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A Modern Treatment of the Ricardian Economy: Author(s): Paul A.

Samuelson Reviewed work(s): Source: The Quarterly Journal of Economics, Vol. 73, No. 2 (May, 1959), pp. 217-231 Published by: Oxford University Press Stable URL: http://www.jstor.org/stable/1883721 . Accessed: 26/12/2012 13:58
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A MODERN TREATMENT OF THE RICARDIAN ECONOMY: II. CAPITAL AND INTEREST ASPECTS OF THE PRICING PROCESS
By PAUL A. SAMUELSON
Back to the beginning, 217.- Time and interest, 219. - Failure of the labor theory, 220. - A simple corn economy, 222. - The special timeless case, 222. - The extreme Torrens-Ricardo Case, 223. - Land scarcity and falling interest,225. - A long-run,constant floorfor interest,227. - The land theory restated, 228. - A final word, 230. BACK TO THE BEGINNING

theroleoftimein the productive 28. Part I has neglected process. To this I now turn. to an Both Smithand Ricardo speak in parables whentheyrefer can be neglected.There earliergoldenage whenland rentand interest neverwas such a goldenage in human history;but we are entitledto thinkof this device as an ancient formof the method of successive in whichone first assumesverysimplemodelsbefore approximations, into them. various complications introducing ofland rentat the beginThe way we got rid ofthe complication fromthe way we mighthope to get ning of Part I is really different rid of the complicationof interest. In Part I we began by assuming that good land is so superabundantthat its rent is freeand can be neglected. Certainlyone can imagine a Europe peopled by so few cavemen as to make this a logical possibility. But can we imagine take place in an an early age in which all productionrelationships ignorable? I do not thinkwe can. instant,so that time is perfectly Productionoperationsmust always have taken place over a period of time. would be to assume that our early An alternativeformulation systemis "time saturated." By this I mean that so muchaccumulation had taken place in the system'spast as to have driventhe interlevel. It is thenstilltruethat est rate down to zero or to a negligible outputsbecome available afterinputsin time; but the marketplace as if they were unimis supposed to evaluate these time differences portant. What about this interpretation?I do not thinkthat any classical economistwould have been such a utopian antediluvianas
217

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to have imagined that ever in the golden past capital was superabundant in the same sense as land mighthave been superabundant. stock had accumulated.") (Recall that Smith uses the words "before And certainlysuch a model would not provide a convenientspringof accumulation in loweringthe board for the study of the effects interest rate. We must instead, I think,imaginea golden age which was not verygolden- one in whichlifewas shortand brutish,in very part because oftheextreme shortageof capital. In such a worldwe might at a first still hope to be able to neglectinterest approximation prorate were so highas to forcethe systeminto using vided the interest we may turn projects exclusively. (Alternatively, very short-lived and envisage a systemwith only very back the clock of technology short-lived processesavailable to it.) If all the delay periodsin the short- say of the magnitudeof a day rather are sufficiently system than a year- then even if the interestrate is quite high expressed as a rate perannum,interest per day and the relativeshareofinterest in the total may be so small as to be at first neglectable. And so if we persistwith the assumptionof freeland, the simplelabor theory as in Figure I of Part I. of value may serveas a good approximation, 29. When,however,we leave the realm of parables and nursery tales, the phenomenonof interestor profit'does raise its head and into account. we must take it explicitly As accumulationlowersthe interestrate, time-consuming processes which previouslyhad not paid will now become worthwhile. oftechnology, This the classical economists, along withany observers even if they did not explicitly would presumablyhave recognized2 foreseea Bohm-Bawerkianmodel in which some dimensionof time varied so as to increasethe outputs of can be continuously intensity Still another way that more time consumingprocprimary inputs. technoesses become relevantis throughthe process of irreversible
1. Profitin the real world consists (1) partly of implicit wages, paid for the services provided by the entrepreneurhimself (including management services); (2) partly of monopoly returns to "contrived scarcities," and imperfectlycompetitive situations; (3) partly of the ex ante and ex post rewards to uncertainty bearing; and (4) partly of the "surplus" residual or rents paid to factors in inelastic supply. Assuming perfect competition and sidestepping the important problems connected with uncertainty, we need not distinguish implicit factor returns from explicit factor returns and we can strictlyidentifythe profitrate with the pure interestrate. 2. That Ricardo was aware of substitution possibilities induced by changes in factorcosts is shown by passages like the following:"Now if the wages of labour rise 10 per cent . . ., he will no longer hesitate, but will at once purchase the machine. .." David Ricardo, Works, Sraffa ed., I, 61. Any who attribute to Ricardo a fixed-proportions model do him an injustice.

