Model Answer
0 min readIntroduction
David Ricardo, a prominent classical economist, developed a system of thought that profoundly influenced economic theory in the 19th century. His work, *On the Principles of Political Economy and Taxation* (1817), laid the foundation for understanding the distribution of income among different classes – landowners, capitalists, and workers. Ricardo’s system posits that income is distributed as rent, wages, and profit. Crucially, he believed these components don’t move in unison with changes in the level of income; rather, their movements are distinct and often inversely related. This answer will examine these differing movements within the Ricardian framework, focusing on the dynamics of each factor of production as income levels evolve.
Ricardian System: A Foundation
Ricardo’s system is built on several key assumptions: diminishing returns to agricultural land, wages determined at a subsistence level, and a relatively fixed supply of capital. These assumptions are critical to understanding how income is distributed and how changes in income levels affect each component.
Rent in the Ricardian System
Ricardo’s theory of rent is central to his system. He argued that rent arises due to differential rent – the difference in productivity between the most fertile land and the least fertile land in use. As income (and population) increases, demand for agricultural products rises, necessitating the cultivation of less fertile land. This pushes up the price of agricultural goods.
- Increasing Rent with Income: As income rises, the demand for food increases, bringing more marginal lands into cultivation. This leads to a rise in rent on the superior lands, as their differential advantage becomes more pronounced.
- No Limit to Rent: Ricardo believed there was no natural limit to rent; it could continue to rise as long as demand for food outstripped supply and less fertile lands were brought into production.
Wages in the Ricardian System
Ricardo adhered to the Iron Law of Wages, which states that wages tend to gravitate towards the minimum level necessary for the subsistence of the worker and their family. This is because any increase in wages would lead to population growth, increasing the supply of labor and driving wages back down to the subsistence level.
- Wages Relatively Constant: In the Ricardian system, wages are largely independent of changes in income. While short-term fluctuations might occur, wages are ultimately constrained by the subsistence level.
- Impact of Income on Subsistence: While wages themselves are fixed at subsistence, the *cost* of subsistence might rise with income (due to increased demand for certain goods). However, this doesn’t translate into higher wages, but rather a lower standard of living for workers.
Profit in the Ricardian System
Profit, in Ricardo’s view, is the residual income left after paying rent and wages. It is the return to capital and is crucial for investment and economic growth. However, Ricardo argued that profit is inversely related to both rent and wages, and therefore, to the level of income.
- Decreasing Profit with Income: As income rises, rent increases (as explained above). Since wages are relatively constant, the increase in rent directly reduces the share of income accruing to profit.
- Diminishing Returns & Profit: The cultivation of less fertile land (due to rising income and demand) leads to diminishing returns. This means that each additional unit of capital and labor yields less output, reducing the rate of profit.
- Stationary State: Ricardo predicted that, over time, the relentless increase in rent and the diminishing returns to agriculture would lead to a “stationary state” where profit would fall to zero, and economic growth would cease.
Comparative Movements with Income
The following table summarizes the movements of profit, wages, and rent with changes in the level of income:
| Factor of Production | Movement with Increasing Income |
|---|---|
| Rent | Increases |
| Wages | Remains Relatively Constant (at subsistence level) |
| Profit | Decreases |
It’s important to note that Ricardo’s model is a simplification of reality. It assumes a closed economy, a fixed supply of capital, and a focus solely on agricultural production. However, his insights into the dynamics of rent, wages, and profit remain relevant for understanding the distribution of income and the potential limitations to economic growth.
Conclusion
In conclusion, Ricardo’s system demonstrates a distinct and often inverse relationship between profit, wages, and rent as income levels change. Rent rises with increasing income due to differential rent, wages remain anchored at the subsistence level, and profit declines as rent increases and diminishing returns set in. While his model has limitations, it provides a valuable framework for understanding the complexities of income distribution and the potential for long-term economic stagnation. The Ricardian framework highlights the importance of technological progress and capital accumulation in offsetting the negative effects of diminishing returns and maintaining economic growth.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.