david ricardo, on the principles of political economy and taxation

(xxxv-xxxvi): key--Ricardo correcting Smith's 'original error respecting value'. for Ricardo, the value of a thing was regulated by the quantity of labour required for its production -- not by the remuneration of that labour (this was Smith's 'adding up' wages, profits and rent, and saying all enter as component parts). Smith, Ricardo argued, limited his theory to the 'early and rude state of society', before capital had accumulated and private property appeared. This was wrong.

(11): definition--value of a commodity depends on the relative quantity of labour that is necessary for its production (not, as Smith argued, on the greater or less compensation paid for its labour).

(11): all he's adding, about use-value, is that use-value is a prerequisite for something to have an exchange-value.

(12): commodities derive their exchange value from two sources:

1. scarcity (some commodities get their value from scarcity alone: rare statues, scarce books, wines, etc. -- their value is independent of the quantity of labour required to produce them; nonetheless this is a very small part of the mass of commodities daily exchanged in the market)
   
2. quantity of labour required to obtain them
   

(14): Smith's confusion--his first standard (which Ricardo shares) is invariable; but the second (what it will fetch) varies with fluctuations in the exchange-value of the commodities to which it's being compared.

(22): constant capital--not only the labour being applied immediately affects commodities value, but also labour in the form of implements/tools/buildings (like Smith, understands it as 'past labour')

(24, 27): for relative prices, Ricardo is arguing, it doesn't matter whether profits are high or low, or whether wages are high or low, since this operates equally on both employments [this, of course, is modified when we consider the impact of K-L ratios]

(30): introducing the question of machinery and other fixed capital -- now introducing different K-L ratios, which becomes another cause for variations in relative prices.

(31): fixed/circulating distinction, for Ricardo, is all about durability

(32-35): key--a rise in wages (i.e., declining profit rates) will affect two employments with different K-L ratios differently. the relative value of those employments with lower K-L ratios will rise (so, in the example here, corn vs. cloth/cotton goods). in other words, commodities produced by very valuable machinery would fall in relative value, whereas commodities chiefly produced by labour would rise in relative value.

(36): this effect, though, is comparatively 'slight'

(38): what follows from the above, of course, is the recognition that durability and rapidity with which fixed capital is worked up matters also--the closer something gets to being circulating capital, the more its price will rise relative to commodities produced in manufactures involving fixed capital.

(43-44): an invariant measure of value -- closest thing to this is relative labor costs, but this, of course, is subject to variations on account of different proportions of K-L ratio (and the impact of rising/falling prices, then)

(46): so, unlike Smith, a rise in the price of labour is not uniformly supposed to lead to a rise in prices. relative prices will depend on K-L ratios

(48): rise/fall in the price of money should not be treated as affecting the value of other commodities; should be understood as a rise/fall in the value of money

(49): similarly, we should not judge the share going to rent/profit/wages in money, since money is variable--we should have some sense of the real quantities going to each.

(67): rent as that portion which is paid to the landlord for the use of the original and indestructible powers of the soil [Smith, Ricardo will add, despite having this kind of a definition, will often confound rent with profit (example of the forests in Norway; Smith thinks rent is involved, whereas it is clearly profit)--pg 68]

(69): if there is bountiful land, there will be no rent (this is why there is rent on land, and not air/water, etc.)

(70): key--differential fertility begets rent (it is when land of inferior quality is called into cultivation)

(71): rent is the difference between the produce obtained by the employment of two equal quantities of capital and labour

(74) : imp--a progressive rise in prices is the effect of the fact that more labour is employed in the production of the last portion obtained (not because a rent is paid to the landlord). the value of corn is regulated by the quantity of labour bestowed on its production. 'corn is not high because a rent is paid, but a rent is paid because corn is high'

(75): Ricardo solely sees natural factors

(77): imp--the rise of rent is the effect of the increasing wealth of the country (i.e., via increassing pressures on the land); a symptom but never a cause of wealth.

