David Ricardo

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David RicardoClassical economics

Born 19 April 1772

Died 11 eptem!er 1"2# $a%ed &1'
Nationality (ritish
Influences
mith (entham
Influenced
Ricardian ocialists )ohn t*art +ill +ar, raffa (arro
Contributi
ons
Ricardian e-*ivalence, la!o*r theory of val*e, comparative advanta%e,
la. of diminishin% ret*rns, /conomic rent011
David Ricardo $19 April 1772 2 11 eptem!er 1"2#' .as an /n%lish34ort*%*ese political
economist, often credited .ith systematisin% economics, and .as one of the most infl*ential of the
classical economists, alon% .ith 5homas +alth*s, Adam mith, and )ohn t*art +ill6
021 7e .as also a mem!er of 4arliament, !*sinessman, financier and spec*lator, .ho
amassed a considera!le personal fort*ne6 4erhaps his most important contri!*tion .as the la. of
comparative advanta%e, a f*ndamental ar%*ment in favo*r of free trade amon% co*ntries and of
specialisation amon% individ*als6 Ricardo ar%*ed that there is m*t*al !enefit from trade $or e,chan%e'
even if one party $e6%6 reso*rce3rich co*ntry, hi%hly3skilled artisan' is more prod*ctive in every
possi!le area than its tradin% co*nterpart $e6%6 reso*rce3poor co*ntry, *nskilled la!orer', as lon% as
each concentrates on the activities .here it has a relative prod*ctivity advanta%e60#1
Contents
0hide1
1 4ersonal life
2 8deas
o 261 9al*e theory
o 262 Rent
26# 5rade theory and policy
26#61 4rotectionism
26#62 Comparative
Advanta%e
# Ricardian e-*ivalence
: Ricardo;s theories of .a%es and
profits
& 7is <e%acy and 8nfl*ence
&61 Ricardian ocialists
&6161 =ne-*al /,chan%e
&62 >eo3Ricardians
&6261 /vol*tionary
%ro.th theory
&6# 5he Ricardian theory of international trade
&6#61 Contemporary
theories
&6#62 >eo3Ricardian trade
theory
&6#6# Ricardo3raffa trade theory
&6#6#61 5raded
intermediate %oods
&6#6#62
5heoretical
developments
&6#6#6# Recent
episode
&6#6: Criticism of the
Ricardian theory of trade
? 4*!lications
7 >otes
" References
9 /,ternal links
[edit] Personal life
(orn in <ondon, Ricardo .as the third of 17 children of a ephardic )e.ish family of 4ort*%*ese
ori%in .ho had recently relocated from 7olland6 7is father .as a s*ccessf*l stock!roker and
incredi!ly virile6
At a%e 21, Ricardo eloped .ith a @*aker, 4riscilla Anne Wilkinson, leadin% to estran%ement from
his family6 7is father diso.ned him and his mother apparently never spoke to him a%ain6
Witho*t family s*pport, he started his o.n !*siness as a stock!roker, in .hich he !ecame -*ite
s*ccessf*l thanks to the connections he made .hen .orkin% .ith his father6
D*rin% the (attle of Waterloo, A*st like >athan +ayer Rothschild, he !et a%ainst the French
victory and invested in (ritish sec*rities6 (y the time he retired from the /,chan%e at the a%e of :#,
his fort*ne .as estimated at a!o*t B?CC,CCC6 7e then p*rchased and moved to Datcom!e 4ark, an
estate in Dlo*cestershire6
At the time of his marria%e, Ricardo disconnected from )*daism and !ecame a =nitarian60:1 7e
had ei%ht children, incl*din% three sons, of .hom Esman Ricardo $179&21""1F +4 for
Worcester 1":721"?&' and another David Ricardo $1"C#21"?:, +4 for tro*d 1"#221"##',
!ecame mem!ers of parliament, .hile the third, +ortimer Ricardo, served as an officer in the <ife
D*ards and .as a dep*ty lie*tenant for E,fordshire6 7e .as one of the ori%inal mem!ers of
5he Deolo%ical ociety60:1 7is da*%hter .as arah Ricardo34orter, .ho married Deor%e R6
4orter and .as an a*thor in her o.n ri%ht $e6%6 GConversations in Arithmetic'").
Ricardo !ecame interested in economics after readin% Adam mith;s 5he Wealth of >ations in
1799 on a vacation to the /n%lish resort of (ath6 5his .as Ricardo;s first contact .ith economics6
7e .rote his first economics article at a%e #7 and .ithin another ten years he reached the hei%ht of his
fame6
8n 1"19, Ricardo took a seat in the 7o*se of Commons, representin% 4ortarlin%ton, an 8rish
rotten !oro*%h6 7e held the seat, .hich had initially !een made availa!le to him !y his friend
Richard GConversationG harp, *ntil his death in 1"2#6 8n 1":?, his nephe. )ohn <e.is
Ricardo, +4 for toke3on35rent, advocated free trade and the repeal of the Corn <a.s6
Ricardo .as a close friend of )ames +ill, .ho enco*ra%ed him in his political am!itions and
.ritin%s a!o*t economics6 Ether nota!le friends incl*ded )eremy (entham and 5homas
+alth*s, .ith .hom Ricardo had a considera!le de!ate $in correspondence' over s*ch thin%s as the
role of lando.ners in a society6 7e also .as a mem!er of <ondon;s intellect*als, later !ecomin% a
mem!er of +alth*s; 4olitical /conomy Cl*!, and a mem!er of the Hin% of Cl*!s6
[edit] Ideas
+ain articleI Ricardian economics
[edit] Value theory
Ricardo;s most famo*s .ork is his 4rinciples of 4olitical /conomy and 5a,ation $1"17'6
Ricardo opens the first chapter .ith a statement of the la!o*r theory of val*e6 <ater in this
chapter, he demonstrates that prices do not correspond to this val*e6 7e retained the theory, ho.ever,
as an appro,imation6 5he la!o*r theory of val*e states that the relative price of t.o %oods is
determined !y the ratio of the -*antities of la!o*r re-*ired in their prod*ction6 7is la!o*r theory of
val*e, ho.ever, re-*ired several ass*mptionsI 13 !oth sectors have the same .a%e rate and the same
profit rateF 23 the capital employed in prod*ction is made *p of .a%es onlyF #3 the period of
prod*ction has the same len%th for !oth %oods6 Ricardo himself realised that the second and third
ass*mptions .ere -*ite *nrealistic and hence admitted t.o e,ceptions to his la!o*r theory of val*eI 13
