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[log in to unmask] (James C.W. Ahiakpor)
Date:
Tue Mar 11 17:31:40 2008
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Gary Mongiovi writes: "Ricardo states quite clearly, in CH. XXX of the 
Principles, that deviations between S&D explain deviations between 
market price and long-period normal price, and that the latter is not 
determined by the forces of S&D but  by cost of production: he is here 
explicitly rejecting Malthus's theory, so James errs, I believe, in 
placing them together on this issue. If we take Ricardo at his word, as 
we should, he had a very different theory in mind from modern textbook 
S&D theory."

Ricardo does state the S&D theory of price in chapter 4 of the 
_Principles_, following Smith, thus: "Suppose now that a change of 
fashion should increase the demand for silks, and lesson that for 
woollens; their natural price, the quantity of labour necessary to their 
production, would continue unaltered, but the market price of silks 
would rise, and that of woollens would fall ..." (pp. 90-91).  In 
chapter 30, Ricardo quotes extensively the Earl of Lauderdale's 
explanation of the price of commodities by supply and demand, including 
(1) "an increase ... from a diminution of ... quantity," (2) "a 
diminution of ... value from an augmentation of ... quantity," (3) "an 
augmentation of ... value from the circumstance of an increased demand," 
and (4) "value might be diminished by a failure of demand" (p. 384).  
Ricardo agrees with the above and more, but disputes the completeness of 
the explanation for the long run: "This is true of monopolized 
commodities, and indeed of the market price of all other commodities for 
a limited period.  If the demand for hats should be doubled, the price 
would immediately rise, but that rise would be only temporary, unless 
the cost of production of hats, or their natural price, were raised" 
(pp. 384-85).  The argument very much reads like Alfred Marshall's 
tracing of an industry's long-run supply curve as taught in modern 
microeconomics -- an increase in demand leads to a rise in market price 
along a rising short-run supply curve, followed by a shift of the supply 
curve, which then changes the long-run price.

Ricardo does close chapter 30 with an argument that would appear to some 
readers as his negation of the S&D theory of market prices: "but the 
prices of commodities, which are subject to competition, and whose 
quantity may be increased in any moderate degree, will _ultimately_ 
depend, not on the state of demand and supply, but on the increased or 
diminished cost of their production" (p. 385; my emphasis).  Now 
understand supply as being determined by the cost of production, and 
then you find that Ricardo's objection to the S&D theory in the long 
run, as argued by the Earl of Lauderdale and Malthus, is more of 
semantics than substance.  None of those with whom Ricardo disputes 
would disagree that a permanent reduction in the cost of production 
would lower price in the long run.  Indeed, Ricardo (p. 383) quotes 
J.-B. Say as having made the same point: "the cost of production 
determines the lowest price to which things can fall: the price below 
which they cannot remain for any length of time, because production 
would then be either entirely stopped or diminished."

One of J.S. Mill's (3: 467-68) principal clarifications of the S&D 
theory of price was to distinguish supply form quantity supplied and 
demand from quantity demanded, just as modern microeconomics teaches.  
That distinction was not clearly made in some of the earlier statements 
of the theory of value (or price), including that of Ricardo.  For 
example, Ricardo claims that "The demand for a commodity cannot be said 
to increase, if no additional quantity of it be purchased or consumed; 
and yet, under such circumstances, its money value may rise" (p. 382).  
But an increase in demand (shift of the curve to the right) along with a 
significant decrease in supply (leftward shift) would describe the 
circumstance Ricardo is disputing.

Thus, to insist, as Gary does, that S&D theory of market prices is a 
post-1850 development is to misrepresent the classical literature, just 
as some other contributors have noted.  So is the insistence that 
Ricardo does not belong in the same (classical) tradition as Malthus, 
their semantic disputes notwithstanding. 

James Ahiakpor
 

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