Download Brief Points for Discussion of Ricardo`s Chapter 20, 21, and 26

Brief Points for Discussion of Ricardo’s Chapter 20, 21, and 26
1. We will not spend much time discussing Chapter 20 on the question of Value and
Riches. It is a useful chapter for anyone struggling with making a distinction between the
value of a commodity (or, value of the aggregate output) and the well-being of an
individual (or, society). Sometimes, when we first encounter a theory of value not based
on utility certain problems arise with clearly understanding the terminology. This might
be due to equating the term ‘value’ with some sense of ‘valuable’. As simple as this
differentiation may appear right now, there is always a danger of slipping into this type of
reading. Essentially, Ricardo spends most of Chapter 20 in trying to explain this
difference. Thus, an increase in riches (meaning ‘well-being’) may occur due to an
increase in the aggregate output of a society while at the same time a decrease in value
occurs. This could arise from an increase in the productivity of labor for example.
There is one passage from Chapter 20 that I would ask you to keep in mind while reading
Marx’s Chapter 1. We will observe that Marx ‘lifts’ this passage from Ricardo for his
own use. The importance comes from the attacks on Marx concerning this point, while
most of the attackers have not realized that the argument comes directly from Ricardo. In
addition, the passage has some importance because it hints at something Ricardo
struggled with, ‘absolute value’ as opposed to ‘relative value’: one of the last papers
Ricardo appeared to be writing before his death was on this question. Here, Ricardo is
agreeing with a semi-famous economist of his time (M. Destutt Tracy) - and, you’ll
notice while reading Chapter 1 of Marx that Marx has a footnote dealing with Ricardo’s
interpretation of Tracy. Here is the passage from Ricardo:
“A franc is not a measure of value for any thing, but for a quantity of the same metal of
which francs are made, unless francs, and the thing to be measured, can be referred to
some other measure which is common to both. This, I think, they can be, for they are
both the result of labour; and, therefore, labour is a common measure, by which their real
as well as their relative value may be estimated.”
I suppose, the only question that arises is how convincing this argument is to you? Does
Ricardo offer a logical “proof” of the labor theory of value? More specifically, is labor
the substance of value? And, after reading Marx, the question becomes what type of
labor (tailor, carpenter, etc.) is the substance of value?
2. Chapter 21 presents a few important ideas. First, we can detect Ricardo’s growth
theory and the ever-present inverse relationship between the wage and profit rate. We
observe Ricardo’s commitment - qualified as it is - to a tendency for the profit rate to fall:
“From the account which has been given of the profits of stock, it will appear, that no
accumulation of capital will permanently lower profits, unless there be some permanent
cause for the rise of wages.” Ricardo goes on to criticize Smith’s falling profit rate
thesis. So, can you state Ricardo’s dynamic process involved in the falling profit rate?
3. Another important issue in Chapter 21 - again, coming very early in the chapter - is
Ricardo’s endorsement of what has come to be termed ‘Say’s Law’: “M. Say has,
however, most satisfactorily shewn, that there is no amount of capital which may not be
employed in a country, because demand is only limited by production. No man produces,
but with a view to consume or sell, and he never sells, but with an intention to purchase
some other commodity, which may be immediately useful to him, or which may
contribute to future production. By producing, then, he necessarily becomes either the
consumer of his own goods, or the purchaser and consumer of the goods of some other
person. ... While the profits of stock are high, men will have a motive to accumulate
[thus, investment] ... Productions are always bought by productions, or by services;
money is only the medium by which the exchange is effected [in this, we might recall
Adam Smith’s “A man must be perfectly crazy who, where there is tolerable
security, does not employ all the stock which he commands, whether it be his own or
borrowed of other people, in some one or other of those three ways.” Thus, money
does not serve as a store of value, at least in the aggregate. This is one way to derive
Say’s Law.]. Too much of a particular commodity may be produced, of which there may
be such a glut in the market, as not to repay the capital expended on it; but this cannot be
the case with respect to all commodities [thus, some markets might be in excess supply
while others will be in excess demand, implying temporary disequilibrium - but,
there cannot be an excess supply in the aggregate. Marx refuted this logic in his
history (published as Theories of Surplus-Value) by noting that an excess supply of
commodities (in the aggregate) can be matched by an excess demand for money thus, rejecting Say’s Law while retaining a type of Walras’ Law] ... The wish to do all
or some of these [e.g., have more wine or furniture, etc. recall Smith’s proposition
that we are born with the desire to improve our position] is implanted in every man’s
breast; nothing is required but the means, and nothing can afford the means, but an
increase of production. ... Whether these increased productions, and the consequent
demand which they occasion, shall or shall not lower profits, depends solely on the rise
of wages; and the rise of wages, excepting for a limited period, on the facility of
producing the food and necessaries of the labourer.”
