The Ricardo's model of economic growth encompasses the production
function, natural and human resources, capital accumulation and pattern of
development. Now we present them.
(i) Production Function:
Ricardo's production function is as:
Y = f (L, N,
However, this production function is subject to diminishing marginal
productivity. It means that as more of K, more of L and more of N are employed
the marginal productivity of K, L and N falls. Such all is represented as:
According to equation (9) Ricardo's
model depends upon change in capital accumulation with respect to time (dK/dt), change in labor with respect
to time (dL/dt), change in land with respect to time (dN/dt) and change in
technology with respect to time (dS/dt).
(ii) Natural and
According to Ricardo land includes the original and indestructible powers of
soil. Therefore, he considers land to be fixed m supply, as it is a gift of
It is shown as:
dN/dt = 0
Regarding population growth (dL/dt),
Ricardo says that there is a
market wage rate (W) and natural wage rate (W). The natural wage rate is similar to the
subsistence wage rate of Smith. According to Ricardo, if the market wages are
above the natural wages the population will increase. While if the market wages
are below the natural wages the population will decrease. It is stated as:
dLs/dt = q [W -
Ricardo says that the natural wage rate (W) is determined by productivity of
land and socio-cultural environment. This is represented as:
The movement in the market rate of wages are regulated by the relationship of
demand and supply. Therefore, it is written as:
W = n (Ld/Ls)
Where Ld = demand for labor, and Ls = supply labor.
If Ld > Ls the market wages will rise. If Ld = Ls the market wages will
remain constant and they will fall if Ls > Ld.
Ricardo further says that the Ld is directly influenced by the change in
stock of capital in the economy. It is shown as:
d . Ld/dt = q . dK/dt
Where q is a constant and its value is greater than zero. According to
Ricardo in long run the W becomes equal to
W and here Ls = Ld. It is as:
d . Ld/dt = d . Ls/dt
= dL/dt .................. (15)
Substituting equation (11) and (14) in equation (15):
The equation (16) shows that in long run the growth of labor force depends
upon capital and the relationship between two variables is proportional. Thus
the above discussion shows that the change in labor force or population depends
upon comparison between natural wages and market wages, and rate of change of
Ricardo includes both fixed and circulating capital in capital.
is that part of wealth of country which is employed in production, and it is
consisted of food, clothing, tools, machinery and raw material. While
circulating capital consists of 'Wage Fund'. This capital grows in
constant proportion to fixed capital provided no technical changes are taking
place in the economy. According to Ricardo, there are two ways whereby capital
(a) Due to increase in revenues and
(b) Due to decrease in consumption.
As result of both these cases the savings will be generated. And whatsoever
is saved is invested. He further says that rate of capital accumulation is
regulated by two factors. (a) The ability to save, (b) The will to save.
The ability or power to save depends upon the surplus over the total product
necessary to maintain labor's subsistence level. Larger this surplus is greater
will be the means to save. The will to save depends upon the rate of profit. As
he says, "while the profits of stocks are higher, men will have motive to
accumulate, if the rate of profit falls men can move towards increased
The capital accumulation in Ricardo's model is presented as:
dK/dt = f (r -
r, y -
WL) ................... (17)
Where y -
WL represents the net income of the society or the incomes left
over meeting the subsistence level of living. While r -
r means the difference
between the actual and minimum rate of profit.
Ricardo says that as community's net income grows, and the difference between
actual profit (r) and minimum compensation for risk (r) increases the capital
accumulation will grow. Thus it is the net income and the rate of profit which
play an important role in the dynamic process of capital accumulation. He
further says that the rate of profit would rise and fall depending upon
subsistence wages, it is as:
r = d (W)
Ricardo says that it is a natural tendency amongst the profits to fall. It is
because of the reason that as development takes place the labor will be
requiring more food. As a result the level of net income will fall. Moreover,
because of application of diminishing returns in production the rate of profit
will fall in long run. Thus, according to Ricardo in the
beginning capital accumulation increases at an increasing rate, and when the
ratio of profit in total output decreases the capital accumulation becomes
sluggish. Because of increase in population and cultivation of less fertile
lands the level of profit eventually falls to
r . Here capital accumulation stops, population
becomes stagnant and the economy enters into "Stationary State". It is
shown with Fig.
(iv) Patterns of
With the help of equation No. (9), (10) and (16) the economic development can
be represented as:
The equation (19) shows that capital accumulation plays an important role in
economic development. With the help of equation (17) and (19) we can find the
dynamic path of national income as:
Y = f [Ko, No, Lo, a.............aN;
S(t)] ....................... (20)
This equation shows that the growth of the economy depends upon initial
amounts of K, L and N like Ko, No and Lo; structural parameters like a......aN and
and S(t) which are institutional framework and technology. Regarding
Ricardo says that they are exogenously determined.
The neatness and beauty of this model
lies in this fact that it stresses upon raising of savings and profits, the most important elements of economic growth. But
still this model has following shortcomings:
(i) Ricardo's model is based upon diminishing returns. But due to modern
scientific knowledge its application can be suspended.
(ii) The concept of stationary state advanced by Ricardo is baseless. How that
economy can be a stationary one whose output is expanding, whose profits are
rising and capital accumulation is taking place.
(iii) Ricardian concept of subsistence wages and the concept of increase in
population due to rise in wages are misleading. As far as western countries are
concerned the wages have never been subsistence and because of rise in wages the
population in these countries decreased, rather increasing.
(iv) Like Smith, Ricardo also assumes the system of 'Laisseze-Fair'. But it is
not applicable in real life and the state does have to interfere with.
(v) Ricardo assumes that there are no institutional changes. But the
institutional changes highly influence the process of growth.
(vi) Ricardian model basically explains the theory of rent determination.
Therefore, this model is like a theory of national income distribution.
(vii) Ricardian model did not incorporate the role of rate of interest in
economic growth. Moreover, according to Hicks it is a static model and fails to
analyze the dynamic situation, the important feature of growth theory.
Ricardo's Model and
Ricardo's model is based upon 'diminishing returns' and Malthusian theory of
population. If we analyze UDCs we find that here population increases more than
food. The use of superior technology on lands is limited. Consequently,
there applies diminishing returns. In case of UDCs the supply does not match the
demand. Hence rent goes on to increase. Whereas because of abundance of labor
the wages remain low leading to low savings and low investment. Such is in
accordance with what it has been said by Ricardo in his model.