Lecture notes: Ricardo

0: Introduction

A. As you will see, Ricardo is fundamentally a theorist--a mathematical

economist who doesn't happen to know any mathematics beyond arithmetic.
o 1. His primary interest is not in the details of the real world, but ...
o 2. In putting together a logically consistent theory, and ...
o 3. He is willing to use unrealistic simplification where necessary.
B. His introduction provides a fine example of courtesy and modesty
o 1. He says admiring things about Smith and Say--both of whose ideas
he is going to demolish various pieces of
o 2. Concedes the imperfections of what he is doing,
o 3. Leaves it to some abler man to complete the job.
o 4. Unfortunately, there weren't any, so we had to wait another eighty
years or so until Marshall et. al., building on the framework Ricardo
had constructed, gave us modern economics.

Chapter I
I. Value:

A. Use value vs exchange value

o 1. Use value a necessary condition to have exchange value.
o 2. Given that, exchange value depends on
a. Scarcity--goods with fixed supply, value determined by
demand.
b. Quantity of labour required to obtain the good. Most goods.

3. Ricardo is going to be discussing only the latter category--goods

that can be produced, and whose exchange value thus depends on cost
of production.

B. Distinction between labour to produce and labour to earn the money to

purchase.
o 1. In a primitive society, exchangeable value is proportional to labour
input (Smith).
o 2. Generalizing this gives us labour input as the measure of value.
o 3. Smith, however, is using the labour cost of buying an input as his
measure of value.
o 4. The two would be equivalent if wages were always proportional to
output, but they are not.
 o 5. Smith's standard--wages or corn--is itself a variable one.
a. What does that mean? Variable in terms of what?
b. Corn varies in the amount of embedded labour.
c. And wages vary with the cost of food.

6. Suppose the labour cost of producing corn doubles:

a. Corn contains twice as much embedded labour.

b. In order for it to exchange for twice as much labour, the
ratio of wages to corn would have to fall in half.
c. But it cannot, because workers were already near
subsistence.
d. All of which proves, not that Smith was wrong, but only that
measuring value by embodied labour gives a different result
than measuring it by labour to earn the money to produce.

7. Ricardo is sneaking up on his rent theory--note "land last taken into

production." The fact that the amount of corn produced by a given
amount of labour varies with the fertility of the marginal land is going
to be key to his analysis.

o 8. And he, like Smith, is using a "wages determined by subsistence"

theory.

C. Which standard of value is right?

o 1. Ricardo suggests that if the relative value of commodity A changes

relative to B, we should compare both to C-Z. If A's relative value
has stayed the same with regard to C, D, E ...Z, it seems reasonable to
say that it was B that changed.
o 2. Especially if we observe that the inputs needed to produce A and
C-Z have all stayed the same, but there has been a change in the
inputs needed to produce B.
o 3. So what Ricardo is proposing is not a definition of value used to
compare how well off people are in different times and places, but ...
o 4. One intended to predict relative prices.
o 5. Which Smith's definition of value makes no claim to do. He has a
price theory, based on cost of production including labour, but that is
a different part of what he is doing from his definition of value.
o 6. According to Smith (and Malthus), if the price of gold drops
relative to other things because producing it get easier, that is a drop
in its value, but ...
o 7. If the price of labour drops relative to other things because
producing it (i.e. growing corn) gets easier, that means everything
else has gone up in value.
 o 8. Ricardo points out an inconsistency in Smith, given that labourers
do not spend all of their income on corn:
a. Labourer gets one bushel/week when corn is 80s/quarter, 1
1/4 when it falls to 40s.
b. Consumes 1/2 bushel, exchanges the rest for other things.
c. Suppose his remaining 1/2 bushel at the old price buys him
more goods than his remaining 3/4 at the new (as it will if
other prices don't change)
d. His wage has gone up measured in corn, down measured in
what he can buy with it.
e. But in Smith's sense, the worker's wage is always of the
same value, by definition--1.
f. Corn comes in only as a useful approximate measure of
value, not as a definition of value.
g. And Ricardo has merely pointed out a special case where the
approximation breaks down.
II. Different qualities of labour.
o A. Obviously, some workers have more skill, work harder, etc.
o B. Over time, relative wages reflect that--one is producing one hour
per hour, one two, so to speak (my way of putting it, not Ricardo's).
o C. Ricardo is interested in explaining relative prices, so ...
1. Provided that the relative productivity of different kinds of
labour stays roughly the same over time
2. (And Smith says it does.)
3. He can ignore it in what he is doing.

