Lecture notes: David Ricardo

                                      
  Introduction
   
     * A. As you will see, Ricardo is fundamentally a theorist--a
       mathematical economist who doesn't happen to know any mathematics
       beyond arithmetic.
          + 1. His primary interest is not in the details of the real
            world, but ...
          + 2. In putting together a logically consistent theory, and ...
          + 3. He is willing to use unrealistic simplification where
            necessary.
     * B. His introduction provides a fine example of courtesy and
       modesty
          + 1. He says admiring things about Smith and Say--both of whose
            ideas he is going to demolish various pieces of
          + 2. Concedes the imperfections of what he is doing,
          + 3. Leaves it to some abler man to complete the job.
          + 4. Unfortunately, there weren't any, so we had to wait
            another eighty years or so until Marshall et. al., building
            on the framework Ricardo had constructed, gave us modern
            economics.
       
  
  
                                 Chapter I
                                      
   I. Value:
   
     * A. Use value vs exchange value
          + 1. Use value a necessary condition to have exchange value.
          + 2. Given that, exchange value depends on
               o a. Scarcity--goods with fixed supply, value determined
                 by demand.
               o b. Quantity of labor required to obtain the good. Most
                 goods.
            3. Ricardo is going to be discussing only the latter
            category--goods that can be produced, and whose exchange
            value thus depends on cost of production.
       B. Distinction between labor to produce and labor to earn the
       money to purchase.
          + 1. In a primitive society, exchangable value is proportional
            to labor input (Smith).
          + 2. Generalizing this gives us labor input as the measure of
            value.
          + 3. Smith, however, is using the labor cost of buying an input
            as his measure of value.
          + 4. The two would be equivalent if wages were always
            proportional to output, but they are not.
          + 5. Smith's standard--wages or corn--is itself a variable one.
               o a. What does that mean? Variable in terms of what?
               o b. Corn varies in the amount of embedded labor.
               o c. And wages vary with the cost of food.
            6. Suppose the labor cost of producing corn doubles:
               o a. Corn contains twice as much embedded labor.
               o b. In order for it to exchange for twice as much labor,
                 the ratio of wages to corn would have to fall in half.
               o c. But it cannot, because workers were already near
                 subsistence.
               o d. All of which proves, not that Smith was wrong, but
                 only that measuring value by embodied labor gives a
                 different result than measuring it by labor to earn the
                 money to produce.
            7. Ricardo is sneaking up on his rent theory--note "land last
            taken into production." The fact that the amount of corn
            produced by a given amount of labor varies with the fertility
            of the marginal land is going to be key to his analysis.
          + 8. And he, like Smith, is using a "wages determined by
            subsistence" theory.
       C. Which standard of value is right?
          + 1. Ricardo suggests that if the relative value of commodity A
            changes relative to B, we should compare both to C-Z. If A's
            relative value has stayed the same with regard to C, D, E
            ...Z, it seems reasonable to say that it was B that changed.
          + 2. Especially if we observe that the imputs needed to produce
            A and C-Z have all stayed the same, but there has been a
            change in the inputs needed to produce B.
          + 3. So what Ricardo is proposing is not a definition of value
            used to compare how well off people are in different times
            and places, but ...
          + 4. One intended to predict relative prices.
          + 5. Which Smith's definition of value makes no claim to do. He
            has a price theory, based on cost of production including
            labor, but that is a different part of what he is doing from
            his definition of value.
          + 6. According to Smith (and Malthus), if the price of gold
            drops relative to other things because producing it get
            easier, that is a drop in its value, but ...
          + 7. If the price of labor drops relative to other things
            because producing it (i.e. growing corn) gets easier, that
            means everything else has gone up in value.
          + 8. Ricardo points out an inconsistency in Smith, given that
            laborers do not spend all of their income on corn:
               o a. Laborer gets one bushel/week when corn is
                 80s/quarter, 1 1/4 when it falls to 40s.
               o b. Consumes 1/2 bushel, exchanges the rest for other
                 things.
               o c. Suppose his remaining 1/2 bushel at the old price
                 buys him more goods than his remaining 3/4 at the new
                 (as it will if other prices don't change)
               o d. His wage has gone up measured in corn, down measured
                 in what he can buy with it.
               o e. But in Smith's sense, the worker's wage is always of
                 the same value, by definition--1.
               o f. Corn comes in only as a useful approximate measure of
                 value, not as a definition of value.
               o g. And Ricardo has merely pointed out a special case
                 where the approximation breaks down.
     * II. Different qualities of labor.
          + A. Obviously, some workers have more skill, work harder, etc.
          + B. Over time, relative wages reflect that--one is producing
            one hour per hour, one two, so to speak (my way of putting
            it, not Ricardo's).
          + C. Ricardo is interested in explaining relative prices, so
            ...
               o 1. Provided that the relative productivity of different
                 kinds of labor stays roughly the same over time
               o 2. (And Smithsays it does.)
               o 3. He can ignore it in what he is doing.
       
