Re: Ricardo's Corn Model

[allin cottrell <cottrell@xxxxxxxxxxxxxxxxx>]

Keynes had very little to say about Ricardo, in his published
writings at any rate.  He basically lumped Ricardo with J-B Say --
R's adherence to Say's Law was, for Keynes, his most salient
characteristic (and this, of course, damned him, by contrast with
Malthus).

But I think it is quite interesting to examine the context of
Ricardo's (one) reference to Say's Law in the Principles.  This
occurs in chapter XXI, where he is criticising Smith's views on the
tendency of the rate of profit to fall due to an "increase of stock."

R. quotes Smith: "When the stocks of many rich merchants are
turned into the same trade, their mutual competition naturally
tends to lower its profit; and when there is a like increase of stock
in all the different trades carried on in the same society, the same
competition must produce the same effect in all."

This argument seems open to the charge that it involves a micro-
macro confusion.  Yes, if capital flows into a particular industry,
facing a given, downward-sloping demand curve for its output, we
expect the rate of profit in that industry to fall.  But it is not at all
clear that the same holds for the accumulation of capital in
general, since it is surely invalid to suppose that the demand
schedule for output in general is invariant with respect to the
overall level of investment spending.

Now this is not exactly how Ricardo puts the matter, but I think he
is getting at something similar.  He sees two ways in which
accumulation of capital can depress profits: First, the resulting
increase in the demand for labor will raise wages at the expense of
aggregate profits.  But, for Ricardo, this is a short-run effect: the
high wages will cause the Malthusian population mechanism to
kick in (population and labor force expand, and wages are forced
down again).  Second, however, the resulting expansion of
population will force an extension of the margin in agriculture,
raising the labor-time cost of providing the workers' subsistence
and simultaneously increasing rent.  This latter effect is, in R's
view, the *only* channel by which accumulation of capital tends
permanently to lower profit.

Say's Law comes into the picture as a means of resisting Smith's
"competition" argument.  *Investment*, says Ricardo, will
generate its own demand, rather than merely increasing aggregate
output against a fixed demand.  Now of course, the same (or
something very similar) is true in Keynes's system: investment
raises aggregate demand via the multiplier.  Thus, ironically, if
Keynes had paused to consider carefully the use to which Ricardo
puts "Say's Law," he might have seen that it functions in the service
of an argument against Smith's naive theory of falling profits... that
is broadly compatible with Keynes's own theory!