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1. classical economy 2. neoclassical economy
3. Karl Marx
4. Joseph Schumpeter
5. ordoliberalism
6. keynesianism
7. critical rationalism
8. philosophical criticism
9. monetarism
1. classical economy For an unknown reason, David Ricardo is much more famous than Jean-Baptiste Say, although Jean-Baptiste Say gives the most precise description of a market economy. We can even say, that his description of a market economy is more precise than the one given in Wealth of Nation by Adam Smith, although Adam Smith is much more famous than Jean-Baptiste Say.
Under very special, and wrong, assumption David Ricardo got the conclusion that the demand is irrelevant for the determination of prices, but even if we accept that there will always be an exceed of demand over supply, in other words, that any supply will always be absorbed by demand, it is the demand that determines what is produced.
This is one of the few paragraphs where Jean-Baptiste Say addresses David Ricardo directly. David Ricardo sticks to the labor theory of value. He assumes that the price of corn is not high because a rent is paid, but a rent is paid because costs of production are high. In other words, if the production costs were the same everywhere, there would be no rent at all. That's right, the problem is, that the need to produce at higher costs is due to an increasing demand, as Jean-Baptiste Say states correctly.
| Depuis les premières éditions de ce Traité, M. David Ricardo a cru trouver un nouveau fondement au profit des biens-fonds. Il pose en fait que dans les pays neufs et où les terres n'ont point encore de propriétaires, elles ne rapportent que les profits auxquels peuvent prétendre le travail et les capitaux qui les font produire. La concurrence des producteurs empêche en effet qu'ils se fassent rembourser le droit de cultiver la terre, droit qu'ils ne paient à personne. Mais du moment que les progrès de la société rendent nécessaire une quantité de produits plus considérable que celle que peuvent fournir les meilleures terres et les plus avantageusement situées, il faut avoir recours aux terres de moindre qualité ou plus éloignées, et, pour obtenir sur chaque arpent les mêmes produits, faire plus de frais que l'on n'en fait sur les terres premièrement cultivées. Si c'est du blé que l'on cultive, comme la société ne peut avoir la quantité de cette denrée dont elle a besoin, sans payer tous les frais occasionnés par les blés produits sur les moindres terrains, le prix du marché excède les frais de production qu'exigent les premiers terrains, et les propriétaires de ces premiers terrains peuvent dès lors faire leur profit de cet excédent. Voilà, selon David Ricardo, la source du profit du propriétaire (rent). Il étend le même raisonnement aux différentes qualités des terres. Les unes excèdent beaucoup plus que les autres en qualité les plus mauvais terrains mis en culture ; mais ce n'est jamais que la nécessité de cultiver ceux-ci pour satisfaire aux besoins de la société, qui procure un profit aux autres et permet d'en tirer un loyer. Il en déduit la conséquence que le profit foncier ne doit pas être compris dans les frais de production ; qu'il ne fait pas, qu'il ne peut pas faire, le moins du monde, partie du prix de blé. Or, qui ne voit que si l'étendue des besoins de la société porte le prix du blé à un prix qui permet de cultiver les plus mauvais terrains, pourvu qu'on y trouve le salaire de ses peines et le profit de son capital, c'est l'étendue des besoins de la société et le prix qu'elle est en état de payer pour avoir du blé, qui permettent qu'on trouve un profit foncier sur les terres meilleures ou mieux situées ? C'est aussi le principe établi dans tout le cours de cet ouvrage. Dire que ce sont les mauvaises terres qui sont la cause du profit que l'on fait sur les bonnes, c'est présenter la même idée d'une façon qui me semble moins heureuse ; car le besoin qu'on éprouve d'une chose est une cause directe du prix que l'on consent à payer pour la posséder ; et si les besoins de la société n'étaient pas portés à ce point, ou si elle n'était pas en état de faire un si grand sacrifice, quelque énorme que fût la dépense nécessaire pour fertiliser un sol aride, on ne le cultiverait pas : ce qui nous ramène à ce principe déjà établi, que les frais de production ne sont pas la cause du prix des choses, mais que cette cause est dans les besoins que les produits peuvent satisfaire. | In the first published versions of this treaty (Principles of economics), David Ricardo believed to have found a new explication for the profits on land. He states that in recently discovered countries where the land has no owner, the land yields only what is necessary to pay the labour and the capital needed to cultivate it. The competition between the producer impedes them from demanding any money for the use of the land. But if the progres of society requires a bigger amount than what can be produced by the best situated land it is necessary to cultivate land of inferior quality or more far away and in order to obtain on each acre the same amount the necessary expenditures are higher than on the land first cultivated. Due to the fact that the society can't get all the amount, for instance of wheat, that it needs without paying all the expenditures generated by the production on the less fertil land, the market price exceeds the expenditures of the more fertile land and the landowners of the first land get therefore