Economic Essays by David Ricardo (Routledge Revivals)

The Value Dimension (Routledge Revivals)
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https://quiquachanesttha.ga/map6.php This basic contradiction use-value, value continually reappears in newer and higher forms which grow out of the lower forms as part of an uninterrupted process. Marx could never have gone on to develop the concept of labour-power, and hence capital, without his analysis of the commodity contained in chapter one.

In fact, the very aim of the work, to reveal how the specific social form of organising production — capitalism — determines the development of society, would have been impossible without the first chapter of Capital. This concept characterised the relations between commodity producers — relations that are not expressed directly, as social relations, but only indirectly through the exchange of their products on the market. Thus social relations between producers are expressed as relations between things: relations determined outside of the control of the producers, but controlled by the law of value.

He demonstrates that Marx follows through this basic feature of commodity production in his treatment of the more developed relations of capitalism. As the social power of capital grows, the means of production come to dominate their producers, the working class.

In a crisis the resulting oppression of the working class becomes clear. Marxism shows that the overthrow of capitalist social relations is a precondition for overcoming the crisis in the interests of the workers. But it does deserve some criticism. But his failure to do this leads to certain theoretical problems.

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Pilling misuses the term, confusing financial or banking capital with finance capital pp95, The latter refers to the relationship between the two functions of capital, not just one-sidedly to the banks. Although Lenin emphasised the control of industry by the banks, it is clear that the development of the credit system has led industrial companies also to perform certain banking operations.

According to historian Cecil Woodham-Smith , Ireland in the s is an example of the dangers of specialization. When the union with Great Britain was formed in , Irish textile industries protected by tariffs were exposed to world markets where England had a comparative advantage in technology, experience and scale of operation which devastated the Irish industry.

Ireland was forced to specialize in the export of grain while the displaced Irish labor was forced into subsistence farming and relying on the potato for survival. When the potato blight occurred the resulting famine killed at least one million Irish in one of the worst famines in European history. As Woodham-Smith would later comment, "the Irish peasant was told to replace the potato by eating his grain, but Trevelyan once again refused to take any steps to curb the export of food from Ireland.

The classical and neoclassical formulations of comparative advantage theory differ in the tools they use but share the same basis and logic. Comparative advantage theory says that market forces lead all factors of production to their best use in the economy.

It indicates that international free trade would be beneficial for all participating countries as well as for the world as a whole because they could increase their overall production and consume more by specializing according to their comparative advantages. Goods would become cheaper and available in larger quantities. Moreover, this specialization would not be the result of chance or political intent, but would be automatic. However, the theories of free trade and comparative advantage are based on assumptions that are neither theoretically nor empirically valid [50] [51] :.

The international immobility of labour and capital is essential to the theory of comparative advantage. Without this, there would be no reason for international free trade to be regulated by comparative advantages. Classical and neoclassical economists all assume that labour and capital do not circulate between nations. At the international level, only the goods produced can move freely, with capital and labour trapped in countries.

David Ricardo was aware that the international immobility of labour and capital is an indispensable hypothesis. He devoted half of his explanation of the theory to it in his book.

He even explained that if labour and capital could move internationally, then comparative advantages could not determine international trade. Ricardo assumed that the reasons for the immobility of the capital would be: [50] [51]. Neoclassical economists, for their part, argue that the scale of these movements of workers and capital is negligible.

They developed the theory of price compensation by factor that makes these movements superfluous. In practice, however, workers move in large numbers from one country to another.

Today, labour migration is truly a global phenomenon. And, with the reduction in transport and communication costs, capital has become increasingly mobile and frequently moves from one country to another.

Economic Essays by David Ricardo (Routledge Revivals)

Moreover, the neoclassical assumption that factors are trapped at the national level has no theoretical basis and the assumption of factor price equalisation cannot justify international immobility. Moreover, there is no evidence that factor prices are equal worldwide. Comparative advantages cannot therefore determine the structure of international trade [50] [51].

If they are internationally mobile and the most productive use of factors is in another country, then free trade will lead them to migrate to that country. This will benefit the nation to which they emigrate, but not necessarily the others.

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An externality is the term used when the price of a product does not reflect its cost or real economic value. The classic negative externality is environmental degradation, which reduces the value of natural resources without increasing the price of the product that has caused them harm.

Ricardo on rent

The classic positive externality is technological encroachment, where one company's invention of a product allows others to copy or build on it, generating wealth that the original company cannot capture. If prices are wrong due to positive or negative externalities, free trade will produce sub-optimal results [50] [51]. For example, goods from a country with lax pollution standards will be too cheap. As a result, its trading partners will import too much.

And the exporting country will export too much, concentrating its economy too much in industries that are not as profitable as they seem, ignoring the damage caused by pollution. On the positive externalities, if an industry generates technological spinoffs for the rest of the economy, then free trade can let that industry be destroyed by foreign competition because the economy ignores its hidden value.

Some industries generate new technologies, allow improvements in other industries and stimulate technological advances throughout the economy; losing these industries means losing all industries that would have resulted in the future [50] [51]. Comparative advantage theory deals with the best use of resources and how to put the economy to its best use.

But this implies that the resources used to manufacture one product can be used to produce another object. If they cannot, imports will not push the economy into industries better suited to its comparative advantage and will only destroy existing industries [50] [51]. For example, when workers cannot move from one industry to another - usually because they do not have the right skills or do not live in the right place - changes in the economy's comparative advantage will not shift them to a more appropriate industry, but rather to unemployment or precarious and unproductive jobs [50] [51].