III. Labour applied indirectly as well as directly affects value.

o A. Even in the primitive state, some capital is used. So the value of
deer and beaver is affected by the labour cost of producing the
weapons to hunt them.
1. If one weapon was taking much more labour to make than
the other, that would make that animal more valuable.
2. Or if they were equally costly to make, but one wore out
much faster.
3. What if the weapons belonged to different people than the
ones using them?
a. Supply and demand for capital and labour would
affect the division between the two groups of people,
b. But not the relative prices of the goods?
c. Is that true? We haven't yet gotten to profit as
payment for time value of capital.
d. And when we do, it won't be true any more.
 e. But at this point, the cost of using the capital good is
merely the amount of embodied labour used up--and
employers can hire people to make bows just as cheaply
as to hunt deer.

B. In a more advanced society, tracing out the labour used to produce

a final good is more complicated, but the logic of the problem is still
the same.

1. As Ricardo claims to show by pointing out that a reduction

in the labour used in one stage of production would reduce the
exchange value of the good, but ...
2. That would still be true if, as in Smith, exchange value
depended on a sum of costs, of which labour was one.

C. Going back to the primitive society, Ricardo sketches an

equilibrium price argument for why relative prices must be equal to
relative amounts of embodied labour.

o D. Note also that, implicitly, wages and profits move in opposite

directions in this simple model.
o E. But it is still unclear what the capitalist is contributing to the
process, for which he gets his profit.
o F. If we had an invariable standard (what does that mean?), it would
show us that changes in exchange value always reflected changes in
labour input.

IV. But the conclusion changes if we allow for fixed capital.

o A. Once we include fixed capital, now relative prices may be changed
by changes in the wage rate (not obvious--but true).
o B. We should distinguish between fixed and circulating capital
1. Noting that the latter has varying production periods.
2. That the distinction is not a sharp one.
3. Since a circulating capital with a long period is like a fixed
capital.

C. If all capital were circulating, and all had the same production
period, then exchangeable value would be proportional to labour
input.

1. Or, in modern terms, if all goods were produced with the

same labour/capital ratio, then...
2. All prices would be proportional to labour input.
 3. But, of course, under those assumptions labour input is
proportional to capital input, so ...
4. All prices are proportional to capital input too!
5. Which is not precisely a labour theory of value, although it
looks like one in a bad light.

D. But if that is not the case, then:

1. If Barley and Oats are produced with the same K/L ratio as
each other, and so are cotton goods and cloth
2. Variations of wages will leave the relative prices of Barley
and Oats the same, leave the relative prices of cotton goods
and cloth the same, but change the relative price of Barley (and
Oats) to Cotton goods (and cloth).
3. Ricardo sees the idea of labour capital ratio, but has no
words to explain it in:
a. Since "capital" is not the amount of capital going into
the production but
b. Capital years used in production, i.e.
c. The amount of interest that must be paid on the
capital used to produce a unit of output.
d. But he recognizes that amount of fixed capital and
slowness of circulation are really the same issue.