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even thoughthe oldereconomistswere logical change and invention, induced not so meticulousas modernsin separatingout reversible, induced of or irreversible from changes exogenous type. changes
TIME AND INTEREST

30. We now no longerignorethe fact that labor and land do not Smithand the instantaneously produceoutputs. Ricardo, following if each worker each land is scarce) thinks of (and acre, Physiocrats, - "adding as engaged in movingraw materialstowardscompletion needs finished value" we would say today. But the worker consumpdoes not want to be paid out of the tion goods today and ordinarily "advances" fruits ofhistoday's labor. The employer ultimate finished to the workerfinished consumptiongoods; such a primitive"wage fund"theory regardstheseadvances as "capital" and supposeswages be limited to wage by the magnitudeof the available finished today be The men to out as "destined" acres) wages. (and paid goods receive today less than their tomorrow'sfruits. The capitalist or as profit or interest on the money receivesthe difference entrepreneur value of the capital he has advanced. In brief,employershire currentmen and acres and now pay them money wages and rents. These factorspush the employer's goods towards completion,and when the inventoryof unfinished the employersells them. Under free entryand goods are finished earns ensuresthat the employer absence of uncertainty, competition the marketrate of interest(per annum or per day) on the value of in the auction marketsforunfinhis goods in processas determined ofsociety's ishedor finished goods. Per yearor perday themoneyflow finalproduct(finished consumption goods plus net capital formation) exceeds the sum of wages (and rents) by the interestreturn of capitalists.3 31. Some may say that workers(and landlords) are "exploited" by the "interest discounting" of their ("ultimate") productivity entailed by the lapse of time between inputs and outputs. Others unfinished are freeto be paid in theircurrent may say that workers products,when productswithoutany discount; but such unfinished the workers now tryto sell them,would be foundto have a market goods- lower by exactly the price lower than the price of finished
3. If land is not free,its rent can also be regarded as the interestreturnon land's capitalized market value. Though one saver can "invest" in land by buying part of the limited supply from some seller, society cannot create more of the inelastically-supplied original and indestructible land. Operationally, it would be hard to separate improvements in land that are like other capital projects fromthe original supply of land.

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that the workers could earn on theirsale proceeds amountof interest in the time between now and completion.4 Such people argue that thereis no "exploitation"here,no morethan in the case of a Kansas landlordwho gets the full Kansas value of his land's marginalprodof the fullChicago value uct, whichnaturallyinvolvesa discounting cost across space. forthe transport There is no need here to go into the welfareeconomics of the problem. Those who approve or disapproveboth recognize(1) that a positive marketrate of interestcoupled with the fact (2) that it takes months to change grape juice to wine means that interest receiverswill share in the gross or net output of the economy. Of course,if the interestrate were lower,if corn grewfaster,if nature were kinder,if brains were betterand muscles harder- in shortif pies were biggerand others' shares less, the world and thingswould be different! 32. The above section deals only with circulatingcapital: i.e., one material with productiveprocesses in which labor transforms into another. Ricardo was also familiarwith the kind of fixedcapwithlabor and ital represented by a machine. Fixed capital working materialsproducesnew materialsand also producesas a by-product between older) fixedcapital. Such is the moderndistinction (slightly fixedand circulatingcapital. There is no implication,as Ricardo at firstmay have thought,that the durabilityof fixed capital is capital: wine or redwood necessarily greaterthan that of circulating trees may be circulatingcapital while a briefcandle may be fixed and fixedcapital, whichare not to be concapital. Both circulating fused with Marx's variable and constantcapital, create insuperable foran exact labor theoryofvalue - as Ricardo well knew. difficulties
FAILURE OF THE LABOR THEORY

