week 1: 2. classical school (1776-1871): David Ricardo (Theory of rent 1.,…
week 1: 2. classical school (1776-1871):
1772 - 1823
Self-taught in economic issues
House of Commons (1819)
Stockbroker. Retired at age 43.
Principles of Political Economy and taxation (1817)
Notes on Malthus (1928)
No academic training
Relative price theory 1.
Determination of prices:
More inputs in production than just labor
•Relative prices not just a function of labor cost!
•Express capital costs in terms of labor costs
Production process of unequal length of time
•Time costs should be reflected in prices
Basic factors of production: labor, capital and land
Implication: Labor theory of value does not hold in simple form
•Deviation in relative prices not more than 6-7%
(“93% labor theory of value” (George Stigler, 1958; 1965))
•Level of wages is not irrelevant for relative prices
Relative price Theory 2.
Ricardo’s extended labor theory of value:
By dissolving capital into labor units and using the 93% approximation, both labor and capital could be incorporated and this helped fix for complications raised by use of capital in the simple labor theory of value.
But how about the third production factor rent? →
Theory of rent
Theory of rent 1.
•Should rents be part of labor theory of price formation?
• Price → rents (Example: Table 7-1, Table 7-2)
• Extensive margin and intensive margin
•Last land used characterized by sales=production costs,
hence rent=0. (Example: Table 7-1)
• Rents are no element of production costs.
Link to marginalists (later)
•Land varies in quality/productivity
￼￼￼“Corn is not high because of a rent is paid, but rent is paid because corn is high.” (Ricardo 1817; 1951; p.74)
Theory of international trade 1.
Adam Smith: trade based on absolute cost differences
•Ricardo: Each country specializes in production and uses part
of production for exports – which in turn finances imports
→Ricardo was against Corn laws!
→Beneficial for both to specialize based on comparative advantage.
→England produces cloth and imports wine.