The Macroeconomic Perspectives of David Ricardo, Karl Marx
The Macroeconomic Perspectives of David Ricardo, Karl Marx, and John Stuart Mill ECON 350 19 November 2012 Abstract The author surveys three influential economists of the Classical era—Ricardo, Marx, and John Stuart Mill—and introduces the reader to their Macroeconomic perspectives based on some of their more prominent Macroeconomic theories. David Ricardo David Ricardo was a Classical Economist who lived from 1772 to 1823.
In his professional life he wore many hats: he was a businessman, a financer, a speculator, and a member of Parliament. But what he is most remembered for is the role that he played in the evolution of economic theory, alongside of such other greats as John Stuart Mill and Thomas Malthus, among others. In examining the economic theories which he espoused it is interesting to consider the part that his above-mentioned professions played in influencing his positions.
Through his experience as a businessman was undoubtedly able to gain insights into the workings of industry; through his experiences as a financer and a speculator he gleaned invaluable insights into the workings of the financial system; and through his experiences as a member of Parliament he no doubt acquired insights into the workings of government and politics that does much to add credibility to many of his economic expostulations. Although he worked diligently in the fields of both Macro- and Micro-economics we will be focusing here primarily on some of his more distinguishing Macroeconomic contributions.
The principals within this field of economics which we will be focusing on in particular are: The Law of Comparative Advantage, Comparative Statics, International Money Movement, and Deficit Spending. The principal which is arguably the most important and enduring contribution that David Ricardo ever made to the field of Economics is The Law of Comparative Advantage, also known as The Law of Comparative Cost. This was a principal that was originally developed by Adam Smith in his renowned work entitled “An Inquiry into the Nature and Causes of the Wealth of Nations. However, although Adam Smith first developed this principal it was David Ricardo who refined it and thus he is deserving of credit for his part in the formation of this economic principal. The Law of Comparative Advantage was first mentioned by Ricardo in his work entitled “On the Principals of Political Economy and Taxation. ” It is based in “specialization. ” and is a “law” which we see operating all around us in present times. Basically this law takes one of Adam Smith’s observations–that specialized units within a manufacturing process leads to increased efficiency—and applies it on an international scale.
Adam Smith’s observation was that when manufacturing a particular type of item, if each worker present were to work on an item from start to finish they would be inefficient and slow and would not be able to produce nearly as much of the items as would a factory of workers who were separated into specialized units, each unit having the responsibility of completing one of the processes necessary for manufacturing the particular item. Ricardo took this one step further and applied it on a macro level.
He noted that different countries, for various reasons, have specific goods that they are particularly adept at producing. He further noted that if countries had to provide for all of their needs internally then they would be unable to focus their attention on the things that they did particularly well. On the other hand, if each country were able to focus on producing the things that they did well then they could produce exponentially more of them and could trade amongst each other for the things that they needed but did not produce internally.
Also, he took the Opportunity Cost into account and noted that even if one country did everything better than another it would still be practical for the lesser country to manufacture items for the greater country since the greater country would see the highest returns if they focused their time, money, and energy on the things that they did particularly well. This was actually quite a big deal during Ricardo’s since Protectionist policies were hindering free trade, which Ricardo was a proponent of as can be seen from his Law of Comparative Advantage.
One of Ricardo’s first interactions in the economic dialogue of his time was based around the Quantity Theory of Money. At the time there was something going on in Britain that would come to be known as the “Bullion Controversy”. Basically, as a result of a potential war the British government temporarily suspended the obligation of the Bank of England to convert its notes into gold. During this time agricultural prices rose (which some people attributes to poor harvests) and gold prices went up. It is on this second point that Ricardo chimed in. Ricardo argued that the rise in gold prices was actually the result of inflation.
According to him, since the bank wasn’t obligated to exchange their notes for gold they were printing more notes than they had gold to back them. This flood of currency, Ricardo said, was creating an excess supply which was devaluing the currency and thus causing inflation (Laidler, p. 12). Karl Marx Karl Marx is probably best known for the work that he co-authored with Fredrick Engels entitled “The Communist Manifesto” and also for his work entitled “Capital. ” He is also arguably one of the most well-known of the Classical Economists, or of any group of economists for that matter.
In addition to being an economist he is also renowned for his work in the fields of philosophy, sociology, history, and journalism. Karl Marx was a staunch Socialist and the vast majority of his contributions to the field of economics revolved around a singular event that he believed would inevitably occur sometime in the future and would bring about the fall of Capitalism, replacing it instead with a Socialist society that would eventually evolve through natural means into a Communist society. Marx saw society as segregated units of distinct classes.
