DAVID RICARDO

 Two of Ricardo’s most important contributions were the theory of rent and the
concept of comparative advantage.
 The former, which drew on the writings of (among others) his close friend and
critic Robert Malthus, defined rent as “that portion of the produce of the earth
which is paid to the landlord [by the tenant farmer] for the use of the original and
indestructible powers of the soil.”
 Rent, Ricardo argued, is what remains from gross farm revenue after all the
farmer’s production costs have been paid, including remuneration for the capital
and labour he had expended on the land.
 It is an unearned surplus (now referred to as an economic rent) in that its payment
is not necessary to ensure a supply of farmland.
 For Ricardo, rent arises from the advantages that one site has over another due to
differing degrees of soil fertility: rent per acre is highest on the most fertile land,
and declines to zero on the worst quality soil.
 Comparative advantage, Ricardo believed, ensured that international trade would
bring benefits for all countries; his theory remains the foundation of the economic
case for free trade today.
 He argued that each country should specialize in making the products in which it
possessed a comparative advantage, that is could produce relatively efficiently.
 Ricardo was an early believer in the quantity theory of money, or what is known
today as MONETARISM.
 In his Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815),
Ricardo articulated what came to be known as the law of diminishing marginal
returns. One of the most famous laws of economics, it holds that as more and more
resources are combined in production with a fixed resource—for example, as more
labour and machinery are used on a fixed amount of land—the additions to output
will diminish.

 Ricardo also opposed the protectionist Corn Laws, which restricted imports of
wheat. In arguing for FREE TRADE, Ricardo formulated the idea of comparative
costs, today called COMPARATIVE ADVANTAGE—a very subtle idea that is the main
basis for most economists’ belief in free trade today.

Corn Law, in English history, any of the regulations governing the import and export
of grain. Records mention the imposition of Corn Laws as early as the 12th century. The
laws became politically important in the late 18th century and the first half of the 19th
century, during the grain shortage caused by Britain’s growing population and by the
blockades imposed during Wars. The Corn Laws were finally repealed in 1846, a triumph
for the manufacturers, whose expansion had been hampered by protection of grain,
against the landed interests.
A classical pessimist who published his principles of political economy and taxation in
1817.
 In this work he predicted that capitalist economies would end up in a stationary
state, with no growth and also owing it to diminishing returns in agriculture.
 In Ricardo’s model growth and Development is a function of capital accumulation
and this capital accumulation depends on reinvested profits.
 Profits are however squeezed between subsistence wages and the payment of rent
to landlords, which increase as the price of food rises owing to diminishing returns
to land ad rising marginal costs.
 Ricardo thought of the economy as one big farm in which food and manufactures
are consumed in fixed proportions.
 According to Ricardo, in equilibrium the rate of profit in agriculture must equal the
rate of profit in industry.
 As the profit rate in agriculture declines capital will shift to industry causing the
rate of profit to decline there. Profits are also squeezed because wages rise in terms
of food.
 But Ricardo did not have a problem with effective demand. He saw no limit to the
amount of capital that could be employed.

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KARL MARX
 Das capital 1867
 Among the most influential theories of Marx are the theory of historical
materialism based on class struggle and the theory of alienation of workers under
capitalist conditions.
 He also predicted the collapse of capitalism.
 Adam Smith saw the decline in profits as the result of competition among
capitalists.
 For Marx the economy does not grow forever, but the end comes not from a
stationary state but from ‘crises’ associated with overproduction and social
upheaval.
Marx’s model has a lot of similarities to other economists
 The capitalist’s surplus is the source of capital accumulation and the principal
mainspring of growth. Population growth responds to wages in Malthusian fashion,
keeping wages down, the rate of profit has a long run tendency to fall.
Marx model and his prediction of crisis. Gross output consists of three elements.
 1. Variable capital or the wage bill (v)
2. Constant capital (c) that is plant and machinery and the raw materials used in
production
3. Surplus value or profit (s)
 The wages of labour are determined by the minimum subsistence level and the
surplus value is the difference between output per worker and the minimum wage
per worker.
 The rate of surplus value or degree of exploitation is given by s/v
 The rate of profit is given by the ratio of surplus value to total capital –
s/(v+c) =(s/v)/ (1+(c/v) )
 Where the ratio of constant to variable capital (c/v) is defined as the organic
composition of capital - is the ratio of the value of the materials and fixed costs (constant capital)
embodied in production of a commodity to the value of the labour-power (variable capital) used in
making it.

 By “variable capital” Marx meant that proportion of capital which is

invested in wages, in the purchase of labour-power.
 He calls this capital “variable” because it is this proportion of capital
which, if it is used wisely may produce a new, surplus value in the course
of the labour process, over and above the “necessary labour time” which
constitutes the value of labour power.
 The “constant capital” refers to that proportion of capital invested in the
materials and components purchased but then embodied in the product
when it is sold, and the materials, tools, machinery etc., which are used up,
in the course of production. These materials must be renewed when they
are used up or obsolete.
 When these proportions are taken with respect to their concrete “use-
values”, then Marx calls this the technical composition of capital,
 Marx saw no major problem as long as long as surplus labour exists to keep wages
less, but he predicted that as capital accumulation continues the ‘reserve army of
labour’ would disappear, driving wages up and profits down.
 The main motto of a capitalist is to accumulate. But as capital is substituted for
labour there arises another problem: labour cannot consume all the goods produced
and a realisation crisis is caused by the failure of effective demand.
 Capitalism eventually collapses through its own inner contradictions and power
passes to the working classes because fewer and fewer people benefit from
capitalism.
 Capitalism is replaced by Socialism. Whereby workers own the means of
production, distribution and exchange.

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