4. Example using machinery

a. One man uses 100 workers for a year to grow corn,

two others use the same labour to make one machine
each.
b. Next year, one machine +100 men makes cloth, ditto
makes cotton goods, and the farmer uses his 100 men to
grow more corn.
c. If we looked only at embedded labour, the cloth in the
second year costs200 man years=cotton goods=corn
crop, since the machine in this example is not wearing
out, so none of its embedded labour must be credited to
its output, but ...
d. The farmer got his capital back after one year, the
other two used both their first and second year capital in
their second year production (and will use the first and
third year capital in the third year's production, and...),
so they have to get more profit to compensate, so the
price of what they produce must be higher.
e. He then runs it through with numbers.
 i. Wages of 50/annum, so 5000 of capital was
employed by each of them; assume a profit rate
of 10%
ii. Corn, at end of the first year, is worth 5500,
second harvest the same.
iii.Men with machines have 5500 in the machine
at the end of the first year, must receive 10% on
that plus their second 5000 of wages, or
10%x10500=1050 in profit. Assuming the
machine is infinitely durable (which Ricardo
forgets to mention) their goods must sell for
6050, even though none of the machine's
embedded labour is being used up--and continue
to sell for that each year thereafter.

5. So far, this gives us different ratios of exchangable value to

embedded labour, depending on the capital labour ratio.

6. It also implies that relative prices will change, technology

held constant, as wages change.
a. Note that Ricardo is considering changes in the
division of output between the worker and the capitalist
b. Since this is a change in wages with technology held
fixed.
c. So it is just a question of who gets what share of the
output.

7. If wages go up, labour intensive goods rise relative to capital

intensive goods. But...

8. This effect is small

a. Ricardo guesstimates that plausible variations in the
profit rate could not give fluctuation in relative prices of
more than about 6 or 7 percent
b. From which Stigler gets "the 93% labour theory of
value."

9. But changes in the inputs needed to produce outputs can

result in much larger changes in relative prices.

V. Allowing for fixed capital of variable durability has a similar effect.

o A. Worked through once for a machine that requires labour input to
keep it up--just like labour used directly in production.
 o B. And a second time by observing that a machine that wears out in a
year is just like circulating capital with a period of one year.
1. Actually, both Smith and Ricardo routinely ignore the fact
that wages are paid out during the year, not all at once.
2. Possibly, in Smith's case, because the harvest comes in once
a year and must be stored until eaten. So somebody is paying
the interest on that capital until the workers get it.

C. Consider a machine that lasts only a year, substitutes for 100 men,
and costs 5000.

a. If wages rise, what happens to its price?

b. It must embody less than 5000 in wages, plus some
interest, and ...
c. If the rise in wages is balanced by a fall in interest, its price
will stay the same.
d. And that will happen if it is made with the average
labour/capital ratio (he is getting ahead of himself here).

D. Conclusion:

1. Under primitive conditions, prices are proportional to

labour.
2. With fixed capital etc., ratio of price to labour input can vary
quite a lot.
3. And relative prices can change slightly due to changes in
wages and profit, without any change in production
technology.
4. With rising wages lowering the relative price of capital
intensive goods.

VI. We need an invariable standard of value.

o A. It must always require the same labour input--which real monies
don't.
o B. But that would still be a perfect measure of value only for things
produced with the same labour/capital ratio as the standard. but...
o C. Since the change in relative value of goods with different K/L
ratios due to changes in wages is small, we can (and he will) ignore
that problem.
o D. And he will write as though money was that invariable standard.
o E. Note the paradox in Smith's claim that if wages rose all goods must
rise in price. What about the price of the money in which price is
measured?
 VII. Changes in price due to changes in the value of money

o A. Do not change distribution between profit and wages

o B. But changes with value of money held constant do.
o C. i.e. changes in wages given that the amount of capital and labour
used to produce a unit of money is unchanged.
o D. Note that wages are measured here by labour needed to produce
what the worker can buy with them--i.e. they measure the share of
output going to the worker, not his welfare. Ricardo abandoned that
possibility when he scrapped Smith's version of the labour theory of
value.

Chapter II: Rent

I. We must distinguish rent--the payment for the use of the original and
indestructible powers of the soil, from other payments miscalled rent.
o A. Including the profit on the landowner's investments in improving
the land, and ...
o B. Payment for timber on the land--it would be rent only if you were
paying for the right to grow timber and harvest it, not just for the
right to harvest the timber already there.
o C. Rent of coal mines or quarries--where, again, you are removing
something permanently.
o D. Ricardo will use "rent" only in the narrow sense.

