David Ricardo

(1772 1823)
 Introduction
1772: born to a Sephardic Jewish immigrant family
To Abraham Ricardo, a stockbroker, and Abigail Delvalle
1786: works in the stock exchange
1793: marries Priscilla Ann Wilkinson, a Quaker, against familys wishes;
was disowned; converts to Christianity
1799: reads the Wealth of Nations
1808: becomes a member of the Geological Society
1815: Essay on the Price of Corn published
1817: Principles of Political Economy published
1819: retires and moves to Gatcombe Park; becomes a member of the
Parliament
1823: dies
Ricardo and Malthus England

Gatcombe

Hardenhuish

Source: E. de Dios lectures, delivered 2011

London Stock Exchange (1831)

Source: E. de Dios lectures, delivered 2011

 Parliament, House of Commons

Gatcombe Park

Parliament, House of Lords

Source: E. de Dios lectures, delivered 2011
 Introduction
Interpreting Ricardos work
William Stanley Jevons on Ricardo: that able but wrong-headed
man, David Ricardo, shunted the car of economic science on to a
wrong line (Jevons in The Theory of Political Economy, 1871)
The Works and Correspondence of David Ricardo (195155), edited
by P. Sraffa with M. Dobb: reinterpretation of the Ricardian
contribution; M. Blaug, Ricardian Economics: A Historical Study
(1958)
The Economics of David Ricardo (1979), by S. Hollander: challenged
Sraffa/Dobb
A deductive, abstract method: Schumpeters Ricardian vice
 Value
Measure of value: labor changes as a measure of
value: a less quantity of labour was necessary
to their production, and would therefore
exchange for a smaller quantity of those things in
which no such abridgment of labour had been
made (Principles, Ch 1, Sec III)
Nevertheless assumes that the amount of labor
and the corresponding amount of fixed capital
necessary to produce gold constant over time
Source of value: utility as prerequisite of exchange
value; goods derive exchange value from scarcity
and from the quantity of labor embodied
Price as Exchange Value
Synonymous with exchange value;
follows that exchange ratio between
goods reflect production costs
including current wage rates and profit
Changes in the rate at which two
commodities are exchanged reflect
changes in their relative content of
past and present labor
Implies that exchange values are not
affected by rent, by wage rate
differentials, or by changes in the level
of wages and profit
Nature of Rent
Compensation that is paid to the owner of
land for the productivity of the land: vs. the
returns from capital improvements on land,
the latter sources of profit
Comes from diminishing returns: When in
the progress of society, land of the second
degree of fertility is taken into cultivation,
rent immediately commences on that of
the first quality, and the amount of that
rent will depend on the difference in the
quality of these two portions of land.
(Principles, Ch 2)
 Marginal Productivity
Two rates of exchange between goods cannot exist in
the same purely competitive market, hence the value
of the entire output is determined by the highest labor
and capital cost of production
The exchangeable value of all commodities is
always regulated, not by the less quantity of labour
that will suffice for their production under
circumstances highly favorable, and exclusively
enjoyed by those who have peculiar facilities of
production; but by the greater quantity of labour
necessarily bestowed on their production by those
who have no such facilities; by those who continue to
produce them under the most unfavorable
circumstances (Principles, Ch 2)
Nature of Rent
One prevailing wage and profit rate the
differential surplus goes to the owner of
superior land in the form of rent; therefore a
differential surplus
In such case, capital will be preferably
employed on the old land, and will equally
create a rent; for rent is always the difference
between the produce obtained by the
employment of two equal quantities of capital
and labour. (Principles, Ch 2)
Corn is not high because a rent is paid, but a
rent is paid because corn is high; and it has
been justly observed, that no reduction would
take place in the price of corn, although
landlords should forego the whole of their
rent. (Principles, Ch 2)
Wages and Profit
Wage rate: average payment per worker, comes
from the wage fund; population growth drives
wages down to subsistence levels; wages can
be above this level in the short run, increasing
birth rates
Profit: net income received by capitalists;
includes return on capital used (the interest)
Profits tendency to a uniform rate: higher
profit rates means higher savings and
investment; population growth and diminishing
land productivity increases rent and wages,
which lowers profits
A Stationary State
Capital and population ceases to grow:
for no capital can then yield any profit
whatever, and no additional labour can
be demanded, and consequently,
population will have reached its highest
point. Long indeed before this period, the
very low rate of profits will have arrested
all accumulation, and almost the whole
produce of the country, after paying the
labourer, will be the property of the
owners of land and the receivers of tithes
and taxes. (Principles, Ch 6)
 Capital
(1) Labor instruments of production
such as buildings, machines etc; (2)
circulating capital: wage fund out of
which productive workers are
supported
Primary role is to employ labor
through advances from the wage
fund
Exchange value of a good produced
proportional to both the direct labor
and indirect labor involved and that
which is completed
 Capital
Capital structure and durability:
increased fixed-circulating capital
ratio or increased capital durability
leads to an increased length of
elapsed time before the final good
comes to market, hence
corresponding goods produced
cannot sell at the same price, even if
the same quantity of labor is
involved
Principles of Political Economy (1817)
Pure circulating capital model: Let
pi wai 1 r Source: E. de Dios lectures, delivered
2011
pi wai 1 r ai

p j wa j 1 r a j
Working capital of across time:
pi wai 1 r
Ti

pi wai 1 r ai
Ti
1 r Ti T j
ai
p j wa j 1 r T j a j
aj
if Ti T j
Principles of Political Economy (1817)
Fixed capital:
pi wai 1 r rk i
Source: E. de Dios
1 rk i
wai lectures, delivered
pi

