David Ricardo’s Theories

David Ricardo’s Theories

David Ricardo was a British Political Economists and one of the most prominent figures who contributed to the development of economic theories. Born on April 18, 1772, Ricardo started his career at an early age. At 14 years, Ricardo was involved in his father’s business who was a successful stock broker. In 1793, Ricardo converted from Judaism to Christianity after marrying his longtime girlfriend, Anne Wilkinson. As a result, his family disowned him, and he stopped helping his father in the business. From then, he started his career as a stock broker and later on in the field of economics.

David Ricardo gained interest in economics after going through Adam Smith’s literature The Wealth of Nations. He focused on economic policies and how they affect the economy. Among his theories is the labor theory of value which stated that the price of a good or service was affected by the amount of labor used in producing it. The theory of comparative advantage stated that when two countries are involved international trade, both countries benefit since a zero sum gain does not exist. Other approaches include wages, profits and rent. He distinguished his approach to economics by focusing on the theoretical and quantitative approach rather than a contextual approach.

  1. Labor Value of Money

David Ricardo presented the Labor of money to prove that labor has a natural and market price. The natural price of labor refers to a rate that allows laborers to live. When an increase in the price of food occurs, the natural price of food also increases. Likewise, a decline in the price of food leads in a reduction in the natural price of labor.

The natural price of labor has a tendency to rise with the progress of the society. However, the growth may be slightly altered by changes such as agricultural automation and the discovery of new markets. Their natural fall may also occasion food and other necessities, hence, a corresponding decrease in the price of labor. The average price of labor is that price that is paid work done from the operation of the quantity of supply to demand.[1] When labor is in plenty, the price paid for it is low while the price is high when labor is scarce.

The condition of laborers flourishes when the average price of labor surpasses its natural price.[2] The laborers have the power to command a lot of necessaries and, therefore, can bring up a healthy family. When a high wage rate is given and encourages the population, the labor force may increase, resulting in a decrease in the price of labor to their natural price. It may also fall below the natural price of labor if a reaction occurs. A drop in the price of labor affects the lifestyle of the laborers. The poverty experienced deprives them off the necessaries that they enjoy. It is only after an increase in demand for labor that the average cost of labor will increase to the natural price, and the labors will lead a comfortable life which the natural rates of wage will afford.[3]

An improvement in society and an increase in its capital will affect the labor force. As a result, the steadiness of the rise will be contingent to whether the natural price of labor has also increased. The increase in the natural price of labor will be determined by the increase in natural prices of products on which labor wages are expended.

  1. The Theory of Comparative Advantage

Ricardo in his arguments recorded that comparative advantage refers to the capacity of a part to produce  goods or services at a lower marginal and opportunity cost that the other party.[4] On the other hand, the law of absolute advantage refers to the ability of one party to produce a good at a lower absolute cost.[5] Therefore, countries engaging in international trade can generate value for each other even when one of the parties can create most of the products and services they require.

David Ricardo uses the example of England and Portugal to illustrate the theory of comparative advantage. As such, he finds that Portugal employs 80 men to produce its annual wine supply.[6] Thus, the labor value is 80 years of labor, and the value of Portugal cloth production amounts to 90 years of labor.[7] In this case, years of labor represents the amounts of labor time an average worker takes in one year.

England produces the same amount of cloth and wine it had higher labor productivity than Portugal due to the lower labor productivity in England.[8] England must spend 100 labor years to produce its annual supply of cloth and 120 labor years to produce its annual wine production.[9]

In Portugal it is relatively able to yield wine and cloth with less labor than it would cost England to produce the same quantities.[10] This is because Portugal takes 170 years or labor while England takes 220 Labor years. In England, it is relatively hard to make wine and abstemiously challenging to produce cloth. However, Portugal can produce both goods at a relatively cheaper way. It is, therefore, inexpensive to make cloth in Portugal than in England. It is also cheaper for Portugal to produce excess wine and buy cloth from England. England benefits from this type of trade since it trade wine at a less price, close to the cost of producing cloth. In conclusion, each country can benefit from the trade by specializing in the goods they have an advantage in and trading it for the other good.

  1. Theory of Rent

David Ricardo defined rent as payment for the use of the only land for the original powers of the soil. The return on the investment made by the landlord, after it is deducted from the contractual rent, what remains in called land rent. The law of rent applies to land in the urban and rural land.[11] Ricardo was mainly focusing on the economic rent and locational value and not the soil alone.

