B. His fundamental model is one in which
all goods, including money and agricultural commodities, are
produced with the same ratio of capital to labor.
- 1. Which makes some sense if you are
thinking in terms of circulating capital with a one year
period--the total amount of capital is simply enough to pay
a year's wages, plus paying for raw materials.
- 2. If capital accumulates, the short run
effect is to bid up wages--and value of capital is again
equal to one year's value of wages.
- 3. The long run effect is that the labor
force rises until wages are again at the natural
C. This gives us a tidy, soluble, although
unrealistic first approximation picture of the economy at one
instant and through time.
- 1. At any instant, in long term
equilibrium, all prices are proportional to labor input, and
profit is equal to what is left from output after paying the
natural wage to the workers.
- 2. Over time, capital accumulates,
bidding up wages, driving up population.
- 3. This would scale up forever with no
change save size, except that ...
- 4. You run into declining returns in
- 5. So over time, the price of corn goes
up, the wage rate goes up, profits go down.
- 6. Note that "profits go down" might
mean either that the share of value of profit or the profit
rate--ratio of value of profit to value of capital--goes
- 7. And in fact both happen
- a. Share to profit goes down because
share to labor goes up
- b. And value of capital goes up,
because it is largely advanced wages, hence amount of
capital to support a given amount of labor goes
- c. The value of total profit might go
up, however, since capital is accumulating, hence labor
is increasing, hence total value produced is increasing.
So a smaller share could still be a larger
8. At any instant, rent measured in corn
is the excess of the corn output of the more fertile land
over that of the marginal land--since all corn, labor, and
capital gets the same price, and marginal land must just
cover its costs.
- 9. With progress, the margin moves
farther out, raising rent in two senses
- a. Corn rent goes up, because the
difference between a given piece of land and the marginal
piece goes up as we move to worse and worse marginal
- b. Money rent goes up even farther,
because the value of corn is determined by the inputs
needed to produce it on marginal land--which are
increasing as we move to worse and worse marginal
D. Ricardo runs through the logic of this
model by looking at the effect of various possible
- 1. Tax labor, wage rate rises
accordingly, the tax gets paid out of profit
- 2. Tax necessaries, wage rate rises
accordingly, tax paid out of profit and out of necessaries
bought by rich consumers
- 3. Tax corn, its price rises
- a. Wages rise, profits
- b. After tax rents, measured in corn,
fall, since the excess production on the more fertile
land is being taxed too, but ...
- c. The price of corn is rising
proportionally, so money rents stay the same.
- d. Tax is paid by capitalists and
non-poor consumers of food.
4. Tax the farmer's profits
- a. Price of corn rises enough to
bring agricultural profits back up to other
- b. Rent comes from additional corn
produced with the same amount of labor and capital, so
corn rent remains the same
- c. So money rent goes up.
5. Tax agricultural rent.
- a. If you can really tax rent in
Ricardo's sense, the tax will be paid entirely by the
landowners, but ...
- b. Part of what looks like rent is
really profit on the landowners (frequently sunk) capital
investment on the land.
- c. So you are in part taxing the
profits of a particular sort of capital.
- d. If investing that capital is
important at the margin (i.e. if output is expanding, so
that the marginal cost of corn includes the profit on the
sunk capital used to bring new land into production, or
raise output in old land) then this tax raises the price
- e. Note that he discusses this issue
in two chapters, one on taxes on rent and one on Poor
6. Land tax.
- a. If proportional to rent, then a
rent tax, see above.
- b. If a fixed tax per acre on
cultivated land, it increases marginal cost of
production, leaves corn rent unaffected, raises money
7. Gold tax: Could be a burden free
E. One oddity of the discussion is that at
this point he ignores both substitution of inputs in production
(labor for capital or vice versa) and substitution in
- 1. So in figuring out the effect of a
tax, Ricardo asks who has less money as a result, and how
that person would have spent his money, but usually not
- 2. What actions result in your paying
more or less of the tax, hence what activities are
discouraged or encouraged by the tax.
- 3. In particular, he seems to regard
demand for agricultural output as entirely
- 4. And he usually ignores the effect of
the profit rate on the accumulation of capital, except when
the rate gets so low that accumulation stops.