Classical theory of growth. Role of distribution in growth.

1. RICARDIAN THEORY OF
GROWTH
Prof. Prabha Panth
Osmania University

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1) Three factors of production – land, labour and
capital,
2) One-good model.
3) Land is fixed in quantity, but differs in quality –
heterogeneous land.
4) Labour theory of value,
5) Capital is circulating capital (Corn) =
wages, not fixed capital,
6) Diminishing returns
7) Malthusian theory of population.
8) Perfect competition, uniform rate of profit.
Assumptions:

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Role of Distribution
a) Wage Rate (w) = wage fund = subsistence w
no of workers
b) Rate of profit (r) = Surplus = Surplus
Capital Wages
As wages = circulating capital.
So there is an inverse relationship between w and
r, as w increases r decreases.
c) Rent: is determined at the margin of
production, both intensive margin and extensive
margin.

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Model of Growth
• Economic growth takes place due to
capital accumulation.
• Capital accumulation is by
capitalists, through investment,
• Investment comes from profits,
• As growth takes place, demand for food
increases, and intensive and extensive
margins of land increases
• Total rents and wages increases.

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• This squeezes out profits, which
eventually falls to zero.
• This point is called the “Stationary State”.
• In Industrial sector also:
– Rate of profit is same in industry and
agriculture,
– Corn is paid as wages.
– With growth, labour input increases, total
wages increase,
– Profits fall, investment falls and also rate of
capital accumulation.

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Stationary State
• Capital accumulation output increases,
• More labour is employed, total wages paid
increases, population increases,
• As demand for corn increases, inferior land is
cultivated – extensive margin
• Or existing land is over cultivated – intensive
margin,
• Rents increases, as margin expands,
• Profits fall, investment falls, and growth rate falls
• This leads to Stationary State.

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• 0w3 = wage fund
• w = real wage rate,
• R1w1 = rate of profit =
investment at N1
• K, Q and L increases to
R2,
• Now total wages
increased to w2, and
profit = R2w2.
• The process goes on, till
point S.
• Here profits are zero, no
investment and growth.
• This is the Stationary
State.
0
w
N1 N2 N3
W+Pr =
Q-rent R1
R2 S
w3
w1
w2

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Solution for Stationary State
• Growth can be restored through import of
corn i.e. through international trade,
• Repel the corn laws, which is beneficial to
landlords only.
• Protection leads to increase in corn prices
as the margin increases.
• This increases rent not profits, which are
consumed.