealthy Classes u The Landowners and the nouveaux rich as the Landowners viewed the Industrialist u The Industrialists were building large factories and attempting to obtain status in political arena u Landowners as the original power class controlled the political power u Industrialist complained price of food was high

3 Brilliance or Gloom u The Wonderful World Adam Smith Envisioned was being embraced by some philosophers u A minister by the name of William Godwin saw the poverty around him but was convinced that the world’s future was much brighter

4 Brilliance or Gloom u Godwin foresaw a future where –[t]here will be no war, no crime, no administration of justice, as it is called, an no government. Besides this there will be no disease, anguish, melancholy, or resentment u He even dared state that there would be no longer a need for a marriage contract. His ideas were controversial but due the high cost of his pamphlet very few read it and thus he was not prosecuted by the Privy Council

5 Privy Council u The Privy Council is one of the oldest parts of British Government, it has, over time, adapted to reflect the fact that the United Kingdom is a constitutional monarchy. u It deals with many of the legal issues the government must deal with

6 Economics u Both the theories of Malthus and those proposed by Ricardo led Thomas set a much gloomier outlook than that proposed by Adam Smith, William Godwin, and Condorcet

7 Dismal Science: Economics u According to Heilbroner, as well as many other, Thomas Carlyle after reading Thomas Malthus book described economics as “the “dismal science” u However, recent work by David Levy, Journal of History of Economic Thought, 2001 argues that Carlyle did coin the phrase

8 Dismal Science: Economics u However, Levy argues that Carlyle used the term to refer to the fact that classical economists’ view on race, not their views on population. He called it a dismal science because economics saw all races as equally capable of entering into trades whereas Carlyle believed that the races were different and that slavery was natural for blacks.

9 Malthus ; Food Population Time Growth rate u Recall that Malthus’ hypothesis could be summarized simply by –The fact that while population grows at a geometric rate, food production grew at an arithmetic rate

10 Thomas Malthus u The ideas of Malthus influenced many of his time u Among them, Charles Darwin and David Ricardo u Darwin in the development of his theory of natural selection was greatly influenced by the observation made by Malthus that like plants and animals, humans can overproduce offspring if left unchecked.

11 MALTHUS AND RICARDO u Malthus and Ricardo were above all great friends. u They disagreed with each other on many points which in reality where more an issue of style rather than substance. u However they did have one very important difference of opinion.

12 MALTHUS AND RICARDO u This difference was in the fact that David Ricardo supported the so called Says Law while Malthus did not u We will discuss the Says Law in greater detail later on

13 David Ricardo

14 BIO u Son of Jewish immigrant stock broker u Broke ranks with family and became a Unitarian to marry a Quaker woman he fell in love with u took modest stake and build into a fortune u invested in Securities and Real Estate u In 1779, while on vacation, read The Wealth of Nation by Adam Smith u Got interested in economics as a “hobby”

15 House of Commons u Was elected to the House of Commons u There he became highly respected u He argued issues not based on the prevailing wind but on the relevance to the structure of society u He was said to have been the man that educated Commons

16 Develop System u Basic Assumptions: –Classical Rent –Population issues as presented by Malthus –Wage-fund

17 Rent and Corn Laws u During the Napoleonic wars ( ), the English had a diffucult time using their porst u Thus, reduction in corn imports to England resulted in 18% annual growth rates in the price of corn

18 Extensive and Intensive Rent

19 Theory of Value u Use Value necessary for Exchange Value u Labor theory value only for Perfectly Competitive Markets u Economic Forces change relative prices over time

20 Theory of Value u Short-run price changes are due to demand- supply while Long-run price changes due to labor costs u Any variation of the preceding is only temporarily and in all cases Long-run price changes are due to labor cost changes

21 Distribution Theory Marginal Product

22 Rent Profits wages Doses of Capital Currency

23 First to Deal with the Concept of International Trade in Analytical Terms

24 Basic Assumption of the Law of Comperative Advantages u Each Country has a fixed endowment of resources, and all units of each particular resource are identical (i.e. homogenous factors). u The factors of production are completely mobile between alternative uses within a country factor prices identical for alternative uses.

25 Assumptions (Cont)  The factors of production are completely immobile externally (i.e. across countries) factor prices can be different across countries prior to trade u A labor theory of value is employed for the model. Thus the value of the product is determine solely by the value of its labor (a) no other input is being used, or (b) the other inputs are measured in terms of its labor cost, or (c) the other input/labor ratios.

26 Assumptions (cont.)  are the same in all industries.  The level of technology is fixed in each country during the period under consideration, although the technology can differ between them. u Costs of production are constant horizontal supply curve.

27  There is full employment.  There is perfect competition.  No government-imposed obstacles to economic activity.  Internal and external transportation costs are zero. u We begin with a two-country and two- commodity trade

28 Ricardian Condition of Production in England and in Portugal CountryWineClothingPrice under Autarky Portugal80 hrs/bbl 90 hrs per yard 1 w 8/9 c or 1 c 9/8 w England120 hrs/bbl 100 hrs per yard 1 w 6/5 c or 1 c 5/6 w

29 u If the Autarky Price ratio is the pre-trade price ratios. –These are based on the opportunity cost –England 1 W : 1.2 C –Portugal 1 W ; 8/9 C u Who should specialize in Wine: u Who should specialize in Clothing: Comparative Advantage

30 Terms of Trade between England and Portugal Which TOT is acceptable to which country? TOTEnglandPortugal 1 W : 1 C 1 W : 1.2 C 1 W : 1.4 C 1 W :.89 C 1 W :.7 C

31 Comparative Advantage u So given the previous table: –The range of the TOT would be – 1 W : for ______ C high –1 W : for ______ C low

32 Say’s Law Say’s Law u J.B. Say, James Mill, and David Ricardo u Supply Creates Its Own Demand u Thus, Glut in a market may exist but it will not exist in all markets u An argument against Malthus

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