33. The simplestmodel to show that relative exchange values cannot be predictedfromthe labor theoryof value alone is the folyl and Y2. Let each require lowing. Let therebe two goods as before, al and a2 oflabor per unit; and let the land requirements bl and b2be neglectable because land is so abundant as to be free. But now assume, as Jevonslater was to do, that inputs in the two industries produce their outputs exactly 01 and 02 periods later, respectively.
4. For simplicity I here neglect possible needed later factor inputs; these can be taken account of in an obvious manner. See also my "Wages and Interest: A Modern Dissection of Marxian Economic Models," American Economic Review, XLVII (Dec. 1957), 884-912.

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rate per period,the steady-statecost of proThen if i is the interest ductionequations forpricesbecome


(17) pi = wai(l + i)l'
p2 = wa2(l + i)02,

with
(18) (18)
a2 p-2 = a2 (1 + 2P2
i)02-61

Pi

al

From the embodiedlabor coefficients ai alone, we can no longer predict unchangingrelative prices- except in the singular cases are exactlyequal, 01 = 02; wherethe timeintensities ofthe industries zero. is the rate i interest or where literally When he came to writehis Principles,Ricardo realizedthis. But instead of cuttinghis losses,5he continuedto toy with standards of durabilitythat involved one year periods or that representedthe social average. And he was even under the illusion6that he was on Adam Smith's pragmatic doctrine making great improvements that priceequals the sum of all costs of production. (To have done that he would have had to anticipateLeon Walras's doctrineof genwhich made sure that it had enough equations to eral equilibrium, of price.) determine all the constituents rate will vary the price ratios 34. In (18) a change in the profit between goods of different durability. This change in the interest rate is associated with what Ricardo7 calls an opposite change in "wages," meaning by this not as one might at firstthink,money can be seen fromregardwages, but ratherreal wages. (This effect the price of corn, the in as the first determining (17) ing equation sole wage good: thenthe real wage w/pl = l/ai(l + i)0', an inverse rate i.) function of the interest of Ricardo is again wrongto think that he can neglect effects these changeson rentby goingto the externalmarginwhereno rent rate or real wage can be presumed is paid. A change in the interest to change the location of the extensivemargin. Because he insufficientlyrealized this,Ricardo repeatedlyset up too sharp an opposition between wages and interest,not sufficiently realizingthat the one. is a three-factor problem really
5. As he was tempted to do in his famous 1820 letter to McCulloch, Works, I, xxxix,xl. 6. Works,I, xxxvi, xxxvii. 7. Works,I, xxxviii,53, 56-63, 66.

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35. We have been using the interest rate beforeexplicitly introducing the conditionsneeded to determineit. The time has come to try to come to gripswith this problem. Rather than beginning withthe complexcase of many goods, I shall first followthe example of West and Ricardo and concentrateon the one-good example of corn. How does thefactthat theremustbe a passage oftimebetween and the distribution inputs and outputs affect wages, rent,interest, of income? Insightis providedby the simplestexample wherecorn, yi, appears one period (81 = 1) afterthe applicationof labor, x1,and land L1. homogeneous As in Sections 7-17 of Part I of this paper, all the technological facts are summarizedby the (a1,bl) technicalcoefficients givingthe needed amounts of labor and land per unit of corn. (These coefficientsmay be taken as technically given,or we may wish to assume the variable-coefficient case in which more a1 may be substituted smoothlyfor less b1.) We can complete the systemby specifying cl, the numberof units of corn needed by each man to insurethat the labor supply will be exactlyreproduced. We saw that 1 - cial < 0 wouldimplythat populationbecomes extinct. The interesting and 1 - cal1 > 0. case is where land is stillfree Statically, this implies a "contradiction." Corn cannot sell for its labor cost simultaneously with labor sellingfor its corn cost, since 1 - cial > 0 impliesthe incompatibility of the two cost-of-production equations
(19) pi = aiw and w = cipi.