Rent arises from the difference existing in the productiveness of different soils place under cultivation for the purpose of supplying to the same market. The amount of rent will be determined by the degree of productiveness of the land.[12] The productiveness depends on the fertility and location.

Ricardo views the supply of land from the societal perspective. The scarcity of land gives rise to rent. If the problem of scarcity did not exist, land rent would not exist. When land units appear as homogenous, land rent arises. Therefore, land rent arises due to scarcity and quality of lands.

Were the Theories Accurate?

The arguments presented by David Ricardo have attracted criticism and support in equal measure. The theory of comparative advantage stated that citizens of each country involved in the trade are well of specializing in creating goods or services which they have an advantage in, even if one nation has an absolute advantage in producing all of the goods or services (Bouare 107). Critics argue that in trade, there is a need for trade restrictions to facilitate the economic development of countries. The critics hold that the theory of trade is not a continuous process and is sometimes affected by natural disasters that can disrupt the production process.

The labor value of money is still applicable in the modern society. When the average price of labor is higher than the natural price, the laborers lead a healthy life since they earn a favorable wage. However, a favorable wage encourages the members of the population who then join the labor force, resulting in a decline in the wage rate. The decline affects the condition of life of the workforce. If the demand for labor rises, then an increase in the workforce will occur. The situation presented by Ricardo is still prevalent today and the market price of labor affected by some factors. The factors also have a corresponding effect on food and other necessaries.

Might they be useful in the present?

Ricardo’s theories are still applicable in the present. Ricardo’s theories of economics lay a foundation for economic analysis, and other economists widely borrow his work. Modern economists use Ricardo’s theory of rent to explain why agricultural prices support do not help farmers as expected but make land owners wealthier. The changes in labor market prices are also explained through Ricardo’s theory of labor value of money. Though Ricardo’s theories were presented several centuries back, his analysis and examples are still widely used to explain changes that occur in the economy.

KARL MAX’S ECONOMIC PHILOSOPHY

Karl Marx is best referred not as a philosopher but as a revolutionary leader. Further, he was an outstanding sociologist, journalist, and economist. He was born in 1818 in Trier, German Rhineland. Marx remains the most influential socialist thinker and the founder of the system of thought commonly known as Marxism. Marxism formed the basis of communist and socialist movements around the globe. As a result, he considered communist theories. Trained as a philosopher, Marx shifted from philosophy to economics and politics in his mid-twenties.

Marx’s works formed the basis of many communist regimes during the twentieth century. Marx most notably writing works includes ‘On the Jewish Question’ and ‘Contribution to a Critique of Hegel’s Philosophy of Right, Introduction.’[13]  Later he co-wrote on theories of history ‘The German Ideology’ with Engels in 1845.[14] Although the Communist manifesto does not form the best guide to Marx’s thoughts, nonetheless, it remains the widely read works of his time.

He went into exile from his native Prussia in 1849 to Paris. Later he returned to Germany in 1848 to participate in the revolution. However, the revolution failed, and Marx went to London where he stayed there for his entire life. It is at that point that he focused on the study of economics. His most pronounced economic works include the famous ‘capital (volume 1)’ published in 1867. Marx’s works in economics formed the basis of understanding the relationship and distinction between labor and capital.[15] Economists do agree that Karl Marx’s works are applicable in the modern world

Karl Marx’s works formed a significant part of history. Therefore, magazines and even newspapers published some of his works in fields such as economics, religion, and politics. For instance, the official newspaper of the Vatican concurred with Marx’s analysis of pay inequality, an endorsement to Das Capital.[16]

  1. What was his Economic philosophy?

Marx’s economic philosophy consists of a vast range of topics ranging from private property and communism as well as Marx’s critique of Hegel.[17] However, the larger part of his economic philosophy revolved around alienation of labor through capitalism. Capitalism refers to working towards acquiring benefits and efficiency which would naturally lead to the need for fewer workforces. Therefore, this would mean a significant percentage of unemployed people would suffer in poverty.

Marx’s thought on capitalism came as a result of the constant rise of misconception and strife that existed between labor and capital. On the contrary, most economists of his time could not figure capitalism well. Karl Marx believed that economics is the significant part and determinant of human living. Karl Marx maintained his idea that throughout history, people have always been aroused by material belongings and worries. Therefore, humankind always cooperated and united for this course, and this affected the economy positively

However, as seasons changed, people changed as well until they had the concept of agriculture and the urge to own private property grew among them. As a result, specialization and division of labor emerged and was based on individual’s level of force and wealth. The move, however, received resistance from the capitalism as it saw the differences that existed between the wealthy (bourgeoisie) and regular workers (proletariat).