   
   
     * III. Labor applied indirectly as well as directly affects value.
          + A. Even in the primitive state, some capital is used. So the
            value of deer and beaver is affected by the labor cost of
            producing the weapons to hunt them.
               o 1. If one weapon was took much more labor to make than
                 the other, that would make that animal more valuable.
               o 2. Or if they were equally costly to make, but one wore
                 out much faster.
               o 3. What if the weapons belonged to different people than
                 the ones using them?
                    # a. Supply and demand for capital and labor would
                      affect the division between the two groups of
                      people,
                    # b. But not the relative prices of the goods?
                    # c. Is that true? We haven't yet gotten to profit as
                      payment for time value of capital.
                    # d. And when we do, it won't be true any more.
                    # e. But at this point, the cost of using the capital
                      good is merely the amount of embodied labor used
                      up--and employers can hire people to make bows just
                      as cheaply as to hunt deer.
            B. In a more advanced society, tracing out the labor used to
            produce a final good is more complicated, but the logic of
            the problem is still the same.
               o 1. As Ricardo claims to show by pointing out that a
                 reduction in the labor used in one stage of production
                 would reduce the exchange value of the good, but ...
               o 2. That would still be true if, as in Smith, exchange
                 value depended on a sum of costs, of which labor was
                 one.
            C. Going back to the primitive society, Ricardo sketches an
            equilibrium price argument for why relative prices must be
            equal to relative amounts of embodied labor.
          + D. Note also that, implicitly, wages and profits move in
            opposite directions in this simple model.
          + E. But it is still unclear what the capitalist is
            contributing to the process, for which he gets his profit.
          + F. If we had an invariable standard (what does that mean?),
            it would show us that changes in exchange value always
            reflected changes in labor input.
       
   
   
   IV. But the conclusion changes if we allow for fixed capital.
          + A. Once we include fixed capital, now relative prices may be
            changed by changes in the wage rate (not obvious--but true).
          + B. We should distinguish between fixed and circulating
            capital
               o 1. Noting that the latter has varying production
                 periods.
               o 2. That the distinction is not a sharp one.
               o 3. Since a circulating capital with a long period is
                 like a fixed capital.
            C. If all capital were circulating, and all had the same
            production period, then exchangable value would be
            proportional to labor input.
               o 1. Or, in modern terms, if all goods were produced with
                 the same labor/capital ratio, then...
               o 2. All prices would be proportional to labor input.
               o 3. But, of course, under those assumptions labor input
                 is proportional to capital input, so ...
               o 4. All prices are proportional to capital input too!
               o 5. Which is not precisely a labor theory of value,
                 although it looks like one in a bad light.
            D. But if that is not the case, then:
               o 1. If Barley and Oats are produced with the same K/L
                 ratio as each other, and so are cotton goods and cloth
               o 2. Variations of wages will leave the relative prices of
                 Barley and Oats the same, leave the relative prices of
                 cotton goods and cloth the same, but change the relative
                 price of Barley (and Oats) to Cotton goods (and cloth).
               o 3. Ricardo sees the idea of labor capital ratio, but has
                 no words to explain it in:
                    # a. Since "capital" is not the amount of capital
                      going into the production but
                    # b. Capital years used in production, i.e.
                    # c. The amount of interest that must be paid on the
                      capital used to produce a unit of output.
                    # d. But he recognizes that amount of fixed capital
                      and slowness of circulation are really the same
                      issue.
                 4. Example using machinery
                    # a. One man uses 100 workers for a year to grow
                      corn, two others use the same labor to make one
                      machine each.
                    # b. Next year, one machine +100 men makes cloth,
                      ditto makes cotton goods, and the farmer uses his
                      100 men to grow more corn.
                    # c. If we looked only at embedded labor, the cloth
                      in the second year costs200 man years=cotton
                      goods=corn crop, since the machine in this example
                      is not wearing out, so none of its embedded labor
                      must be credited to its output, but ...
                    # d. The farmer got his capital back after one year,
                      the other two used both their first and second year
                      capital in their second year production (and will
                      use the first and third year capital in the third
                      year's production, and...), so they have to get
                      more profit to compensate, so the price of what
                      they produce must be higher.
                    # e. He then runs it through with numbers.
                         @ i. Wages of 50/annum, so 5000 of capital was
                           employed by each of them; assume a profit rate
                           of 10%
                         @ ii. Corn, at end of the first year, is worth
                           5500, second harvest the same.
                         @ iii.Men with machines have 5500 in the
                           machine at the end of the first year, must
                           receive 10% on that plus their second 5000 of
                           wages, or 10%x10500=1050 in profit. Assuming
                           the machine is infinitely durable (which
                           Ricardo forgets to mention) their goods must
                           sell for 6050, even though none of the
                           machine's embedded labor is being used up--and
                           continue to sell for that each year
                           thereafter.
                 5. So far, this gives us different ratios of exchangable
                 value to embedded labor, depending on the capital labor
                 ratio.
               o 6. It also implies that relative prices will change,
                 technology held constant, as wages change.
                    # a. Note that Ricardo is considering changes in the
                      division of output between the worker and the
                      capitalist
                    # b. Since this is a change in wages with technology
                      held fixed.
                    # c. So it is just a question of who gets what share
                      of the output.
                 7. If wages go up, labor intensive goods rise relative
                 to capital intensive goods. But...
               o 8. This effect is small
                    # a. Ricardo guesstimates that plausible variations
                      in the profit rate could not give fluctuation in
                      relative prices of more than about 6 or 7 percent
                    # b. From which Stigler gets "the 93% labor theory of
                      value."
                 9. But changes in the inputs needed to produce outputs
                 can result in much larger changes in relative prices.
       