Which relationmust give? Actually, both of them must be made non-staticalto take account of the dynamic dating implicitin the problem.
THE SPECIAL TIMELESS CASE

36. If corn output were producibleinstantaneously but periods of human gestationwere nine monthsand periods of infancywere measured in decades, then undoubtedlyunder competitionthe first equation would be valid and the one to be jettisonedwould be the second equation: so long as land continued superabundant, the Ricardo-Malthus subsistencereal wage would be irrelevantto the higheractual marketreal wage. Workerscould earn "surplus rent over subsistence"or surplusquasi-rent. Surplus renton what? On their temporaryscarcity! Biological factorsand the height of the

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real wage above subsistencewould determinethe geometricrate of populationand output growth. But what about the long run? So long as land remainsabunwithreal wage dant, no matterhow long the run this state of affairs better could continue forever. to 1/ai (West, perhaps than equal in America had remained and were realized that wages Ricardo, in What has to than subsistence.) give (19) is the remaining higher of of or stationariness assumption equilibrium population,no other Let us be clear about this: with land free contradiction occurring. and productioninstantaneous,there is no possibilityof exploiting men of theirfullproduct;theyneed only move to labor or depriving it needs for fromlabor something the frontier. Only by withholding with it to the total can share produce. And you get you production then whose produce it is that is being shared becomes a welfareeconomicsor semanticquestion.8
THE EXTREME TORRENS-RICARDOCASE

to get around (19)'s contradiction 38. It is unrealistic by making cornproduction instantaneous. Instead of holdingthe first equation and droppingthe second, Ricardo followedTorrens in tending to neglect the long time period it would take for population to bring level. This is in the real wage back to the conventional-subsistence accordance with his tendencyto treat long-runrelationsas if they a one-sidedresolutionof held in the shorterrun and also represents (19)'s contradiction. However unrealisticis such a practice,it does provide us with an instructive, extremecase. Now the second equation of (19) is but the lag in time betweenlabor assumed to hold instantaneously, is and corn input output explicitlyintroduced. Still keeping land with rentfreeand keeping01 = 1, we now write superabundant as (19)
8. We have already seen how the ultimate scarcityof homogeneous or heterogeneous land and the law of diminishingreturns would, in a zero-interestor at the timeless system, cause population to grow until the new al coefficient external (or speaking loosely, at the intensive) margin will be such as to just satisfy 1 - cial = 0. Hence, at such margins (19)'s costs of productionofcorn and of people are consistent. Men on themargin then do work twelve hours per day, and twelve hours per day is just enough to produce theirsubsistence. Men on good land, or the hypothetical firstmen applied to good land, will in working twelve hours produce their own subsistence and, let's say, an equal amount of produce forlandlords. To say that such men produce in six hours theirown subsistence and work six hours producing surplus value forthe landlord is always my privilege: but little insightinto the laws of motion of the system or its distribution is provided by such a formulation.

