"The ordinary means therefore to encrease our wealth and treasure is by Forraign Trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value. [sic]"

The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour. (Book I, Chapter I)

The natural effort of every individual to better his own condition...is so powerful, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations. (Book IV, Chapter V)

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.

"Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer," (Book IV, Chapter 9)

"A nation is rich, not according to the abundance of its money, nor to the high money value at which its commodities circulate, but according to the abundance of its commodities, contributing to its comforts and enjoyments."

Ricardo, David, 1815, Essay on the Influence of a Low Price of Corn on the Profits of Stock

Ricardo, David, 1815, Essay on the Influence of a Low Price of Corn on the Profits of Stock

• In Ricardo's view, land was a fixed factor (certainly made sense for 19th century England) with diminishing returns

• Start cultivation on most (agriculturally) productive land first

  • Extend cultivation into worse marginal land and worse marginal land...
  • As more land is used, more and more labor and capital would be needed to increase output (diminishing returns to land)

“If all land had the same properties, if it were unlimited in quantity, and uniform in quality, no charge could be made for its use, unless where it possessed peculiar advantages of situation...It is only, then, because land is not unlimited in quantity and uniform in quality...that rent is ever paid for the use of it.”

“[R]ent invariably proceeds from the employment of an additional quantity of labour with a proportionally less return”

Smith, Adam, 1776, An Enquiry into the Nature and Causes of the Wealth of Nations

“The rent of land, therefore, considered as the price paid for the use of the land, is naturally a monopoly price. It is not at all proportioned to what the landlord may have laid out upon the improvement of the land, or to what he can afford to take; but to what the farmer can afford to give,” (Book I, Chapter 11).

• Most of the classical economists thought landowners were parasites, their interests opposed to the rest of a growing society

• In Ricardo's steady-state equilibrium, no more profitable opportunities for investment, workers earn subsistence wages, but landlords are making out like bandits with high rents

• Ricardo was more concerned with predicting the distribution of income across landlords, capitalist, and workers in equilibrium than a model “growth” per se

• Important ideas from Ricardo that we'll need

  1. Diminishing returns
  2. Economic rent (“Ricardian rent”) — return earned above opportunity cost, arises due to relative quality differences and scarcity of some fixed factor
     • permission for using something the possessor did not produce
     • an enormous political problem, “rent-seeking” behavior

"Population, when unchecked, increases in a geometrical ratio. Subsistence increases only in an arithmetical ratio. A slight acquaintance with numbers will shew the immensity of the first power in comparison of the second."

"The power of population is so superior to the power of the earth to produce subsistence for man, that premature death must in some shape or other visit the human race."

• "Malthusian" Trap: finite resources place a hard constraint on population growth

  • When societies grow too large, scarce resources kill off population (famine, disease, warfare)

• Enormously important concept, we'll explore it in more detail in a later lesson

• Smith more optimistic and dynamic, again seeks to explain why countries grow wealthy

• Ricardo has a pessimistic vision of the future: a static long-run equilibrium steady-state

  • “The Ricardian vice” of using highly abstract simple models for econoomic analysis

• Economics as the “dismal science”

• Harrod-Domar Model of economic growth

• Based off of Keynesian macroeconomic concepts:

  • Marginal Propensity to Save (MPS), ΔSΔY: proportion of (changes in) income saved ∈[0,1]
  • Incremental Capital-Output Ratio (ICOR), ΔKΔY¹: addition to capital stock K needed to produce an extra dollar of output Y

¹ Or ΔIΔY, where I is net investment, the change in capital stock.

• Harrod-Domar Model of economic growth

• An economy's equilibrium growth rate =MPSICOR

  • ↑K⟹↑Y⟹↑S
  • We can impute the conditions necessary to yield a desired growth rate

• “Financing gap” between “required” investment rate (predicted from model) and a country's actual saving rate

• Low income countries can't increase savings ⟹foreign aid from countries with higher savings will lead directly to rapid growth¹

“To sum up, Domar's model was not intended as a growth model, made no sense as a growth model, and was repudiated as a growth model. So it was ironic that Domar's growth model became, and continues to be today, the most widely applied growth model in economic history,” (p.28).