a. Does Ricardo have a convincing account of Say’s Law?
b. We should be very careful, what is the time period that Ricardo seems to have in mind
for the operation of Say’s Law?
c. What assumptions does Ricardo’s version of Say’s Law rely upon?
d. Whatever happened to Smith’s intriguing idea that the division of labor (hence,
productivity of labor; hence, aggregate supply of commodities) is limited by the size of
the market (hence, demand)? This little idea in Smith appears to be lost. Ricardo does
not even mention the idea. And, Ricardo’s Principles becomes the standard text on
political economy. I point this out in order to demonstrate how an idea can slowly slip
from theory, only to be recovered years later (typically, after a theory - that could have
been based on it - arises).
4. The last point that I wish to draw our attention to is fairly minor for our purposes.
But, we should note it: “Yet since it is evident that much will be given for the use of
money, when much can be made by it, he [Smith] suggests that ‘the market rate of
interest will lead us to form some notion of the rate of profits’ ... [recall that after
noticing how difficult it was to empirically determine the profit rate, Smith claims
that the interest rate can be used as a proxy] ... The rate f interest, though ultimately
and permanently governed by the rate of profit [notice, Ricardo does not say ‘equal
to’], is however subject to temporary variations from other causes.” I wanted to draw
your attention to this passage (actually, there is about a page being skipped) because it
identifies a ‘real’ (or, productivity) determination of the interest rate, rather than a
monetary explanation of the interest rate. We may have occasion to come back to this
point when reading Keynes.
5. Chapter 26 is very short, it mainly attempts to correct a confusion arising from Smith.
Marx will actually attempt to deal with Smith on this point as well - we’ll spend more
time with it at that point (occurs in Volume 2 of Capital). However, there are some
noteworthy clarifications that Ricardo makes: “The whole produce of the land and labour
of every country is divided into three portions: of these, on portion is devoted to wages,
another to profits, and the other to rent. It is from the two last portions only, that any
deductions can be made for taxes, or for savings; the former, if moderate, constituting
always the necessary expenses of production.”
a. What does this imply for a theory of savings? For example, today - in either the
Solow growth model or standard Keynesian theory - we introduce a saving rate (or,
marginal propensity to save) for the economy without reference to class. Ricardo’s
theory of saving would appear to depend upon a class analysis: hence, the saving rate for
the working class is zero, while that for landowners and capitalists is positive. The
saving rate cannot, therefore, depend solely on the time-preference of consumption (i.e.,
based in inter-temporal utility maximization). Or, can it? The Austrian school of thought
- very big fans of Ricardo in many ways - saw the interest rate arising from just such a
perspective. For them, the interest rate was the price that adjusting to allocate scarce
resource across time, and this was influenced by individual’s time preference for
consumption.
b. The net product (or, net revenue) is composed of rent and profits. Why should
Ricardo drop wages from the net product? Early in his work, Sraffa seems to have liked
this way of thinking - though, later he models the economy to allow workers to share in
the net product. Sraffa saw in the Physiocrats and very early classical economists (e.g.,
Petty) how they thought not so much in terms of a labor input - but rather the labor be
represented by ‘loaves of bread’. In other words, in order to perform labor a worker
needed 2 loaves of bread - a ‘real’ resource just like corn, rubber, or steel.