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(20)

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pi = wlai(l

+ i), wi = cipi; or 1 + i = --

cial

fromthe (ai,ci) coefficients The rate of interestis now determinable alone! This is what Ricardo had in mind already in 1813, beforethe Malthus-West rent theory of 1814 had been published. Ricardo believed that only the limitationon land could explain a fallingrate forif one could always tack on new islands to the existing of profit: England, accumulationwould spend itselfin expandingthe scale of returnsever population and productionwith no law of diminishing have believed nor would into Neither West Ricardo coming play. - on the basis ofMarx's usual willingin Marx's falling rate ofprofit reservearmyof ness to ignorerentand to postulatean inexhaustible the unemployed. 39. Though Ricardo had many children,one often wonders whether he knewthe biologicalfactsof life,so contentis he withthe assumption that labor will soon adjust to its long-runhorizontal wage at the subsistencelevel. Actually,it is unrealisticand inconsistentto make eitherone ofthe equationsin (19) hold as ifit referred to a timelessadjustment. As in equation (4) of Part I, any discrepancyin the equalities of (19) will act as an "errorsignal" to set up certain dynamic adjustment processes both in the creation of people and of goods: thus,the percentagerate of populationgrowth mightbe a risingfunctionof the discrepancyof the real wage and the subsistencelevel; and each greaterprofitdiscrepancybetween marketprice and labor cost alone mightbe expected to give rise to a greaterrate of capital accumulation. I shall not stop to writedown a specific model of these dynamic the results But the outline of is reasonablyclear processes. general and can be related to the discussion in my cited paper on Marx. First, it would probablybe most natural to assume that some accumulation is going on. This is spending itself in population increase- in a wideningof capital. The real wage is above the level by enough to coax out the described subsistence-reproduction rate of endogenouslabor increase. The interest rate is positive but less than the 1/aicl level appropriateto instantaneouspopulation to as the quasithe remainder growth, being what has been referred rentto labor's temporary (but recurring) scarcity. or exponential The above processcould go along in a geometric and with with scale unchangingwage steady state, expanding only and profit rates. But Ricardo is wrongto thinkthat in the absence

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rate cannot permanently of land shortagethe profit possiblyfall. It incomeis suffican. Provided the propensity to save out of interest for of the extensive relative to the growth cientlylarge requirements of there be a may actually deepening capital. Capitalists system, will be trying to save more than mere growthin scale is using; this means they will be bidding among themselvesfor existinglabor, the profit therebyraisingthe real wage, and undermining rate, and in all probabilityfinding that more roundaboutprocessesnow pay. This drop in the profit rate could go on forever. But it is unlikely, so the classicists thought,to bring the profitrate down below a critical equilibriumlevel. This asymptoticequilibriumlevel for i will be reached when interesthas fallen low,enough to reduce the incomesof savers enough to call forth fromthem a pace of accumulation no largerthan can be absorbed in mereduplicationof population and scale.9
LAND SCARCITYAND FALLING INTEREST

40. For Ricardo and West a dynamicmodel whichneglectsscarcityofland is like a whodunitwithouta corpse. How does the using the patternof development? up of all the available best land affect We have seen that as moreand moremen workon the best land theii decline; this can be expressedby sayingthat some marginalreturns kind of an intensivemarginal al coefficient goes up, which is the reasonwhyrecoursemay also be had to poorerqualities of land; and if lands are of continuousgrades of quality,we can also concentrate on the extensivemarginal al, which correspondsto the high labor on that piece of land which is just worthcultivating requirements whenyou have to pay no rentforit at all. With al no longera constantbut now a variable over an indefiformula niterange,Ricardo no longerhas a determinate forthe interalone. (The matteris est rate in termsof technologicalcoefficients even worse if large 0l's can be substitutedfor smalleral's at the margin.) But he correctlyfelt that the process of accumulation would entail a steadily fallingprofitrate and higherrent as land became more intensivelycultivated and commanded higherrents. As we have seen he ratherexaggeratedthe speed with which real wages would revertto their conventional-subsistence level, and we
levelmight be reached from 9. The critical as accumulabelow,withi rising tion belatedlycatchesup with populationincrease. The criticalsteady state be at a profit rateso low as to killoff all accumulation and growth.Indeed might once scarceland is taken into account,mostclassicaleconomists wouldexpect to an interest to lead eventually accumulation rate at the floor determined by "subsistence" levelofsupply, as we shallsee. capital'slong-run

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can clingto the Smith notion that, dependingupon how fast accumulation is causing the systemto advance, real wages will remain somewhatabove the subsistencelevel. For intramarginal and marginallands respectively, we can write down the formulas
(21) pi = (wal' + rbl') (1 + i)01', pi = wal"(l + i)0' .