(79): Ricardo does acknowledge that productivity gains can offset the rise in rents (because less fertile land can be called back from cultivation. but this takes two forms: (1) increase in prod. of land, and increase in (2) prod. of labour. the former allows us to cultivate less land; the latter matters, but only if it narrows the difference between the least and most productive. [confusing, though, because wouldn't absolute gains in the productivity of labour go some way towards calling back land from cultivation, thus decreasing rent in this way, too?]

(83): the landlord gets a double benefit: (1) a greater share, due to increasing differentials between lands in cultivation; (2) commodity he's getting is of greater value.

(88, 91): the equalization of profit rates (i.e., competition) is critical in ensuring balance\

(93): natural price of labour is the subsistence price (needed to perpetuate their race without increase or diminuation

(93): with the progress of society ,there is a tendency for the natural price of labour to rise, because the principal commodities by which its natural price is regulated has a tendency to become more expensive

(94): when mkt price is above nat price, workers are flourishing; when market price is below natural price, condition of labourers is wretched.

(95): capital can increase in quantity when:

1. value of capital is rising (because of additional quanity required to produce food/clothing), so wages will rise, but the condition will not be improved dramatically because of greater costs
2. value of capital is stagnant, so wages will rise, and condition of the labourer will be greatly improved.
   

(96): imp--in other words, the permancence of the rise of wages will depend on whether the natural price of labour has also risen.

(97): natural price also depends on habits and customs (a 'moral' component)

(97): rise/fall of wages have two causes:

1. supply/deman of labour
2. natural price of labour (price of the commodities on which the wages of labour are expended)

(98-99): enter Malthus -- power of production will soon be superseded by the power of population, which means that the tendency to an increase of capital diminishes (only remedies are reduction of people, or a more rapid accumulation of capital--the latter is difficult in rich countries, where fertile land is already cultivated)

(101): thus, natural advance of society displays tendency for wages to fall -- for the supply of labourers will continue to increase, while demand will increase at a slower rate.

(102, 112): important--the advance of society will also tend to raise wages, of course, because the costs of reproduction are higher as productivity in wage goods declines due to pressures on the land. this is true of rent too, Ricardo's noting. but rent and wages are also different. landlords will be gaining real advantages, because it is not just money rent that is increasing--they're also getting more stuff. wherease workers are getting higher money wages, but not more stuff (nominal rise)

(106): against the poor laws, of course

(107): but in favor of population control

(111): discussion of why a capitalist farmer's profits would be affected by the gradual rise in the value of raw produce--the explanation is that the possible gains in his profits (because of a higher price, despite higher wages) would be captured by an increasing rent burden. this, of course, is the result of the equalization of profit rates: farmers on lands of lower fertility are paying the high wages that have resulted from bringing new land into cultivation. the farmers can't make more profit than this new competitor, of course. [sharpen with the shaikh email]

(114): the real value of the farmer's share is stagnant -- and then, of course, he has to pay an increasing sum to his labourers. this is the crux of the falling rate of profit argument in Ricardo -- a secular rise in the price of raw produce.

(124): this doesn't mean that the total social product is decreasing--in fact it is increaseing even if profits are declining.

(126): the laws of nature are the ultimate arbiter, insofar as the argument hinges, in the last instance, on the limits to the productive powers of the land.

(289-290, 296): imp--responding to Adam Smith's argument re: the falling rate of profit, Ricardo is clear that the mechanism is actually the rising price of raw produce due to pressures on the land. Smith has an argument rooted in increasing competition, etc., but Ricardo uses Say's law to dispute this.