prod*ction periods may differF 23 the t.o prod*ction processes may employ instr*ments and
e-*ipment as capital and not A*st .a%es, and in very different proportions6 Ricardo contin*ed to .ork
on his val*e theory to the end of his life6
(*t the first chapter is !*t the introd*ction to a lon% !ook that disc*sses !ack and forth an e,tended
series of comparisons and contrasts of the vario*s points of vie.s and of Ricardo;s o.n reasonin%6
8n the chapter GEn 9al*e and Riches,G0&1 Ricardo makes effort to ill*strate that e,chan%e val*e is
not the same as Gval*e in *seG60?1 8n this .ay one can factor t.o often contradictory res*lts6 4oint
2, a!ove, that the capital employed in prod*ction m*st !e made *p of .a%es only for his val*e
theory to hold, is ans.ered !y thisI that prod*ction may !e made *p of capital and machinery, !*t it
doesn;t chan%e the principle $.hich he attri!*tes to Adam mith' that he tries to lay o*t in this
chapter6071 +achinery may add to one meas*re of val*e !eyond almost all meas*re .itho*t addin%
one penny to the other meas*re of val*e6 8n this .ay, one is a!le, Ricardo seems to sho., to factor o*t
some.hat contradictory ass*mptions .hich if confo*nded lead to e-*ally contradictory res*lts6 (y
makin% all thin%s perfectly clear, or in attemptin% to, +r6 Ricardo, seeks to resolve some of those ills
of the democratic society in .hich he lived in so far as reason, and action, co*ld resolve them6 8n
this p*rs*it, he took action, sittin% in parliament, movin% .ith his stirrin%, and am*sin%, speeches the
inner policies of the (ritish /mpire6
5he key point Ricardo seems to !e aimin% at, tho*%h, %oes somethin% like thisI Acc*m*lation of
capital may add riches .itho*t detractin% from the trade3a!le val*e of thin%s, prod*cin% the possi!ility
of a .in3.in sit*ation6 7e first attempts to sho. that ne. riches are not addin% as m*ch val*e as one
.o*ld think !eca*se they al.ays are detractin% some.hat from the e,chan%ea!le val*e of .hat .as
previo*sly !ein% prod*ced6 5he decreasin% val*e in e,chan%e as val*e3in3*se increases he finally
e,trapolates to infer that the s*m .orld total of val*e in e,chan%e is a fi,ed constant6 And so, .ith
the %ro.th of the .orld economy, the first3.orld co*ntries, he states, .ill event*ally !e%in to lose
val*e per trade, even to the p*rely theoretical e,tent of c*ttin% into the !ase capital6 (*t on the other
hand, Ricardo %oes on to say, .ith more val*e3in3*se, .hat one is likely to %et a hold of personally, for
Rich and 4oor alike .ill !e -*ite a !it more as the sharp3ed%e of competition is !l*nted !y physical
economic %ro.th6 Adam mith, for instance, had tho*%ht that d*e to its effect on val*e, the %ro.th of
.ealth of the poor !eyond s*!sistence levels is likely to c*t into the .ealth of the society6 /conomists
on the left and the ri%ht to this day .orry a!o*t that and *nderc*t the .ealth of the poor to maintain
economic %ro.th6 Ricardo sho.s this not to !e the case, if .e simply meas*re val*e in e,chan%e
to%ether .ith the %ro.th of val*e3in3riches rather than !y its monopolisation val*e6 5he e,temeties of
competition then, leave for Rich and poor alike an appearance of the %ro.th of .ealth .itho*t anyone
personally feelin% its res*lt6 5akin% a step !ack and noticin% the %ro.th of act*al val*e3in3*se allo.s
*s, corporations and la!orers, rich and poor alike, to see a .ay for.ard6
[edit] Rent
Ricardo is responsi!le for developin% theories of rent, .a%es, and profits6 7e defined rent as Gthe
difference !et.een the prod*ce o!tained !y the employment of t.o e-*al -*antities of capital and
la!o*r6G 5he model for this theory !asically said that .hile only one %rade of land is !ein% *sed for
c*ltivation, rent .ill not e,ist, !*t .hen m*ltiple %rades of land are !ein% *tilised, rent .ill !e char%ed
on the hi%her %rades and .ill increase .ith the ascension of the %rade6 As s*ch, Ricardo !elieved that
the process of economic development, .hich increased land *tilisation and event*ally led to the
c*ltivation of poorer land, !enefited first and foremost the lando.ners !eca*se they .o*ld receive the
rent payments either in money or in prod*ct6
8n a caref*l analysis of the effects of different forms of ta,ation, Ricardo concl*des in chapters 1C and
12 that a ta, on land val*e, e-*ivalent to a ta, on the land rent, .as the only form of ta,ation that
.o*ld not lead to price increasesF it is paid !y the landlord, .ho is not a!le to pass it on to a tenant6 7e
stated that the poorest %rade land in *se has no $land' rent and so pays no land val*e ta,F as prices
are determined at this mar%inal site for the .hole economy, prices .ill not !e increased !y a land
val*e ta,6 7is analysis distin%*ishes !et.een rent of $*nimproved' land and rent associated .ith
capital improvements s*ch as !*ildin%s6
Accumulation of Ineuality of Distribution of varied uantities of Accumulatable !carce
Necessary "eans of Production#
Ricardo;s concept of rent is laid o*t in his !ook 4rinciples of 4olitical /conomy and 5a,ation6 D*e to
variation in scarcity of land $or some other acc*m*lata!le scarce necessities of varied *tility', some
land pays a hi%her monopoly val*e d*e to its scarcity than other land6 5his ret*rn on investment is
hi%her than .hat one .o*ld other.ise e,pect !ased simply on the val*e and scarcity of the prod*ceF
this ret*rn on investment comes from the incident of o.nership that allo.s a monopoly price to !e
paid6 *ch premi*m over real social val*e that an individ*al is a!le to reap d*e to incident of
o.nership constit*tes real val*e to an individ*al !*t is at !est0"1 a paper monetary ret*rn to society6
