A Step Back to Reality ?

1
A Step Back to Reality ?

• The Work of Malthus and Ricardo

2
The Struggle between two Wealthy Classes

• 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

3
Brilliance 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
  worlds future was much brighter

4
Brilliance or Gloom

• Godwin foresaw a future where
• there 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

5
Privy 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

6
Economics

• 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

• 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

8
Dismal 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.

9
Malthus

• 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

Population
Growth rate
Food
Time
10
Thomas 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.

11
MALTHUS 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.

12
MALTHUS 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

13

• David Ricardo
• 1772-1823

14
BIO

• 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

15
House 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

16
Develop System

• Basic Assumptions
• Classical Rent
• Population issues as presented by Malthus
• Wage-fund

17
Rent 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

18
Extensive and Intensive Rent
19
Theory of Value

• Use Value necessary for Exchange Value
• Labor theory value only for Perfectly Competitive
  Markets
• Economic Forces change relative prices over time

20
Theory 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

21
Distribution TheoryMarginal Product
22
Distribution TheoryMarginal Product
Currency
Rent
Profits
wages
Doses of Capital
23
First to Deal with the Concept of International
Trade in Analytical Terms
24
Basic Assumption of the Law of Comperative
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.

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
• 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.
• 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.
• We begin with a two-country and two-commodity
  trade

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Ricardian Condition of Production in England and in Portugal Ricardian Condition of Production in England and in Portugal Ricardian Condition of Production in England and in Portugal 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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Comparative Advantage

• 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

30
Comparative Advantage Comparative Advantage Comparative Advantage
Terms of Trade between England and Portugal Terms of Trade between England and Portugal Terms of Trade between England and Portugal
Which TOT is acceptable to which country? Which TOT is acceptable to which country? 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
31
Comparative Advantage

• So given the previous table
• The range of the TOT would be
• 1 W for ______ C high
• 1 W for ______ C low

32
Says 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