(388): machinery can actually be injurious to the interests of w-class (not for capitalists, not for landlords. seems like the argument depends on the degree of productivity that comes from implementation of machinery--Ricardo's concern is that the 'boost' might not be enough to compensate for the diversion of capital into machine-production/constant capital [I think this is the argument]

(400): rent is a creation of value, not wealth (as in, when it gets more difficult to produce raw produce, you have an increase in the value of raw produce, but not an increase in actual wealth)

(404): against Malthus, who thinks rent rises and falls with absolute fertility; Ricardo has an argument about relative fertility

(418): Corn Laws debate with Malthus

anwar shaikh, david ricardo (lecture 5 – 09/28)

Ricardo wants to know how to establish the relative influence of the relative capital-labor ratios (viz-a-viz the Z_ij term which involves the calculation of average profit-wage ratios)

(1) Numerical illustration (so the spreadsheet shows that K/L difference of 100% translates to a price difference of 10%)

(2) Z_ij depends on the profit rate. So let me hold everything constant, but vary the wage rate; even if you bring the profit rate down, enormously, relative prices will still not vary much more than 7%. The change in the relative price, in percentage terms, is going to be less than roughly 7%. [Here we have the discussion of Schwartz and the ingenious idea to compare peak to trough, which has the effect of keeping technology constant amidst turbulence—profit rates drop in a recession, but he showed that relative prices aren't terribly sensitive to a drop in profit rates]

Ricardo says that the market wage oscillates around a 'natural price of labour'--what is this natural price? It depends on the quantity of food, necessary, and conveniences which have come to be habit for the reproduction of labor. It's not a physical subsistence wage; it's a social process of producing a standard of living (pg. 96-97).

Ricardo's Theory of (Differential) Rent

We are not discussing the 'leasing' of produced goods (that's going to be derivative of the 'selling' of produced goods).

Ricardo proceeds instead in the following way.

At the beginning of the story, the price of corn is based on the cost plus the natural profit rate. But as you proceed towards less and less convenient and then fertile land, the productivity of labour will fall. The costs of production on less fertile and more fertile land will be different. Those on good land, of course, will then be able to mark up a bit. This is where rent, for Ricardo, arises. (Note that the transition from Land A to Land B depends on the price having increased enough to make it possible to make normal profits on Land B, which is a result of demand putting ever-increasing pressure on supply)

What about technical change? Well it will lower the price of corn—but it will also lower the price of steel. But there is still something specific about the price of agricultural goods, because of relative differences in fertility on land (is this why? Marx will object to this, arguing that technical change can obviate differences in fertility). For this reason, though there are various forces on this ratio, the ratio of price of agricultural goods to the price of industrial goods will rise (because the price of corn is on an upward tick, all else being equal).

The connection to rent, then, is fairly clear. It is the landlord's charge for the 'excess profits' (I can't charge you more, of course, otherwise you'll pick up and leave). The question of the length of the lease, of course, relates to this dynamic—for the producer it's better to have a longer lease b/c prices will be rising (a fixed rent), but for landlords it's the opposite.

Rent, remember, is not just affiliated to a specific class—it's an economic category. So even if I'm my own landlord, I will get an abnormal return (it will be profit + rent).

(There's a question, also, of what determines 'rent' on the very first plot—Marx will speak about this as 'absolute rent')

(A link to the question of excess profit between firms, too—can treat 'new lands' as 'new investment'. So if you want to measure the rate of profit you want to look at the rate of return on new investment, Shaikh is arguing).

If you follow the 'tiered' logic of Ricardo's argument, you will see that rent is going to rise persistently (as you move to less and less fertile land). So we've established that (1) the price of corn is going to rise, that (2) rent is grounded in the difference between ruling natural price and natural price on better lands, and that (3) rent is going to rise.

Now we may want to know about the price of land. It is, for Ricardo, the presently-discounted value of expected income from that land. It is not from the cost of land, of course, which is effectively zero, (The price of land, of course, will as a result be dependent on the interest rate. If you have land that yields rent of $100 and the interest rate is 10%, you'll sell it for the equivalent of a bond equivalent in years to the expected longevity of the land)

There is also, in Ricardo, an acknowledgement that an element of 'risk' enters into the calculation of the profit rate.

