Distribution Theory

David Ricardo, a prominent economist from the early 19th century, is renowned for his contributions to economic theory, particularly his work on income distribution. In his analysis, Ricardo used a simple graph to illustrate the distribution of income in an economy based on the Ricardian model. This model assumes fixed proportions of capital and labor applied to a fixed quantity of land. The resulting graph, with capital and labor on the horizontal axis and the marginal products on the vertical axis, helps us understand how income is divided among wages, profits, and rent.

Ricardo's analysis is often referred to as a "residual theory" because he determined income shares through subtraction. He first calculated rent, which represents the product above a certain threshold, indicating what the landowner receives. Wages were determined by the subsistence level, based on Malthusian population theory, and profits were what remained after subtracting wages from the marginal product.

ABHQM – Marginal physical products

OABC – Total agricultural output

DAB – Rent

EFJQN – Wage

FC – Wage rate

OEFC – Total wages

EDBF – Total profit

1772-1823. (1817). On the principles of political economy and taxation. London :John Murray,

Distribution of Income Over Time

Another aspect of Ricardo's work was the changing distribution of income over time, focusing on the relative shares received by capitalists, landlords, and laborers. Unlike his predecessors like Adam Smith, Ricardo developed his own theory to explain this phenomenon.

Ricardo predicted a gradual decline in the rate of profit over time, but he disagreed with Smith's reasons for it. Smith believed that increasing competition in labor markets would lead to rising wages and, consequently, falling profits. Ricardo, on the other hand, invoked the Malthusian population doctrine, arguing that population growth would eventually lower wages back to subsistence levels.

Ricardo also refuted Smith's arguments about falling profits due to competition in investment and commodity markets by using Say's Law. He argued that increased output resulting from new investments could be sold at previous prices, preventing a fall in profits. This same principle applied to commodity markets, according to Ricardo.

Ricardo's Long-Run Perspective

Ricardo's analysis suggested that as an economy develops, profits in agriculture would decline due to rising population and land scarcity. However, capital would move to more profitable sectors like manufacturing. In the long run, equilibrium would be reached, characterized by low profits, stagnant capital accumulation, population stabilization, subsistence-level wages, and high rents.

Impact of the Corn Laws

Ricardo's analysis also shed light on the economic consequences of the Corn Laws, which protected British agriculture from foreign competition. These laws caused grain imports to decrease and domestic grain production to increase. As grain output expanded, profits fell as rents increased. Ricardo opposed the Corn Laws because they hastened the arrival of the stationary state, where economic growth would stagnate.

In conclusion, David Ricardo's residual theory of income distribution and his insights on the long-term dynamics of income distribution provide valuable insights into the field of economics. His analysis of the Corn Laws demonstrates how economic policies can impact the distribution of income and the overall welfare of a society. Ricardo's work continues to be relevant in modern economic discussions, highlighting the importance of considering both short-term and long-term effects of policy decisions on income distribution and economic growth.

Written by: Thiruni Senarathne and Pamadi Gamage

Reference - Ricardo, David, 1772-1823. (1817). On the principles of political economy and taxation. London :John Murray,