A Step Back to Reality ?
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Transcript of A Step Back to Reality ?
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A Step Back to Reality ?A Step Back to Reality ?
The Work of Malthus and Ricardo
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The Struggle between two Wealthy The Struggle between two Wealthy ClassesClasses
The Landowners and the nouveaux rich as the Landowners viewed the Industrialist
The Industrialists were building large factories and attempting to obtain status in political arena
Landowners as the original power class controlled the political power
Industrialist complained price of food was high
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Brilliance or GloomBrilliance or Gloom
The Wonderful World Adam Smith Envisioned was being embraced by some philosophers
A minister by the name of William Godwin saw the poverty around him but was convinced that the world’s future was much brighter
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Brilliance or GloomBrilliance or Gloom 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
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
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Privy CouncilPrivy Council
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.
It deals with many of the legal issues the government must deal with
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EconomicsEconomics
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
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Dismal Science: EconomicsDismal Science: Economics
According to Heilbroner, as well as many other, Thomas Carlyle after reading Thomas Malthus book described economics as “the “dismal science”
However, recent work by David Levy, Journal of History of Economic Thought, 2001 argues that Carlyle did coin the phrase
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Dismal Science: EconomicsDismal Science: Economics
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.
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MalthusMalthus
•;
Food
Population
Time
Gro
wth
rat
e
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
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Thomas MalthusThomas Malthus
The ideas of Malthus influenced many of his time
Among them, Charles Darwin and David Ricardo
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.
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MALTHUS AND RICARDOMALTHUS AND RICARDO
Malthus and Ricardo were above all great friends.
They disagreed with each other on many points which in reality where more an issue of style rather than substance.
However they did have one very important difference of opinion.
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MALTHUS AND RICARDOMALTHUS AND RICARDO
This difference was in the fact that David Ricardo supported the so called Says Law while Malthus did not
We will discuss the Says Law in greater detail later on
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David Ricardo
1772-1823
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BIOBIO
Son of Jewish immigrant stock broker Broke ranks with family and became a Unitarian
to marry a Quaker woman he fell in love with took modest stake and build into a fortune invested in Securities and Real Estate In 1779, while on vacation, read The Wealth of
Nation by Adam Smith Got interested in economics as a “hobby”
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House of CommonsHouse of Commons
Was elected to the House of Commons There he became highly respected He argued issues not based on the
prevailing wind but on the relevance to the structure of society
He was said to have been the man that educated Commons
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Develop SystemDevelop System
Basic Assumptions:
–Classical Rent
–Population issues as presented by Malthus
–Wage-fund
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Rent and Corn LawsRent and Corn Laws
During the Napoleonic wars (1790-1810), the English had a diffucult time using their porst
Thus, reduction in corn imports to England resulted in 18% annual growth rates in the price of corn
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Extensive and Intensive RentExtensive and Intensive Rent1
5
8
1020
30 40 50
0
20
40
60
80
100
120
140
160
180
200
Z
Additional Labor
(INTENSIVE)
Additional Land (EXTENSIVE)
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Theory of ValueTheory of Value
Use Value necessary for Exchange Value Labor theory value only for Perfectly
Competitive Markets Economic Forces change relative prices
over time
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Theory of ValueTheory of Value
Short-run price changes are due to demand-supply while Long-run price changes due to labor costs
Any variation of the preceding is only temporarily and in all cases Long-run price changes are due to labor cost changes
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Distribution TheoryDistribution TheoryMarginal ProductMarginal Product
A
D Rent B
Profits G H
E Q N F J
Wages M C I PDoses of Capital
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Distribution TheoryDistribution TheoryMarginal ProductMarginal Product
Rent
Profits
wages
Doses of Capital
Currency
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First to Deal with the Concept of First to Deal with the Concept of International Trade in Analytical International Trade in Analytical
TermsTerms
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Basic Assumption of the Law of Basic Assumption of the Law of Comperative AdvantagesComperative Advantages
Each Country has a fixed endowment of resources, and all units of each particular resource are identical (i.e. homogenous factors).
The factors of production are completely mobile between alternative uses within a country factor prices identical for alternative uses.
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Assumptions (Cont)Assumptions (Cont) The factors of production are completely immobile
externally (i.e. across countries) factor prices can be different across countries prior to trade
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.
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Assumptions (cont.)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.
Costs of production are constant horizontal supply curve.
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There is full employment.
There is perfect competition.
No government-imposed obstacles to economic activity.
Internal and external transportation costs are zero.
We begin with a two-country and two-commodity trade
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Ricardian Condition of Production in England and in Portugal
Country Wine Clothing Price under Autarky
Portugal 80 hrs/bbl
90 hrs per yard
1 w 8/9 c or 1 c 9/8 w
England 120 hrs/bbl
100 hrs per yard
1 w 6/5 c or 1 c 5/6 w
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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
Who should specialize in Wine: Who should specialize in Clothing:
Comparative AdvantageComparative Advantage
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Comparative Advantage
Terms of Trade between England and Portugal
Which TOT is acceptable to which country?
TOT England Portugal
1 W : 1 C
1 W : 1.2 C
1 W : 1.4 C
1 W : .89 C
1 W : .7 C
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Comparative AdvantageComparative Advantage
So given the previous table:– The range of the TOT would be– 1 W : for ______ C high– 1 W : for ______ C low
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Say’s LawSay’s Law
J.B. Say, James Mill, and David Ricardo Supply Creates Its Own Demand Thus, Glut in a market may exist but it will
not exist in all markets An argument against Malthus