5he portion of s*ch p*rely individ*al !enefit, and e,cl*sively that portion, that accr*es to scarce,
acc*m*lata!le reso*rces s*ch as land or %old or ho*ses, over and a!ove any socially !eneficial
e,chan%e, Ricardo la!els Rent6
8f all land .ere e-*ally sit*ated, ho.ever scarce, one co*ld determine that all market e,chan%e of the
prod*ce thereof .as free and e-*al and that the e,act val*e of the trade .as conveyed sim*ltaneo*sly
to !oth parties and to society6 8n the case of increasin% scarcity of the land of hi%her a!sol*te *tility,
the free market principle fails to either properly meas*re or convey val*e6 5his %ap !et.een personal
val*e accr*al and social val*e accr*al, in the case of land, is Ricardian Rent6 Rent therefore constit*tes
val*e for nothin% and as s*ch constit*tes a loss to society a!ove ma,im*m prod*ction, and one that
increases at a faster rate than the decline in prod*ction that comes from the scarcity of the land, as land
!ecomes more scarce6 4roposals to solve this !y vario*s types of land ta, are e,plored f*rther6 5he
key pro!lem then, Ricardo disc*sses, .o*ld !e to find a ta, that is a!le to ma,imally differentiate
!et.een ta, on profit and ta, on s*ch p*rely Ricardian rent6 >o easy task, he points o*t, as in the case
of ho. one differentiates !et.een !asic land ret*rn, that portion that constit*tes s*ch e,cess a!ove
social prod*ctivity that he la!els rent, and the portion that comes from non3rent prod*cin% capital
investment in fertiliser, irri%ation, deep plo.in% and land improvements of all types, !arns, etc6
"althus$s criticism and %&tra'olation of the 'roblem of Ricardian Rent
8n demonstratin% that Ricardian Rent constit*tes val*e for nothin% $Ricardo .as momentarily
ne%lectin% ay;s <a. that all savin%s !y3definition3e-*als investment', Ricardo overlooks that s*ch
val*e3for3nothin% doesn;t necessarily disappear *pon Gmis3paymentG to a landlord6 5his is .hat
+alth*s, Ricardo;s personal friend and intellect*al opponent, states in his o.n !ook on Rent, one of
his .orks that e,po*nds from a point of vie. of +alth*s;s *rpl*s 9al*e theories, rather than
+alth*s;s earlier and more -*oted carcity 9al*e 5heory6 5h*s, says +alth*s, Rent, ho.ever mis3
placed, constit*tes a prime so*rce of savin%s and investment for the f*t*re6 We need then, if contented
!y +alth*s, only look for s*ch portion of Ricardian Rent that d*e to its over3investment $d*e to its
misallocation' represents lost economic val*e to the society as a .hole6 +alth*s; Criticism of
Ricardian Rent does not in +alth*s; !ook on Rent to*ch on this pro!lem of Ricardian over3investment
as e,po*nded !y +alth*s $the Deneral Dl*t controversy'F rather, in his later .orks, +alth*s does so6
oI to Ricardo, /conomic Rent is a s*rpl*s of individ*al investors; paper profit $.hich has its val*e in
control over reso*rces rather than directly in the reso*rces themselves' over societal %ain6 As s*ch, it
does not represent any %ain !*t rather an *nearned transfer of .ealth6 5o +alth*s, there is material
%ain created in the re3investment .hich is rent, !*t at some point s*ch %ain may as says Ricardo in
re%ards to the paper profit he !elieves /conomic Rent to !e, !e in e,cess of social *tility6
Earlier writers touched on Economic Rent too. Ricardo advises caution in responses to the problem of
Economic Rent 5o !e clear, the topic of /conomic Rent, as e,po*nded !y Ricardo, .as !y earlier
.riters s*ch as mith6 Ricardo;s !ook forms a sort of te,t!ook of s*ch earlier e,po*nded theories, in
.hich he adds his o.n analysis .hile comparin% and contrastin% different vie.s and pointin% o*t the
fla.s in them6 Ricardo, after spendin% many chapters contented .ith this vie. of Rent, ascri!es it to
mith and then says it is tr*e !*t pro!a!ly not so important in an e,pandin% economy and meas*res to
address it sho*ld !e marked .ith ca*tion as they .o*ld likely prod*ce different effects in different
sit*ations6091
[edit] (rade theory and 'olicy
[edit] Protectionism
<ike Adam mith, Ricardo .as also an opponent of protectionism for national economies,
especially for a%ric*lt*re6 7e !elieved that the (ritish GCorn <a.sGJtariffs on a%ric*lt*re prod*cts
Jens*red that less3prod*ctive domestic land .o*ld !e harvested and rents .o*ld !e driven *p6 $Case
K Fair 1999, pp6 "12, "1#'6 5h*s, the s*rpl*s .o*ld !e directed more to.ard fe*dal landlords and
a.ay from the emer%in% ind*strial capitalists6 ince landlords tended to s-*ander their .ealth on
l*,*ries, rather than investments, Ricardo !elieved that the Corn <a.s .ere leadin% to the sta%nation
of the (ritish economy6 4arliament repealed the Corn <a.s in 1":?6
[edit] Com'arative Advanta)e
(he Problem of Com'etitive Advanta)e
Ricardo e,trapolates the pro!lem of monopolistic rent on the land itself to other sit*ationsLreso*rces
that are f*ndamentally scarceI the !*ildin%s that sit on the land, d*e to the lon% time frame of *se and
lar%e l*mp3s*m cost of !*ildin% ne. onesF or %old, .hich is a also partial monopoly d*e to its
scarcity, and .hich is not cons*ma!le6 7e then -*estions .hether all trade has a f*ndamental pro!lem
of ine-*ality that is inevita!ly hard to !rid%e6 5his is the pro!lem of a!sol*te competitive advanta%eJ
.here one party has an *n!rid%ea!le competitive advanta%e d*e to .ealth or prod*ctive advanta%es in
every field6 8f so, can trade profita!ly contin*eM Ricardo solves this .ith Comparative Advanta%e6
Com'arative Advanta)e* (he !olution
5his !ook, 4rinciples of 4olitical /conomy, introd*ces the theory of comparative advanta%e6
Accordin% to Ricardo;s theory, even if a co*ntry co*ld prod*ce everythin% more efficiently than