   
   
   V. Allowing for fixed capital of variable durability has a similar effect.
          + A. Worked through once for a machine that requires labor
            input to keep it up--just like labor used directly in
            production.
          + B. And a second time by observing that a machine that wears
            out in a year is just like circulating capital with a period
            of one year.
               o 1. Actually, both Smith and Ricardo routinely ignore the
                 fact that wages are paid out during the year, not all at
                 once.
               o 2. Possibly, in Smith's case, because the harvest comes
                 in once a year and must be stored until eaten. So
                 somebody is paying the interest on that capital until
                 the workers get it.
            C. Consider a machine that lasts only a year, substitutes for
            100 men, and costs 5000.
               o a. If wages rise, what happens to its price?
               o b. It must embody less than 5000 in wages, plus some
                 interest, and ...
               o c. If the rise in wages is balanced by a fall in
                 interest, its price will stay the same.
               o d. And that will happen if it is made with the average
                 labor/capital ratio (he is getting ahead of himself
                 here).
            D. Conclusion:
               o 1. Under primitive conditions, prices are proportional
                 to labor.
               o 2. With fixed capital etc., ratio of price to labor
                 input can vary quite a lot.
               o 3. And relative prices can change slightly due to
                 changes in wages and profit, without any change in
                 production technology.
               o 4. With rising wages lowering the relative price of
                 capital intensive goods.
       
   
   
   VI. We need an invariable standard of value.
          + A. It must always require the same labor input--which real
            monies don't.
          + B. But that would still be a perfect measure of value only
            for things produced with the same labor/capital ratio as the
            standard. but...
          + C. Since the change in relative value of goods with different
            K/L ratios due to changes in wages is small, we can (and he
            will) ignore that problem.
          + D. And he will write as though money was that invariable
            standard.
          + E. Note the paradox in Smith's claim that if wages rose all
            goods must rise in price. What about the price of the money
            in which price is measured?

       VII. Changes in price due to changes in the value of money
          + A. Do not change distribution between profit and wages
          + B. But changes with value of money held constant do.
          + C. i.e. changes in wages given that the amount of capital and
            labor used to produce a unit of money is unchanged.
          + D. Note that wages are measured here by labor needed to
            produce what the worker can buy with them--i.e. they measure
            the share of output going to the worker, not his welfare.
            Ricardo abandoned that possibility when he scrapped Smith's
            version of the labor theory of value.
       
                                      
                                      
                              Chapter II: Rent
                                      
     * I. We must distinguish rent--the payment for the use of the
       original and indestructible powers of the soil, from other
       payments miscalled rent.
          + A. Including the profit on the landowner's investments in
            improving the land, and ...
          + B. Payment for timber on the land--it would be rent only if
            you were paying for the right to grow timber and harvest it,
            not just for the right to harvest the timber already there.
          + C. Rent of coal mines or quarries--where, again, you are
            removing something permanently.
          + D. Ricardo will use "rent" only in the narrow sense.
       
