He goes on to claim that the greatest effects on profits that would be experienced from an increase in wages could only amount to six or seven percent. Ricardo purports that profits could not ‘admit of a greater general and permanent depression than to that amount’ (Ricardo 1817-1821, 36). This random statement is placed in the middle of his argument without any conclusive evidence supporting it, and represents a further weakness in his attempt at linking labour and profits.
In the chapter on ‘Value’, Ricardo considers there to be many factors which result in changes in relative values but concludes that he will only refer to alterations in relative values resulting from the employment of greater or less quantity of labour. In making these simplistic assumptions, he is later able to make viable conclusions about the relation between the rate of profits and the quantity of labour and their wages.
In Chapter VI, “On Profits” Ricardo concludes that as wages rise, profits would fall and that the only group that would benefit from such alterations in society would be the landlords.
His argument centres around two industries, the manufacturing and agricultural sectors. He assumes that the farmer and the manufacturer divide the whole value of their commodities into the ‘profits of stock’ and the ‘wages of labour’. They do not ‘sacrifice any portion of their produce for rent’ (Ricardo 1817-1821, 110). He also assumes that money is invariable in value and therefore every variation in price is attributable to an alteration in the value of the commodity. (Ricardo 1817-1821, 110)
He shows that as the price of raw materials rises, so does the price of wages which diminishes the rate of profits for the farmer and manufacturer as they have to pay higher wages to their employees. If for example the price of corn were to rise, then the farmer is obliged to pay higher wages (since the labourer requires subsistence wages to be able to afford this necessity – corn). 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. Perhaps it is because the farmer is moved to lesser quality land, that rent is now generated on the higher quality land (Ricardo 1817-1821, 75) however Ricardo fails to mention this here.
This is also in contradiction to Ricardo’s ‘labour theory of value’ where increases in the quantity of labour required in the production process are given to lead in increases in the value of the commodities produced. Therefore, if an increase in corn (or other raw materials) results in more workers employed, should this not result in a higher value of the commodity produced and a subsequent increase in profits? In the earlier chapters, Ricardo explicitly separates wages from labour input and states that alterations in wages could not affect the value of a commodity if the same amount of labour is still used (Ricardo 1817-1821, 28). The notion of the inverse relationship between the rate of profits and wages comes at a total contradiction to ‘the labour theory of value’. Ricardo too is aware of the inadequacy of this theory yet still presents it in order to achieve a simplification of his analysis and the required conclusions.
At times he seems to contradict himself and the assumptions, he makes and does not delve into a complete explanation of his concepts. He often reiterates the same point over and over, in order to give it validity.
Ricardo reaches the conclusion that, if the farmer and the manufacturer get no additional value, but have to pay higher wages, than profits must fall. Since the farmer has an unvarying fund of 720l. to be distributed between him and the labourer, than wages are shown to have an inverse relationship to profits.
Since higher wages are offset by higher relative prices, then workers are no better off than before the price increases (Ricardo 1817-1821, 112). The only group left enjoying higher profits are the landlords, via the increased rent they receive.
Ricardo is successful in depicting the unproductive nature of landlords and their position in society. He concludes that ultimately, the incentives for the farmer and manufacturer to undertake productive activities will diminish as profits diminish (Ricardo 1817-1821, 122). This leads to the second central theme in Principles which is the relation between natural prices and the distribution of income.
Ricardo approaches this by differentiating between natural and market prices. His fundamental claim which is correct even in the modern market economy, is that as prices diverge from their natural level, ‘profits are elevated above, or depressed below their general level, and capital is either encouraged to enter into or is warned to depart from the particular employment which the variation has taken place’(Ricardo 1817-1821, 88). The tendency for capitalists to enter the more profitable industry in the long term, ensures that the profits of all capitalists are equalized or at least fixed in some proportion.
The natural price of labour is assumed to be that which is necessary to enable workers to live at subsistence, enough to ‘perpetuate their race, without either increase or diminution’ (Ricardo 1817-1821, 93) and the market price is presupposed to have a tendency to conform to the natural price with only slight deviations. Via an explanation of real compared to nominal wages, Ricardo is able to outline that increases in wages do not mean an increased income distribution to labourers, as offsetting increases in prices often result in declining real wages (Ricardo 1817-1821, 102). 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.
References
Ricardo, David 1817-1821 On the Principles of Political Economy, and Taxation, chs i-vi, pp. 1-127 eds. Sraffa, Piero, Cambridge University Press
Nelly Harapoff
011 3931
A Critical Review of David Ricardo’s On the Principles of
Political Economy, and Taxation
Abstract
The main themes surrounding David Ricardo’s Principles are i) the relation between the natural level of prices and income distribution and ii) the inverse relationship between real wages and the general rate of profits. Ricardo comes to the first conclusion via the relationship between market and natural prices, delineating their effect on the wages of the labourer, and profits of the capitalist and landlord. The second theme is illustrated once the relationship between prices of goods, wages and subsequent profits is established.