another co*ntry, it .o*ld reap %ains from specialisin% in .hat it .as !est at prod*cin% and tradin%
.ith other nations6 $Case K Fair, 1999I "122"1"'6 Ricardo !elieved that .a%es sho*ld !e left to free
competition, so there sho*ld !e no restrictions on the importation of a%ric*lt*ral prod*cts from
a!road6
5he !enefits of comparative advanta%e are !oth distri!*tional and related to improved real income6
Within Ricardo;s theory, distri!*tional effects implied that forei%n trade co*ld not directly affect
profits, !eca*se profits chan%e only in response to the level of .a%es6 5he effects on income are
al.ays !eneficial !eca*se forei%n trade does not affect val*e6
Comparative advanta%e forms the !asis of modern trade theory, reform*lated as the 7eckscher3
Ehlin theorem, .hich states that a co*ntry has a comparative advanta%e in the prod*ction of a
prod*ct if the co*ntry is relatively .ell3endo.ed .ith inp*ts that are *sed intensively in prod*cin% the
prod*ct6 $Case K Fair 1999, p6 "22'6 ee the section 5he Ricardian theory of international
trade of this pa%e for another side of the theoretical development6
5he theory of comparative advanta%e as he descri!ed it seems to !e that !oth those rich in a!ility and
the poor alike concentrate each their o.n analytical po.ers on meetin% the needs and a!ilities of the
richer, more skilf*l party to an other.ise *ne-*al e,chan%e and there!y !oth !enefit6 8deas often
e,trapolated areI that !oth !enefit e-*allyF and that someho. in s*ch e,chan%e each nation, or person,
is ena!led to foc*s on its o.n area of real specialisation in a !i3directional e-*al tradeJ!*t .e only
start .ith an idea of p*rely comparative specialisation in one direction6
For the contemporary development of Ricardo;s idea on international trade, see the section 5he
Ricardian theory of international trade in the part 7is <e%acy and 8nfl*ence6
[edit] Ricardian euivalence
Another idea associated .ith Ricardo is Ricardian e-*ivalence, an ar%*ment s*%%estin% that in
some circ*mstances a %overnment;s choice of ho. to pay for its spendin% $i.e., .hether to *se ta,
reven*e or iss*e de!t and r*n a deficit' mi%ht have no effect on the economy6 8ronically, .hile the
proposition !ears his name, he does not seem to have !elieved it6 /conomist Ro!ert (arro is
responsi!le for its modern prominence6
[edit] Ricardo$s theories of +a)es and 'rofits
ome credit Ricardo .ith the concepts !ehind the so3called 8ron <a. of Wa%es, that .a%es
nat*rally tend to a s*!sistence level601C1 0111 0121 Ethers disp*te the assi%nment to Ricardo of this
idea6
Ricardo !elieved that in the lon% r*n, prices reflect the cost of prod*ction, and referred to this lon%
r*n price as a >at*ral price6 5he nat*ral price of la!o*r .as the cost of its prod*ction, that cost of
maintainin% the la!o*rer6 8f .a%es correspond to the nat*ral price of la!o*r, then .a%es .o*ld !e at
s*!sistence level6 7o.ever, d*e to an improvin% economy, .a%es may remain indefinitely a!ove
s*!sistence levelI
>ot.ithstandin% the tendency of .a%es to conform to their nat*ral rate, their market rate may in an
improvin% society, for an indefinite period, !e constantly a!ove itF for no sooner may the imp*lse,
.hich an increased capital %ives to a ne. demand for la!or, !e o!eyed, than another increase of
capital may prod*ce the same effectF and th*s, if the increase of capital !e %rad*al and constant, the
demand for la!o*r may %ive a contin*ed stim*l*s to an increase of people6666
8t has !een calc*lated, that *nder favo*ra!le circ*mstances pop*lation may !e do*!led in t.enty3five
yearsF !*t *nder the same favo*ra!le circ*mstances, the .hole capital of a co*ntry mi%ht possi!ly !e
do*!led in a shorter period6 8n that case, .a%es d*rin% the .hole period .o*ld have a tendency to rise,
!eca*se the demand for la!o*r .o*ld increase still faster than the s*pply6 $On the Principles of
Political Econom, Chapter &, GEn Wa%esG'6
8n his !heor of Profit, Ricardo stated that as real .a%es increase, real profits decrease !eca*se the
reven*e from the sale of man*fact*red %oods is split !et.een profits and .a%es6 7e said in his Essa
on Profits, G4rofits depend on hi%h or lo. .a%es, .a%es on the price of necessaries, and the price of
necessaries chiefly on the price of food6G
[edit] ,is -e)acy and Influence
David Ricardo;s ideas had a tremendo*s infl*ence on later developments in economics6 With his
hi%hly lo%ical ar%*ments, he has !ecome the theoretical father of the classical political economy6
ch*mpeter coined an e,pression Ricardian vice, .hich indicates that ri%oro*s lo%ic does not
provide a %ood economic theory601#1 5his criticism applies also to most neoclassical theories, .hich
make heavy *se of mathematics, !*t are, accordin% to him, theoretically *nso*nd, !eca*se the
concl*sion !ein% dra.n does not lo%ically follo. from the theories *sed to defend it6
0
citation
needed
1
[edit] Ricardian !ocialists
[edit] .neual %&chan)e
Chris /d.ard incl*des /mman*el;s =ne-*al /,chan%e theory amon% variations of neo3Ricardian
trade theory601:1 Ar%hiri /mman*el ar%*ed that the 5hird World is poor !eca*se of the
international e,ploitation of la!o*r601&1
5he *ne-*al e,chan%e theory of trade has !een infl*ential to the $ne.' dependency theory601?1
[edit] Neo/Ricardians
After the rise of the ;neoclassical; school, Ricardo;s infl*ence declined temporarily6 8t .as 4iero
raffa, the editor of the Collected Works of David Ricardo0171 and the a*thor of seminal
Production of Commodities b "eans of Commodities,01"1 .ho res*rrected Ricardo as the ori%inator
