econ434notes8a

econ434notes8a - T he Liberal Tradition: Classical...

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The “Liberal” Tradition: Classical Economics III Ricardo’s “Iron Law of Wages” David Ricardo hypothesized a fixed wages fund that is set before the production period. All income in excess of the wages fund goes to landowners and as business profits and interest. Thus, the wage rate [set in the graph at the right] is inversely proportional to the supply of labor. Surpluses accrued from prices going up while costs stay constant will go to those who control the means of production (landowners in Ricardo’s day). No matter the MPP of labor, the amount allocated to workers should always be equal ( ceteris paribus of course), and the per capita wage rate will be dependent on the population of job-seeking individuals (in Ricardo’s market of unskilled labor). Thus, he theorized, if job-seekers rose by 10% in number, then wages would fall about 10%. [In modern parlance, Ricardo’s demand curve for labor is a rectangular hyperbola . Each rectangle drawn from a point on the curve to the two axes absorbs the same area as any other rectangle so drawn.] Ricardo relied heavily on a variant of Thomas Malthus’ theory of population. He assumed that the supply of labor would be influenced primarily by the size of the population so that wages would tend to be close to subsistence levels in the long run. The division of national income is divided between workers and landlords -Total amount of wage available to the population is fixed -Consequently, wage rate is inversely proportional to size of labor force. -WL + RN = Y, where N=land WL is fixed Ricardo’s Theory of Land Rent Suppose there are various types of land ranging from hostile [ex: Arctic tundra or Gobi desert] to hospitable [ex: fertile American Midwest.] and that a tenant farmer, located at
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the edge of the productive land must rent from a landlord. Ricardo terms the area at the border dividing productive from hostile land as “marginal land.” Land at the margin draws zero economic rent because any attempt by a landlord to collect rent will cause the tenant to move to slightly worse land. Given this, Ricardo concluded that rent is positively [proportionally?] related to the productivity of more fertile land relative to the marginal land. Suppose a plot of productive land produces 100 bushels, while marginal land produces
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econ434notes8a - T he Liberal Tradition: Classical...

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