II. The development of rent

o A. If land, like air, were available in unlimited supply, it would be
free.
o B. It commands rent only because it is not unlimited in extent and
uniform in quality--the best land is all in use.
1. When land of the second quality goes into use, there must be
rent on land of the first quality
2. And its amount depends on the difference in quality.
3. And similarly with the third.

C. More precisely, suppose three qualities, yielding, with the same

inputs of labour and capital, net produce (after supporting the
labourers) of 100, 90 and 80 quarters of corn.

1. While there is plenty of quality 1 land, the farmer will get all
of the output to pay his profits.
 2. But when quality 2 goes into cultivation, rent appears on
quality 1, since ...
3. All corn sells for the same price, and that price must be
sufficient to pay for the profits of the farmer farming quality 2
land, leaving the difference as rent for the owner of the quality
1 land--10 quarters.
4. And rent goes to 20 on quality 1 land and 10 on quality 2
land when the third quality comes into cultivation.

D. But there is an intensive margin as well--before the really bad land

is cultivated, it becomes worth applying more labour and capital to
the good land to get additional output.

1. Suppose quality 3 is in production, and that doubling the

input on quality 1 raises net output from 100 to 185. It is worth
doing (cheaper than cultivating quality 3), and rent on quality 1
is now 25 quarters.
2. If quality 3 is not in production, and the second dose on
quality 1 is the marginal input, then quality 1 gets 15 quarters
rent, quality 2 gets 5.
3. Price equal marginal cost, rent is output where cost is lower
than on the margin--does this start to look familiar?
4. The last applied capital pays no rent--i.e. P=MC!

III. So the reason why the value of corn rises over time is not that the rent
goes up, but ...
o A. Value goes up because the labour cost of producing one more
quarter of wheat goes up
o B. Which causes rent to go up. "Corn is not high because a rent is
paid, but a rent is paid because corn is high."
o C. And Smith was wrong to include rent in cost!
o D. It is said that land is an especially good thing because it generates
rent--but
1. That is a result of the limited supply of land--we would be
better off if we had lots more land, hence paid no rent.
2. And worse off if air, water, etc. became more scarce and
started to pay rent.
3. If the surplus produce which rent affords is an advantage,
we should make our machinery worse each year--giving a rent
on the old machinery.

E. The increase of rent is a symptom of wealth, not a cause.

 o F. The countries in the best position to get wealthy are those that have
lots of fertile land, or can import food freely, or have a technology
that lets them increase agricultural output per acre readily at constant
cost--all circumstances that lead to low rent.
o G. Smith claims that the high price of corn is the effect of rent, but ...
1. The price of corn is determined by the cost of production on
marginal land
2. Which pays no rent.
3. Hence the existence of rent does not affect exchange ratios.
4. (but the existence of the circumstance that leads to rent--
scarcity of first quality land--does affect exchange ratios--via
its effect on labour cost of producing on marginal land)

H. A reduction in national capital, and consequent reduction in

population, would push the margin towards more fertile lands,
reducing rent.

o I. And an improvement in agricultural technology which made land

more productive, permitting us to take the less productive land out of
production, might make rent go down, in the short run (capital held
constant).
1. At which point wages as a share of output would fall (iron
law)
2. Profits would increase
3. Accumulation of stock would increase
4. Eventually, the old marginal land would be back in
production, and rent back up.
IV. Distinguish between improvements in agricultural technology that give
more output and those that reduce needed inputs (of labour).
o A. Improvements such as better crop rotation give you a larger yield
from any piece of land, labour held constant.
1. If the result is to increase output, but keep the difference in
output between successive doses of capital and labour the same
...
2. Then the marginal dose comes with less capital and labour,
and rent is lower. (p. 55)

B. Improvement such as better plows give us the same output from

the land at lower cost in labour (and capital)

1. The same amount of land is cultivated

2. If the difference in output from each dose of labour + capital
remains the same, while the doses get smaller, then rent stays
the same.
 C. Note that we are measuring rent as proportion of output, not as
exchangable value.