Comparative advantage theory allows for a "static" and not a "dynamic" analysis of the economy. That is, it examines the facts at a single point in time and determines the best response to those facts at that point in time, given our productivity in various industries. But when it comes to long-term growth, it says nothing about how the facts can change tomorrow and how they can be changed in someone's favour.

It does not indicate how best to transform factors of production into more productive factors in the future [50] [51]. According to theory, the only advantage of international trade is that goods become cheaper and available in larger quantities. Improving the static efficiency of existing resources would therefore be the only advantage of international trade. And the neoclassical formulation assumes that the factors of production are given only exogenously.

Exogenous changes can come from population growth, industrial policies, the rate of capital accumulation propensity for security and technological inventions, among others. Dynamic developments endogenous to trade such as economic growth are not integrated into Ricardo's theory. And this is not affected by what is called "dynamic comparative advantage".

In these models, comparative advantages develop and change over time, but this change is not the result of trade itself, but of a change in exogenous factors [50] [51]. However, the world, and in particular the industrialized countries, are characterized by dynamic gains endogenous to trade, such as technological growth that has led to an increase in the standard of living and wealth of the industrialized world.

In addition, dynamic gains are more important than static gains. A crucial assumption in both the classical and neoclassical formulation of comparative advantage theory is that trade is balanced, which means that the value of imports is equal to the value of each country's exports. The volume of trade may change, but international trade will always be balanced at least after a certain adjustment period.

Economic Essays by David Ricardo (Routledge Revivals)

The balance of trade is essential for theory because the resulting adjustment mechanism is responsible for transforming the comparative advantages of production costs into absolute price advantages. And this is necessary because it is the absolute price differences that determine the international flow of goods. Since consumers buy a good from the one who sells it cheapest, comparative advantages in terms of production costs must be transformed into absolute price advantages.

In the case of floating exchange rates, it is the exchange rate adjustment mechanism that is responsible for this transformation of comparative advantages into absolute price advantages. In the case of fixed exchange rates, neoclassical theory suggests that trade is balanced by changes in wage rates [50] [51]. So if trade were not balanced in itself and if there were no adjustment mechanism, there would be no reason to achieve a comparative advantage.

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However, trade imbalances are the norm and balanced trade is in practice only an exception. In addition, financial crises such as the Asian crisis of the s show that balance of payments imbalances are rarely benign and do not self-regulate. There is no adjustment mechanism in practice. Comparative advantages do not turn into price differences and therefore cannot explain international trade flows [50] [51]. Thus, theory can very easily recommend a trade policy that gives us the highest possible standard of living in the short term but none in the long term.

This is what happens when a nation runs a trade deficit, which necessarily means that it goes into debt with foreigners or sells its existing assets to them. Thus, the nation applies a frenzy of consumption in the short term followed by a long-term decline. The assumption that trade will always be balanced is a corollary of the fact that trade is understood as barter. The definition of international trade as barter trade is the basis for the assumption of balanced trade.

Ricardo insists that international trade takes place as if it were purely a barter trade, a presumption that is maintained by subsequent classical and neoclassical economists. The quantity of money theory, which Ricardo uses, assumes that money is neutral and neglects the velocity of a currency. Money has only one function in international trade, namely as a means of exchange to facilitate trade [50] [51].

In practice, however, the velocity of circulation is not constant and the quantity of money is not neutral for the real economy. A capitalist world is not characterized by a barter economy but by a market economy. The main difference in the context of international trade is that sales and purchases no longer necessarily have to coincide. The seller is not necessarily obliged to buy immediately. Thus, money is not only a means of exchange. It is above all a means of payment and is also used to store value, settle debts and transfer wealth.

Thus, unlike the barter hypothesis of the comparative advantage theory, money is not a commodity like any other. Rather, it is of practical importance to specifically own money rather than any commodity. And money as a store of value in a world of uncertainty has a significant influence on the motives and decisions of wealth holders and producers [50] [51].

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Ricardo and later classical economists assume that labour tends towards full employment and that capital is always fully used in a liberalized economy, because no capital owner will leave its capital unused but will always seek to make a profit from it. That there is no limit to the use of capital is a consequence of Jean-Baptiste Say's law, which presumes that production is limited only by resources and is also adopted by neoclassical economists [50] [51]. From a theoretical point of view, comparative advantage theory must assume that labour or capital is used to its full potential and that resources limit production.

There are two reasons for this: the realization of gains through international trade and the adjustment mechanism. In addition, this assumption is necessary for the concept of opportunity costs. If unemployment or underutilized resources exists, there are no opportunity costs, because the production of one good can be increased without reducing the production of another good. Since comparative advantages are determined by opportunity costs in the neoclassical formulation, these cannot be calculated and this formulation would lose its logical basis [50] [51].

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A systematic analysis of this relationship has however been lacking. Samuelson Comparative advantage theory deals with the best use of resources and how to put the economy to its best use. The basic assumption of the model are: the process of production is circular that is the products are also the means of production and there are no other means of production apart from the products ; the total quantities of each product and the production technology are given; commodities are divided into basic and non-basic and the system contains at least one basic commodity — a basic commodity enter directly or indirectly into the production of any other commodities —; the wage is variable and paid post-factum as a share of the annual product. Comparative advantage is a theory about the benefits that specialization and trade would bring, rather than a strict prediction about actual behavior. Those with higher incomes spend a smaller percentage even when luxury consumption is considered, while saving the remaining part of income. More recently, Golub and Hsieh [40] presents modern statistical analysis of the relationship between relative productivity and trade patterns, which finds reasonably strong correlations, and Nunn [41] finds that countries that have greater enforcement of contracts specialize in goods that require relationship-specific investments.

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Toggle navigation Additional Book Information. Description Table of Contents. Summary David Ricardo — was a hugely influential British political economist and stock trader.