   
   
   II. The development of rent
          + A. If land, like air, were available in unlimited supply, it
            would be free.
          + B. It commands rent only because it is not unlimited in
            extent and uniform in quality--the best land is all in use.
               o 1. When land of the second quality goes into use, there
                 must be rent on land of the first quality
               o 2. And its amount depends on the difference in quality.
               o 3. And similarly with the third.
            C. More precisely, suppose three qualities, yielding, with
            the same inputs of labor and capital, net produce (after
            supporting the laborers) of 100, 90 and 80 quarters of corn.
               o 1. While there is plenty of quality 1 land, the farmer
                 will get all of the output to pay his profits.
               o 2. But when quality 2 goes into cultivation, rent
                 appears on quality 1, since ...
               o 3. All corn sells for the same price, and that price
                 must be sufficient to pay for the profits of the farmer
                 farming quality 2 land, leaving the difference as rent
                 for the owner of the quality 1 land--10 quarters.
               o 4. And rent goes to 20 on quality 1 land and 10 on
                 quality 2 land when the third quality comes into
                 cultivation.
            D. But there is an intensive margin as well--before the
            really bad land is cultivated, it becomes worth applying more
            labor and capital to the good land to get additional output.
               o 1. Suppose quality 3 is in production, and that doubling
                 the input on quality 1 raises net output from 100 to
                 185. It is worth doing (cheaper than cultivating quality
                 3), and rent on quality 1 is now 25 quarters.
               o 2. If quality 3 is not in production, and the second
                 dose on quality 1 is the marginal input, then quality 1
                 gets 15 quarters rent, quality 2 gets 5.
               o 3. Price equal marginal cost, rent is output where cost
                 is lower than on the margin--does this start to look
                 familiar?
               o 4. The last applied capital pays no rent--i.e. P=MC!
       
   
   
     * III. So the reason why the value of corn rises over time is not
       that the rent goes up, but ...
          + A. Value goes up because the labor cost of producing one more
            quarter of wheat goes up
          + B. Which causes rent to go up. "Corn is not high because a
            rent is paid, but a rent is paid because corn is high."
          + C. And Smith was wrong to include rent in cost!
          + D. It is said that land is an especially good thing because
            it generates rent--but
               o 1. That is a result of the limited supply of land--we
                 would be better off if we had lots more land, hence paid
                 no rent.
               o 2. And worse off if air, water, etc. became more scarce
                 and started to pay rent.
               o 3. If the surplus produce which rent affords is an
                 advantage, we should make our machinery worse each
                 year--giving a rent on the old machinery.
            E. The increase of rent is a symptom of wealth, not a cause.
          + F. The countries in the best position to get wealthy are
            those that have lots of fertile land, or can import food
            freely, or have a technology that lets them increase
            agricultural output per acre readily at constant cost--all
            circumstances that lead to low rent.
          + G. Smith claims that the high price of corn is the effect of
            rent, but ...
               o 1. The price of corn is determined by the cost of
                 production on marginal land
               o 2. Which pays no rent.
               o 3. Hence the existence of rent does not affect exchange
                 ratios.
               o 4. (but the existence of the circumstance that leads to
                 rent--scarcity of first quality land--does affect
                 exchange ratios--via its effect on labor cost of
                 producing on marginal land)
            H. A reduction in national capital, and consequent reduction
            in population, would push the margin towards more fertile
            lands, reducing rent.
          + I. And an improvement in agricultural technology which made
            land more productive, permitting us to take the less
            productive land out of production, might make rent go down,
            in the short run (capital held constant).
               o 1. At which point wages as a share of output would fall
                 (iron law)
               o 2. Profits would increase
               o 3. Accumulation of stock would increase
               o 4. Eventually, the old marginal land would be back in
                 production, and rent back up.

     * IV. Distinguish between improvements in agricultural technology
       that give more output and those that reduce needed inputs (of
       labor).
          + A. Improvements such as better crop rotation give you a
            larger yield from any piece of land, labor held constant.
               o 1. If the result is to increase output, but keep the
                 difference in output between successive doses of capital
                 and labor the same ...
               o 2. Then the marginal dose comes with less capital and
                 labor, and rent is lower. (p. 55)
            B. Improvement such as better plows give us the same output
            from the land at lower cost in labor (and capital)
               o 1. The same amount of land is cultivated
               o 2. If the difference in output from each dose of labor +
                 capital remains the same, while the doses get smaller,
                 then rent stays the same.
            C. Note that we are measuring rent as proportion of output,
            not as exchangable value.
               o 1. But things that push us to produce on worse land both
                 raise rent and ...
               o 2. Raise the exchangeable value of corn
               o 3. Thus doubly benefitting the landowner.
               o 4. This assumes that the increased difficulty of
                 production is due to shifting the margin of production,
                 not to something that decreases output everywhere
                 (Japanese beetles, say). That might raise or lower rent,
                 depending on how it decreased output.
       
