Question

Present a clear succinct statement of Ricardo`s basic analytical "system." Discuss thoroughly his theory of economic growth. How does his discussion differ from Adam Smith's?

Answer 1

a) Ricardo's basic analytical system is based on the notion of natural resource scarcity and distribution of scarce resources among the unlimited end users. Specifically Ricardo's system focuses on the allocation of resources. Ricardo stated an organic relationship of the economic growth with agricultural development. In this analytical system, it is stated that the interest of landlords are against the improvement in of agriculture. Hence, the profit falls due to the absence of improvement of agricultural land and free trade.

b) Economic growth theory of Ricardo is based on the theory of capital accumulation. Reinvestment of profits leads to the increase in the agricultural output. The most important factor pointed out by Ricardo was diminishing returns to the agricultural land due to the scarcity. According to Ricardo, when production increases, there is a hike in the wage above the subsistence level. However, wage cannot fall below subsistence level as workers would be willing to work at the wage rate below subsistence level. In the growth model, Ricardo distinguished between agriculture and industrial sector such that agricultural sector exhibits diminishing returns and industrial sector exhibits constant returns. As the agricultural sector is subject to diminishing returns, marginal productivity falls with more and more employment of labor or capital when the other factors are fixed. Thus labor would be employed up to the point where marginal productivity of labor produces surplus over the expense of the capitalist. The higher volume of savings results in faster rate of accumulation of capital leading to rapid economic growth as well as employment.

On the other hand, in the industrial sector, extra labor employment depends on the surplus food grains generated in the agricultural sector. Workers in this sector build up the capital stock, which further shifts up the marginal productivity of labor. If there is shortage in the surplus of food grain, it induces food price to hike. Therefore, capitalists are bound to increase wage for the workers to retain them. However, surplus of capitalists fall due to increase in production cost leading to decrease in the growth rate as the availability of capital for reinvestment falls.

c) Adam Smith emphasized on the 'market' in the economic system, which is temporary as well as accidental factor. On the other hand, Ricardo, stressed on the 'natural' factors in the system. The natural tendency of profit to fall is a result of ''competition of capitals'' as depicted by Adam Smith. On the contrary, Ricardo depicted that fall is due to the fact of diminishing returns in the agricultural sector.