ilrle 344 2nd half_Notes - October 23, 2006 D. Ricardo...

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October 23, 2006 D. Ricardo (1772-1823) was a brilliant stockbroker who made a fortune by his mid- thirties. In 1815, the debates on the Corn Laws made Ricardo write and publish “The Influence of the Low Price of Corn on the Price of Stock” (What effect do food prices have on profits?). The Corn Laws, according to Ricardo, are the root of all evil. His book, while has many things in it, is largely an attack on English Corn Laws. Ricardo basically sets up this framework. His framework was that we should be looking at economic growth and its effects on the theory of distribution. We want to know what happens to wage rates, profits, and rents. However, his analysis on these things isn’t that great because he didn’t understand the theory of diminishing returns or Malthus’s theory of population. Malthus has derived a true doctrine of rent based on the theory of diminishing returns and given us the laws of population. Now, we need to redo Smith in a more analytic way. Ricardo’s book is in no sense a replacement of the Wealth of Nations. The key point is that Ricardo says, “If you look at a growing economy, the effect of capital accumulation is going to differ in different countries. This difference depends on two things: 1. Fertility of land (farm) 2. Laws governing importation of food (either prohibited or very heavily taxed) In a country, if there’s bad land and bad laws blocking free trade, even a modest accumulation of capital (modest economic growth) will quickly lead to declining profit rates and economic growth will choke economic disaster. Ricardo believes all economic growth comes from rising profits. Economic growth depends on land and quality of laws. Thus, the key question is, “Do you allow free trade of food?” Thus, Ricardo hates the English Corn Laws b/c they will eventually choke off economic growth. Ricardo’s model of the economy is very abstract; it’s essentially a model of a giant farm. The model is essentially one that is all agriculture. Ricardo’s model is based on five assumptions (see handout). Increased profits leads to capital accumulation which leads to higher money wages which leads to higher population which leads to higher demand for food which leads to higher price of food which leads to lower profits AND higher rents. Then, the cycle begins again. Thus, Britain is doomed because profits are going down (only landowners win). But, Ricardo says, if we abolish the Corn Laws, we can buy food on the world market. We (Britain) is a small country; we cannot affect the world price of food by ourselves (we’re too small given the world supply). This means, if there’s no Corn Laws, there is a horizontal supply curve for food. Thus, as demand goes up, price doesn’t change! Price is still at the same it was before because supply curve is horizontal. Thus, price of food will
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be constant, profits will be constant, and rents will be constant. Thus, with free trade in food, Britain can grow indefinitely! John Stuart Mill: His father was a complete lunatic (he was an economist). He abused
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This note was uploaded on 02/20/2009 for the course ILRLE 3440 taught by Professor Boyerg during the Fall '08 term at Cornell University (Engineering School).

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ilrle 344 2nd half_Notes - October 23, 2006 D. Ricardo...

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