But even ifwe knewthe real wage to be 1/cl,these are not sufficient equations to determinethe interestrate, therebeing a suitable al" rate. Again, we face the to satisfythe last equation forany interest fact that the externaland internalmarginsvary in direct response to drops in the interestrate - as Ricardo well realized. 41. The classical economistsnever did write down an explicit in each movingshortrunthe level of interest modelto determine and of the othervariables of the system. We cannot criticizethem too harshlyfor this in that the neoclassical economistsalso- save in veryspecial cases - failedto writedownexplicitmodelswhichdetermined rigorouslythe time shape of interestand other variables. seem due to the intrinsic of getting These failures into twodifficulty of the real world'svecor few-dimensional diagramsthe complexity torsof diversecapital goods and timeprocesses. Most of the classicistsspoke vaguely of some kind of a capital stock or wage fund. By analogy with what happens when you increase the quantity of somethingso apparentlyconcreteas land or labor,theyfelt that accumulationofmoreofthiscapital stuff would bring down its price- the profitor interestrate. Qualitatively, these vague notionsdo, I think,lead to the correctinsights into the competitive system. But we must not be dynamicsof a developing, under any illusionthat such notionsgo far beyond the language of parable.1 must not be confused However, the problemof the storyteller with the action of the market place. In the real world engineers and combineinputs over time to produce outputs. And merchants and goods in variousmarkets.Were consumers buy and sell securities - whose intrinsic of competition it not forimperfections difficulties - we for the analyst are tied up with the uncertainty of thefuture could writedown in great detail the full set of equations forall the
1. Jevons, Bohm-Bawerk, Wicksell and others carried the parable farther. See also Robert Dorfman, Paul A. Samuelson, and Robert M. Solow, Linear Programmingand Economic Analysis (New York: McGraw-Hill, 1958), Chaps. 11, 12; and P. A. Samuelson and R. M. Solow, "A Complete Capital Model Involving Heterogeneous Capital Goods," this Journal,LXX (Nov. 1956), 537-62.

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that are going on. We would talk of the diverse micro-processes interest rate foreach periodalong witha host of otherintertemporal price ratios. We mightalso talk of capital asset values, as determarketplaces, and as mightbe added by the mined in competitive statistician. But no marketwould directly hingeon such recording a definedcapital aggregate,and our rigoroustheoryof interestand generalequilibriumcould eschew completelythe use of any homogeneousaggregateof capital. Thus, we could hope to sidestepcomincludpletelythe indexnumberproblemthat everysocial aggregate, ing Capital with a capital C, is knownto involve intrinsically. 42. One of the reasons the classical economistshad so weak a and wages was that theyhad so strong interest theoryforshort-run a long-run theory. If you believed, as Ricardo somehowdid, that as determined by a longwages would soon settledown to theirfloor run horizontalscheduleof supply,what was the point in elaborating a theoryto explain the ephemeraldeviationsfromthis level? The same, but to lesser degree,might be said of the long-runlevel of interest. Ricardo is not so explicitas John Stuart Mill and other classicists,but he does at times come close to the notion of a horilike that forwages. Thus, zontal long-run supply curve forinterest he says
"Long indeed before this period [ofzero interestrate], the very low rate of profits will have arrested all accumulation . .. "I have already said, that long before this state. ., there would be no motive foraccumulation; forno one accumulates but with a view to make accumulation productive.... The farmer and manufacturercan no more live without than the labourerwithoutwages. Their motive for accumulation... will profit, cease altogether when their profitsare so low as not to affordthem an adequate compensationfortheirtrouble, and the riskwhich they must necessarilyencounter in employingtheir capital productively."2

