The Stationary State

The Nature of Economic Progress: The Stationary State

In the Ricardian system the theory of value, reduced to Ricardo's level of sim­plification, plus the theory of rent, provided the key to the central problem of income distribution. It was, of course, necessary to relate the theory of value to the theory of prices in a complex economy. Ricardo did this by relating mar­ket price to the costs of production in the marginal (no-rent) firm. He noted:
The exchangeable value of all commodities, whether they be manufactured, or the produce of the mines, or the produce of the land, is always regulated, not by the less quantity of labour that will suffice for their production under circumstances highly favorable, and exclusively enjoyed by those who have peculiar facilities of produc­tion; but by the greater quantity of labour necessarily bestowed on their production by those who continue to produce them under the most unfavorable circumstances (Works, I, p. 73).

Ricardo recognized that there is no perfect measure of value, since any measure chosen varies with fluctuations in wages and profit rates. We have seen that different durabilities of capital and different ratios of fixed to circu­lating capital will affect market prices differently if wages change relative to profits. Thus Ricardo devised an analytical gimmick—the "average firm"—in which both the ratio of capital to labor and capital durability are assumed equal to the economy average. So armed, Ricardo was ready to solve the problem of income distribution and its changes over time.

Let us illustrate Ricardo's process utilizing the product information con­tained in Table. Suppose that three doses of labor and capital on a given farm produce 270 bushels of corn per year. Each labor input, by virtue of its advance from the wages-fund, constitutes an expenditure of circulating capital, whereas each capital input, through annual depreciation, constitutes an expen­diture of fixed capital. Ricardo defined total profits as total revenue minus the sum of fixed and circulating capital expenditures incurred per production pe­riod. Now assume that the price per bushel of corn is $1, that the wage rate per worker is 10 bushels of corn and $10 of other necessities (the latter can be given in dollar terms because they are assumed to be produced under condi­tions of constant cost), and that the annual depreciation per unit of capital is $10. Profits on No. 1 land would be calculated as in Table.

If all land were equally fertile, profits could continue at the same rate. But with the progress of capital and population, cultivation must be extended to No. 2 land, where three doses of labor and capital produce only 240 bushels of corn. Technically, more labor and capital are now needed to produce the same output on No. 2 land as on No. 1 land. Therefore, the price of corn must rise to $1,125 (270/240 x $1.00 = $1.25). In Ricardo's system, this increase in the price of corn has the effect of raising money wages and aggregate rents and of lowering profits. The ensuing distributional pattern is illustrated in Table .

*Table

Value of product = 270 X $1 = $270
Wage rate = (10X$1) + $10 = 20
Wage bill = 3 X $20 = 60
Depreciation = 3 X $10 = 30
Total profit = $270 - $90 = 180
Rent = 0

Table 2 shows what we learned earlier—that rent arises on No. 1 land only when production with the same amount of capital and labor is extended to No. 2 land. The calculation of rent is, as Ricardo indicated, the value of the initial firm's output less the value of the marginal firm's output. The illustra­tion can be extended to additional firms (i.e., types of land), of course, but the distributional effects of economic growth are already clear. Increased agricul­tural production leads to higher money wages but the same real wages. Ricardo assumed, via the population principle, that wage rates would be at subsistence levels in the long run. On the other hand, higher nominal wage rates and increasing aggregate rents place a two-way squeeze on profits. Al­though under competition profits are the same for all firms in a given industry, the inevitable tendency of profits is to decline as output increases. Eventually a minimum profit rate is reached at which new investment (i.e., additional cap­ital accumulation) ceases. Ricardo described this as the "stationary state." Theoretically, this minimum profit rate is zero; practically, however, it may be slightly above zero.


*Table 2

No.1 Land

Value of product 270 X $1,125 = $ 303.75
Wage rate (10 X $1,125) + $10 = 21.25
Wage bill 3 X $21.25 = 63.75
Depreciation 3 X $10 = 30.00
Profits $303.75-93.75-33.75 = 176.25
Rent = 33.75

No.2 Land

Value of product =240 X $1,125 = $270.00
Wage rate = (10X $1,125) + $10 =21.25
Wage bill = 3 X $21.25 = 63.75
Depreciation =3 X $10 = 30.00
Profits = $270-93.75 = 176.25
Rent = 0

The process that Ricardo described may therefore be restated as a paradox: The logical result of economic growth is stagnation! Ricardo's analytical sys­tem did not allow for technological progress, and it uncritically accepted the population principle; it may be attacked on both these grounds. But granting Ricardo's assumptions, it is a logically consistent system. In its final version, the stationary state arises in the following manner. The average wage rate is determined by the proportion of fixed and circulating capital (i.e., the wages-fund) to the population. As long as profits are positive, the capital stock is in­creasing, and the increased demand for labor will temporarily increase the av­erage wage rate. But when wage rates rise above subsistence, the "domestic delights" come into play, and population increases. A larger population re­quires a greater food supply, so that, barring imports, cultivation must be ex­tended to inferior lands. As this occurs, aggregate rents increase and profits fall, until ultimately the stationary state is reached.