HISTORY OF ECONOMIC THOUGHT
LECTURE 3
Robert Thomas Malthus and David Ricardo
Adam Smith’s economic discourse established the framework within which economic/social issues were
addressed within the context of natural laws of the market by the economists who succeeded him. However,
while Smith arrived at an optimistic conclusion about future outcome of a free market system, Malthus and
Ricardo, both adhering to the same natural laws, arrived at a fundamentally different, much less sanguine
conclusions.
1. Robert Thomas Malthus (1766-1834)
1.1. Population Theory
Malthus’ fame rests upon his main thesis, the theory of population. To recognize the implications of Malthus’
population theory, first consider what Adam Smith had to say about population growth. For Smith,
population growth was a positive social phenomenon. It was essential for economic growth. Population
growth allowed for the expansion of markets, increased division of labor and increased productivity. But for
both Malthus and Ricardo, population growth had negative consequences, although much less for Ricardo
than for Malthus. Malthus, particularly, saw population growth as the impediment to economic growth and
social improvement. Furthermore, based on natural laws, he argued, there is no practical public policy that
would alleviate the dire impact of population growth.
1.1.1.
Geometric versus Arithmetic Ratio
Malthus’ theory is compactly presented in following statement in the first edition of his book (published
1798) An Essay on the Principle of Population as it affects the future Improvement of Society.
“Population, when unchecked, increases in a geometrical ratio. Subsistence [food production]
increases only in an arithmetical ratio. A slight acquaintance with numbers will show the immensity
of the first power in comparison to the second.”
The following table shows what Malthus meant by geometric versus arithmetical ratios:
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Years
Population
1
2
4
8
16
32
64
128
256
512
1,024
2,048
4,096
25
50
75
100
125
150
175
200
225
250
275
300
Food
1
2
3
4
5
6
7
8
9
10
11
12
13
According to this scheme, every 25 years, while population doubles, food increases only by one unit. Thus,
within one century, the ratio of population to food (the inverse of food production per capita) will increase to
16/5, in two centuries, 256/9, in three centuries, 4,096/13, and in six centuries, to 16,777,216/25.
Food Production and Population
Why this tension between population and food? The theoretical justification for the geometric growth
assumption is biological, as Malthus expresses it, it arises from “the passion between the sexes”, or, as one
contemporary writer called it, “the delights of domestic society”. However, Malthus has no clear theoretical
justification for the arithmetic series describing food production. Malthus’ argument stems from his attempt
to show the rapid divergence of the two time series.
300
Population
250
200
150
100
50
Food
0
0
25
50
75
100
125
150
175
200
225
Time Line
Malthus wants to warn us that the tension between population and food is inevitable and permanent:
“By the law of our nature which makes food necessary to the life of man, the effects of these
two unequal powers must be kept equal. This implies a strong and constantly operating
check on population [emphasis added] from the difficulty of subsistence. This difficulty must
fall somewhere; and must necessarily be severely felt by a large portion of mankind.”
1.1.2.
Constantly Operating Check on Population
What is this “constantly operating check”? Malthus mentions two distinct checks or mechanisms: “misery and
vice.” A clear example of the misery is famine or scarcity of food. By “vice” Malthus actually meant, according
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to his theological convictions, birth control. Without birth control, which he clearly disapproved, then misery
is the lot of a large portion of mankind.
At the heart of the “misery” check is the mechanism that forces wages to the subsistence level, the so-called
“iron law of wages”. If at any time wages rise above the subsistence level, the delights of domestic society
would lead to more childbirth and, down the line, increased supply of labor. The result is the fall in wages
back to the subsistence level.
What are the implications of this argument with respect to attempts for social and economic reforms to
improve the working-class living standards? For Malthus any such attempts would be self-defeating. The
result of any social improvement is increased population and the move back to the subsistence wage. In
modern debates about social reforms, this punitive attitude toward the poor had, and still has, significant
adherents.
As is explained below, based on his own population theory, in the debate about free trade and repeal of Corn
Laws, Malthus and David Ricardo were on the opposite side of this debate. Corn Laws in effect then set high
tariffs against imported grains, keeping the price of grains high to the benefit of the landowners. Malthus
opposed the repeal, again arguing that a decrease in price of food would improve the lot of working class,
which would cause population to rise, and then we are back to square one!
1.2. “General Glut”
Other than Marx, who is basically considered outside the sphere of “orthodox” economists, Malthus is the only
well-known economist before Keynes who mentions the possibility of economic stagnation. Until John
Maynard Keynes, practically all economists, including Malthus’ friend David Ricardo, denied the possibility of
economic stagnation. This problem is variously referred to as, over-production, under-consumption, or, as
Malthus termed it, general glut.
The argument against general glut goes as follows. In terms of modern national income accounting, the value
of all goods produced in a given time period, that is, the cost of producing these goods are returned back into
the economic flow as income to owners of factors of production. The recipients of the various categories of
income, namely, wages to workers, rent to owners of the land, and profit to capitalist are plowed back into the
economy. But what if people decide, rather than spending all their income, save part of it? Does this not take
part of funds out of circulation and make the economy shrink? The answer is, no.