wai 1 r rk i
wai 1 r 2011
pj wa j 1 r rk j 1 rk j
wa j
wa 1 r
j
k r k
1 i 1 i
a ai (1 r ) w ai ai
i
a a
j 1 k j
r
j
1
kj

a (1 r ) w a
j j

pi /pj will change with r and w, and with ai and aj unless ki =

kj = 0, or ki /ai = kj /aj. Changes in pi /pj brings up the issue on
distinguishing between changes in value and changes in
distribution. Need for an invariable measure of value
Capital and Labor on Value
Role of capital in the determination of value:
seemed to highlight also the role of capital in the
production
Ricardo was only concerned with explaining
changes in exchange values rather than the
exchange ratio between goods; also was only
concerned insofar as it affected the determination
of the distribution of income shares
Implies that different capital-labor ratios mean
that changes in wages must affect prices: rise in
wages will make prices of goods produced with a
lower capital-labor ratio to rise relative to goods
produced with a higher capital-labor ratio (the
Ricardo effect)
Distribution
Distribution as the chief problem of economics:
The produce of the earth is divided among
three classes of the community In different
stages of society, the proportions of the whole
produce of the earth which will be allotted to
each of these classeswill be essentially different

To determine the laws which regulate this
distribution, is the principal problem in political
economy, much as the science has been
improved by the writings of othersthey afford
very little satisfactory information regarding the
natural course of rent, profit, and wages.
(Principles, Preface)
Distribution
Rent comes from the niggardliness of
nature: emerges only when resorting
to inferior lands is necessary; high
rents result from low profits, a
residual remaining after wage share
has been paid, net of rent
Wages as marginal cost: labor
productivity relatively unimportant in
the production of non-wage goods
Divergence of class interests: interests
of landlords in conflict to those of
every other class in society
 Sequence Analysis
Transition process from one equilibrium to another
Outcome of changing from production without machinery to that
with machinery
Ricardos example involves four periods:
t-1 (initial equilibrium)
t (machine constructed)
t+1 (machine used in production)
t+2 (examines welfare effects of shifting resources from supporting outlays
for labor to supporting outlays for constant capital)
Capital Accumulation and Saving
As increased labor efficiency reduces cost
and therefore prices, capitalists tendency
to save also increases: positive net
accumulation
Displaced workers might become
reabsorbed as result of a net increase in
savings
A fall in the real wages as an effective
remedy for unemployment
Technology
Three reasons to support
introduction of machinery
(technological progress)
To counter of diminishing returns
To counter adverse effects of State
intervention
To encourage labor demand
Comparative Advantage
If, instead of growing our own corn, or
manufacturing the clothing and other
necessaries of the labourer, we discover a new
market from which we can supply ourselves
with these commodities at a cheaper price,
wages will fall and profits rise; but if the
commodities obtained at a cheaper rate be
exclusively commodities consumed by the rich,
no alteration will take place in the rate of
profits. The rate of wages would not be
affected, although wine, velvet, silks, and other
expensive commodities should fall 50 percent.,
and consequently profits would continue
unaltered. (Principles, Ch 7)
Comparative Advantage
Comparative advantage and profits: It has
been my endeavour to shew throughout
this work, that the rate of profits can
never be increased but by a fall in wages,
and that there can be no permanent fall of
wages but in consequence of a fall of the
necessaries on which wages are expended.
If, therefore, by the extension of foreign
trade, or by improvements in machinery,
the food and necessaries of the labourer
can be brought to market at a reduced
price, profits will rise. (Principles, Ch 7)
 Comparative Advantage
Production Possibilities Frontier:

Panel (a) shows the production opportunities available to the farmer and the rancher.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Comparative Advantage
(b) The farmers production (c) The ranchers production
possibilities frontier possibilities frontier
Meat (oz) Meat (oz)
If there is no trade, the farmer If there is no trade, the rancher
chooses this production and 24 chooses this production and
consumption. consumption.

8
12 B

4 A

0 16 32 0 24 48
Potatoes (oz) Potatoes (oz)
Panel (b) shows the combinations of meat and potatoes that the farmer can produce. Panel (c) shows the
combinations of meat and potatoes that the rancher can produce. Both production possibilities frontiers
are derived assuming that the farmer and rancher each work 8 hours per day. If there is no trade, each
persons production possibilities frontier is also his or her consumption possibilities frontier.
2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Comparative Advantage
Specialization and trade
Farmer: specialize in growing potatoes
Rancher: specialize in raising cattle

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or
in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website for classroom use.
 Comparative Advantage

2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or
in part, except for use as permitted in a license distributed with a certain product or service or
otherwise on a password-protected website for classroom use.
 Comparative Advantage
(a) The farmers production (b) The ranchers production
and consumption and consumption
Meat (oz) Meat (oz)
Farmer's production Ranchers production Ranchers
and consumption with trade production and
24
without trade consumption
18 without trade
Farmer's
8 consumption
Ranchers
with trade 13 B*
A* 12 consumption
5 Farmer's B with trade
4 production
A
with trade

0 16 17 32 0 12 24 27 48
Potatoes (oz) Potatoes (oz)
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Influences
Chief followers include James and John
Stuart Mill, John Ramsey McCulloch (the
Ricardians)
Marxs conflict model: labor theory of value
Divergence of class interests: interests of
landlords in conflict to those of every other class
in society
Principles (3rd edition, 1821): labourers may suffer
from the introduction of machinery (Ch 31, On
Machinery)
Machinery and labour are in constant
competition (Sraffa ,1955)