1. But things that push us to produce on worse land both raise

rent and ...
2. Raise the exchangeable value of corn
3. Thus doubly benefitting the landowner.
4. This assumes that the increased difficulty of production is
due to shifting the margin of production, not to something that
decreases output everywhere (Japanese beetles, say). That
might raise or lower rent, depending on how it decreased
output.

Chapter III
I. In the case of mines as well, high rent reflects the high value of the
produce, not the other way around:
o A. If there were an unlimited supply of equally fertile mines
1. the value of the produce would be the amount of labour
necessary to produce it, and ...
2. No rent would be paid.

B. With mines of varying fertility

1. The marginal mine must cover the cost of labour and capital
2. So the marginal mine's costs regulate the price
3. And all better mines pay rent.

C. If the labour cost of producing gold from marginal mines was

always the same, gold would be as nearly invariable a measure of
value as is possible. Ricardo will write as if this were true--i.e. use
"gold" to mean an imaginary standard having this characteristic.

IV. Note that throughout this discussion, Ricardo is ignoring his earlier
point that revenue from an extractive industry is not really rent.
o A. If a mine eventually runs out, part of the cost of getting gold now
is not getting it later.
o B. If mines have unlimited amounts of ore, why don't you produce
everything you want from the most fertile mine?
o C. The implicit model seems to be a mine that can produce at a
certain rate forever, with a fixed input required for each unit of
output--the lower the ratio of input to output, themore fertile mine.
 o D. Which lets Ricardo apply is analysis of rent to mines, but isn't ver
realistic.
o E. On the other hand, doing it right probably requires Hotelling's
analysis of depletable resources, which isn't going to be written for
another century or so.

Chapter IV
I. Of course, market price is not always equal to natural price.
o A. Ricardo repeats Smith's argument for how equilibrium in the
capital market moves market prices towards natural prices.
1. Goes through a little more detail--borrowed capital shifting
from one manufacturer to another.
2. Observes that it works better than might be supposed.
3. And notes non-pecuniary as well as pecuniary costs and
benefits.

II. And refers the reader back to Smith.

Chapter V
I. The ability of the labourer to support himself and bring up the children
needed to maintain the working poulation depends not on his wages but ...
o A. on what his wages will purchase.
1. So the natural price of labour depends on the price of foods,
necessaries, and customary conveniences.
2. And with progress, tends to rise, because corn gets more
costly as we push to worse marginal land, but ...
3. The effect might be temporarily reduced by improvements
in agricultural technology
4. As happened, temporarily, for 180 years after Ricardo
published!

B. The natural price of goods other than raw produce and labour
tends to fall over time

1. Since the increase in the natural price of the raw material

that goes into them
2. Is outweighed by improvements in technology, etc.
3. This is apparently an empirical claim.
 C. The market price of labour, as of other goods, can deviate from its
natural price, but tends to conform.

1. When market price is above natural, labourers are well off.

2. When below, labourers are wretched.

D. Market rate could be above natural rate in an improving society for

an indefinite period of time

1. Since capital might keep accumulating

2. As in fact happened from then till now.

E. In talking of capital accumulating, one should distinguish between

1. An increase in the value of capital--which might happen

because the things making it up became more valuable (i.e.
required more labour to reproduce)
2 And an increase in the quantity of capital.
3. If capital increases in quantity and value, the natural price of
labour rises, due to increased value of the stuff needed to
support it.
4. Capital might increase while its value held constant or fell,
in which case the natural price of labour would be constant or
declining.
5. In both cases, market price of labour would be above natural
price.
a. First case, only by a little, so soon back to natural
price
b. Second by a lot, since his wages have gone up and the
cost of subsistence is constant or falling. So it may take
a long time for market wage to get back down to natural
wage.