A LONG-RUN,CONSTANTFLOOR FOR INTEREST

of seeinghow my land theoryof 43. For the purpose,therefore, value can be extendedto a Ricardian systeminvolvingtime,I shall the systemas literallyhaving a long-run SS schedule for interpret interestlike the one shown in Figure IV for wages. Above that critical interestrate accumulation will be taking place; below it, will be takingplace so as to restoreit; at it, therewill decumulation be a stationary equilibrium.
2. Works,I, 120, 122; my italics. The last sentence mightpossibly be interpreted as being compatible with a zero interest rate, once we allow for wages of management and ex post losses. It might also open the door to an equilibrium with Keynesian stagnation rather than full employment.

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one new We have then in addition to our (a,b,c) coefficients importantconstant- the long-runinterestrate. Let us label this i = d. And we must now turn back froma simple one-good economy involving corn alone to a many-good model. The total of land, L, is also taken as a given. homogeneous
THE LAND THEORY RESTATED

44. Under the postulated conditions,it then followsthat my "Ricardian land theoryof value" remains intact in the long run. to the 1. All long-run magnitudesremaindirectlyproportional supply of land L. and 2. The pricesof all goods produced(finaland intermediate) the wage rate all remain in determinateratio to the rent rate r, demand. ofconsumption of thequantitative pattern independently 3. While the absolute level of total rent or produitnet depends of the compositionof independently only on the a,b,c,dcoefficients consumptiondemand, the absolute and relative sizes of the gross returnsto wages and interestwill depend upon the quantitative demand. patternof landlordand capitalist consumption 45. To see all this I suggestwe considera three-good example. Let y, (corn) and y2 (velvets) involveonlycirculating capital in their but followRicardo in letting y2 have, say, twicethe time production; intervalthat yl has betweenfirst application of land and labor and ultimateproduct. (I.e., 02 = 201 = 2.) Finally,let y3(gold) require in addition to labor and land (and one time intervalfortheiraction to take effect)also fixedcapital in the formof a machine (and one time intervalforits co-operativeaction with land and labor to take effect). difficase presentsall the complicating This simple three-good botheredRicardo. It involvescirculating cultiesthat rightly capital of different degrees of durability. And it involves fixedas well as uses new and old capital. (Indeed, sincethe thirdindustry circulating a fourth that have we producesmachines.) industry machines, really relationsof I now proceedto writedown the cost-of-production this system,in orderof theirsimplicity.
(i)

(ii)
(iii)

pi = (wai + rbl) (1 + d)
p2 = (wa2 + rb2) (1 + d)2

w = plci

(22)

(iv)
(v)

(vi)

Po = (wao + rbo) (1 + d) p3 + e3p0' = (wa3 + rb3+ pof3) (1 + d) = (wa3' + rb3'+ po'ga') (1 + d) p3