                                      
                                      
                                Chapter III
                                      
     * I. In the case of mines as well, high rent reflects the high value
       of the produce, not the other way around:
          + A. If there were an unlimited supply of equally fertile mines
               o 1. the value of the produce would be the amount of labor
                 necessary to produce it, and ...
               o 2. No rent would be paid.
            B. With mines of varying fertility
               o 1. The marginal mine must cover the cost of labor and
                 capital
               o 2. So the marginal mine's costs regulate the price
               o 3. And all better mines pay rent.
            C. If the labor cost of producing gold from marginal mines
            was always the same, gold would be as nearly invariable a
            measure of value as is possible. Ricardo will write as if
            this were true--i.e. use "gold" to mean an imaginary standard
            having this characteristic.
     
   * II. Note that throughout this discussion, Ricardo is ignoring his
       earlier point that revenue from an extractive industry is not
       really rent.
          + A. If a mine eventually runs out, part of the cost of getting
            gold now is not getting it later.
          + B. If mines have unlimited amounts of ore, why don't you
            produce everything you want from the most fertile mine?
          + C. The implicit model seems to be a mine that can produce at
            a certain rate forever, with a fixed input required for each
            unit of output--the lower the ratio of input to output,
            themore fertile mine.
          + D. Which lets Ricardo apply is analysis of rent to mines, but
            isn't ver realistic.
          + E. On the other hand, doing it right probably requires
            Hotelling's analysis of depletable resources, which isn't
            going to be written for another century or so.
       
                                      
                                      
                                 Chapter IV
                                      
     * I. Of course, market price is not always equal to natural price.
          + A. Ricardo repeats Smith's argument for how equilibrium in
            the capital market moves market prices towards natural
            prices.
               o 1. Goes through a little more detail--borrowed capital
                 shifting from one manufacturer to another.
               o 2. Observes that it works better than might be supposed.
               o 3. And notes non-pecuniary as well as pecuniary costs
                 and benefits.
       II. And refers the reader back to Smith.
       
                                      
                                      
                                 Chapter V
                                      
     * I. The ability of the laborer to support himself and bring up the
       children needed to maintain the working poulation depends not on
       his wages but ...
          + A. on what his wages will purchase.
               o 1. So the natural price of labor depends on the price of
                 foods, necessaries, and customary conveniences.
               o 2. And with progress, tends to rise, because corn gets
                 more costly as we push to worse marginal land, but ...
               o 3. The effect might be temporarily reduced by
                 improvements in agricultural technology
               o 4. As happened, temporarily, for 180 years after Ricardo
                 published!
            B. The natural price of goods other than raw produce and
            labor tends to fall over time
               o 1. Since the increase in the natural price of the raw
                 material that goes into them
               o 2. Is outweighed by improvements in technology, etc.
               o 3. This is apparently an empirical claim.
            C. The market price of labor, as of other goods, can deviate
            from its natural price, but tends to conform.
               o 1. When market price is above natural, laborers are well
                 off.
               o 2. When below, laborers are wretched.
            D. Market rate could be above natural rate in an improving
            society for an indefinite period of time
               o 1. Since capital might keep accumulating
               o 2. As in fact happened from then till now.
            E. In talking of capital accumulating, one should distinguish
            between
               o 1. An increase in the value of capital--which might
                 happen because the things making it up became more
                 valuable (i.e. required more labor to reproduce)
               o 2 And an increase in the quantity of capital.
               o 3. If capital increases in quantity and value, the
                 natural price of labor rises, due to increased value of
                 the stuff needed to support it.
               o 4. Capital might increase while its value held constant
                 or fell, in which case the natural price of labor would
                 be constant or declining.
               o 5. In both cases, market price of labor would be above
                 natural price.
                    # a. First case, only by a little, so soon back to
                      natural price
                    # b. Second by a lot, since his wages have gone up
                      and the cost of subsistence is constant or falling.
                      So it may take a long time for market wage to get
                      back down to natural wage.