First of all, since workers receive only subsistence wages, they must spend all their income on necessities to
maintain and reproduce the working class. Thus, all savings are done by capitalists and, to a lesser extent,
landowners. But why would capitalists save? The answer is, to further accumulate capital. The capitalists
urge to accumulate always finds a channel to invest the available savings.
Malthus’ argument was that the very fact that wages are stuck at the subsistence level keeps the working
class from consuming the very goods that it produces. Therefore, there is always the tendency for the
economy to over-produce, to experience a “general glut” of commodities. What alleviated this tendency to
overproduction was the expenditure by the “landed gentry”, who demanded the excess products, in terms of
luxury goods, without themselves contributing to total output of the economy.
In summary, in the conflict of interest among the three classes, workers, capitalist, and landowners, Malthus
was firmly in the landowners’ camp. He opposed the repeal of Corn Laws because it would have lowered the
price of grain, which would be harmful to the interests of landowners, and supported the landed gentry’s
profligate consumption habits because it helped to prevent a general glut.
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2. David Ricardo (1772-1723)
In modern perspective, David Ricardo can be considered more of an economists’ economist than any of the
other economists who populated the classical school, including Adam Smith. His contribution to economic
theory are still taught in modern economic textbooks. These contributions are explained below.
2.1. Use of Abstraction and Economic Models
Ricardo was the first economist who used models, abstracting from many details and peripheral aspects of
the “real world”, by making simplifying assumptions, to effectively and persuasively expound his arguments
about major economic issues of his time. He did not use graphs or mathematical functions. His arguments
were stated in very precise language, interspersed with simple numerical examples.
2.2.
Labor Theory of Value
The labor theory of value is an essential aspect of the economic models Ricardo uses to explain his theory of
rent, international trade, and his arguments for the repeal of Corn Laws.
Ricardo’s value theory is essentially the same as Smith’s, with some additional arguments with respect to the
cost of capital used in the production process in determining the value of a good. To Ricardo, cost of capital
can be reduced to the amount of labor time embodied in that part of capital that is used up in the production
process. This embodied labor time plus the current “live” labor time necessary for production make up the
cost, hence the value of the good.
2.3.
The Theory of Rent
Land, along with capital and labor, is a factor of production and its cost, counted as rent, is included in the
total cost of production, or the price of the product. So it appears, and it sounds logical. But Ricardo, using a
simple model showed that appearances are deceiving. He showed that price, rather than being determined
by rent, in fact, determines the rent.
To explain rent, Ricardo also used a concept that is one of the foundations of modern economic theory-marginal analysis. To simplify the model, Ricardo assumes that the landowner does not cultivate his own
land, he rents it to the tenant farmer. Land varies in quality and productivity. Thus, as population increases,
to produce more food, land of decreasing quality is cultivated.
Given a tract of land, the tenant farmer, the farmer capitalist, uses his own capital and hires workers to
cultivate the land. The value or price of “corn” is determined by how much it costs, expressed in the amount
of actual and embodied labor (capital) required to produce a unit, say a bushel. This price is equal to the cost
of production in the marginal land, the land with the lowest quality.
The following table shows how rent is generated. There are three tracts of land where 𝐴 has the highest
productivity and 𝐶 the lowest. Therefore, the output of the same dosage of labor and capital, costing $600,
diminishes from 400 bushels on tract A to 300 bushels on B, and to 240 on C. The price of a bushel of corn is
determined by the cost per bushel on the marginal land C, which is $600⁄240 = $2.50. Total revenue
accruing to each tract is obtained by multiplying output by $2.50. The difference between the total revenue of
A and C is $1,000 − $600 = $400, is the rent accruing to A, and that for B is $750 − $600 = $150.
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Land
A
B
C
Output
(bushels)
400
300
240
Total
cost
$600
600
600
Average
Cost
$1.50
2.00
2.50
Total
Revenue
$1,000
750
600
Rent
$400
150
0
This example illustrates Ricardo’s theory of rent, which implies that the chain of causation goes from the price
of corn to rent. The price of corn determines how much rent is paid to the landowner. Rent is not a factor in
the cost of production. According to Ricardo: “Corn is not high because a rent is paid, but a rent is paid
because corn is high.”
Ricardo defines rent as the payment “to the landlord for the use of the original and indestructible powers of
the soil.” Rent exists because of (1) the scarcity of fertile land and (2) the law of diminishing returns.
“If, then, good land existed in a quantity much more abundant than the production of food
for an increasing population required, or if capital could be indefinitely employed without a
diminished return on the old land, there could be no rise of rent; for rent invariably proceeds
from employment of an additional quantity of labour with a proportionally less return.”
2.4. Rent, Distribution of Income, and the Stationary State
Why has Heilbroner included Ricardo in the chapter titled “The Gloomy Presentiments”? This has to do with
impact of the rise in the landowners’ share, rent, as a percentage of national income, and the consequent
crowding out of the capitalists’ profits. The decreasing profits slows down capital accumulation, and in the
final analysis, brings it to a standstill.