a profit at the size of this extracosts. This is, following David Ricardo, the source of the profit that get the landowners (rent). He uses the same reasoning for the different types of land. Some of them are much more than others superior on quality the less fertile land still cultivated. But it is always only the need to cultivate the last ones depending on the need of the society that procures a profit to the first ones and allows them to get a rent. He concludes from this that the rent is not part of the production costs. That it is not and can't be, not at all, be part of the price of corn. But who doesn't see that if the size of the necessities of the society leads to a market price for wheat allowing to cultivate the less fertile land presumed that the wages are high enough to compensate for the endeavor and high enough to yield a profit for the capital it is the size of the needs of society and the price that society is able to pay to obtain the wheat that allows a rent on the more fertile or better located land? That's what I say in this paper. To say that the bad land is the cause of the major profit in comparison to the infertile seems to me less precise, because the necessity is the direct cause of the price that someone is willing to pay in order to obtain it and if the necessity of the society were not so high or if the society were not able to make such a big sacrifice whatever would be the expenditure needed to cultivate an infertile land, it wouldn't be cultivated. That brings us back to the principle already mentioned. The expenditures are not the cause of the price of the products. The price depends on the needs that the product can satisfy. |
The affirmation is correct. It is the demand that allows producing wheat at higher costs. If there were no demand willing and able the higher prices, the owners of the most fertile or better-situated land wouldn't get any rent.
The demand, therefore, determines the value of something and not by the supply as assumed by David Ricardo.
[We find very often the affirmation that in the classical theory the value of a commodity is exclusively determined by the supply, in other words by the cost of production. We see now that this is not true. Although Alfred Marshall described the situation correctly by distinguishing between the short run and the long run, Jean Baptiste Say described already the situation precisely enough. As we already said very often, it doesn't make any sense to summarise all the "classical authors," what we nowadays consider classical authors, under one term. See as well classical theory.]
Incidentally, there is another problem. David Ricardo applies the theory of rent, the fact that the marginal producer, the less efficient producer that still can produce given a certain demand, determines the profit of his competitors, only to the land. Actually, the theory can be applied to all sectors of the economy. For any commodity, there is a certain demand and this demand determines the costs a product can be produced and in any branches of the economy there efficient and less efficient producers and, therefore, Alfred Marshall applies the same logic to any product, although he called it producer surplus and not rent. The fact that David Ricardo didn't apply it to other branches is because producer surplus is not compatible with the idea that the value of a product depends on the labour materialised in this product.
This is another nice example of a phenomenon we can observe very often. A theory can narrow the perspective.
Besides disregarding the demand, there is another error in thinking that impedes David Ricardo from applying the concept of rent to other branches. Rent or a consumer surplus can only exist if the production structure is the same in all branches of the economy. The same machines must be used, the workmen have to be equally qualified, the access to markets must be the same everywhere. Actually, this is going to happen in the long run. That requires that no adoption process is needed, and all the productive factors can flow immediately to the most profitable use. That's not going to happen. A new production technique, for instance, requires the substitution of the machines and qualification of the workmen. It will take some time until this process is finished and in the meantime there will be differences in the efficiency.
If someone assumes that adaptations need no time, as David Ricardo does, there is no consumer surplus. He assumes that rents exist only related to land because concerning land no adaptation is possible.
[Something wrong by the way. Nowadays, it is irrelevant where the land is located. If apples are produced in Israel or Germany, it doesn't make any big difference. There are no differences in prices, in Germany, between apples coming from Israel and apples produced in Germany. The amount of land and the fertility of land depends as well from technological progress. One of the biggest exporters of agricultural product are the Netherlands, where land is actually very scarce and not very fertile.]
It is the demand that pulls the supply. This is even the case under the assumptions of David Ricardo, although he stated the opposite.
Under the assumption of the classic theory, immediate adaptation of the productive resources to a change in the underlying structure, there are no rents and producer surplus. In reality that doesn't happen and therefore there are rents or poducer surpluses in all branches, not only in agriculture.
