David Ricardo and Thomas Malthus: Impact on Classical Economics
David Ricardo: Pioneer of Modern Macroeconomics
David Ricardo, born in London on April 18, 1772, was one of the most influential economists, along with Adam Smith and Thomas Malthus. He is considered one of the pioneers of modern macroeconomics and is invoked by both neoclassical monetarists and English Marxists. Ricardo was also a successful businessman, speculator, stockbroker, and member of Parliament. He belonged to the school of classical economics.
Theory of Differential Rent
David Ricardo investigated how the growing wealth of society was distributed among its members. Taking into account that the main problem of the economy is to determine the laws governing such distribution, he developed his theory of differential rent. Rent is that part of the proceeds of land that is paid to the landlord for the use of ground forces. Ricardo stated that if all land had the same properties, if it were unlimited in quantity and uniform in quality, nothing would be paid for its use. However, rent is paid because land is limited in amount and of varying quality.
One of Ricardo’s assumptions is that the portion of land that is cultivated first is the most fertile and of the best quality. Only when the population grows does the need to increase the food supply necessitate cultivating lands of inferior quality or less advantageous locations. However, when these second-order lands start being cultivated, the first-quality land starts paying rent. The amount of income depends on the difference in quality between these two fields.
Rent is always the difference between the product obtained by equal amounts of capital and labor on lands of different quality. This concept is known as differential rent.
Main Ideas of David Ricardo
- A comparative advantage is the advantage that one country has over another to produce a product at a lower cost than the other country would require to develop the same product.
- David Ricardo established the idea that the decisive factor in assessing the comparative advantage of one country over another is the relative cost of production of a product rather than its absolute cost.
- David Ricardo argued that tariffs on international trade have a negative effect on the economy because they deprive consumers of cheap products, and those who produce the good cheaper benefit. That is why he stressed the importance of free trade to achieve the smooth exchange of goods between countries.
Assumptions of Ricardo’s Model
From the Point of View of Production
Each country produces two goods by using a single factor of production that is completely uniform in that there is a fixed allocation: labor. The technology is represented by a production function of fixed coefficients, which has the effect that the marginal productivities and average work will be equal.
From the Point of View of Demand
Say’s Law is met: everything that is produced is sold, and one cannot spend more than what is produced.
With Regard to International Trade
The world has only two countries (in the example, England and China). Trade is free. There are no restrictions to trade. There are no transport costs. Labor is internationally immobile.
Institutional Assumptions
There is perfect competition in all markets and all countries. The value of an asset is determined by the number of hours that the employee includes. Tastes are given. The structure and income distribution are given and known.
Thomas Malthus: The Father of Demography
Thomas Malthus was an English economist belonging to the classical school of thought. He is considered the father of demography.
The Law of Population
Thomas Malthus argued that the poverty of the masses was simply a consequence of man’s reproductive instincts, which did not depend on the social conditions of the time. The result was the struggle between the human capacity for reproduction and food production systems, which he considered would be perpetual. To achieve balance between population and food, thus eliminating poverty, Malthus proposed to apply a moderate approach (as an excess would be immoral) using two options:
- The positive approach, which aims to seek equilibrium through death, with its different forms such as epidemics, hunger, and wars.
- The preventive method, namely to reduce births (birth control) through sexual continence – only – he counseled celibacy, above all, to reduce births.
However, Malthus’s ideas have been proven wrong in many cases. Malthus did not succeed because industrialization increased food production in rich countries and also reduced their fertility. When the population gets richer, families are reduced, and when families are reduced, the population is enriched. Mothers’ education helps to explain this trend.
The Classical School of Economics
The classical school is based in a capitalist context, in which the Industrial Revolution caused great changes in society. Society had not assimilated the change from a feudal system and went to a system of market capitalism.
The classical school developed its own theory of value, which states that the value of all merchandise is given by the amount of work in production. This theory also seeks the establishment of profits, wages, and natural income as the basis of natural prices of commodities.
The classical theory creates scenarios based on the ethics of the market.
Say’s Law
- All merchandise is moving in perfectly competitive markets.
- In a society in search of individual self-interest, this generates the benefit of society.
- The only authority that leads to equilibrium prices is the market.
- Economies operate in a state of full employment.
The main exponents of this school were Adam Smith, Thomas Malthus, David Ricardo, and John Stuart Mill.