In his mind there was a constant struggle going on between these classes as a direct result of one class having dominance over the other. The two classes that he was particularly concerned with were the Proletariat and the Bourgeoisie. The Bourgeoisie were representative of the wealthy Capitalists—this included factory owners, entrepreneurs, and the like. In other words the Bourgeoisie was composed of those individuals who were able to create great wealth for themselves as a direct result of the Capitalist system. Aristocracy and the like were not included as among the Bourgeoisie.
The Proletariat on the other hand were those individuals who worked in the factories, et cetera, of the Bourgeoisie. These were the blue collar workers of their time and the lower class members of society. In Marx’s opinion the Bourgeoisie had taken advantage of the Proletariat by making themselves wealthy off of the labor of this oppressed class. Furthermore Marx felt that the base nature of the work that the Proletariat was given to do was stifling. Last and worst of all Marx felt that these workers were not being fairly compensated for their work.
What we now call Recessions and Depressions Marx referred to as “Crises. ” He felt that these Crises were the direct result of disproportionalities in the Law of Supply and Demand. According to Marx the amounts of items supplied to markets and the amounts demanded were in a constant state of tension because they were always seeking to achieve equilibrium but could never quite do so. Since this often led to more of an item being supplied than was demanded by the market, the market became flooded and the item’s price would drop significantly.
Businesses in their current state could not survive off of these minimal returns, and workers ultimately suffered as a result. Marx believed that workers were not paid adequately during good times to compensate for these Crises, whereas the Bourgeoisie ultimately became wealthy despite these Crises. Marx did not blame the Bourgeoisie but instead saw them merely as a product of their environment. He did, however, feel that this environment which ran according to the tenets of Capitalism was inherently flawed.
Marx believed that the Proletariat would eventually revolt against this flawed system and would take manufacturing into their own hands. At first a Socialist form of government would be set up and would be run by what Marx referred as the “Dictatorship of the Proletariat. ” This would only be a temporary institution however and it would eventually become obsolete and dissolve naturally and from that time on Communism would be the sole system that would guide the economy, government, and society as a whole.
John Stuart Mill John Stuart Mill was born in England and lived between 1806 and 1873. He was both an accomplished philosopher and economist and is recognized as one of the greatest thinkers of his time. His father, James Mill, was a respected philosopher, economist, and political theorist. James Mill was also a contemporary and close friend of David Ricardo and was influential in the Classical Economics movement of his time.
Because of James Mill’s intellectual circle of friends, and also because of his strict tutelage, John Stuart Mill was, from a very young age, privy to much of the political, philosophical, and economic discussions and arguments of his day. Because of the influence of his father and also because of his close acquaintance with David Ricardo and others in his father’s circle, he would continue to hold to and defend many of their opinions and precepts throughout the course of his life. John Stuart Mill was also a contemporary of Karl Marx although Mill was apparently unaware of who Marx was.
Although Mill wrote volumes of literature on the topic of economics during the course of his lifetime, there is one particular topic that seems to be especially relevant in shaping an understanding of his macroeconomic perspective and so it is on this topic that we will focus our attention. Thomas Stowell tells us in his book entitled “On Classical Economics” that “the three major controversies in economics during John Stuart Mill’s lifetime were disputes over Say’s Law, the Malthusian overpopulation theory, and the theory of value (p. 134). The first is a macroeconomic concern whereas the second and third fall under the banner of microeconomics. Therefore it is on this topic that we will now focus our attention: Say’s Law, also known as the Law of Market, was founded on the presumption that money is used solely as a means of initiating transactions and that in the end transactions ultimately consist of one commodity being traded for another. Say believed that producers are eager to get rid of their products because of price fluctuation which could cause their devaluation and because an unsold product produces no return on investment.
Say also believed that producers were equally eager to get rid of the money they acquired through transactions because money’s value fluctuates as well. In order to get rid of money it must be traded for some product or service and thus through this cycle economic growth is created. Say believed that “gluts” occurred when too much of one product was created, thus flooding the market. This, the law states leads to a loss of revenue for the producer, who in turn consumes less due to this loss of revenue.
Because of this lowered consumption there is an overall reduction in demand in the economy as a whole. This reduced demand leads to unemployment and recessionary conditions. It should be noted however that these consequences ultimately result not from an inadequate supply of money with which to purchase goods, but from markets supplying more of one particular product than is desired and not enough of others. John Stuart mill was a huge proponent of Say’s Law although he did appear to alter some parts of it slightly throughout the course of his life. References
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