       II. The natural price of labour, measured in food etc., is not
       fixed
          + A. It varies across time and space
          + B. because it depends on the habits of the working population
          + C. The more they require to feel they are doing well enough
            to afford to marry and have children, the higher the natural
            wage will be.

     * III. Wages are affected by two factors
          + A. Supply and demand of labor
          + B. Price of what laborers buy.
          + C. If lots of fertile land is available, capital may
            accumulate faster than labor.
               o 1. Mimimum doubling time for population has been
                 estimated at 25 years, but ...
               o 2. Capital might double faster than that under favorable
                 circumstances
               o 3. In which case wages would go up.
            D. In new settlements, this happens--until they get pushed
            onto worse land.
          + E. Contrast countries with lots of fertile land but bad
            institutions with countries which are fully developed.
               o 1. In the first case, introduce good government and
                 capital will rapidly accumulate, making people better
                 off.
               o 2. In the other, accumulation of capital will simply be
                 matched by new population.
            F. The friends of humanity cannot but wish ... that workers
            should have luxurious tastes.

     * IV. As capital accumulates, what happens to wages?
          + A. If we look only at the supply/demand side, we observe that
            capital will accumulate more and more slowly (he hasn't shown
            this yet, but will), so wages will sink--i.e. be closer and
            closer to the wage that gives constant population.
          + B. But the prices of necessaries are rising (because they are
            being produced on worse and worse marginal land), so the wage
            (measured in Ricardo's imaginary money--i.e. value) that
            gives constant population is rising.
          + C. So money (i.e. value) wages rise, but real wages (in our
            sense--what the laborer can buy) fall.
          + D. But the rise in money wages will lower the profit rate--as
            we will see later.
          + E. So both rent and wages increase as capital and population
            accumulate, but ...
               o 1. The increase in rent involves the landlord getting an
                 increasing share of agricultural output--and selling it
                 at a higher price per unit
               o 2. The increase in wages involves a decreasing amount of
                 corn--at a higher price.
               o 3. The difference between the two situations being that
                 the landowner is selling corn, the laborer is buying it,
                 and the value of corn is rising.
            F. All of these calculations are done in terms of Ricardo's
            imaginary gold of fixed value, but the argument does not
            depend on that.
               o 1. One might think (Smith apparently does) that an
                 increase in wages would raise the price of all
                 commodities.
               o 2. But gold is a commodity--and prices are measured in
                 it. Its price cannot rise.
               o 3. To put it differently, if prices of goods all go up
                 we will need more gold to circulate our goods, but ...
               o 4. If prices of all goods in gold go up, the price we
                 are paying for gold in goods has gone down, so how can
                 we import gold?
               o 5. So the argument works for prices in real gold as
                 well.
            G. Digression on the poor laws, citing Malthus:
               o 1. Describes the bad consequence, but doesn't run
                 through the argument--number of people on welfare (in
                 our terms) would rise until it absorbed all of the
                 country's net revenue save that used by the government
               o 2. But immediate abolition would have terrible
                 consequences.
               o 3. Hence gradual abolition the solution.
               o 4. Sound familiar?
               o 5. Shifting from a local to a national poor law (which
                 is suggested by Smith's attack on the settlement laws,
                 although I don't think he actually proposes it) would be
                 a bad idea
                    # a. Because local administration and payment gives
                      each parish an incentive to collect the money as
                      efficiently as possible, and
                    # b. Spend it as sparingly as possible.
                    # c. Which is why welfare is not yet destroying the
                      country
                 6. If everyone could live comfortably on welfare, the
                 principle of gravitation is not more certain than the
                 tendency of such laws to convert wealth into misery.
               o 7. Presumably the part of the argument we would not see
                 in modern discussions of the problem of welfare is a
                 population argument--by supporting the unemployed poor
                 we keep up the laboring population, thus depress the
                 wages of the employed poor.
       
                                      
                                      