II. The natural price of labour, measured in food etc., is not fixed

o A. It varies across time and space

o B. because it depends on the habits of the working population
o C. The more they require to feel they are doing well enough to afford
to marry and have children, the higher the natural wage will be.
III. Wages are affected by two factors
o A. Supply and demand of labour
o B. Price of what labourers buy.
o C. If lots of fertile land is available, capital may accumulate faster
than labour.
 1. Mimimum doubling time for population has been estimated
at 25 years, but ...
2. Capital might double faster than that under favorable
circumstances
3. In which case wages would go up.

D. In new settlements, this happens--until they get pushed onto worse

land.

o E. Contrast countries with lots of fertile land but bad institutions with
countries which are fully developed.
1. In the first case, introduce good government and capital will
rapidly accumulate, making people better off.
2. In the other, accumulation of capital will simply be matched
by new population.

F. The friends of humanity cannot but wish ... that workers should
have luxurious tastes.

IV. As capital accumulates, what happens to wages?

o A. If we look only at the supply/demand side, we observe that capital
will accumulate more and more slowly (he hasn't shown this yet, but
will), so wages will sink--i.e. be closer and closer to the wage that
gives constant population.
o B. But the prices of necessaries are rising (because they are being
produced on worse and worse marginal land), so the wage (measured
in Ricardo's imaginary money--i.e. value) that gives constant
population is rising.
o C. So money (i.e. value) wages rise, but real wages (in our sense--
what the labourer can buy) fall.
o D. But the rise in money wages will lower the profit rate--as we will
see later.
o E. So both rent and wages increase as capital and population
accumulate, but ...
1. The increase in rent involves the landlord getting an
increasing share of agricultural output--and selling it at a
higher price per unit
2. The increase in wages involves a decreasing amount of corn-
-at a higher price.
3. The difference between the two situations being that the
landowner is selling corn, the labourer is buying it, and the
value of corn is rising.

F. All of these calculations are done in terms of Ricardo's imaginary

gold of fixed value, but the argument does not depend on that.
 1. One might think (Smith apparently does) that an increase in
wages would raise the price of all commodities.
2. But gold is a commodity--and prices are measured in it. Its
price cannot rise.
3. To put it differently, if prices of goods all go up we will
need more gold to circulate our goods, but ...
4. If prices of all goods in gold go up, the price we are paying
for gold in goods has gone down, so how can we import gold?
5. So the argument works for prices in real gold as well.

G. Digression on the poor laws, citing Malthus:

1. Describes the bad consequence, but doesn't run through the

argument--number of people on welfare (in our terms) would
rise until it absorbed all of the country's net revenue save that
used by the government
2. But immediate abolition would have terrible consequences.
3. Hence gradual abolition the solution.
4. Sound familiar?
5. Shifting from a local to a national poor law (which is
suggested by Smith's attack on the settlement laws, although I
don't think he actually proposes it) would be a bad idea
a. Because local administration and payment gives each
parish an incentive to collect the money as efficiently as
possible, and
b. Spend it as sparingly as possible.
c. Which is why welfare is not yet destroying the
country

6. If everyone could live comfortably on welfare, the principle

of gravitation is not more certain than the tendency of such
laws to convert wealth into misery.

7. Presumably the part of the argument we would not see in

modern discussions of the problem of welfare is a population
argument--by supporting the unemployed poor we keep up the
labouring population, thus depress the wages of the employed
poor.

Chapter VI
I. What determines the average rate of profit and interest?
o A. The higher wages (measured in labour--hence share of output) are,
the lower profit is.
1. Fairly obvious for the manufacturer, what about the farmer?
2. He is paying more money for his labour, but selling his corn
for more money, but ...
3. He is either producing less corn per unit of labour (on
marginal land) or paying more rent (on more fertile than
marginal land).
4. Since money is assumed of constant value, the amount for
which you can sell the output of an hour's labour on marginal
land is always the same. Ricardo goes through some numbers
on this.
a. The farmer on marginal land is getting the same
amount of money, paying more in wages, so has less
profit.
b. And the farmer on non-marginal land is paying the
difference between his output and the output of the
farmer on marginal land to the landowner as rent.

