PRINCIPLES OF POLITICAL ECONOMY AND
The produce of the earth-all that is derived from its
surface by the united application of labour,
machinery, and capital, is divided among three
classes of the community; namely, the proprietor of
the land, the owner of the stock of capital
necessary for cultivation, and the labourers by
whose industry it is cultivated.
CENTRAL ISSUE ON POLITICAL ECONOMY
To “determine the laws” regulating distribution
between the various classes and their relation to
the general circumstances of society.
The effects on the economy as a whole of the
protection afforded to agriculture by the Corn Laws.
THE NAPOLEONIC WARS
A series of conflicts fought between France and a
number of European nations between 1799-1815.
Trade barriers designed to protect cereal producers in
the UK and Ireland against competition from less
expensive foreign imports between 1815-1846.
Born in London on April 18, 1772.
He was third of 17 children from a Sephardic Jewish
He amassed a large fortune as a member of the London
He greatly influenced Great Britain’s policy on trade as
member of the Parliament in 1819 when he retired from
his business at the age of 42.
Ricardo was a close friend of James Mill, who
encouraged him in his political ambitions and writings
about economics. Other notable friends included Jeremy
Bentham and Thomas Robert Malthus, with whom
Ricardo had a considerable debate (in correspondence)
over such things as the role of land owners in society.
Died on September 11, 1823 at his estate in
THEORY OF DISTRIBUTION
Three Classes of People
that in all countries, and all times, profits depend on
the quantity of labour
requisite to provide
necessaries for labourers on that land or with that
capital which yields no rent.
Rate of profit as a primary regulator of the rate of
Agriculture was unique because it was the only
sector in which the same commodity figured as
both input and output (e.g. corn seed=input,
Net return= output-input
Rate of profit= net return ÷ total inputs
As population grows, a need to produce more is
seen, thus they will have to need more labourers,
which will in turn decrease the rate of profit.
THE ARGUMENT FOR THE ISOLATION OF RENT
The „niggardliness of nature had made land scarce and
uneven in quality.
Acreages of high fertility would provide a windfall to their
The size of this windfall would swell as population growth
enlarged the demand for food.
As food prices rose, less fertile areas would be brought under
The owners of the fertile acreages would reap higher and
The outputs of the last units, on the other hand, would be
sufficient only to cover the costs of cultivation and would fail to
yield a rent.
Thus be maintained the rent and profit could be isolated by
observing zero-rent land where the net return would consist
entirely of the return on capital- profits
profits of stock remains as the
cause of the permanent alterations in
the rate of interest.
LAW OF RENT
rent of a land site is equal to the
economic advantage obtained by using the
site in its most productive use, relative to the
advantage obtained by using marginal (the
best rent-free) land for the same purposes,
given the same inputs of labour and capital.
ZERO-CAPITAL RENT LAND
The best available land that is not earning rent for
its owner is define as zero-rent land.
Extensive Margin Rent
When the rent earned by a landlord is due to the
superior fertility of the land (quality).
Intensive Margin Rent
Rent earned from the intensive use of land
Basis for the price of a product
Profits would be high or low in proportion as wages
were low or high.
The power of the labourer to support himself, and
the family which may be necessary to keep up the
number of labourers, does not depend on the
quantity of money which he may receive for wages,
but on the quantity of food, necessaries, and
conveniences become essential to him from habit,
which that money will purchase.
NATURAL PRICE OF LABOUR
on the price of food, and
conveniences required for the support of the
labourer and his family
Has always a tendency to risem because
one of the principal commodities by which
its natural price is regulated, has a tendency
to become dearer from the greater difficulty
of producing it.
MARKET PRICE OF LABOUR
is dear when it is scarce and
cheap when it is plentiful.
The price which is really paid for it.
May deviate from its natural price, it
has, like commodities, a tendency to
conform to it.
NATURAL VS. MARKET PRICE OF LABOUR
market price of labour exceeds
its natural price, the labourer is most
When the market price is below its
natural price, the condition of the
labourer is most wretched.
LABOUR THEORY OF VALUE
Labour as the crucial common denominator.
The value of a commodity could be expressed in
terms of labour inputs required in its production.
There would be divergent price results if the
elements of production differ from one producer to
Two commodities produced with identical quantities
of labour input would differ in price if one required
longer commitments of capital before revenues
were realized through sales than the other.
on raw produce falls on the consumer,
but will also diminish profits.
Tax on rents falls on the landlord
Taxes on houses will be divided between
the occupier and the ground landlord
Taxes on profits will be paid by the
consumer and taxes on wages by the
RICARDO AND THE LONG-PERIOD
PROSPECTS OF THE ECONOMY
The value of corn is regulated by the quantity of
labour bestowed on its production on that quality of
land, or with that portion of capital which pays no
As population growth was thought likely to
accompany economic expansion, food
requirements would grow higher.
The distribution of income would shift in favour of
RICARDO ON ECONOMIC POLICY
government intervention in
economic activity and endorsed the
beneficence of a self-regulating market
Mainly focused on the Corn Laws
Supports free trade in agricultural
THEORY OF COMPARATIVE ADVANTAGE
The idea holds that it is better for a country to trade
for products that it can get at a lower cost from
another country than producing it domestically.
Tradeoffs between nations consider the opportunity
cost of each production.
When both countries specialize and trade their
products, both countries gain. These gains come
because each country specializes in producing the
goods for which its comparative cost is lower.
it advantageous for Richland to
Think again. Poorland‟s cost of producing wine,
although higher than Richland‟s in terms of
hours of labor, is lower in terms of bread. For
every bottle produced, Poorland gives up half
of a loaf, while Richland has to give up three
loaves to make a bottle of wine. Therefore,
Poorland has a comparative advantage in
producing wine. Similarly, for every loaf of
bread it produces, Poorland gives up two
bottles of wine, but Richland gives up only a
third of a bottle. Therefore, Richland has a
comparative advantage in producing bread.
If they exchange wine and bread one for one, Poorland
can specialize in producing wine and trading some of it
to Richland, and Richland can specialize in producing
bread. Both Richland and Poorland will be better off than
if they had not traded. By shifting, say, ten hours of labor
out of producing bread, Poorland gives up the one loaf
that this labor could have produced. But the reallocated
labor produces two bottles of wine, which will trade for
two loaves of bread. Result: trade nets Poorland one
additional loaf of bread. Nor does Poorland‟s gain come
at Richland‟s expense. Richland gains also, or else it
would not trade. By shifting three hours out of producing
wine, Richland cuts wine production by one bottle but
increases bread production by three loaves. It trades
two of these loaves for Poorland‟s two bottles of wine.
Richland has one more bottle of wine than it had
before, and an extra loaf of bread