Conflict between Capitalists and Landlord
There exist diminishing returns to scale in the agricultural production due to the limited amount of land. When the world population increases, then the production of the agricultural production increases while more people are hired in the agricultural production. The surplus is distributed to the landowners (as rent), to the workers (as the wage), and the capital owners (as profit). Under the condition of diminishing returns, the agricultural production cannot increase the surplus to increase the profits, the wages, and the rent. The rent is fixed for the limited amount of land; therefore, the capital owners and the workers debate on sharing the rest of the surplus after subtracting the rent. Although the wages go down when the production increases, the surplus will not be enough for increasing the profit. Therefore, the capital owners create relatively more pressure on the wages. Also, Ricardo complains about the increasing rents for the limited amount of lands. The rising rents create relatively more pressure on the salaries and the profits (Hunt & Lautzenheiser, 2011).
The Diminishing Returns to the Food Production in the Graphs
Graph 5.3
Graph 5.4
The graph 5.3 and 5.4 explain how the diminishing returns to the scale work. When more land is used, the total additional production for each successive unit of land decreases and this is depicted by the P line on the graphs. The sum of the area under the P-line is the total surplus which is distributed to the capital owners, the land owner and the workers. When the use of the land increases, more people are hired, and the surplus decreases the three production factors share.
Price Determination in Ricardo
There exist the diminishing returns to scale in Ricardo’s model. Therefore, when the number of workers increases in the agricultural production, then the productivity of the labor decreases in this industry while the other industries in the economy use the same amount of workers with the constant productivity. Subsequently, the increasing number of workers and the decreasing productivity in the agricultural production causes an increase in the price of the agricultural products while the other manufactured goods’ prices decrease. This is an adjustment of the profits in the economic system. Price determination is dependent on the competition in the economy.
Ricardo’s Capital Accumulation
Ricardo’s capital accumulation is dependent on the growth of the profits and the rent. The wage goes to the workers, and their saving is comparatively less to the landowners and the capital owners. Therefore, the savings of the landlords and the capital owners are the big part of the total saving.
Ricardo profit squeeze scheme
The diminishing returns to scale works when the production increases and the surplus decreases. The surplus is distributed to the workers, the landowners, and the capital owners. The increasing use of more lands increases the rent, and the total wages stay constant. Therefore, the profit's share in the surplus is squeezed.
Uniform Rate of Profit
The profit grows by a rate parallel to the increase in the wages, and the capital. According to Ricardo, the profit growth is dependent on the changes in the wages and the other conditions in the competitive market. The competitive market determines the profits for the different industries similarly, and almost all the industries face the same rate of profit growth. This profit growth rate is named as the uniform rate of profit.
Compositions of Capital and Ratio of Capital to Labor
A producer might use labor and machinery in the production processes. The machinery is called as constant capital, and the labor is the part of the variable capital. The composition of the capital includes the machinery and the labor hired at the production. The ratio of capital to labor indicates how much constant capital investment made per worker.
The different producers in the different industries might prefer different compositions of labor and machinery. The cost of machinery is relatively more costly compared to labor at the beginning. Labor cost differs depending on the changing wages in the economy. Therefore, the producers might have a different ratio of capital to labor.
Price and Labor
Ricardo develops an economic system approach on the labor value definition. According to Ricardo, the primary determinant of the prices of the goods is the labor embodied in the production of the goods. Therefore, the prices are mainly determined by the labor contained in the products. This system develops a price system that enables the markets to be competitive.
Price Calculations
The central part of the Ricardo calculations of price is the labor cost embodied in the products. Also, the time spent in the production is a major factor. Ricardo uses kind of present net value reduction calculation while determining the current price of the products.
Reference
Hunt, E. & Lautzenheiser, M. (2011). History of economic thought. Armonk, N.Y.: M.E. Sharpe.
