Economists David Ricardo and John Stuart Mill dedicated their lives to economic writing that analyzed the dynamics of capitalist economies. Specifically, they investigated sources of economic growth and development. Principles of Political Economy and Taxation was David Ricardo’s contribution to this economic growth and development literature. Within this economic literature, Ricardo built a complex model through the theory of value and rent that attempted to thoroughly address topics of rent, profit, and wages. “To Ricardo, the economic world was constantly tending to expand.”[1] To Ricardo, continuous expansion by capitalist would cause a chain reaction that would affect prices of commodities, wages and eventually lead to a long run tendency for the rate of profit to fall until the economy would reach a station state(economic growth is neither positive or negative). Follower of David Ricardo work, John Stuart Mill, agreed with the basic Ricardian model of falling rates of profit and the stationary state. However, Mill’s opinion about the meaning of the stationary state was not the dismal one Ricardo pictured. This paper will compare and contrast Ricardo’s and John Stuart Mill’s view of the stationary state:
The Driving Mechanism
In the Principled of Political Economy and Taxation, Davis Ricardo created a model that essentially grew into a large chain reaction of different variables that would lead an economy to a stationary state. Ricardo’s chain reaction visually:
Positive profit Þ investment in stock Þ demand for labor Ý Þ wage > subsistence wage Þ population Ý Þ demand for food Ý Þ move to less fertile land (causing more labor in each unit of land) Þ price in food Ý Þ rent Ý Þ subsistence wages Ý Þ profitsß
Starting with positive profit from capitalists, investment in stock would increase the demand for labor. Although positive profit appears to be a good thing because it creates more work, Ricardo argues that, “with the progress of society the natural price of labour has always a tendency to rise, because one of the principal commodities by which its natural price is regulated has a tendency to become dearer from the greater difficulty of producing it.”[2] With an increase in the demand for labor and therefore new employment, prices of commodities begin to fall because of the societal progress. As workers become better off, their purchasing power increases and they demand more enjoyments in life along with a healthy and numerous family. Here, Ricardo is arguing that the increase in labor, essentially increases the population because people can afford to have larger families. To him, this increase in population consequently would lead to an increase in the demand for food. He continues to argue that even if “ the power of production is still greater than that of population, it will not long continue so; for the land being limited in quantity, and differing in quality, with every increased portion of capital employed on it there will be a decreased rate of production, whilst the power of population continues always the same.”[3] In other words, stated in the diagram, the population would have to expand to less fertile land in order to continue to feed the growing population. With the increase in the price of food is triggered not only by the increase n population but also the wage of the worker. As the movement to more fertile land, aggregate rents increase. Note that the workers are not better off because of the subsistence wage, but landlords get richer because the rent is increasing. Profit begins to fall until ultimately the stationary state has been reached. This theory was accepted by many economists who came after Ricardo, including John Stuart Mill.
Postponing the Stationary State
Postponing the stationary state at this time was ideal to Ricardo. To postpone the falling rate of profit that led to the stationary state, the main causality of the diagram above would need to be disrupted or changed. For Ricardo, that main causality was the increase in the demand of labor. He argues, in order to stop the natural tendency of falling rates a profit, society would have to cut back on the number of people contributing to the labor force. “This tendency, this gravitation as it was of profits, is happily checked at repeated intervals by the improvements in machinery connected with the production of necessaries, as well as by discoveries in the science of agriculture, which enables us to relinquish a portion of labour before required, and therefore to lower the price of the prime necessary of the labourer.”[1] In other words, to decrease the demand for labor, society needs to replace laborers with machinery. Advances in technological change would produce inverse effects, therefore the stationary state would not be reached.
John Stuart Mill completely agreed with Ricardo’s idea that technological change would help prevent the falling rate of profit. However, he was able to visualize three other preventative measures of the falling rate of profit. The first was the idea to import food. He argued, “as long as food can continue to be imported for an increasing population without any diminution of cheapness, so long declension of profits through the increase of population and capital is arrested, and accumulation may go on without making the rate of profit draw nearer to the minimum.”[2] The second idea was to export capital (aka outsourcing to save capitalism). This idea emerged from Mills own interpretation of the Ricardian model he followed. Instead of the increased demand for labor becoming the lead cause of the falling rate of profits, Mill believed that the economic annual savings were the main cause of the falling rate of profit. Therefore, “this is, the perpetual over-flow of capital into colonies or foreign countries, to seek higher profits that can be attained at home.”[3] To Mill outsourcing or investments in new land could get rid of capital would prevent the falling rate, and benefit the country in other ways. The third idea was to purposely cause a depress/recession in the economy. The perverse effects would cause a decrease in the demand for labor, which would postpone the continuation of the chain reaction in the diagram above.
Desirability
In the 19th century, the idea of a stationary state was considered as undesirable as a modern-day declining state. “Growth was thought to benefit all three great classes of society: capitalists, landlords, and workers.”[4] Ricardo envisioned a dismal stationary state, that essentially would ultimately lead to the end capitalism. Therefore, the stationary state of Ricardo was highly undesirable and should be avoided at all costs.
John Stuart Mill, “in contrast to nearly all orthodox economists up to the present, Mill was not certain whether a nation with a growing economy, such as England of his times, was a desirable place in which to live.”[5] Mill, unlike Ricardo, was not fixed on the idea that material goods made people happier. He states, “I confess I am not charmed with the idea of life being held out by those who think that the normal state of human beings is that of struggling to get on; that the trampling, crushing, elbowing, and treading on each other’s heels, which form the existing type of social life are the most desirable lot of humankind or anything but the disagreeable symptoms of one of the phases of industrial progress.”[6] Therefore, the idea of a stationary state was good because it would reduce the population (aligning with Ricardo’s ideals), and decrease the pace of economic activity in order to focus on the well-being of individuals (strayed away from Ricardo).
Conclusion
Although Mill followed Ricardo’s work closely, Mill’s changed interpretation of Ricardo’s model and the difference in political stance led to a dissimilar consensus of the desirability of the stationary state. Ricardo wanted to avoid the stationary state because his view of a progressive society was materialistic. A productive society was the only way to make all three classes better off, but was flawed and only benefitted landlords. Through Mill’s different interpretation of the actual problem, he deduced that a stationary state could actually benefit society. He sought to fix the problem of the falling rate of profits addressed by Ricardo but ultimately created more advanced solutions because he altered the leading cause of what makes profits fall.
[1] Ricardo_Principles ofpolitcal economy 71
[2] Mill Principles of the economy 100-101
[3] Mill Principles of the economy 103
[4] http://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/stationary-state
[5] http://www.economictheories.org/2008/07/stuart-mill-different-stationary-state.html
[6] Mill Principles of the economy 113
[1] The worldy philsophers 96
[2] Ricardo_Principles ofpolitcal economy 53
[3] Ricardo_Principles ofpolitcal economy 56