5. Note that all of this increase in wages is with technology

fixed--output per worker is the same, save that we are moving
to worse marginal land, so output of corn per worker on
marginal land is less, but ...

6. That assumption is not essential, because Ricardo is

measuring everything in a money whose value (labour input)
stays constant, so measured in that money output per worker is
always the same.

B. So the farmer has an interest in keeping rent low

1. Not because he pays it--he really doesn't (in value terms--go

through Ricardo's analysis)
2. But because high rent means high value of corn means high
(value of) wages means low profits.
3. And even lower profit measured as a rate of return rather
than a value, since higher value of agricultural output means
higher value per unit of his capital stock, means more value per
worker employed.
4. So he is getting fewer s of profit on more s of stock.

C. Effect on other goods:

 1. Most goods have some agricultural output as inputs, so will
rise in value along with the increase in the value of corn,
although not by as much.
2. But they are rising because they have more labour expended
on them, not because the labour is more expensive.
3. Since, after all, the money they are measured in (by
assumption) is also being made with more expensive labour.
4. And, measured in that money, profit falls as wages rise.
5. All of this assumes that when corn becomes more expensive,
wages rise
a. Which doesn't have to happen in the short run, both
because it takes time for population to adjust and
because the workers might be making above the natural
wage to start with, but ...
b. In the long run ... .

D. The same thing would happen if there was an increase in the price
of other goods consumed by the labourer--profits would fall.

1. But not if there was an increase in the price of luxury goods.

2. Which labourers do not consume.

E. All of this describes equilibrium.

1. In the short term, some profits might rise even while profits
in general were falling, but...
2. They would be brought back down as capital moved into the
more profitable field.

F. Very long term story:

1. Over time, we push onto worse and worse land, so the value
of corn rises ...
2. Checked from time to time by improvements in machinery
for producing necessaries and in agricultural science.
3. Eventually we reach the point where the workers on
marginal land just produce enough to pay their wages.
4. So the rate of return on capital is zero, so it stops
accumulating.
5. And in fact, accumulation will stop short of that point.
6. As accumulation goes on, total amount of profits keeps
rising for a while, but eventually the reduction in the profit rate
with further accumulation outweighs the increase in the
amount of capital that rate is earned on, so ...
7. Total of profit starts to go down.
 8. But the total of value is still going up.
a. As we move to worse land, we are still farming the
better land, so ...
b. The increase in capital means more total output, and
...
c. The (agricultural) output has greater value/unit, so ...
d. Total value of agricultural output is increasing.
e. Indeed, total value is increasing--more labour (which
produces a value divided between labour and capital)
and more rent.

9. So the shift in value is away from profit and into labour and
rent--the latter get a larger fraction of the total, and eventually
the former starts to fall absolutely as well as relatively.

Chapter VII: On Foreign Trade

I. Trade does not directly increase the value annually produced by a country,
although it may increase the amount, usefulness, etc. of the goods the
country can consume.
o A. Because if the ability to import wine cheaply increases its quantity
and drops its price, it also drops its value
1. Wine is now being produced by using English labour to
produce (say) cloth and trading that for Portuguese wine
2. And it takes less English labour to produce wine that way
than directly, so ...
3. It has less value--in Ricardo's sense.

B. It has been argued by high authority (Smith?) that when capital is

shifted into foreign commerce, the result will be to raise the rate of
profit in general. But ...

1. The purchase of foreign commodities will employ the same,

more, or less of the produce of England's land and labour (as
producing them would have before?).
2. If the same, then the same amount available for everything
else.
3. If less, then more money available to purchase domestic
commidities--and more capital to produce them.
4. If more, then proportionally less demand for domestic
commodities, and less capital to produce them.
5. Putting it differently, foreign trade is simply a new
technology for producing goods, and in Ricardo's system, new
 technologies (save in agriculture or necessaries for workers) do
not affect the profit rate.
6. But note that Ricardo has assumed away the affects of
changing labour/capital ratios--which might be relevant if, as
Smith argues, foreign trade is a capital intensive industry.