In his first manuscript on economic philosophy, Karl Marx talks about estranged labor.[18] He believed that with a system that cherished private ownership of assets, the society would divide itself into two classes namely: the property owners and the property-less workers.[19] In this type of society, the labor force suffers from not only abject poverty, but also from alienation from the fruit of their labor.[20] The separation occurs as the worker cannot afford the products of his or her effort. The proletariat puts his life and invests his labor into the object, yet he does not own the end products in a capitalist society. Therefore, the more he produces, the more, he remains estranged. Therefore, the worker shrinks contrary to the world of objects that he invests his labor in production, yet he does not own.

The second alienation according to Marx is the split-up of the worker from the production activity.[21] The worker does not own the work that he performs, but he does so for survival. Therefore, the worker’s activities do not emanate from within as a normal act of inventiveness, but rather from external pressure that signifies the loss of self.[22]

Karl Marx further explained the third alienation which is the worker’s alienation from human identity.[23] For humankind, work drives individuals to a life purpose. The progression of acting on to create useful products brings the vital status of a person. However, in the current system of division and ownership, Marx foresaw the separation of the worker from this crucial source of identity and meaning.

On the last alienation, Marx saw the separation of man to man.[24] Since the labor outcomes are owned by someone else, the worker regards the owner who is the capitalist as an alien and hostile. Further, the employee feels alienated from the whole system as owner uses both objects of making for his benefit.[25] At the same time, undermining of the worker’s sense of identity and wholeness as a human being occurs.

Marx in his economic philosophy views production as a process of converting raw materials into sustainable products. Marx considers the manufacturing process as critical in contributing an individual’s uniqueness and sense of place in the world. However, he sees capitalism as undermining work as a source of identity and place in society. The poor in society are left with no choice but to offer their productive capacities and their worth to the bourgeoisie.[26] The outcome is frustrated and unsatisfied workforce. The workforce eventually turns against the capitalist and system of private property which are their source of frustrations. Karl Marx saw the solution to alienation as communism. Communism does away with the system of private ownership that creates frustrations among the workers.

Karl Marx believed that class struggle would bring about changes in the mode of production in the society. Also, class struggle would shape each historical period and drive historical change. Therefore, Marx believed that the capitalist mode of production enables the bourgeoisie to exploit the proletariat.[27] However, a social revolution must occur so as to establish the dictatorship of the proletariat with the aim of achieving public ownership of production, distribution, exchange as well the self-emancipation of the middle class (Library of Congress 2).

  1. How and why has his economic philosophy been so widespread as well as controversial? Explain.

Marx’s economic philosophy has become widespread especially in the modern century. The current economic problems experienced globally points out the predictions stated by Karl Marx. Some bourgeoisie economists are increasingly accepting the idea that capitalism in itself has its destructions.[28] For instance, the current economy consists of an anarchic and chaotic system that brings about periodic crises which force people out of work in addition to causing social and political instability. A good example is a crisis of the Euro in 2008 that evidently showed that the bourgeoisie has no idea on how to solve the problems of the Greece, Italy, and Spain. These problems, in turn, threaten the stability of the European common currency as well as the European Union.

Following the 2008 economic crisis, Gordon Brown himself proclaimed ‘end of boom and bust’. Further, in a seminar held in London on July 2009, people were concerned with the question, ‘what is wrong with the economics?’ Many people wrote various articles that concurred with Marx’s ideas of capitalism. Therefore, Marx’s ideas have spread widely as many people have seen the practicality of Marx’s ideas in our current economy. Hence, people are turning to Marx’s theories to find solutions to the current crisis on the modern economy. In fact, George Magnus, who is a senior economic analyst, wrote an article titled, ‘Give Karl Marx a chance to save the world economy.’[29] He further wrote that current global economy resembles what Marx had foreseen. Further, George explained how United States companies’ strategy of cutting costs while avoiding the employment of new employees boosted the U.S corporate profits considerably for the last decades. On the other hand, the unemployment rate stood at a considerate high level and real wages became stagnant.

