Question 1.
The market price of labor will always converge to subsistence, according to David Ricardo’s subsistence wage theory. Wages will fall if labor supply is increased, resulting in a labor shortage (Kurz, 2011). When wages rose above subsistence levels, the population grew until the increased labor force brought down wages. Employee remuneration was determined by the amount of money available and the size of the workforce. Wages rise and fall in lockstep with the labor force. The size of the pay fund fluctuated throughout time, but it was always fixed. Legislation to raise wages would fail owing to the presence of a single pre-determined pay.
Adam Smith’s supply and demand conceptualizes that workers act in their own best interests drawing labor to jobs where it was most needed, and the employment conditions that promised benefit to everyone. Grieve (2019) notes that Smith also emphasized the significance of paying employees for the cost of learning new skills, which is a pillar of contemporary human-capital theory. Smith also claimed that in order to fund population growth, a rising nation’s pay must be larger than its subsistence rate.
Subsistence theories emphasize the supply side of the labor market while ignoring demand. Changes in labor supply, they claim, drive actual wages down (that is, for basic needs such as food and shelter). Assumedly, Smith assumed that labor demand could only expand in lockstep with labor demand (Kurz, 2011). The wage-fund idea assumed a pre-existing “fund” of resources for paying wages. Smith claims this hypothetical fund represents the wealthy’s extra cash (Grieve, 2019), that may be utilized to employ other people.
Question 2.
David Ricardo argued that unrestrained global trade facilitates comparative advantage. Ricardo proposed the law of diminishing marginal returns, which asserts that when additional resources are pooled with a constant resource, the output contribution decreases. Ricardo was opposed to the protectionist agricultural Corn Laws that restricted wheat importation (Siddiqui, 2018). In favor of free trade, Ricardo established the notion of comparative costs, known today as comparative advantage. The idea was that a country that trades for goods it can purchase cheaper elsewhere is better off than one that manufactures them. According to Ricardo, gains emerge because each country specializes in producing goods with reduced comparative costs.
David Ricardo’s idea of absolute advantage is bolstered by Smith’s promotion of free commerce and competition. Countries with no advantages over others are excluded from international commerce (Siddiqui, 2018). One of the main strengths of the Ricardian profit model is that it allows countries, and by extension organizations, to understand the impact of differences in technology and resource endowments on the overall profitability. It also allows a highlight of the differences in demand and thus looks at the advantages of economies of scale in the production process. The theory’s primary flaw is that comparative advantage only assesses static advantages.
The rent on a piece of land is determined by its productive capacity; certain lands are more fertile than others (Bridel, 2018). As a result, there exist land classes. Differential rent is the difference in the yields of excellent and inferior lands.
According to the Ricardian model, countries will export their most productive goods. Countries that focus only in exporting are considered extreme cases. The concept is based on the rise of global trade and the specialization of countries, which makes it difficult to identify their flaws.
Question 3.
The concept of labor-based value was utilized by Karl Marx and David Ricardo in an attempt to explain why certain items on the market were traded at specified relative prices. As per the concept, the value of a commodity is determined by the average number of work hours required to produce it (Kurz, 2011). The value of an economic good is defined by the amount of work necessary to manufacture it, according to the labor theory of value. If two goods represent the same amount of labor time, they will trade at the same price or at a ratio determined by the relative amounts of labor time represented by each.
According to Karl Marx, the value of a product is based on how many hours it takes to make. Marx thought that the theory could help explain when a worker sells something to a capitalist for money (Garegnani, 2018). Labor power is the ability of a worker to make money. How long does it take for society to feed, clothe, and shelter the worker so that they can work? Marx said that this is how the value of labor power is determined. Workers’ long-term pay is based on how many hours of work it takes to make a worker.
There is a conflict between Marx’s labor theory of value and the tendency of profit rates to equalize across industries as the cause of the transformation problem. Labor-intensive firms will profit more than capital-intensive enterprises, according to the labor theory of value, because work is the source of both value and surplus value.