of another strand of economics tho*%ht, .hich .as effaced .ith the arrival of the neoclassical school6
5he ne. interpretation of Ricardo and raffa;s criticism a%ainst the mar%inal theory of val*e %ave rise
to a ne. school, no. named neo3Ricardian or raffian school6 +aAor contri!*tors to this school
incl*des <*i%i 4asinetti $19#C2', 4ieran%elo Dare%nani $19#C2', 8an teedman $19:12', Deorffrey
7arco*rt $19#12', 7einN H*rN $19:?2', >eri alvadori $19&12', 4ier 4aolo aviotti $3' amon% others6
ee also >eo3Ricardianism6 >eo3Ricardian school is sometimes seen to !e a composin% element
of 4ost3Heynesian economics6
[edit] %volutionary )ro+th theory
everal distinctive %ro*ps have spr*n% o*t of the neo3Ricardian school6 Ene is the evol*tionary
%ro.th theory, developed nota!ly !y <6 4asinetti, )66 +etcalfe, 4ier 4aolo aviotti, and Hoen Frenken
and others60191 02C1
5he first step came from 4asinetti60211 0221 7e ar%*ed that the demand of any commodity came to
sta%nate and fre-*ently decline as /n%el c*rve sho.s it6 5he commodities are prod*ced !y each
ind*stry .ith different %ro.th rate of la!o*r prod*ctivity6 5he conse-*ences are different rate of
%ro.th of o*tp*t and employment6 5o any economic development str*ct*ral chan%e is invita!le6 8f the
commodity variety remains constant, demand sat*ration occ*rs for any rich eceonmy6 8ntrod*ction of
ne. commodities $%oods and services' is necessary to evade from economic sta%nation6
5he pro!lem of demand sat*ration and satiety !ecame one of the most topical themes of evol*tionary
economists6 +any articles and !ooks have !een .ritten602#1 02:1 02&1 02?1 0271
As for the ca*ses and mechanisms of demand sat*ration, 8, teedman pointed that time plays as
important a role as income602"1 0291 8ndeed, the neocalssical economics admits monetary !*d%et as
*ni-*e constraint, !*t for any !*sy person the time co*nts as m*ch as price to enAoy the p*rchased
commodities6 Another constraints, s*ch as ho*se s*rface, are effective for e,ample in the )apanese
economy, .here people live in a Gra!!it h*tch6G
Demand sat*ration pro!lems are p*rs*red, parallel to evol*tionary economists, !y Aoki and
Ooshika.a0#C1 0#11 and other )apanese reserchers60#21 0##1
[edit] (he Ricardian theory of international trade
5he Ricardian theory of comparative advanta%e also !ecame a !asic constit*ent of neoclassical trade
theory6 Any *nder%rad*ate co*rse in trade theory incl*des e,pansions of Ricardo;s e,ample of fo*r
n*m!ers in for form of a t.o commodity, t.o co*ntry model6 Ricardo intended to sho. !y this classic
e,ample the !enefits of free trade from comparative advanta%e, as in his e,ample there is one co*ntry
that is more proficient in prod*cin% !oth commodities relative to the other co*ntry6 Adam mith
.o*ld likely reason, !y lo%ic of a!sol*te advanta%e, that there .o*ld !e no incentive for trade
!et.een the t.o co*ntries6 5his model .as e,panded to many3co*ntry and many3commodity cases
and also to incl*de mi%ration of people !et.een co*ntries6 +aAor %eneral res*lts .ere o!tained !y the
!e%innin% of 19?C;s !y +cHenNie0#:1 0#&1 and )ones,0#?1 incl*din% his famo*s form*la6
[edit] Contem'orary theories
Ricardo;s idea .as even e,panded to the case of contin**m of %oods !y Dorn!*sch, Fischer, and
am*elson0#71 5his form*lation is employed for e,ample !y +ats*yama0#"1 and others6
[edit] Neo/Ricardian trade theory
8nspired !y 4iero raffa, a ne. strand of trade theory emer%ed and .as named neo3Ricardian trade
theory6 5he main contri!*tors incl*de 8an teedman $19:12' and tanley +etcalfe $19:?2'6 5hey have
criticised neoclassical international trade theory, namely the 7eckscher3Ehlin model on the !asis
that the notion of capital as primary factor has no method of meas*rin% it !efore the determination of
profit rate $th*s trapped in a lo%ical vicio*s circle'60#91 0:C1 5his .as a second ro*nd of the
Cam!rid%e capital controversy, this time in the field of international trade60:11
5he merit of neo3Ricardian trade theory is that inp*t %oods are e,plicitly incl*ded to the analytical
frame.ork6 5his is in accordance .ith raffa;s idea that any commodity is a prod*ct made !y means
of commodities6 5he limit of their theory is that the analysis is limited to small co*ntry cases6 5he
.a%e of the Rest of the World is determined !y ass*mption and there is no internal mechanism .hich
%enerates international .a%e differences6 8n this sense the neo3Ricardian trade theory lacks
international val*e theory60:21
[edit] Ricardo/!raffa trade theory
[edit] (raded intermediate )oods
Ricardian trade theory ordinarily ass*mes that the la!or is the *ni-*e inp*t6 5his is a %reat
deficiency as trade theory, for the intermediate %oods occ*py the maAor part of the .orld international
trade6 Oeats0:#1 fo*nd that #CP of .orld trade in man*fact*rin% is intermediate inp*ts6 (ardhan and
)afee0::1 fo*nd that intermediate inp*ts occ*py #7 to #"P in the imports to the = for years 1992
and 1997, .hereas the percenta%e of intrafirm trade %re. from :#P in 1992 to &2P in 19976
+cHenNie0#:1
I17729
and )ones0:&1 emphasised the necessity to e,pand the theory to the cases of traded
inp*ts6 4a*l am*elson0:?1 coined a term #raffa bonus to name the %ains from trade of inp*ts6
[edit] (heoretical develo'ments
)ohn Chipman o!served in his s*rvey that +cHenNie st*m!led *pon the -*estions of intermediate
prod*cts and discovered that Gintrod*ction of trade in intermediate prod*ct necessitates a f*ndamental
alteration in classical analysis6G0:71 8t took may years *ntil recently O6 hioNa.a0:"1 s*cceeded to
remove this deficiency6 5he Ricardian trade theory .as no. reconstr*cted to incl*de intermediate
