Ricardo, an English economist (1772-1823), from Dutch-Sephardi origins, became rich at a very young age on the stock market and devoted the rest of his life to the study of mathematics and natural sciences and, from 1799, Economics. He became known with his pamphlet “The high price of bullion” on economic issues, and ended his work with his “Principles of Political Economy and Taxation.” Ricardo took the major step in the process of deductive abstraction of what later became known as the Classical school of economics in the path initiated by Adam Smith. His theories of comparative advantage, which were firstly stated in 1815 by Col. Robert Torrents (Ricardian trade theory), rent of land (Ricardian distribution theory) and the steady state, were some of their major contributions to economic science.
David Ricardo
Ricardian distribution theory
The importance of David Ricardo‘s model is that it was one of the first models used in Economics, aimed at explaining how income is distributed in society.
Starting assumptions:
-there is only one industry, agriculture; only one good, grain;
-there are three kinds of people:
Capitalists: they start the economic growth process by saving and investing. In return, they receive profits (P), which is what is left once wages and rents have been subtracted from the gross revenue. Capital can be divided into fixed capital (machines, for example) and working capital (wage fund, WF).
Workers: they represent the labour force, in return for wages (w).
Landlords: they allow production(y) to take place in their lands in return for rent (R).
-law of diminishing returns: affects labour (variable factor of production) and land (fixed factor).
-principle of margin: marginal product of labour, which, along with the average product of land, is decreasing.
-principle of economic surplus: profits are determined as a surplus of production.
Analysis:
At a given initial situation, production is at a y0 level, which we can divide into wages, w0, and profits, P0. Rent paid to landlords corresponds to R0. From w0 and the level of labour, L0, we determine the wage fund at the initial situation, WF0.
In the long term, wages will arrive at a subsistence level, ws, which can be defined as the wage a worker needs in order to survive. From this, and the level of labour being employed, we determine the wage fund in the long run, WF*. As this level is the same as labour’s marginal product, the capitalist will not obtain any profits. On the other hand, landlords will get higher rents, R*.
Steady state:
Real wages will stagnate at subsistence level, the interest rate of capital will stay at 0 and rents will reach its maximum level.
Ricardo explains how this steady state is painful, especially for the working class. However, this steady state can be delayed with technological progress or international trade, as is shown in Ricardian trade theory.
Physiocracy
Physiocracy is an eighteenth-century neologism from the Greek “physis,” nature, “kratia” authority: government of nature. It is the name that François Quesnay and his followers, the Physiocrats, gave in France from 1750 to the new science that saw in nature, especially in agriculture, the source of wealth. All useful and valuable things were generated, following the immutable natural order of economic and social relations studied by political economy. The Physiocrats were popularly known as “the economists” and aroused the interest of Adam Smith in Economics. His philosophy regarding the role of government is summarized in the famous phrase: laissez faire, which basically means letting the economic equilibrium arise from free will, believing the economy to be self-regulating. The emphasis on agriculture was to despise the value of trade by not adding new value to what was created by farmers.
Physiocracy coexisted with the main doctrine at that time, mercantilism. However, physiocracy had a few differentiating characteristics, such as the fact that it developed only in France, during a shorter period than mercantilism (only between 1750 and 1780), had a major intellectual leader, Quesnay, and developed a more analytical approach and models (such as Quesnay’s Tableau Économique), giving scientific status to the study of Economics.
Physiocracy and mercantilism also had some common characteristics, mainly the fact that they studied the economy (from its very core, the natural laws) in order to understand it, but also to formulate sound economic policies. This established the study and understanding of economy as a prerequisite in order to develop economic policies.
John Stuart Mill
John S. Mill was an English economist, (1806-1873), son of the also economist James Mill, who gave him a rigorous education. His “Principles of Political Economy”, which is considered one of the most important contributions made by the Classical school of economics, did not think of prices from a Theory of value perspective, but as a result of the intersection of supply and demand, with references to international trade concepts, such as reciprocal demand and the terms of international exchange, or as we know the term nowadays, terms of trade. In fact, it was Mill’s work on “International values” which made possible further graphical analysis by Francis Y. Edgeworth. Individualistic in the first part of his life, showed in the second a certain proclivity for socialist ideas without ever losing its high appreciation of freedom and even religious values.
He also made contributions to the quantity theory, by developing David Hume‘s work on the subject. In his book “Principles of Political Economy”, he explained the difference between money and price, often used for the same idea by other classical economists, and made clear the relation between money quantity and prices. However, it was Irving Fisher who finally stated the equation of exchange.
Thomas Robert Malthus
Malthus was an English reverend (1766-1843), who in his book “An Essay on the Principles of Population,” wrote an argument against his contemporary Mr. Godwin, who believed in unlimited population growth. Malthusian population theory warned of the possibility, that while the population grew geometrically, food resources grew only in arithmetical proportion, thus creating the conditions for a shortage in the long term that would require an adjustment in the birth rate. This law of Malthus’s population was severely criticized by Karl Marx, another heterodox economist from the Classical school of economics, who called the parish of Albury “advocate of the bourgeoisie.” The principles of Malthus had great influence on the thinking of Darwin and Wallace about the struggle for life as the source of the natural selection of the strongest.
In his “Principles of Political Economy”, Malthus explained how he was against Say’s Law, by considering demand as an aggregate. Thus, if wages were to be mantained at a subsistence level, aggregate demand would drop. Therefore there would be a production surplus, idea that would be used by J.M. Keynes in his “The General Theory of Employment, Interest and Money”.
Mercantilism
Mercantilism is a pre-classical economic thought, according to which the prosperity of nations is reached by promoting agriculture and manufacturing. The aim is to increase exports and restrict imports, thus accumulating gold and precious metals, relevant as a sign of wealth. Bullionism, which is considered part of mercantilist theory, was specific to the monetary matters of this economic thought.
In order to implement policies recommended by the authors of this doctrine, mercantilist policymakers resorted to either prohibiting imports outright on some goods or resorting to high tariffs or quantitative restrictions. Mercantilism was the economic policy prevailing in Europe from 1500 and 1750. Although mercantilist literature was written all around Europe, the most significant texts and thoughts came from French (mainly from Physiocracy authors) and English writers.