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The central themes that emerge out of David Ricardo's On the Principles of Political Economy, and Taxation.

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Introduction

The central themes that emerge out of David Ricardo's On the Principles of Political Economy, and Taxation are the relationship between real wages and the general rate of profits, and the relation between income distribution and natural prices. Ricardo maintains that real wages have an inverse relationship to the general rate of profits in an economy. Before he delves into a detailed explanation of this relationship in the chapter on 'Profits' he refers to profit rates as a function of the quantity of labour employed in the production process in earlier chapters on 'Value'. Ricardo's argument leads to the notion that the rate of profit depends on the relative value of goods, which in turn depend on the proportion of fixed to variable capital employed and the wages accorded to them. According to Ricardo, goods produced differ in value (amongst other things) on account of the different quantities of fixed capital to labour they employ in the production process (Ricardo 1817-1821, 34). Therefore industries with different fixed capital are affected differently by a rise in labour and wages. It is affirmed that commodities which incorporate a great deal of fixed capital in their production, and which take a longer time to be brought into the market would fall in relative value, whilst those which are primarily produced by labour and are quickly brought to the market would rise in relative value (Ricardo 1817-1821, 35). ...read more.

Middle

Since the farmer never retains more of the value of the produce than a fixed amount (given as 720l.) his profits will ultimately diminish as he has to pay more out of his fixed intake in the form of higher wages (Ricardo 1817-1821, 114). In considering this link between wages and profits, Ricardo fails to see that the farmer, facing higher expenditures such as wages, can pass this onto the consumer in terms of higher prices. With regards to his argument, these higher prices would then result in higher wages which inturn poses a problem for the farmer, however Ricardo fails to touch on this notion in his theoretical representation. The question also needs to be posed as to why the farmer is faced with the same real value before and after wage increases. The figure of 720l. is prominent in his discussion as the farmer's constant revenue. It should be noted that this is a random figure, obtained by multiplying random amounts produced by random prices on a given land. Ricardo seems to make these figures up to suit his argument rather than deriving them from real life scenarios and observational data. The reason given for the fixed revenues of the farmer is that a rise in corn will be accompanied by an equal rise in rent, or additional labour employed, leaving the farmer with the same real value (Ricardo 1817-1821, 114). Here he contradicts the assumption of the opening paragraphs, that the farmer faces no rent. ...read more.

Conclusion

With constant or decreasing real wages of workers, and fixed profits of capitalists, the only group that will again benefit and face greater income distribution, are the landlords. Ricardo uses 'corn wages' to further illustrate this concept. Even though the labourer will receive more wages with an increase in prices, his corn wages will be reduced and his general condition will be deteriorated (Ricardo 1817-1821, 102). This rings true for markets existent today. With the incorporation of corn as an explanatory tool, Ricardo is able to apply his theory to the everyday and successfully show its impact on the average labourer. He goes on to state affirmatively that as price increases, wages will always rise but by less than the rise in rent (Ricardo 1817-1821, 103). This stance again lacks substantiated evidence derived from a valuable source. The figures used to illustrate this perception are again randomly generated. He concludes that wage determination should be left to market forces and that interferences in the market such as the Poor Laws, only serve to exacerbate the situation further. His analysis though at times vague and unfounded, proves insightful when applied to the economic situation present at the time of his writings. Even though he embarks on concepts with incorrect assumptions, primarily the 'labour theory of value', he does this in order to achieve a solid conclusion relevant to the economic system of his day. In Principles, the theories Ricardo developed applied to the time they were written in, and were therefore able to be incorporated in government policy and provide solutions to existing problems. ...read more.

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