Ricardo’s Theory of Distribution and Growth David Ricardo (1772-1823)

Ricardo’s Theory of Distribution and Growth

David Ricardo (1772-1823)

• “To determine the laws which regulate this distribution, is the principal problem in Political Economy.”

Ricardo’s Theory is Important for the Following Reasons:

• Provides us with vision of the future

• Explains why in Ricardo’s view investment opportunities decline

• Explains in simple terms the reason for rent

Historical Backdrop: Corn Laws

• Corn Laws

• imposed a tariff on the importation of agricultural products

• British Parliament was dominated by the landowning classes

Distribution and Production

• Ricardo sought to show how changes in distribution affect production

• Ricardo contended that as the economy grows, rents rise, squeezing profits

• As profits are squeezed, economic growth declines

Assumptions

• Say's law--supply creates its own demand, and whatever is saved is invested (accumulated).

• Labor theory of value, prices are proportional to the quantities of embodied labor.

• Agriculture is labor intensive, manufacturing is capital intensive.

• Land is fixed and differs in fertility

• three classes

Rent

• Return to an factor of production for which there are no substitutes or no “good” substitutes

• Examples: land, a particular location, a living legend, etc.

Ricardian Rent

• Ricardo defined rent as follows:

• different between output on the most and least fertile land in cultivation
• difference between costs of production on the most and least fertile lands in cultivation

The End of Capitalism?

Implications?

• Why was Ricardo’s position regarding the corn laws? Explain.

• What policies did Ricardo recommend?

• What happens to economic growth over time as the population increases? Why?

• How does Ricardo’s theory reflect his class interests?