inp*t trade in a very %eneral case of many co*ntries and many %oods6 5his ne. theory is sometimes
called Ricardo3raffa trade theory6
8t is emphasised that the Ricardian trade theory no. provides a %eneral theory .hich incl*des trade of
intermediates s*ch as materials, f*el and machine tools6 5he traded intermediate %oods are then *sed
as inp*ts of prod*ctions6 Capital %oods are nothin% other than inp*ts to the prod*ctions6 5h*s, in the
Ricardian trade theory, capital %oods moves freely from co*ntry to co*ntry6 5rade in capital %oods
may transmit the !enefit of technolo%ical advances across tradin% co*ntries60:91 <a!or is the *ni-*e
factor of prod*ction that remains immo!ile in the co*ntry of its ori%in6
5he neoclassical 7eckscher3Ehlin3am*elson theory ass*mes only prod*ction factors and finished
%oods6 8t has not the concept of intermediate %oods6 5herefore, it is the Ricardo3raffa trade theory
that provides theoretical !ases for the topics as o*tso*rcin%, fra%mentation0&C1 and intra3firm
trade60&11
[edit] Recent e'isode
8n a !lo% post of 2" April 2CC7, Dre%ory +anki. compared Ricardian theory and 7eckscher3
Ehlin theory and stood !y the Ricardian side60&21 +anki. ar%*ed that Ricardian theory is more
realistic than the 7eckscher3Ehlin theory as the latter ass*mes that capital does not move from co*ntry
to co*ntry6 +anki.;s ar%*ment contains a lo%ical slip, for the traditional Ricardian trade theory does
not admit any inp*ts6 hioNa.a;s res*lt saves +anki. from his slip60:21
[edit] Criticism of the Ricardian theory of trade
Ricardo;s plea for free trade received attacks from those people .ho think trade restriction is
necessary6 =ta 4atnaike claims that Ricardian theory of international trade contains a lo%ical
fallacy6 Ricardo ass*med that in !oth co*ntries t.o %oods are prod*ci!le and act*ally are prod*ced,
!*t developed and *nderdeveloped co*ntries often trade those %oods .hich are not prod*ci!le in their
o.n co*ntry6 For e,ample, many >orthern co*ntries do not prod*ce tropical fr*its6 8n these cases, one
cannot define .hich co*ntry has comparative advanta%e60&#1
Ricardo;s theory of comparative advanta%e is also fla.ed in that it ass*mes prod*ction is
contin*o*s and a!sol*te6 8n the real .orld, events o*tside the realm of h*man control $e6%6 nat*ral
disasters' can disr*pt prod*ction6 8n this case, specialisation co*ld cripple a co*ntry that depends on
imports from forei%n, nat*rally disr*pted co*ntries6 For e,ample, if an ind*strially !ased co*ntry
trades its man*fact*red %oods to an a%rarian co*ntry in e,chan%e for a%ric*lt*ral prod*cts, a nat*ral
disaster in the a%ric*lt*ral co*ntry $e6%6 dro*%ht' may ca*se an ind*strially !ased co*ntry to starve6
[edit] Publications
Ricardo;s p*!lications incl*dedI
!he $i%h Price of &ullion, a Proof of the 'epreciation of &an( )otes$1"1C', .hich advocated
the adoption of a metallic c*rrency6
Essa on the *nfluence of a +ow Price of Corn on the Profits of #toc($1"1&', .hich ar%*ed
that repealin% the Corn <a.s .o*ld distri!*te more .ealth to the prod*ctive mem!ers of
society6
En the 4rinciples of 4olitical /conomy and 5a,ation $1"17', an analysis that
concl*ded that land rent %ro.s as pop*lation increases6 8t also clearly laid o*t the theory of
comparative advanta%e, .hich ar%*ed that all nations co*ld !enefit from free trade, even if
a nation .as less efficient at prod*cin% all kinds of %oods than its tradin% partners6
7is .orks and .ritin%s .ere collected inI
!he ,or(s and Correspondence of 'avid Ricardo, ed6 4iero raffa .ith the Colla!oration of
+676 Do!! $8ndianapolisI <i!erty F*nd, 2CC&', 11 vols6 5his et Contains 5he Follo.in% 5itlesI
o 5he Works and Correspondence of David Ricardo, 9ol6 1 4rinciples of 4olitical
/conomy and 5a,ation
o 5he Works and Correspondence of David Ricardo, 9ol6 2 >otes on +alth*s
o 5he Works and Correspondence of David Ricardo, 9ol6 # 4amphlets and 4apers
1"C921"11
o 5he Works and Correspondence of David Ricardo, 9ol6 : 4amphlets and 4apers
1"1&21"2#
o 5he Works and Correspondence of David Ricardo, 9ol6 & peeches and /vidence
o 5he Works and Correspondence of David Ricardo, 9ol6 ? <etters 1"1C21"1&
o 5he Works and Correspondence of David Ricardo, 9ol6 7 <etters 1"1?21"1"
o 5he Works and Correspondence of David Ricardo, 9ol6 " <etters 1"19 2 )*ne 1"21
o 5he Works and Correspondence of David Ricardo, 9ol6 9 <etters 1"2121"2#
o 5he Works and Correspondence of David Ricardo, 9ol6 1C (io%raphical +iscellany
o 5he Works and Correspondence of David Ricardo, 9ol6 11 Deneral 8nde,
[edit] Notes
1 Q +iller, Ro%er <eRoy6 Economics !oda6 Fifteenth /dition6 (oston, +AI 4earson
/d*cation6 pa%e &&9
2 Q o.ell, 5homas $2CC?'6 On classical economics6 >e. 7aven, C5I Oale =niversity
4ress6
3 Q Ro!erts, 4a*l Crai% $2CC#3"32"', G5he 5rade @*estionG, ,ashin%ton !imes
4 Q a ! raffa, 4iero, David Ricardo $19&&', !he ,or(s and Correspondence of 'avid
Ricardo- .olume /0, &io%raphical "iscellan, Cam!rid%e, =HI Cam!rid%e =niversity 4ress, pp6
:#:, 8(> C3&213C?C7&3#
5 Q 4rinciples of 4olitical /conomy, Chapter 2C
6 Q 4rinciples, Ch62C
7 Q 4rinciples, Ch62C, last t.o para%raphs
8 Q En 5he 4rinciples of 4olitical /conomy and 5a,ation <ondonI )ohn +*rray, Al!emarle3
treet, !y David Ricardo, 1"17 $third edition 1"21' 2 Chapter ?, En 4rofitsI para%raph 2", G5h*s,
takin% the former 6 6 6G and para%raph ##, G5here can, ho.ever 6 6 6G
9 Q Chapter 1" of 4rinciples
10 Q (ritannica6comG/n%lish economist .ho %ave systematiNed, classical form to the risin%
science of economics in the 19th cent*ry6 7is laisseN3faire doctrines .ere typified in his 8ron <a.
