Ricardo and the Theory of Value Distribution and Growth

Giovanni A. Caravale, Domenico A. Tosato

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135033378
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

The book presents a rigorous reconstruction of Ricardo's contribution to economic theory and a unifying interpretation of the key issues of Ricardo's research. Part One deals primarily with the problems of value and distribution Part Two deals specifically with the issues of distribution and growth. * Contemporary economic literature in the fields of value, distribution and growth is witnessing a renewed interest in the approach of the classical school, notably in the work of David Ricardo.

Part I

Value and Distribution

1 Scope and Method of the Work

1.1 The Renewed Interest in Ricardo’s Theory

Recent years have witnessed a renewed interest in the theoretical work of David Ricardo. On the analytical plane, this circumstance may be attributed both to critical developments in the field of the theory of value and to significant advances in the field of growth theory.

As to the first aspect, it may be recalled that the ‘crisis’ of the marginal theory of value and distribution is intimately related to the contribution of Piero Sraffa (86), who explicitly points out the connection of his work with the theories of the old classical economists (in particular, of David Ricardo). For Sraffa’s suggested reconstruction of the theory of value is based on a logical scheme which rejects the neoclassical supply-and-demand approach and is centred instead upon the notion of ‘prices of production’, strictly linked to the Ricardian concept of ‘natural prices’. As to the second aspect, it may be said that Ricardo can be rightly considered to be a forerunner of modern growth theory, in that he built a simple but impressive macroeconomic model in which the relation between growth and income distribution plays a key role.¹

On a different plane, an additional reason pointing back to Ricardo may be mentioned – the growing awareness of the relevance of environmental constraints on economic expansion. From this point of view, Ricardo’s model with diminishing returns may be viewed as directly pertinent for the problems of a world economy with limited natural resources.

The renewed interest for the analytical issues tackled by Ricardo, and for the crucial assumptions on which his reasoning rests, has led to a passionate revival of study and debate – for which the publication of Ricardo’s complete Works and Correspondence (84) has represented a significant point of reference. The approach of some of the works on the Ricardian theory is predominantly critical in nature,² and tends to concentrate on the ambiguities originating in the objective difficulty of the text, in the use, at times inconsistent, of terms and concepts, and in the incomplete specification of the assumptions.

As opposed to this type of analysis, a ‘more constructive’ approach³ tends to state ‘explicitly the assumptions needed to eliminate the ambiguities’ (Pasinetti (64), p. 78) and to reconstruct Ricardo’s analytical propositions – generously interpreting obscure or controversial passages of his writings, as Marshall ((54), p. 670) and Barone ((4), p. 435) have suggested we should do. The present work is to be viewed in this latter perspective.

1.2 Scope of the Work

Ricardo’s thesis of the long-run tendency of the economy towards a stationary-state situation is based on a set of crucial assumptions – diminishing returns in agriculture, reinvestment of profits and a theory of distribution in which the income of the capitalist class represents a residual. This set of assumptions implies a strict connection between the rate of profit and the rate of capital accumulation. It is thus necessary, for a theory which aims at proving the validity of that thesis, to solve the problem of the unambiguous determination of the profit rate and to show how diminishing returns affect its behaviour through time.

These problems found a straightforward solution within Ricardo’s primitive agricultural model of the Essay on Profits (67). It was in the attempt to escape the limitations of this model that Ricardo felt, in the Principles (68), the need for a ‘developed theory of value’ (Dobb (21), p. 73), to which – we will maintain – the role was attributed of making it possible to draw in the general case the same type of conclusions, as to the relation between diminishing returns and the rate of growth, that had been reached within the more restricted analytical framework of the Essay on Profits. In the Ricardian theoretical construction the theory of value thus performs, in our view, a substantially instrumental role.

It is clear that the thesis, occasionally emerging in the literature, according to which the theory of value represents for Ricardo a field of investigation logically autonomous from the rest of his inquiry, does not fit into this approach.

This does not mean that specific attention should not be devoted to Ricardo’s long and troubled reflection on the topic of value, but rather that this problem should be treated with the purpose of emphasizing the strict connection between value and growth in the Ricardian framework of analysis. We shall try to show that this aim can be achieved when the whole of Ricardo’s theoretical research is viewed as centred on the rate of profit, as the true key variable of the system.