Finally, for Ricardo, the thing that makes landlords richer and richer also kills capitalists. This is Ricardo's theory of the falling rate of profit (Smith saw this, but didn't have an explanation). Because of the diminishing fertility of land, the ruling profit rate will fall (since it's set at the margin).

[There's a claim, here, about the determination/identification of the profit rate that I don't fully understand—which presumably explains how the profit rate in corn ramifies throughout the economy -->The answer to this last question, of course, is through the wage-basket. The productivity is declining in wage-basket production, which means that the price of labour will rise. And this will be behind the declining rate of profit.]

[Also interesting question regarding the relationship of the profit rate to the interest rate. Smith will argue that they're proportional. Shaikh is making the point that it will depend centrally on inflation/the price level].

anwar shaikh, adam smith/david ricardo (lecture 04 – 09/21)

key, Smith's argument re: labor and price: the ratio of the price of two commodities will be equal to ratio of labor time of these two commodities if (a) all value added goes to labor; (b) part of value added goes to labor, rest goes to capital/landlord, but in the same proportion for both. (c) but natural profit in a sector is not determined in proportion to its labor time but rather in proportion to its capital (because the natural profit in any sector is the uniform rate of profit multiplied by the amount of capital invested. So obviously, if the capital labor ratios are equal across sectors, then the natural profit is also to proportional to labor in each sector, which means that natural prices are still proportional to labor time) [the equation is: natural profit = rate of profit multiplied by capital invested ]

1. what determines the uniform rate of profit? we want to know what determines the size of this difference, which will be influenced by the rate of profit?

2. what causes the difference in capital-to-labor ratio? differences in the capital labor ratio can cause differences between relative prices and relative labor-times – how do they do this?

There is a deep logic to this. Ricardo is going to answer these two questions that Smith leaves unanswered (indeed, he's going to start with them).

- - - - -

the first question that Ricardo addresses: what determines the profit rate? let's suppose that we abstract away from differences in capital-labor ratios, and think of the output as one whole (made of parts of the same substance). Ricardo will argue that this is justified, because you can represent things in terms of common inputs/outputs.

this is where we get Ricardo's corn-corn model (economy as a single sector).

Ricardo's answer is that it will depend on the conditions of production in corn (abstracting, remember), and the wage rate.

you have a hundred workers, and your wage rate is .008 corn bushels/worker

you will need .8 bushels of corn in advance, of course.

you will employ these .8 bushels in the course of production

your output for these hundred workers is 1 bushel of corn (remember, your output must be greater than your cost, for this to make sense)

the profit is .2 bushels of corn.

your profit rate (profit divided by capital) is 25%

here it's very clear, then, that the profit rate is dependent on the level of technology and the wage rate. he's solved the first problem in Adam Smith, which is the question of the determination of the profit rate.

we have more.

what happens if I was to raise the wage rate, to .009? profit goes down, as does your profit rate. So Ricardo establishes the antagonistic relationship between wages and the profit rate.

economists will say, “but the economy is not one sector?”

Sraffa's reply was simple. think of this model as an average sector, which becomes the center of gravity of a complex economy (any given wage in that sector will give you the profit rate). this sector will have the property that outputs and inputs will be made of the substance.

so we have an argument not just about a single sector, but about a general sector (Marx has a concept of the “standard industry,” which he doesn't develop).

the second question relates to the issue of relative prices. when we have acknowledged that capital-labor ratios are not equal, how do differences in the capital-labor ratios affect relative prices? (see spreadsheet—the difference between the capital-labor ratios is 'muted' in the difference in relative prices)

to look at the effects of differences in the wage rates, you increase the wage rate in the corn sector (which raises the prices). But you will see that this doesn't greatly affect relative prices.

having done this reasonsing and analysis, Ricardo's hypothesis is that relative prices are not very sensitive to distributions in the changes of income. the dominant determinant is the capital-labor ratio, and the secondary element is the distributions of income.

