Wednesday, August 14, 2019
Ricardo’s Theory of Distribution
RicardoÃ¢â¬â¢s contribution in his theory of distribution Ricardo sought to show how changes in distribution affect production and contended that as the economy grows, rent rises which leads to low profits and deters economic growth. Ricardo's theory of distribution has been briefly enunciated as follows: Ã¢â¬Å"(1) The demand for food determines the margin of cultivation; (2) this margin determines rent; Ricardo defined rent as Ã¢â¬Å"payment for the original and indestructible powers of the soilÃ¢â¬ .He identified rent as the margin of cultivation (i. e. When more land was taken to cultivation), but rent also arises because of diminishing returns of the land of the same quality (i. e. on the intensive margin). (3) the amount necessary to maintain the labourer determines wages; Increased agricultural production leads to higher money wages but the same real wages. Ricardo assumed, via the population principle, that Ã¢â¬Ëwage rates would be at subsistence levels in the long run. On the other hand, higher nominal wage rates and increasing aggregate rents place a two-way squeeze on profits. Although under competition profits are the same for all firms in a given industry, the inevitable tendency of profits is to decline as output increases. Eventually a minimum profit is reached at which additional capital accumulation and new investment ceases. (4) the difference between the amount produced by a given quantity of labour at the margin and the wages of that labour determines profit. Ricardo recognized that there is no measure of value, since any measure chosen varies with fluctuations in wages and profit rates. Moreover, he feels that the rising of rents will push profits down until there is no more profit, which probably might be the end of capitalism in his opinion. These theorems are too absolutely stated, and require much modification to adapt them to real life.