DAVID RICARDO
(1772-1823)
Contd.
vDavid Ricardo was British political economist, one of the most influential of classical economist
vRicardian economist, as Schumpeter observes, is difficult to understand, more difficult to interpret and most difficult to make an appraisal
vThe Principles of Political economy and Taxation is his best known work
vRicardo was interested in analysing the problems of political economy rather than in its wealth and
progress
Contd.
• He is one of the greatest representatives of classical economics
• To him, political economy is an enquiry into the laws that determine the division of the produce amongst the classes who are responsible for its production
• Ricardo would be remembered for the introduction of a theoretical framework that gave economic
thinking a new direction
RICARDO’S VALUE ANALYSIS
• Ricardo’s theory of value contains many
Smithian legacies: (1) labour theory of value;
(2) natural and market prices; (3) use value and exchange value: and so on
• He has used three type of values (i)Value
relevant for scarce commodities (ii)Value
relevant for reproducible commodities
(iii)Market value and normal value
Contd.
Contd.
• According to Ricardo, utility is a precondition of value but it is not its explanation
• Utility is essential if a commodity is to have
exchange value; but utility cannot be a measure of value
• Commodities possessing utility derive their
exchange value from two sources: scarcity and quantity of labour required to produce them
• There are some commodities which are non reproducible rare commodities,there supply is fixed and value is determined by the intensity of demand.These are scarce commodities.
Contd.
• Ricardo was considering relative value analysis.In cases where different factors of production are
used,he used the cost of production of the factors of production.
• He has ignored the influence of demand in the case of the commodities whose values are to be fixed up in the long run
• In the long run, supply responds to demand in
such a way that value is equated with the cost
of production
Contd.
• The market value on the other hand is
determined by the market forces of supply and demand.It may be greater than or less than the long run normal price
• Ricardo had a flexible mind.He modified his views regarding labor theory of value as
follows:
1-He introduced capital as a factor of production
Contd.
2-He took into account the varying proportion of labor and capital
3-He introduced varying qualities of labor
4-He wanted to have an invariable measure of value
• Ricardo had all along a weakness in favor of labor theory of value.He was of the opinion that the
labor theory of value can be valid inspite of the existence of different factors of production,if the following conditions are satisfied:
Cont.
A-The ratio of fixed capital to labor remains same in every type of production
B-All fixed capitals are equally durable
• If the fixed capital labor ratio differs, value will also change
• The higher the C/L ratio,the higher would be the value and vice versa
• Similarly, value may also be different if the
fixed capital differs in turn over rates
Criticism of value theory
• Role of demand is not properly taken into account, except in the case of scarce goods
• Ricardo has not taken into account depreciation on capital and rate of interest in case of
commodity values
• He has not explained as to how capital can be converted into labor
• He has not cleared how to convert different types of labor into standard units
• Rent does not enter into price.It is not a cost factor
Theory of Distribution
• Ricardo was interested in finding out the
principle by which the income from different factors of production can be determined
• Ricardo was of the view that as the economy develops, the relative shares of wages,profits and rent will vary
• According to Kaldor , Ricardian theory of
distribution is based on two principles:
Contd.
i-Marginal principle, and ii-Surplus principle
• The marginal principle discusses the share of rent and the surplus principle is applied to the division of surplus between wages and profits
• Output of economy is divided among three major shares;rent, wages, and profits
• Rent is the the reward for the use of the services of land. It arises as per law of diminishing returns
Contd.
• Wage is a return to labor. Wage is equal to subsistence
• Profit is the residual. It is the income which is left after the payment of wages and rent
• According to Ricardo, agricultural sector is more fundamental than industrial sector
• The pattern of distribution in the economy
must arise from the agricultural sector, first.
Contd.
• Rate of profit in the agricultural sector
determines the rate of profit in the industrial sector
• Rent is the difference between the average
product and the marginal product of labor for any given volume of employment-shown in the above diagram
• Rent depends on the elasticity of AP & MP curves and on the extent of diminishing returns
Contd.
• Marginal productivity of labor is equal to wages and profit.The wage level is at the subsistence
• The wage is determined by the supply price of labor which is constant in terms of corn
• At the prevailing wage rate OW , there is an infinitely elastic supply curve of labor
• Profit is residual
• Thus Ricardo has been successful in finding out the share of land labor and capital