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corn theoryof the real The first equation is Ricardo's long-run as in (17). Before wage. The second gives corn's cost of production, we can solve equations (i) and (ii) by simplesubgoingany farther, in termsof the given (a,b,c,d)coefficients the stitutionto determine corn level of rent,or corn's price in termsof rent. I leave this to the reader. Now consider the firstthree equations alone. By themselves to enable us to solve for(w/r,pi/r,p2/r) theyare enoughconditions alone. in termsof the (a,b,c,d)coefficients The last three equations are more complicated because they involve the use of fixedcapital. Thus, they introducethe unknown in (iv) by its cost of proprice of a new machine,po, as determined duction. More complicatedis (v), whichgives the cost of the third good, gold's p3; but now it takes f3 units of the new machine along so to speak, withlabor and land to make gold; and as a by-product, each worth an unknown theprocessalso leaves us withe3old machines, pricePo. The last equation gives the same p3 forgold producedwith old machines. In all we have six equations to determinethe six unknowns (w/r,pi/r,p2/r, po/r,p3/r); and provided that (generalized) po/r, these will determine Hawkins-Simon conditionsare satisfied, unique positive solutions. What is importantto emphasize is that if the returns us, theresulting pattern (r,d) are given ofprices factors primary demand. Equations is quite independent of the mix of consumption coefficients. (22) make this quite clear in the case of fixed(a,b,c,e,f,O) set of substitutableprocor infinite, But even if therewere a finite, esses in (ii)-(vi), a change in consumers'demand for corn,velvets, or gold would not make any new substitutions profitable. 46. A sketchyproof is given in P. A. Samuelson, "Prices of Factors and Goods In General Equilibrium,"3 But it needs to be modifiedto take account of the joint productioninherentin (v). will rule out the "substitutability jointnessof production Ordinarily, theorem." Thus, ifpeople wantedto consumeold machinesdirectly, as well as use them to produce gold, a shiftin tastes towards such old machineswould tend to raise the pricepo, and probablyto lower would be substituted. new (a,b,e,f)coefficients p3. Mathematically, the last equation would become an inequality Or if these were fixed, once it became too expensiveto use old machinesto produce gold; of gold withnew machines,it is gold which,so but in the production to speak, now becomes the by-productto the productionof such in demand. However,when valued old machinesthat are now highly
XXI (1953-54),19. 3. Review Studies, ofEconomic

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230

QUARTERLY

JOURNAL

OF ECONOMICS

we rule out the possibilitythat machines are anythingbut intermediate goods, each belongingsolely to one consumersgood industheoremis saved. try,the substitutability Recall Section25's qualification concerning joint consumer goods, venison and deer skin. Similarly,if corn stalks were used in gold production,or if old gold machines were used to produce velvets, theoremwould be lost. For it to be valid, all the substitutability each verticallyintegratedsingle consumer be within must jointness good. 47. Net productfor society would be proportionalto land L. Since there is no accumulation,net product would equal the gross value of all consumers goods minusthe goods consumedby laborers and by interestreceivers. Why definenet product so? In postRicardian language, because there is no consumer's or producer's surplus enjoyed by laborers or capitalists,their returnsjust being enoughto cover theircosts. The equation fornet productwould be

(23) (23)

p.1 Yy +

p_2

Y2 + P3Y3 = L

wherethe p's come from(22). While the total value of net productis unaffected by changesin the mix of (Yi) demand, the total of wages and of interest-bearing depend on that mix. Thus, if landlords (or capital will definitely rise in goods, the short-run capitalists) want more labor-intensive increasein population,with wages will be wiped out by a permanent the typical man ending up no better offthan before. Likewise, if finaldemand moves towardscapital-intensive goods, the total interrise but the returnper and capital value will permanently est return dollar,d, will stay the same by hypothesis.
A FINAL WORD

49. AfterexaminingRicardo-likemodels, what feelingare we left with? Were the classical economistsfools? Were they gods? What were they? I for one am left with mixed feelings. Ricardo's logical skills have been, I think,somewhat exaggerated.4 But they were very considerable. He would have made a most excellentmoderneconomist! Despite though the high native abilities of the ancients,we have advanced a long way ahead of theirdiscussions. Poor as our
4. If Ricardo has been overrated, Smith has in our day perhaps been underrated. I mean as a theorist.

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knowledgeand insightsare, they are way ahead of those of our predecessors. In particular we are more humble. They declared so many thingsto be necessarilyso that we today recognizeas not havingto be so. This is, in a sense,a step backward. How excitingto be able that inventionof a machine cannot do this and to assert definitely must mustdo that! But, alas, dull as it may be, the moderntheorist of patternsthat can face the facts of life- the infinite multiplicity emergein actuality. Good, advanced theorymust be the antidote intuitivetheory. foroverly-simple,
MASSACHUSETTS INSTITUTE OF TECHNOLOGY

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