                                 Chapter VI
                                      
     * I. What determines the average rate of profit and interest?
          + A. The higher wages (measured in labor--hence share of
            output) are, the lower profit is.
               o 1. Fairly obvious for the manufacturer, what about the
                 farmer?
               o 2. He is paying more money for his labor, but selling
                 his corn for more money, but ...
               o 3. He is either producing less corn per unit of labor
                 (on marginal land) or paying more rent (on more fertile
                 than marginal land).
               o 4. Since money is assumed of constant value, the amount
                 for which you can sell the output of an hour's labor on
                 marginal land is always the same. Ricardo goes through
                 some numbers on this.
                    # a. The farmer on marginal land is getting the same
                      amount of money, paying more in wages, so has less
                      profit.
                    # b. And the farmer on non-marginal land is paying
                      the difference between his output and the output of
                      the farmer on marginal land to the landowner as
                      rent.
                 5. Note that all of this increase in wages is with
                 technology fixed--output per worker is the same, save
                 that we are moving to worse marginal land, so output of
                 corn per worker on marginal land is less, but ...
               o 6. That assumption is not essential, because Ricardo is
                 measuring everything in a money whose value (labor
                 input) stays constant, so measured in that money output
                 per worker is always the same.
            B. So the farmer has an interest in keeping rent low
               o 1. Not because he pays it--he really doesn't (in value
                 terms--go through Ricardo's analysis)
               o 2. But because high rent means high value of corn means
                 high (value of) wages means low profits.
               o 3. And even lower profit measured as a rate of return
                 rather than a value, since higher value of agricultural
                 output means higher value per unit of his capital stock,
                 means more value per worker employed.
               o 4. So he is getting fewer s of profit on more s of
                 stock.
            C. Effect on other goods:
               o 1. Most goods have some agricultural output as inputs,
                 so will rise in value along with the increase in the
                 value of corn, although not by as much.
               o 2. But they are rising because they have more labor
                 expended on them, not because the labor is more
                 expensive.
               o 3. Since, after all, the money they are measured in (by
                 assumption) is also being made with more expensive
                 labor.
               o 4. And, measured in that money, profit falls as wages
                 rise.
               o 5. All of this assumes that when corn becomes more
                 expensive, wages rise
                    # a. Which doesn't have to happen in the short run,
                      both because it takes time for population to adjust
                      and because the workers might be making above the
                      natural wage to start with, but ...
                    # b. In the long run ... .
            D. The same thing would happen if there was an increase in
            the price of other goods consumed by the laborer--profits
            would fall.
               o 1. But not if there was an increase in the price of
                 luxury goods.
               o 2. Which labourers do not consume.
            E. All of this describes equilibrium.
               o 1. In the short term, some profits might rise even while
                 profits in general were falling, but...
               o 2. They would be brought back down as capital moved into
                 the more profitable field.
            F. Very long term story:
               o 1. Over time, we push onto worse and worse land, so the
                 value of corn rises ...
               o 2. Checked from time to time by improvements in
                 machinery for producing necessaries and in agricultural
                 science.
               o 3. Eventually we reach the point where the workers on
                 marginal land just produce enough to pay their wages.
               o 4. So the rate of return on capital is zero, so it stops
                 accumulating.
               o 5. And in fact, accumulation will stop short of that
                 point.
               o 6. As accumulation goes on, total amount of profits
                 keeps rising for a while, but eventually the reduction
                 in the profit rate with further accumulation outweighs
                 the increase in the amount of capital that rate is
                 earned on, so ...
               o 7. Total of profit starts to go down.
               o 8. But the total of value is still going up.
                    # a. As we move to worse land, we are still farming
                      the better land, so ...
                    # b. The increase in capital means more total output,
                      and ...
                    # c. The (agricultural) output has greater
                      value/unit, so ...
                    # d. Total value of agricultural output is
                      increasing.
                    # e. Indeed, total value is increasing--more labor
                      (which produces a value divided between labor and
                      capital) and more rent.
                 9. So the shift in value is away from profit and into
                 labor and rent--the latter get a larger fraction of the
                 total, and eventually the former starts to fall
                 absolutely as well as relatively.
       
                                      
                                      
                       Chapter VII: On Foreign Trade
                                      
       I. Trade does not directly increase the value annually produced by
       a country, although it may increase the amount, usefulness, etc.
       of the goods the country can consume.
          + A. Because if the ability to import wine cheaply increases
            its quantity and drops its price, it also drops its value
               o 1. Wine is now being produced by using English labor to
                 produce (say) cloth and trading that for Portuguese wine
               o 2. And it takes less English labor to produce wine that
                 way than directly, so ...
               o 3. It has less value--in Ricardo's sense.
            B. It has been argued by high authority (Smith?) that when
            capital is shifted into foreign commerce, the result will be
            to raise the rate of profit in general. But ...
               o 1. The purchase of foreign commodities will employ the
                 same, more, or less of the produce of England's land and
                 labor (as producing them would have before?).
               o 2. If the same, then the same amount available for
                 everything else.
               o 3. If less, then more money available to purchase
                 domestic commidities--and more capital to produce them.
               o 4. If more, then proportionally less demand for domestic
                 commodities, and less capital to produce them.
               o 5. Putting it differently, foreign trade is simply a new
                 technology for producing goods, and in Ricardo's system,
                 new technologies (save in agriculture or necessaries for
                 workers) do not affect the profit rate.
               o 6. But note that Ricardo has assumed away the affects of
                 changing labor/capital ratios--which might be relevant
                 if, as Smith argues, foreign trade is a capital
                 intensive industry.
            C. The effect of trade is to get us more usefulness for the
            same value.
               o 1. Which might result in more capital accumulation, if
                 people who don't need to spend as much money to get the
                 same goods save what is left, instead of buying more
                 goods with it.
               o 2. And it could increase profits if it decreased the
                 cost of food and necessaries, and thus wages.
               o 3. Ditto for improvements in manufacture, inland trade,
                 etc.
            D. Profits depend only on wages (measured in value terms!),
            Prices are independent of wages (rise in wage compensated by
            drop in profits) but depend on productivity.
               o 1. So an improvement in productivity benefits everyone
               o 2. A fall in wages benefits only the owners of capital.

