The Ricardian system

In the Ricardian system, economic growth is frequently viewed as if all demographic adjustments depend on the fact that the stock of capital is not yet optimally adjusted to the labour force and the supply of available land. So the rate of profit varies with the strength of diminishing returns; Ricardo did use corn as a measure for aggregating the heterogeneous inputs of agriculture on the assumption that all prices rise and fall with corn prices, and he also employed arithmetical examples in which all inputs and outputs of both agriculture and manufacturing are expressed in terms of corn. In normal circumstances, a change in the terms of trade between corn and cloth will alter real wages and hence will upset the proposition that the profits of the farmer regulate the profits of all other trades. In fact, the landowners, who also earn very high incomes, do not save because the accumulation of wealth is not among their aspirations; on the other hand, the workers who earn subsistence wages, do not save because they have nothing to save. However Ricardo admitted that technical innovations, by increasing the productivity of labour, could also induce increases in profits, he believed that such affects would only be temporary and would reactivate the catastrophic effects of decreasing returnsHe did emphasis the quantitative importance of labour inputs and in particular their strategic role in bringing about changes in relative prices over time, the approximate ratios in which goods exchanged are quantitatively influenced more by relative labour costs than by, say, relative interest charges. Therefore, labour costs do dominate total costs in almost all industriesThe price of a good in the long run is equal to its wage cost plus a profit margin on the capital advanced. Ricardo assumed that the purchasing power of money over all goods and services, as measured by the average level of prices in the economy, is constant and hence that distribution is a matter of dividing a given real national product among landlords, capitalists and labourers. The fact that capital-labour ratios differ among industries means that any change in money wage rates or the rate of profit necessarily alters the structure of prices and therefore the value of the product.

Say’s law

In an economy with an advanced division of labour, the means available to anyone for acquiring goods and services are the power to produce equivalent goods and services. Production increases not only the supply of goods but, by virtue of the requisite cost payments to the production factors, also creates the demand to purchase these goods. This is the core of Say’s Law of Markets: while it is possible for a particular good to be produced in excess relative to all other goods, it is impossible for all goods to be produced in relative excess. That is the impossibility of a general overproduction in the economy. Summing over all the n goods (commodities plus money) demanded and supplied, this identity can be written as:

This identity (called Walras Law) simply states the logical impossibility of oversupply of all goods in a barter economy where money is only accounting money. This strong version of Say’s Law is called “Say’s Identity” which states that the money market is always in equilibrium because, regardless of prices, economic agents supply commodities only to use the money received to demand other commodities immediately. This implies that a change in the price level is no way disturbs the relations between commodity markets and the money market. Translated into the ‘homogeneity postulate’, this means that excess demand functions for commodities depend only on relative prices and not on the absolute price level: the demand functions for commodities are homogeneous of degree zero in money prices. In a world in which Say’s Identity holds, money is only a ‘veil’ which can be lifted without affecting the analysis of relative prices.

Date: 2016-01-14; view: 499