Ricardo’s stationary state model can be explained using the following diagram. The downward curve labeled
MP is the marginal product. When capital and labor added in fixed proportions to the land, as the lower
quality land is cultivated, marginal productivity of capital/labor decreases. When L₁ units of capital/labor is
used on the available land, the total output (in bushels of corn) is shown as the area under the MP curve,
OQ₀BL₁. The line W represents the subsistence wage.
Units of output
Q₀
Rent
Q₁
Q₂
B
Profit
C
D
Q₃
E
F
Wage
W
MP
O
L₁
L₂
L₃
Doses of capital and labor
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Given the subsistence wage rate, workers’ share of total output is OQ₃EL₁. Since marginal product is
OQ₁ = L₁B, then any output above this marginal product accrues to landowners as rent. This is shown as the
area of the triangle Q₀BQ₁. What is left, the residual, is the capitalists’ profit—the area Q₁BEQ₃.
Now, as the population rises, and the economy is forced to produce more food on lower quality land using L₂
units of capital/labor, marginal productivity falls to OQ₂ = L₂C. Rent, in this situation, is increased to Q₀CQ₂.
Wage rate remains at the subsistence level, using the Malthusian thesis. Thus, the decreasing rate of return,
squeezes capitalists profit between the wages fund and rent. In the long-run, when marginal productivity
falls to the subsistence level, all profits are squeezed out and rent takes it all, after covering the wages fund.
This is the stationary state, where capital accumulation comes to a standstill.
2.5. Comparative Advantage, Specialization, and the Benefits of International Trade
Ricardo’s theory of comparative advantage is now taught in every introductory course in microeconomics
and international economics. The theory proves that in any economic transaction or trade, both parties
to the trade would be better off if they specialized in the production of a good in which each has a relative
or comparative advantage. That is, each is relatively more productive in the production of one good
compared to the other good that are being traded. The comparison of productivity is not between the
two parties, rather, it is between the production of the two goods subject to the trade.
To show how comparative advantage works, Ricardo uses the two countries England and Portugal as the
trade partners, and cloth and wine as the two goods that are being traded. The following is a slightly
altered example which Ricardo uses. In this two country/two commodity model, suppose both countries
use equal amount of labor time to produce cloth and wine. The output of cloth and wine are shown in the
two countries are shown in Table A.
Cloth
Wine
Table A
England
90
80
Portugal
100
120
The table shows that equal doses of labor and capital in England can produce either 90 units of cloth or
80 units of wine. In Portugal, the same dose of labor and capital can produce either 100 units of cloth or
120 units of wine. The figures indicate that Portugal has an absolute advantage in the production of both
goods. Labor and capital or more productive in the production of both cloth and wine in Portugal than in
England. The diagram below shows that Portugal can allocate its resources and produce any combination
of cloth and wine along its production possibilities line (PPL), which would be greater than any
combination that England can produce along its production possibilities line.
The question is, however, which country has a comparative advantage in the production of either cloth or
wine. Consider cloth first. In the diagram below, Portugal’s PPL is steeper, where the slope is ∆𝑊 ⁄∆𝐶 =
120⁄100 = 1.2, than England’s PPL, with a slope of ∆𝑊 ⁄∆𝐶 = 80⁄90 = 0.89. This tells us that in
Portugal the relative cost of producing each additional cloth is 1.2 wine, while in England the relative cost
of cloth is 0.89 wine. This means that, in terms of relative costs, it is cheaper to produce cloth in England
than in Portugal. England has a comparative advantage in producing cloth
Regarding Wine, the cost of each additional wine in Portugal is ∆𝐶 ⁄∆𝑊 = 100⁄120 = 0.83 cloth, while in
England each additional wine costs ∆𝐶 ⁄∆𝑊 = 90⁄80 = 1.125 cloth. The relative cost of wine is lower in
Portugal. Portugal has a comparative advantage in producing wine.
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Wine
120
80
60
40
45 50
90 100
Cloth
Suppose both countries pursue a policy of autarky, being self-sufficient in cloth and wine both, and each
chooses the following combinations of cloth and wine. The combined international output is Cloth = 95
and Wine = 100.
Cloth
Wine
Table B
England Portugal
45
50
40
60
Total
95
100
On the other hand, if each country specializes in the good according to its comparative advantage, one of
the possibilities is shown below.1 Note that now the international total output of cloth and wine with
specialization is greater than that under autarky: Cloth = 100, Wine = 108.
Cloth
Wine
Table C
England Portugal
90
10
0
108
Total
100
108
Finally, if both countries trade in a way that makes them both better off than under autarky, one of the
possible outcomes would be the following,
Cloth
Wine
Table D
England Portugal
48
52
43
65
Total
100
108
The diagram below shows that with specialization and trade both countries can produces and consume
combinations of both goods that goes beyond each individual PPL.
You can obtain these numbers by simply using the linear PPL equations:
120
Portugal: 𝑊 = 120 −
𝐶
𝐶 = 10
𝑊 = 120 − 1.20(10) = 108
1
England: 𝑊 = 80 −
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100
80
90
𝐶
𝐶 = 90
𝑊=0
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Wine
120
80
65
43
4852
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90 100
Cloth
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