     * II. The theory of value that explains prices within a country does
       not explain prices across countries:
          + A. Because labor and capital are mobile within a country but
            relatively immobile across countries.
          + B. So profit rates and wages tend to be equal within a
            country but not across countries.
          + C. So exchange ratios in international trade are not
            determined by ratio of embodied labor.
               o 1. It might be profitable for Portugal to import from
                 England cloth that cost 90 man years to produce in
                 Portugal and 100 man years in England
               o 2. Because it would be sending wine, which costs 80 in
                 Portugal, 120 in England.
               o 3. Principle of comparative advantage first rears its
                 head.
               o 4. If capital and labor were perfectly mobile, this
                 wouldn't happen--because they would be getting more in
                 Portugal, and would move there.
            D. Gold and silver distribute themselves among countries in
            such a way as to make profitable in money terms those trades
            that would be profitable in barter terms.
               o 1. The cloth must sell for more in Portugal, or it won't
                 be imported, so ...
               o 2. Wages paid 90 men in Portugal must be more than those
                 paid 100 men in England (actually, cost of wages plus
                 associated capital costs)
               o 3. Which means that the value of gold in Portugal,
                 measured in Portuguese labor, is lower than the value of
                 gold in England, measured in English labor.
               o 4. If it were not, gold would flow into Portugal
                 (exporting both cloth and wine, importing nothing) until
                 it was.
               o 5. The specie flow mechanism for foreign trade
                 equilibrium.
               o 6. If England discovered a new way of making wine that
                 cost less than 80 man years, England would export cloth,
                 import nothing, until enough gold accumulated to drive
                 the price of one of the goods in England above that in
                 Portugal (This version is actually Ricardo's example,
                 the previous was my addition).
               o 7. If there is a trade imbalance, then people who buy
                 bills of exchange in one country on another know they
                 may not be able to trade for a bill the other direction,
                 so discount to allow for the cost of transporting the
                 gold to pay the bill.
               o 8. Oddly enough, if England could make both goods
                 cheaper (in labor), gold flowing into England and out of
                 Portugal would make prices in general rise in England,
                 fall in Portugal (until a new equilibrium was reached).

     * III. Explanation of varying value of money in different countries:
          + A. If a country improves its ability to produce goods that
            are readily traded, gold flows in, prices measured in gold
            (real gold, not Ricardo's imaginary money) are higher.
          + B. Rate of profits may be the same, wages the same, but
            everything measured in money is higher.
          + C. So real money, unlike Ricardo's imaginary money, varies in
            value across countries for this reason.
          + D. But this does not imply a difference in the profit rate,
            which is a ratio of two amounts of money, across countries.
          + E. In the early state of society, when goods are bulky, the
            value of money depends mainly on distance from the mines
            (think of the labor cost of growing corn, transporting it to
            the mine, trading for gold, bringing the gold back).
          + F. But once one country improves its manufactures (of high
            value to weight goods), now it is relative ability in
            manufacturing those that determines the value of gold at
            home.
          + G. The higher value of money will not be indicated by the
            exchange.
               o 1 That must be at par as long as you can freely import
                 and export money, and doing so does not cost very much.
               o 2. A country that could prohibit the export of money
                 could push up its domestic prices--and push the exchange
                 against it. Must give 11 ounces in that country to get
                 10 ounces abroad.
               o 3. Similarly with paper money not freely convertible
                 into gold.
               o 4. And an exchange against England is evidence that the
                 currency is depreciated--otherwise you would just export
                 money, melt it down, and have it coined as foreign
                 money.