Page 332 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-20: Macroeconomic Theories of Distribution

Since MK, which is rate of labour cost of life, is unchangeable, so as cereal the rate of profit is changed Notes
with the marginal production. According to Ricardo, taxes increase with the progress of society and
profit decreases, but the rate of real labour cost should be unchangeable. This is clarified by below
diagram—

Fig. 20.2

A
Cost/Salary/Profit Reduced Rent

Unchanging Wage Rate

Declining rate of profit
B
Social Progress C

Profit is essential for capital deposit. If profit is not sufficient in quantity; it affects adversely and stops
the development of economy. When the rate of profit becomes zero then the capital deposit would stop
and economical situation will go to that level which Ricardo described as the long run stable period.
The main properties of this period are— (i) rate of progress will be zero, (ii) profit will not happen or it
is zero, (iii) taxes would be more and rate would be high (iv) The cost of labour would be stable in the
level of life standard.

Ricardo’s theory is based on the population theory of Malthus and productivity
loss theory.

Criticism of Ricardo’s Theory

(i) Unnecessary Importance to Revenue: Ricardo has given more importance to taxes rather than
wages, interest, profit etc. But it is necessary because every factor gets credit as per their part of
services.

(ii) Capital and Labour is not Constant Multiplication: Ricardo has accepted capital and labour
as constant multiplication while this is free factor, not constant.
(iii) Other possible uses of land: It is not correct that land can be used only for production of cereal
but it can also be used for building construction, establishment of industry.
(iv) To add Interest in Profit is Incorrect: In this theory, interest is also added in profit which is not
correct.
(v) Based on False Assumption: Theory of Ricardo is based on the utilization of theory of population
and theory of production loss, but the reality is both the theories are unreal.

Express views on Ricardo’s theory.

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