of Wa%es, .hich stated that all attempts to improve the real income of .orkers .ere f*tile and that
.a%es perforce remained near the s*!sistence level6
11 Q )ohn Henneth Dal!raith, Economics in Perspective, GRet*rnin% to .a%es, Ricardo, in
another of his %reatly -*oted passa%es, says that they are ;5hat price .hich is necessary to ena!le
the la!o*rers, one .ith another, to s*!sist and to perpet*ate their race, .itho*t either increase or
dimin*tion6; 5his tho*%ht, as the 8ron <a. of Wa%es, .as to enter into a history e,tendin% far
!eyond formal economics666G, p6 ":, 7o*%hton +ifflin, 19"7, 8(> C3#9&3#&&7239F the
Ricardo -*ote a!ove is referenced to pa%e 9# of !he ,or(s and Correspondence of 'avid
Ricardo, edited b Piero #raffa, Cambrid%e 1niversit Press, /23/
12 Q !he Columbia $ouse Encclopedia, GRicardo666holds that .a%es tend to sta!iliNe aro*nd
the s*!sistence level666G, Col*m!ia =niversity 4ress, 19"#, 8(> C32#13C&?7"3"6
13 Q ch*mpeter, $istor of Economic Analsis, $p*!lished posth*mo*sly, ed6 /lisa!eth (oody
ch*mpeter', 19&:6 p6&?9 and p611716 ch*mpeter also criticiNed )6 +6 Heynes for committin% the
same Ricardian vice6
14 Q Chris /d.ards 19"& !he 4ra%mented ,orld- Competin% Perspectives on !rade, "one
and Crisis, <ondon and >e. OorkI +eth*en6 Chapter :6
15 Q /mman*el, Ar%hiri $1972', 1ne5ual e6chan%e7 a stud of the imperialism of trade, >e.
OorkI +onthly Revie. 4ress, pp6
0
pa%e needed
1
, 8(> C3"&#:&31""3&
16 Q 4alma, D $197"', GDependencyI A formal theory of *nderdevelopment or a methodolo%y
for the analysis of concrete sit*ations of *nderdevelopmentMG, ,orld 'evelopment 0 $72"'I ""12
92:, doiI1C61C1?LC#C&37&CR$7"'9CC&137
17 Q 4iero raffa and +676 Do!!, editors $19&12197#'6 !he ,or(s and Correspondence of
'avid Ricardo6 Cam!rid%e =niversity 4ress, 11 vol*mes6
18 Q raffa, 4iero 19?C, Production of Commodities b "eans of Commodities- Prelude to a
Criti5ue of Economic !heor6 Cam!rid%e =niversity 4ress6
19 Q 4asinetti, <*isi 19"1 tr*ct*ral chan%e and economic %ro.th, Cam!rid%e =noversity
4ress6 )66 +etcalfe and 4646 aviotti $eds6', 1991, Evolutionar !heories of Economic and
!echnolo%ical Chan%e, 7ar.ood, 27& pa%es6 )66 +etcalfe 199", Evolutionar Economics and
Creative 'estruction, Ro*tled%e, <ondon6 Frenken, H6, 9an Eort, F6D6, 9er!*r%, 56, (oschma,
R6A6 $2CC:'6 .ariet and Re%ional Economic 8rowth in the )etherlands 9 4inal Report $5he
7a%*eI +inistry of /conomic Affairs', &" p6 $pdf'
20 Q aviotti, 4ier 4aoloF Frenken, Hoen $2CC"', G/,port variety and the economic performance
of co*ntriesG, )o*rnal of /vol*tionary /conomics 12 $2'I 2C1221",
doiI1C61CC7LsCC1913CC73CC"13&
21 Q 4asinetti, <*i%i <6 $19"1', #tructural chan%e and economic %rowth- a theoretical essa on
the dnamics of the wealth of nations, Cam!rid%e, =HI Cam!rid%e =niversity 4ress, pp6
0
pa%e
needed
1
, 8(> C3&21327:1C39
22 Q 4asinetti, <*i%i <6 $199#', #tructural economic dnamics- a theor of the economic
conse5uences of human learnin%, Cam!rid%e, =HI Cam!rid%e =niversity 4ress, pp6
0
pa%e
needed
1
, 8(> C3&213:#2"23C
23 Q Andersen, /s!en loth $2CC1', Gatiation in an evol*tionary model of str*ct*ral economic
dynamicsG, )o*rnal of /vol*tionary /conomics 11I 1:#21?:,
doiI1C61CC7L4<CCCC#"&2
24 Q Andersen, /s!en loth 2CC7 G8nnovation and demand,G 7orst 7an*sch and Andreas 4yka,
/l%ar companion to neo3ch*mpterian economics, Chap6 :7, 7&:27?&6
25 Q 4ier 4aolo aviottiF aviotti, 4aolo $199?'6 !echnolo%ical Evolution, .ariet and the
Econom6 /d.ard /l%ar 4*!lishin%6 pp6
0
pa%e needed
1
6 8(> 13"&27"377:3C6
26 Q aviotti, 4ier 4aolo $2CC1', G9ariety, %ro.th and demandG, )o*rnal of /vol*tionary
/conomics 11I 11921:2, doiI1C61CC7L4<CCCC#"&#
27 Q Witt, =lrich $/d6' 2CC1 /scapin% atiationI 5he Demand ide of /conomic Dro.th
$7ardcover, prin%er, eptem!er ?, 2CC16 Witt, =lrich 2CC1 GCons*mption, demand and
economic %ro.th3 an introd*ction,G in Witt, =lrich $/d6' 2CC16
28 Q teedman, 8an 2CC1a Cons*mption takes timeI implications for economic theory6
Ro*tled%e, <ondon6
29 Q teedman, 8an $2CC7', GWhat hall 8 doM $or Why Cons*mer 5heory ho*ld Foc*s on
5ime3=se and Activities, Rather than on Commodities'G, Advances in Austrian Economics 13I #12
:C, doiI1C61C1?L1&29321#:$C7'1CCC23"
30 Q Aoki, + $2CC2', GDemand sat*ration3creation and economic %ro.thG, :ournal of
Economic &ehavior ; Or%ani<ation 42 $2'I 12721&:, doiI1C61C1?LC1?732?"1$C1'CC2293
