DAVID RICARDO:
4
DAVID RICARDO [1772-1823], BRITISH
CLASSICAL ECONOMIST
þ APOSTLE OF CAPITAL ACCUMULATION:
þ GROWTH OF CAPITAL = GREAT SOURCE
OF ECONOMIC
EXPANSION.
þ ALL ECONOMIC POLICY --> SHOULD BE
DIRECTED
TO EXPANDING IT.
þ ECONOMIC FREEDOM --> WAY TO MAXIMIZE PROFITS -->
PROFITS SOURCE OF INVESTMENT CAPITAL.
þ COMPETITIVE ECONOMY --> LEADS TO PROFIT-
MAXIMIZING INVESTMENTS.
þ ADVOCATED GOVN. POLICIES THAT BENEFITTED BUSINESS
--> MAX ECONOMIC GROWTH.
þ A MILLIONAIRE RADICAL, HE ADVOCATED:
þ REFORMS IN BANKING & CURRENCY
þ POOR RELIEF
þ TARIFFS
þ FREEDOM OF PRESS & SPEECH
þ AUTHOR OF THE INFLUENTIAL BOOK PRINCIPLES OF
POLITICAL ECONOMY AND TAXATION.
þ 1815 --> GREAT DEBATE IN ENGLAND --> TO PRESERVE
ENGLAND'S AGRICULTURAL WAY OF LIFE OR NOT?
þ THE CORN LAWS --> THE IMPORT OF WHEAT INTO
ENGLAND
þ WHEAT & OTHER GRAINS = "CORN"
þ VS. "INDIAN CORN" OR "MAIZE"
5
DAVID RICARDO [1772-1823]
þ ENGLISH LAWS --> TO PROMOTE DOMESTIC AGRI WITHOUT
CAUSING MAJOR INCREASES IN PRICE OF FOOD.
þ WHEN WHEAT PRICES FELL IN ENGLAND,
TARIFFS
RAISED ON WHEAT IMPORTS TO
KEEP OUT FOREIGN
GRAIN THAT WAS DEPRESSING DOMESTIC
PRICES,
HURTING DOMESTIC FARMERS.
þ WHEN DOMESTIC PRICE OF WHEAT ROSE
ABOVE
CERTAIN LEVEL, IMPORT DUTIES
REDUCED,
KEEPING LID ON DOMESTIC PRICES.
þ AFTER WARS WITH FRENCH, WHEAT PRICES FELL &
FARMERS CLAMORED FOR HIGHER DUTIES, FEARING RUIN.
þ SOUND AGRI NEEDED FOR BR DEFENSE
& NAT.
VIGOR.
þ REVIVAL OF PHYSIOCRACY.
þ BUT BUSINESS INTERESTS OPPOSED TO TARIFF
INCREASES --> RAISE FOOD PRICES --> FORCE WAGES
UPWARD --> REDUCED PROFITS--> DECREASED EXPORTS -
-> RUIN FOR ENGLISH INDUSTRY.
þ BUSINESS INTERESTS SAID ENGLAND'S FUTURE LAY WITH
INDUSTRIAL EXPANSION, NOT AGRI.
þ BUS. INTERESTS DEMANDED REPEAL OF CORN LAWS.
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DAVID RICARDO [1772-1823] [C]
þ RICARDO ON BUSINESS SIDE OF ARGUMENT:
þ LAND OWNERS, NOT FARMERS, CHIEF BENEFICIARY OF
HIGHER WHEAT PRICES.
þ HIGHER PRICES --> CULTIVATION IN OTHERWISE
UNPROFITABLE AREAS --> RENTS WOULD BE RAISED IN
OLDER AREAS --> MORE NAT. INCOME TO LANDOWNERS -->
THIS PARASITIC GP WOULD USE INCOME FOR LUXURY
EXPENDITURES --> NOT FOR PRODUCTIVE INVESTMENT.
þ ENLARGE CULTIVATION WOULD DRAW CAPITAL & LABOR
AWAY FROM INDUSTRY, HINDERING INDUSTRY.
þ HIGHER FOOD PRICES ---> HIGHER WAGES --> HIGHER
MFGG COSTS --> REDUCED ENGLISH EXPORTS --> REDUCED
OUTPUT FOR ENGLISH MFGG.
þ ALSO, REDUCED PROFITS FOR MFGG --> SLOWER CAPITAL
ACCUMULATION & ECON EXPANSION.
þ IN SUM, RICARDO OPPOSED CORN LAWS, BUT NOT THEIR
COMPLETE REPEAL.
7
RICARDO'S THEORY OF ECONOMIC GROWTH
þ RICARDO DEVELOPED THEORETICAL MODEL OF THE
ECONOMY --> DEVELOPED A GENERAL THEORY OF
ECONOMIC GROWTH.
þ IN EARLY STAGES OF NATION'S GROWTH, POP. SMALL &
ONLY SMALL PORTION OF LAND CULTIVATED.
þ RENT PAID TO LANDOWNERS ONLY SMALL PART OF NAT.
INCOME, PROFITS TO FARMERS LARGE PART.
þ PROFITS PLOWED BACK INTO INDUST DEVELOPMT -->
GREATER DEMAND FOR LABOR --> POP GROWTH --> WHILE
WAGES REMAIN AT SUBSIST. LEVEL.