In this perspective the present work is divided in two parts. Part I deals with the problems of value and distribution, while Part II deals with the issues of distribution and growth.

The scope of Part I is that of exploring the possibility of defining an unambiguous relation between diminishing returns in agriculture and the general rate of profit, and of analysing the way in which Ricardo tackled this problem and tried to solve it. In particular, Chapter 2 aims at defining a general (i.e. free of the limitations of the labour theory of value) framework of analysis for the study of the problems of income distribution arising from diminishing returns in agriculture. The distributive antagonism among social classes, stemming from the limited availability of fertile land, is viewed as an essentially dynamic problem; the difference with Sraffa’s approach in Production of Commodities (86) is accordingly underlined. It is shown that, in the framework of analysis referred to, the issue of the distributive antagonism cannot find a solution when it is posed in terms of the determination of the impact on the aggregate amount (or, what is the same, on the share) of profits. It is further shown that the solution can be arrived at if the problem is posed instead in terms of the determination of the effects of diminishing returns on the rate of profit. The solution is expressed both as a relation between money wages and the profit rate (‘wage equation’) and as a relation between the level of the labour input in agriculture and the rate of profit (‘profit equation’). The implications of the results obtained are briefly commented on, both with reference to Adam Smith’s theory of prices and with respect to more general issues relevant for the Ricardian scheme of analysis.

Chapter 3 brings into the picture Ricardo’s search for an invariable measure of value and tries to show how this search is to be interpreted as an attempt to find a general solution to the problem of the determination of the rate of profit along a different logical approach. In other words, the effort is made to clarify how this line of research, so tenaciously and admittedly in vain pursued by Ricardo till the end of his life, is addressed precisely to the solution of his central problem – the relation between diminishing returns and the rate of profit. The subject of the invariable standard of value has been recently resumed, though in a different framework of analysis, by Sraffa with his construction of the standard commodity. A comparison between the requisites of Ricardo’s invariable measure of value and the properties of Sraffa’s numéraire is then made for the purpose of assessing the possibility of a significant use of the standard commodity in the Ricardian context. The analysis carried out seems to indicate that a negative answer should be given to this question.

Part II is devoted to the study of growth in some simplified versions of the Ricardian dynamic model. While the analysis of Part I belongs to the realm of comparative statics in the sense that only the direction of movement of the rate of profit is shown, the method adopted in Part II is truly dynamic – the time path of the rate of profit qua rate of capital accumulation as well as that of the other variables being fully specified.

The point of departure of our analysis (Chapter 4) is represented by an examination of Pasinetti’s brilliant mathematical formulation of the Ricardian system (64), which appears to be particularly relevant for our purpose on account of its analytical rigour and close adherence to the fundamental traits of Ricardo’s theory. Pasinetti’s analysis, centred as it is on the definition of individual natural equilibrium positions of the economy and on the proof that only the stationary-state equilibrium is stable, does not, however, represent a truly dynamic study of the Ricardian system in that his model does not include, as an essential part, the interaction between the population adjustment mechanism and that of capital accumulation.

The effort is then made in the following chapters to present a dynamic Ricardian model characterized by the joint consideration of these two mechanisms. On the basis of this model, it becomes possible to determine the time paths of the variables and to describe the transition of the economy from a ‘progressive’ situation (with growing population and net capital accumulation) to a stationary situation (in which these events cease to occur), due to the working of diminishing returns in agriculture.

Chapter 5, in particular, studies the connection between growth and distribution with reference to a one-sector (agricultural) Ricardian model. In Chapter 6, the same kind of analysis is extended to a two-sector (agriculture and industry) model; some steps in the direction of further extension to a three-sector model (agriculture, industry and machines) are taken in the appendix to Chapter 6. Chapter 7, finally, examines problems – of ‘traverse’, in Hicksian terminology (see Hicks (35), ch. 16) – arising from changes in the saving behaviour of social classes.

The time paths of the variables defined in the various models considered are classified in the two categories of equilibrium and disequilibrium paths. The problems connected with this distinction will be discussed in the following section.

1.3 The Concept of Natural Equilibrium in the Ricardian Context

The concept of ‘natural equilibrium’ is central to Ricardo’s t...