#
31 Q Ooshika.a, 7iroshiF Aoki, +asanao $2CC7'6 Reconstructin% macroeconomics- a
perspective from statistical phsics and combinatorial stochastic processes6 Cam!rid%e, =HI
Cam!rid%e =niversity 4ress6 8(> 97"3&213"#1C?326
32 Q +ats*mae, 5ats*yoshi $2CC:', GA t*dy on the Consistency !et.een /mpirical
t*dies and Dro.th +odels .ith Demand atiation and tr*ct*ral Chan%eG,
Evolutionar and *nstitutional Economics Review 1 $2'I 197222C
33 Q H*rose, HaN*hiro $2CC9', G5he relation !et.een the speed of demand sat*ration and the
dynamism of the la!o*r marketG, #tructural Chan%e and Economic 'namics 53 $2'I 1&121&9,
doiI1C61C1?LA6str*eco62CC96C16CC#
34 Q a ! +cHenNie, <6 W6 $19&#', Gpecialisation and /fficiency in World
4rod*ctionG, !he Review of Economic #tudies 51 $#'I 1?&21"C, )5ER 229&77C
35 Q +cHenNie, <6 W6 $19&&', GpecialiNation in 4rod*ction and the 4rod*ction
4ossi!ility <oc*sG, !he Review of Economic #tudies 56 $1'I &?2?:,
doiI1C62#C7L229?1&2, )5ER 229?1&2
36 Q )ones, R6 W6 $19?1', GComparative Advanta%e and the 5heory of 5ariffsI A +*lti3
Co*ntry, +*lti3 Commodity +odelG, !he Review of Economic #tudies 52 $#'I 1?1217&,
doiI1C62#C7L229&9:&, )5ER 229&9:&
37 Q Dorn!*sch, R6F Fischer, 6F am*elson, 46 A6 $1977', GComparative Advanta%e, 5rade,
and 4ayments in a Ricardian +odel .ith a Contin**m of DoodsG $4DF', !he American
Economic Review 07 $&'I "2#2"#9, )5ER 1"2"C??
38 Q +ats*yama, H6 $2CCC'6 GA Ricardian +odel .ith a Contin**m of Doods *nder
>onhomothetic 4referencesI Demand Complementarities, 8ncome Distri!*tion, and
>orth3o*th 5radeG $4DF'6 :ournal of Political Econom 132 $?'I 1C9#2112C6
39 Q teedman, 8an $/d' 1979 4undamental *ssues in !rade !heor, <ondonI +ac+illan and
>e. OorkI t6 +artin;s 4ress6
40 Q teedman, 8an $1979', !rade amon%st %rowin% economies, Cam!rid%e, =HI Cam!rid%e
=niversity 4ress, pp6
0
pa%e needed
1
, 8(> C3&21322?713?
41 Q Chris /d.ards $19"&' !he fra%mented world- competin% perspectives on trade, mone,
and crisis, <ondon and >e. OorkI +eth*en K Co6 #62 5he ;raffian; Approach to 5rade
5heory, pp6:"2&16
42 Q a ! hioNa.a, Ooshinori $2CC9'6 Gam*elson;s 8mplicit Criticism a%ainst raffa
and the raffians and 5.o Ether @*estionsG $4DF'6 !he =oto Economic Review 72 $1'I
192#76
43 Q Oeats, A6, 2CC1, )*st 7o. (i% is Dlo!al 4rod*ction harin%M in Arndt, 6 and
76HierNko.ski $eds6', 2CC1, Fra%mentationI >e. 4rod*ction 4atterns in the World /conomy,
$E,ford =niversity 4ress, E,ford'6
44 Q (ardhan, Ashok Deo and )affee, D.i%ht $2CC:', GEn 8ntra3Firm 5rade and +*ltinationalsI
Forei%n E*tso*rcin% and Effshorin% in +an*fact*rin%G in +onty Draham and Ro!ert olo.
$eds6', 5he Role of Forei%n Direct 8nvestment and +*ltinational Corporations in /conomic
Development6
45 Q )ones, Ronald W6 19?1 Comparative Advanta%e and the theory of 5rarrifsF A +*lti3
Co*ntry, +*ti3commodity +odel, Review of Economic #tudies, 52$#'I 1?1217&6 ee pp61??2"6
46 Q am*elson, 46 A6 $2CC1', GA Ricardo3raffa 4aradi%m Comparin% Dains from
5rade in 8np*ts and Finished DoodsG, :ournal of Economic +iterature 68 $:'I 12C:2121:,
)5ER 2?9"&2:
47 Q Chipman, )ohn 6 19?&6 A *rvey of the 5heory of 8nternational 5radeI 4art 1, 5he
Classical 5heory6 Econometrica, 66$#'I :772&196 ection 16"
48 Q hioNa.a, O6 $2CC7'6 GA >e. Constr*ction of Ricardian 5rade 5heoryJA +any3
co*ntry, +any3commodity Case .ith 8ntermediate Doods and Choice of 4rod*ction
5echni-*esJG6 Evolutionar and *nstitutional Economics Review 6 $2'I 1:121"76 Retrieved :
April 2C116
49 Q /aton, )onathan K Hort*m, am*el, 2CC16 G5rade in capital %oods,G /*ropean /conomic
Revie., /lsevier, vol6 :&$7', pa%es 119&212#&6
50 Q Deardorff, A $2CC1', GFra%mentation in simple trade modelsG, !he )orth American :ournal
of Economics and 4inance 15 $2'I 12121#7, doiI1C61C1?L1C?239:C"$C1'CCC:#32
51 Q Ashok (ardhan and D.i%ht )affee 2CC& GEn 8ntra3Firm 5rade and +an*fact*rin%
E*tso*rcin% and Effshorin%G $/d.ard +onty Draham6 ed6, 5he Role of Forei%n Direct
8nvestment and +*ltinational Corporations in /conomic Development F 4al%rave, 2CC&'
52 Q +anki., Dre%ory 2CC7 Ricardo vs 7eckscher3Ehlin, 4ost of 2" April 2CC7 of 8re%
"an(iw's &lo%6 Dre%manki.6!lo%post6com
53 Q =ta 4atnaik $2CC&' GRicardo;s FallacyL +*t*al (enefit from 5rade (ased on Comparative
Costs and pecialiNationMG )omo H66 $/d6' Development /conomicsL Dreat /conomists on
Development, Sed !ooksI <ondon and >e. Oork6 Chapter 26 pp6#12:16