þ POP GROWTH --> EXPANSION OF CULTIVATED AREAS -->
RAISE FOOD PRICES TO COVER HIGHER COSTS OF
GROWING ON LESS FERTILE AREAS.
þ HIGHER FOOD PRICES --> LANDOWNERS RAISE RENTS IN
OLDER CULTIVATED AREAS.
þ ALSO, HIGHER FOOD PRICES --> EMPLOYERS PAY HIGHER
MONEY WAGES --> COST OF MFGG GOODS UP --> REDUCE
MFGG PROFITS --> REDUCED WEALTH FOR EXPANSION &
REDUCED INCENTIVE TO INVEST --> CAPITAL
ACCUMULATION SLOWING --> ECON GROWTH SLOWING -->
HALTING OF GROWTH AFTER MANY DECADES.
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RICARDO'S THEORY OF ECONOMIC GROWTH
þ AT THIS MATURE STAGE, POP LARGE, CULTIVATION
EXTENDED, INDUSTRY DEVELOPED, PRODUCTION HIGH -->
BUT CAPITAL ACCUMULATION ADEQUATE ONLY FOR
REPLACEMENT OF CAPITAL, NOT FURTHER EXPANSION.
þ RICARDO BELIEVED THAT ECONOMY, IF LEFT ALONE,
WOULD ACHIEVE MAX. GROWTH POSSIBLE:
þ BUSINESS SHOULD BE FREED OF ALL
RESTRICTIONS
THAT MIGHT REDUCE ABILITY TO
MAX PROFITS.
þ RIGHT OR WRONG, RICARDO'S THEORY
WAS ON THE
SIDE OF THE COMING RULERS OF
THE SOCIAL
ORDER, BUSINESS INTERESTS.
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RICARDO AND THE INTERNATIONAL ECONOMY
þ RICARDO SHOWED THAT INTERNATIONAL SPECIALIZATION
WAS ADVANTAGEOUS TO ALL NATIONS.
þ DR ALSO SHOWED THAT TARIFFS TO PROTECT DOMESTIC
PRODUCERS INJURED THE NATION IMPOSING THEM.
þ FREE TRADE WAS ROAD TO ECONOMIC WELL BEING -->
DOMESTICALLY & INTERNATIONALLY.
þ DR: THE LAW OF COMPARATIVE ADVANTAGE:
þ IF IT COSTS LESS TO PRODUCE COST
IN ENGLAND
THAN IT DOES TO PRODUCE WHEAT
-- COMPARED
WITH COSTS IN OTHER COUNTRIES
-- PAYS FOR
ENGLISH TO SHIFT TO CLOTH MFGG,
EXPORT
CLOTH, & IMPORT WHEAT FROM
OTHER COUNTRIES.
þ ENGLISH WORKER --> 1 DAY TO MAKE
YD OF CLOTH
--> 2 DAYS TO GROW BUSHEL OF
WHEAT.
þ THUS, A BUSHEL OF WHEAT COSTS 2X
YD OF
CLOTH.
þ FRENCH WORKER --> 1 DAY TO MAKE
YD OF CLOTH
--> 1 DAY TO MAKE BUSHEL OF
WHEAT.
þ CONCLUSION: ENGLAND SHOULD MAKE
CLOTH (1
DAYS LABOR), EXPORT TO FR,
TRADE IT 1 FOR 1
FOR WHEAT, IMPORT THE WHEAT
BACK TO ENGLAND.
þ IN THIS WAY, ENGLISH WILL GET FOR
ONE DAY'S
LABOR, THE WHEAT IT WOULD OTHERWISE
TAKE 2
DAYS TO PRODUCE.
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RICARDO AND THE INTERNATIONAL ECONOMY
[C]
þ FR WOULD ALSO GAIN: THEY PRODUCE WHEAT, , SHIP TO
ENGLAND, , TRADE ONE BUSHEL FOR 2 YDS OF CLOTH,
AND SHIP CLOTH BACK TO FR.
þ BOTH SIDES BENEFIT FROM THIS SPECIALIZATION &
FREE EXCHANGE.
þ ENGLAND WOULD PRODUCE & EXPORT MUCH CLOTH, BUT
OUTPUT OF WHEAT WOULD BE SMALL. THE OPPOSITE IN
FR.
RICARDO SAW WHOLE WORLD MOVING TOWARD
GREATER WEALTH
þ DR SAID THAT IN FULLY DEVELOPED ECONOMY, THAT THE
RETURN TO CAPITAL WAS LOW --> ONLY REPLACEMENT OF
WORN-OUT CAPITAL EQUIPMENT.
þ AS RETURN TO CAPITAL FELL IN ENGLAND, ENGLISH
INVESTORS WOULD SEEK HIGHER RETURNS BY INVESTING
IN LESS WELL DEVELOPED COUNTRIES ABROAD.
þ CAPITAL EXPORTS FROM MATURE ECONOMIES WOULD FLOW
QUICKLY TO NEWLY DEVELOPING COUNTRIES, WHO WOULD
BE BROUGHT TO HIGHER LEVELS OF PRODUCTION &
WEALTH.
þ THUS, CLASSICAL ECONOMISTS SUCH AS DR SAW THE
WHOLE WORLD GRADUALLY MOVING TOWARDS OPULENCE.