(NB: the natural price is not necessarily the price you will get on the market, remember—you have to fight for the natural price)

Ricardo couldn't run this whole thing empirically, because he didn't have any information on direct and indirect labor time. We, however, have input/output tables, which were started by the Soviets, but are now published regularly.

the main point of all of this is that the center of gravity is set, structurally. the second row in Shaikh's table (Price of Production vs. Market Price) would suggest that supply/demand, taxes, monopoly, etc. can only explain 8.2% of the deviation from Mkt Price.

anwar shaikh, why classical political economy (lecture 01 - 08/30)

classical economists asked this question: how can we have patterns of recurrence? how can g. depressions recur?

the surprising answer, though, is that capitalism does not work through individuals' intentions. it runs 'behind their backs.'

the market possesses powerful internal structural patterns that emerge from the centrality of the 'profit motive'

what happened in the 1930's?

the system broke because the profit motive led it to that outcome.

the key point is that the classical tradition sees the system in these terms, in terms of a pattern (boom + bust)

classical economists do not mean the same thing as the modern orthodox economists by 'equilibrium'. they see boombs past it, and busts below it--whereas the orthodoxy is content to understand the economy at equilibrium.

neo-classical position--the idea is that equilibrium is a state of rest ("attained and held state"). a gravitational attractor. you're entitled to view equilibrium as a pretty good approximator of reality (analogy to a pendulum)

classical position--the equilibrium point is itself not fixed, and the system can itself move around it. we want to talk about equilibrium points, then, but as 'turbulent regulation.' order in and through disorder. the pattern occurs through overshooting and undershooting.

- - - - - -

what is it specifically about classical economists that distinguishes them from neo-classicals?

neo-classicals

1. self-interest as the primary human motive--rational economic man makes all decisions.
   
2. utility maximization--not just as a principle for understanding firm-level decisions, but also as a principle of behavior
3. firms are price-takers, they all take a common price. competition forces firms to produce at a common price (a competitive economy)
4. profits, wages, and technology is all equal between firms. everything is studied at equilibrium.
   
5. full employment is a stable and regular outcome. if there's unemployment, wages will be bid down, and workers will be hired (unemployment is a feature of government intervention, distortions, etc.) [remember, neo-classicals aren't worried about demand]

keynes and post-keynes

arose in a post-depression context. central argument is that economy can get stuck in a state of persistent unemployment, if there's a lack of demand. unemployment, in other words, is a feasible equilibrium state.

in this context you need the state. the state becomes an important complement to the market. to 'push' it up to a full employment state of existence, which can be a 'higher-level' equilibrium

classical

the inventors of modern economics, and in search of a deeper answer to these questions. unemployment, for example, can be sustained easily, if there aren't profits to be made.

you can't re-open factories if private profit is the dominant law, even if it's socially desirable.

a better understanding of the world we live in is offered by the classicals.

key features of classical political economy

1. economic acts are embedded in a social context. not abstract agents/firms, but embedded (this opens up possibility of thinking about race, gender, etc.)
2. focus is on industrial capitalism (not merchang capitalism, etc.)
3. emphasis is on the 'laws of motion'--patterns produced by capitalism. system is always 'changing and moving'
4. emphasis is also on competition, which has its own hierarchies and forms (amongst workers, between nations. the dominant form is between firms)
5. order in and through disorder
6. expansion and growth are inherent. the system is always moving.
   
7. incentive to mechanize is inherent in the system
8. conflict between private aims/incentives and social goals.
   
9. the state now appears in a very different light, as compared to both the neo-classical and keynesian models. classical economists are more likely to see the State as a State of the 'system.' a conflict between the profit motive and State intervention.
   

the main point--the purpose of the course is not to study dead economists, but about an alternative vision of the system we (today) inhabit.