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Malthus & Ricardo
Malthus & Ricardo
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Malthus’ Theory of Subsistence Real Wages
w → w SUBSIS as t → ∞
theoretical
e.g. S
L ↑→w↓
empirical
ethical
hard to interpret
*
Ferdinand Lassalle (1825-64): German philosopher and founder of the
social-democratic movement in Germany. Also coined the term “night-
watchman state”
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An Essay on the Principle of Population (Malthus)
1. “Yet in all societies, even those that are most vicious, the
tendency to a virtuous attachment is so strong, that there
is a constant effort towards an increase of population. This
constant effort as constantly tends to subject the lower
classes of the society to distress and to prevent any great
permanent amelioration of their condition”
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2. “The way in which these effects are produced seems to be
this. We will suppose the means of subsistence in any
country just equal to the easy support of its inhabitants.
The constant effort towards population... increases the
number of people before the means of subsistence are
increased. The food therefore which before supported
seven millions must now be divided among seven millions
and a half or eight millions. The poor consequently must
live much worse, and many of them be reduced to severe
distress…
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A Modern Interpretation (Model) of
Malthus’ Theory of Population and Living Standards
Assumptions:
Y
w=
L
(i.e. consumption of food per worker = output per
worker in agriculture) if the economy’s food output is
entirely consumed by its workers (effectively, shared out
between them) and all workers work in agriculture†
†
These “ifs” mean that the total monetary demand for food is WL, where
L = agricultural employment. Equating this to nominal food supply, P F Y ,
W Y W
and rearranging gives P = L (where P =w )
F F
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Y
If L> LEQM , then L
< wSUBSIS
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The (Differential) Theory of Rent
Example:
Observations:
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Ricardo’s “Corn Model”
Structure of CM:
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Agricultural wages and employment:
( Wage fund )
L=
w SUBSIS
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Rents and profits:
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Distribution of income:
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“Stationary state”:
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Kaldor’s (1955) Diagram of the Corn Model
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Discussion of “Corn Model”
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1(a): Explanation of Rate of Profit ()
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1(a) cont’d:
MPL AGRIC
¿ −1
w SUBSIS
P LUX ∙ q−W
= π
⏟ W π LUXURIES =Profit-per-worker /Capital-per-worker (the advanced wage)
AGRIC
P LUX w SUBSIS
P CORN
=
q
( 1+π AGRIC )
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1(a) cont’d:
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1(b): Policy Recommendations
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Principle of Comparative Advantage
e.g.
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Ricardo showed that specialisation and trade created
gains more generally – i.e. outside the special pattern of
absolute advantage that Smith assumed
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Result: Again, specialising and trading can leave both
countries with more of both goods to consume
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1(c): Criticisms of Adam Smith
… and commodities
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1(c) cont’d:
( Wage fund )
e.g. “wage fund” theory (w= L
); subsistence
theory (based on Malthusian population dynamics);
monopsony theory
‡
Recall that the rate of profit in agriculture is given by
π=( MPL−w ) /w= ( MPL/w ) −1. Therefore, if LAGRIC is given, w . The
situation is more complex if, instead, the agricultural wage fund is treated
as given (because then w LAGRIC ), but still depends on w (rather
than being independent of it).
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2: Textual Foundations of the Corn Model
(in Ricardo’s writings)
§
e.g. the modern claim that by his “invisible hand” observations, Adam
Smith “really meant” that a perfectly competitive equilibrium is Pareto
efficient (a result known as the “first fundamental theorem of welfare
economics”)
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Blaug on origin of CM:
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3: Malthus’ Objections to the Corn Model
commodity. Rather than assuming that all firms continue to resemble the
Classical economists’ “farmers” (who owned physical stocks of corn-
capital, which they “advanced” to workers in return for their labour), a
more modern interpretation – which leads to the same result – is that the
value of the money wage that firms must “advance” to their workers
equals the total cost of buying a heterogeneous consumption basket
(whose composition is determined by “fair wage” norms). From the point
of view of production costs (and thus invested/advanced capital), this
modern interpretation (where firms must pay their workers enough
money to buy a certain bundle of goods) is equivalent to the Classical
economists’ framework (where capitalists were assumed to pay their
workers in kind – e.g. in physical consumption goods)
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Value of Profit (£)
to get a theoretical prediction for π=
Value of Capital(£) , we
need a theory of (relative) prices
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Ricardo tried the Labour Theory of Value, but he was
aware that it was inadequate
∴ P X = (1+ π )2 l X W
∴ P Y =( 1+ π ) l Y W
PX lX
Eqm relative price: PY
=( 1+ π ) ∙
lY
P X lX
But LTV prediction: =
PY l Y
P X AC X l X m
Intuitively, eqm = >
PY AC Y l Y
if materials per worker ( l ) much
larger in X: see Adam Smith on the LTV
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Ricardo justified using LTV by arguing that, empirically,
the conditions for LTV to predict eqm relative prices
accurately were approximately satisfied:
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Optional material: For information only††
P X lX
=
PY l Y
This is true:
††
This derivation treats the rate of profit () as the exogenous
“distributive variable”. Alternatively, one could assume that the real wage
in units of good Y, w ≡ W / PY , is exogenously given (i.e. determined
outside the “economic system”). The equation for PY implies that the
endogenous rate of profit would then satisfy 1+ π=1/ ( lY w ). Substituting this
into the eqm-relative-price equation, we get P X /P Y =lX / ( l2Y w ) – which,
again, differs from the LTV’s prediction
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1(a): both in Adam Smith’s “early and rude state of society”…
P X =l X W and PY =l Y W
In equilibrium:
P X =( 1+ π ) l X W and PY =( 1+ π ) lY W
(Note that the squared term in the equation for the equilibrium
PX arises because capital must be invested in the production of
X, “wine”, for two years before sales revenue is realised – and
capitalists expect compound interest on their investments.)
P X =( 1+ π ) ( l X W +m X PM )
PY =( 1+ π ) ( l Y W +mY P M )
e e
l Y =l Y + mY l M
Substituting into the above for the P and le terms,*** the LTV
works if
PM
l X +m X e
W l X + mX l M
=
PM l Y + mY l eM
l Y +mY
W
***
We will see that there are some specific (“fluke”) cases where the LTV works.
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[Proof: Rearranging the above equation and simplifying gives
PM e
∆=l M ∆
W
where ∆ ≡ lY m X −lX mY . There are two ways for this equation to hold.
First, ∆=0, which requires m X /l X =mY /lY -- i.e. a common ratio of
material:labour inputs.††† Second (if ∆ ≠ 0), P M /W =leM . We can
derive P M /W from the definition of PM:
P M =( 1+ π ) ( l M W +mM P M )
PM ( 1+ π ) l M
⇒ =
W 1−( 1+ π ) mM
e lM
⇒ l M=
1−mM
1/W
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very specific). An immediate implication is that the so-called
“transformation problem” in Marxian economics is insoluble.‡‡‡
‡‡‡
The “naïve LTV” also works in this case – i.e. with a common materials:labour
ratio, we get P X /P Y =l X /l Y .
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3(b): Possibility of a “general glut” of commodities
Keynes-type argument:
AD < AS (i.e. “deficient demand”) unemployment
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Malthus’ argument [for landlords’ consumption]
Problem:
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Ricardo’s response: Say’s Law
Three quotes:
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“[T]here is no over-production; production is not excessive,
but merely ill-assorted.”
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Idea that “saving is spending”:
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