Question 4.
The Currency School, led by Robert Torrens, believed that to prevent difficulties with the circulation of paper bank notes, the metallic standard should be used to back national money. The idea was to focus on the nation’s gold reserves to back money, which caused money fluctuations. The Banking School, led by Thomas Tooke, claimed that the changes were caused by fluctuations in money demand, focusing on general liquidity rather than the metallic standard’s role (Skidelsky, 2018). This point was important in the conversation. According to the Banking School, fluctuations in metal reserves were to be used to manage the Bank’s overall commitments (which included deposits) over the long term. The Currency School, on the other hand, contended that only notes should be subject to the same laws as other forms of currency (Skidelsky, 2018).
If the rule of reflux is followed, banks do not produce an excessive quantity of money since any surplus money is immediately returned to the issuer bank through deposits, loan repayments, or base money redemption (Gómez Betancourt & Pierre Manigat, 2018). With this doctrine, banks are allowed to issue short-term loans in order to aid in commerce and other profitable pursuits. Consequently, the loans in this situation were not considered to be inflationary. Short-term loans were regarded non-inflationary at this period; thus they could be used to boost the economy’s money supply. According to this theory, gold loans are the only source of money production that is efficient.
Question 8.
The overall price level of a nation is related to its money supply, as presented in the quantity theory. Further, if an economy’s money supply doubles, so will its price levels. A similar number of products will then cost twice as much (Pazos, 2018). The Cambridge and Fisherian approaches are only two sides of the same coin. The Cambridge approach focuses on flow, whereas the Fisherian method concentrates on stock. The Fisher method is concerned with money supply, whereas the Cambridge approach is concerned with money demand (Laidler, 2014). Money is defined differently in both approaches. The Fisherian method emphasizes money’s exchange function, whereas the Cambridge method emphasizes money’s value storage role.
Interest rates are critical in both theory and practice of monetary policy and are used by central banks as both a tool and an indicator variable. Central banks attempt to contain excessive inflation by altering nominal interest rates in response to changes in prices. Entrepreneurs (investors) can now profit from merchant capitalists when loan interest rates are lower than real interest rates, according to Wicksell’s two-interest-rate inflation hypothesis (Fontana, 2007). As a result, entrepreneurs increase their bank borrowing and investments. When banks charge interest rates on loans that are greater than market rates, the reverse occurs.
References
Bridel, P. (2018). Sismondi as a critic of Ricardo: On rent, Corn Laws and methodology. In Money, Finance and Crises in Economic History (pp. 77-91). Routledge.
Fontana, G. (2007). Why money matters: Wicksell, Keynes, and the new consensus view on monetary policy. Journal of Post Keynesian Economics, 30(1), 43-60.
Garegnani, P. (2018). On the labour theory of value in Marx and in the Marxist tradition. Review of Political Economy, 30(4), 618-642.
Gómez Betancourt, R., & Pierre Manigat, M. (2018). James Steuart and the making of Karl Marx’s monetary thought. The European Journal of the History of Economic Thought, 25(5), 1022-1051.
Grieve, R. H. (2019). On Terry Peach’s Unconvincing “Reconsideration” of Adam Smith’s Theory of Value. History of political economy, 51(4), 753-777.
Kurz, H. D. (2011). On David Ricardo’s Theory of Profits: The Laws of Distribution Are’Not Essentially Connected with the Doctrine of Value,’. The history of economic thought, 53(1), 1-20.
Laidler, D. E. (2014). The golden age of the quantity theory. Princeton University Press.
Pazos, J. (2018). Valuation of utility tokens based on the quantity theory of money. The Journal of the British Blockchain Association, 1(2), 4318.
Siddiqui, K. (2018). David Ricardo’s comparative advantage and developing countries: Myth and reality. International Critical Thought, 8(3), 426-452.
Skidelsky, R. (2018). Money and Government. Yale University Press.
