David Ricardo: Technical Change and Income Distribution
The role of the manufacturing sector as the engine of growth had largely escaped Smith’s attention, who still lived in an “age of corn”. In Ricardo we glimpse the transition to an age of “coal and iron”, with machine power gradually replacing labour power.
He began to sense what was not yet to be openly seen, that is, the process of incessant technological and organizational change that had seized the Western European economies. He elaborated analytical concepts and tools that allow us to describe and analyse almost any form of technical progress and its implications.The arguably most important analytical tool Ricardo forged formed the basis of what he called the “fundamental law of income distribution”, that is, the inverse relationship between the general rate of profits, r, and the real wage rate (or, alternatively, the share of wages), w, given the system of production actually in use, r = φ(w), where φ'(w) < 0. Ricardo in fact maintained: “The greater the portion of the result of labour that is given to the labourer, the smaller must be the rate of profits, and vice versa” (Ricardo 1951-73, hereafter Works, VIII: 194). Technical change affects ψ(w) and moves the corresponding wage curve over time in w - r space. We owe Ricardo the following findings:
1. In the case in which technical improvements are set aside and less and less fertile plots of land have to be cultivated in order to produce a growing amount of wheat, the profit rate, given w, is bound to fall. This is Ricardo’s version of the falling tendency of the rate of profits. The reason for this fall is the “niggardliness of nature”.
2. In the case of technical progress new methods of production replace old ones and new commodities and the methods to produce them enter the system. If technical change affects the production of wage goods (“necessaries”) or capital goods needed directly or indirectly in the production of wage goods, then for a given real wage rate (a given rate of profits) the rate of profits (the wage rate) will increase.
As early as in the Essay on Profits of 1815, Ricardo stressed that “it is no longer questioned” that improved machinery “has a decided tendency to raise the real wage of labour” (Works IV: 35). This is possible without a fall in the general rate of profits, because improved machinery reduces the quantity of labour needed directly and indirectly in the production of the various commodities: it reduces “the sacrifices of labour” ( Works IV: 397).3. If technical change affects only “luxuries”, the general rate of profits will not change, given the real wage rate; only the prices of luxuries will fall relative to that of necessaries.
4. Ricardo was convinced that technical progress reduces the amount of labour needed directly and indirectly to produce the commodity under consideration. According to the particular shift of the wage curve, one may distinguish between different forms of technical progress. In chapter 2 of the Principles Ricardo distinguishes between direct labour saving, capital (that is, indirect labour) saving and land saving forms of progress. These affect income distribution, employment and growth differently.
5. In the newly added chapter 31, “On machinery”, in the third edition of the Principles (1821), Ricardo discussed a particular form of technical progress, which, he insisted, “is often very injurious to the interests of the class of labourers” (Works, I: 388). The case under consideration is “the substitution of machinery for human labour” that reduces the gross produce. It is characterized by an increase in labour productivity and in the capital-output ratio, and thus a decrease in the maximum rate of profits: it is both labour saving and (fixed) capital using. The gross produce reducing mechanization entails what was later called “technological unemployment”, which might exert a downward pressure on real wages, viz. its injurious effect on workers.
6. Ricardo also had a clear understanding of induced technical change. A newly invented machine, for example, may not be introduced by cost-minimizing producers, because at the given real wage rate and prices it would not be profitable to do so; it is born into an environment that is inimical to it. In Schumpeter’s words, there would be an “invention” but no “innovation”, because the new knowledge would not be applied. However, as capital accumulates and the population grows, in conditions without any further technical progress wage goods would rise in price relative to manufactured products (such as machines), and for a given real wage rate nominal wages would have to follow suit. This situation is at the back of Ricardo’s statement: “Machinery and labour are in constant competition and the former can frequently not be employed until labour rises” (Works I: 395).