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1、David Ricardo,Articulated and rigorously formulated “Classical economics” 古典经济学的集大成者 Personal friend of Malthus, although they disagreed about much of economics He did incorporate some of Malthus ideas Elected to Parliament in 1819 Friend of John Stuart Mill,Framework of Analysis,What are the questi
2、ons that David Ricardo is asking? What determines the distribution of income between workers, landlords and capitalists? What determines wages, rent and profit? More specifically, what determines changes in relative factor prices over time? Or, what determines changes in the distribution of income o
3、ver time?,Essence of Ricardos Model,Per capita wages remain at subsistence level in the long run because of wages fund doctrine 工资基金论 工资基金理论的代表人物是英国古典经济学家约翰穆勒（John SMill,1806-1873）。 工资基金理论是指工人的工资受人口规律支配，工人的工资水平和工人的生活状况就是随工人人口的增减而变动，而周而复始的反复下去。 Wages fund doctrine wage is equal to wages fund/labor fo
4、rce,Essence of Ricardos Model,Landlords contribute nothing to the economy they receive rent simply by holding land, which was fixed in supply. They only consume, not save. The profits of capitalists are the only source of investment (capital accumulation) Over time, the distribution of income will f
5、avor landlords, because of the declining rate of profit,Framework of Analysis,What are Ricardos assumptions? Labor cost theory changes in relative prices over time are explained by changes in labor cost measured in hours Neutral Money Changes in the money supply do not cause changes in relative pric
6、es,Framework of Analysis,What are Ricardos assumptions? Fixed coefficients of production fixed capital/labor ratio for each production process, does not change as level of output changes Constant returns to scale (规模收益不变) in manufacturing horizontal supply curve, Marginal Cost is constant,Framework
7、of Analysis,What are Ricardos assumptions? Diminishing returns to scale （规模收益递减）in agriculture upward sloping supply curve, MC increases Full employment flexible wages ensure full employment of labor via market forces,Framework of Analysis,What are Ricardos assumptions? Perfect competition Rational
8、economic actors Malthusian population thesis: Population growth always exceeds the growth of means of subsistence Wages fund doctrine wage is equal to wages fund/labor force,Framework of Analysis,What is the economic/ political/cultural/social environment of Ricardo? Rising grain prices, rising rent
9、 Growth of industrialization, decline of agriculture Landlords wanted restricted trade, capitalists wanted “free” trade,Framework of Analysis,What is the role of the market? Ricardo advocated free markets, free international trade, free movement of labor,Framework of analysis,What is the role of gov
10、ernment? Limited role for government provide basic infrastructure to aid in functioning of markets Judicial system, roads, national defense,Ricardos Theory of Rent,Rent exists because of Diminishing returns in agriculture diminishing returns begin immediately Scarcity (fixed amount) of fertile land
11、(like Malthus),Ricardos Theory of Rent from the Product Side,As more labor and capital are applied to a fixed amount of land, the marginal product decreases. This makes it profitable to bring less productive land into production But because a bushel of corn from less productive land sells for the sa
12、me price as a bushel from highly productive land, tenant farmers are willing to pay more to rent the highly productive land. Result: the landowners, not the tenant farmers, are the ones who gain from productive land.,Ricardos Theory of Rent from the Cost Side,As more labor and capital are applied to
13、 a piece of land, the marginal cost of production increases Equilibrium condition: Price = marginal cost of the last unit produced by the least efficient (highest cost) producer,Ricardos Theory of Rent Conclusions,Rent is a payment to the landlord that equalizes the rate of profits (profits earned b
14、y tenant farmers) on land of differing fertilities Rent is price-determined, not price-determining The high price of corn is not determined by high rents Rather, high rents are determined by high price of corn BECAUSE As the price of corn increases, more less fertile land is brought into production,
15、Ricardos Theory of Value,What do we mean by theory of value? We are talking about what determines prices. (or, for Ricardo, relative prices) To understand Ricardos value theory, first look at what Smith had to say,Smiths Value Theory,According to Smith, in an undeveloped economy, the exchange value
16、(price) of a product depends upon the quantity of labor embodied in each Labor Theory of Value How do we measure the quantity of labor? When Smith tried to answer this question, he ended up with wages as a measure of quantity.,Smiths Value Theory,In a more advanced society, the value (price) of a product is determined by the cost of production = Wages + profit + rent (Profit includes interest). In the long run, with competition, price = cost. How does