Karl Marx’s economic philosophy in particular capitalism received a lot of criticisms on various perspectives. Objections ranged from those who differed from its principles to those who could not concur with specific outcomes of capitalism. Further, some individuals felt that other means of production and social organization should replace capitalism.[30]  Based on that, a distinction was made between those who believed that revolution such as revolutionary socialism could replace capitalism with those who thought that structural change could occur through political reforms to capitalism such as classic social democracy. Therefore, a public debate existed for a long time with regards to Marx’s economic philosophy since different people hold dearly their distinct views about capitalism.[31] However, with the current economic state most people including some bourgeoisie economists have concurred with the Karl Marx’s economic philosophy. As a result, some are seeking to understand his ideas so as to find solutions to the current economic problems including rising levels of unemployment.

 

Works Cited

Bouare, Oumar. “An Evaluation of David Ricardo’s Theory of Comparative Costs: Direct and Indirect Critiques.” Journal of Economic Development 34.1 (2009): 99-123. Print.

Findlay, Ronald. Comparative Advantage. Ed. John Eatwell, Murray Milgate and Peter Newman. London: MacMillan, 1987. Print.

Library of Congress. Stanford Encyclopedia of Philosophy. Ney York: Library of Congress. Print.

Mandel, Ernest. Formation of Econ Thought of Karl Marx. New York: NYU Press, 1971. Print.

Marx, Karl. Economic & Philosophic Manuscripts of 1844. Moscow: Progress Publishers, 1959.

 

Michael, Hardt. “The common in communism.” Rethinking Marxism 22.3 (2010): 346- 356. Print.

Negri, Antonio. “Karl Marx’s Grundrisse: Foundations of the Critique of Critical Economy 150 Years Later.” Rethinking Marxism 26.3 (2014): 427-430. Print.

Prychitko, David. “The Concise Encyclopedia of Economics.” econlib.org.  Library of Economics and Liberty. 2008. Web. 3 April 2016.

Sammut , Vince. David Ricardo and the Theory of Economic Rent. New York: University of Mata, 2005. Print.

Schneider , Michael. “The Discovery of the ‘Ricardian’ Theory of Rent-Mutiple and Therefore Exceptinal.” uwa.edu. Victoria School of Econom. 2005. Web. 3 April 2016.

 

[1] Ernest Mandel, Formation of Econ Thought of Karl Marx (New York: NYU Press, 1971) 52.

 

[2] Mandel 55.

[3] Mandel 50-60.

[4] Ronald Findlay, Comparative Advantage. Ed. John Eatwell, Murray Milgate and Peter (Newman. London: MacMillan, 1987). 515.

 

[5] Findlay 515.

[6] Oumar Bouare, “An Evaluation of David Ricardo’s Theory of Comparative Costs: Direct and Indirect Critiques,” Journal of Economic Development 34.1 (2009): 99-123.

 

[7] Bouare 105.

[8] Bouare 105.

[9] Bouare 105.

[10] Bouare 105.

[11] Vince Sammut, David Ricardo and the Theory of Economic Rent (New York: University of Mata, 2005) 4.

 

[12] Michael Schneider, “The Discovery of the ‘Ricardian’ Theory of Rent-Mutiple and Therefore Exceptinal,” 2005, Victoria School of Econom, 3 April 2016. (8).

 

[13] David Prychitko, “The Concise Encyclopedia of Economics,” 2008,  Library of Economics and Liberty, 3 April 2016 < econlib.org>. (2).

 

[14] Prychitko 2.

[15] Prychitko 2.

[16] Prychitko 2.

[17] Michael Hardt, “The Common in Communism,” Rethinking Marxism 22.3 (2010): 346- 356.

 

[18] Karl Marx, Economic & Philosophic Manuscripts of 1844, (Moscow: Progress Publishers, 1959) 1-2.

[19] Marx 1-5.

[20] Marx 3-5.

[21]  Marx 25-35.

[22]  Marx 6.

[23]  Marx 29.

[24] Marx 3-9.

[25] Marx 25

[26]  Library of Congress, Stanford Encyclopedia of Philosophy, (Ney York: Library of Congress) 1.

[27]  Marx 30.

[28] Hardt 352-353.

[29]  Hardt 354-356.

[30] Negri, Antonio, “Karl Marx’s Grundrisse: Foundations of the Critique of Critical Economy 150 Years Later,” Rethinking Marxism 26.3 (2014): 427.

[31] Antonio 429-430.

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