C. The effect of trade is to get us more usefulness for the same value.

1. Which might result in more capital accumulation, if people

who don't need to spend as much money to get the same goods
save what is left, instead of buying more goods with it.
2. And it could increase profits if it decreased the cost of food
and necessaries, and thus wages.
3. Ditto for improvements in manufacture, inland trade, etc.

D. Profits depend only on wages (measured in value terms!), Prices

are independent of wages (rise in wage compensated by drop in
profits) but depend on productivity.

1. So an improvement in productivity benefits everyone

2. A fall in wages benefits only the owners of capital.
II. The theory of value that explains prices within a country does not explain
prices across countries:
o A. Because labour and capital are mobile within a country but
relatively immobile across countries.
o B. So profit rates and wages tend to be equal within a country but not
across countries.
o C. So exchange ratios in international trade are not determined by
ratio of embodied labour.
1. It might be profitable for Portugal to import from England
cloth that cost 90 man years to produce in Portugal and 100
man years in England
2. Because it would be sending wine, which costs 80 in
Portugal, 120 in England.
3. Principle of comparative advantage first rears its head.
4. If capital and labour were perfectly mobile, this wouldn't
happen--because they would be getting more in Portugal, and
would move there.

D. Gold and silver distribute themselves among countries in such a

way as to make profitable in money terms those trades that would be
profitable in barter terms.

1. The cloth must sell for more in Portugal, or it won't be

imported, so ...
 2. Wages paid 90 men in Portugal must be more than those
paid 100 men in England (actually, cost of wages plus
associated capital costs)
3. Which means that the value of gold in Portugal, measured in
Portuguese labour, is lower than the value of gold in England,
measured in English labour.
4. If it were not, gold would flow into Portugal (exporting both
cloth and wine, importing nothing) until it was.
5. The specie flow mechanism for foreign trade equilibrium.
6. If England discovered a new way of making wine that cost
less than 80 man years, England would export cloth, import
nothing, until enough gold accumulated to drive the price of
one of the goods in England above that in Portugal (This
version is actually Ricardo's example, the previous was my
addition).
7. If there is a trade imbalance, then people who buy bills of
exchange in one country on another know they may not be able
to trade for a bill the other direction, so discount to allow for
the cost of transporting the gold to pay the bill.
8. Oddly enough, if England could make both goods cheaper
(in labour), gold flowing into England and out of Portugal
would make prices in general rise in England, fall in Portugal
(until a new equilibrium was reached).
III. Explanation of varying value of money in different countries:
o A. If a country improves its ability to produce goods that are readily
traded, gold flows in, prices measured in gold (real gold, not
Ricardo's imaginary money) are higher.
o B. Rate of profits may be the same, wages the same, but everything
measured in money is higher.
o C. So real money, unlike Ricardo's imaginary money, varies in value
across countries for this reason.
o D. But this does not imply a difference in the profit rate, which is a
ratio of two amounts of money, across countries.
o E. In the early state of society, when goods are bulky, the value of
money depends mainly on distance from the mines (think of the
labour cost of growing corn, transporting it to the mine, trading for
gold, bringing the gold back).
o F. But once one country improves its manufactures (of high value to
weight goods), now it is relative ability in manufacturing those that
determines the value of gold at home.
o G. The higher value of money will not be indicated by the exchange.
1 That must be at par as long as you can freely import and
export money, and doing so does not cost very much.
 2. A country that could prohibit the export of money could
push up its domestic prices--and push the exchange against it.
Must give 11 ounces in that country to get 10 ounces abroad.
3. Similarly with paper money not freely convertible into gold.
4. And an exchange against England is evidence that the
currency is depreciated--otherwise you would just export
money, melt it down, and have it coined as foreign money.