Econ 107 Midterm 2

What is the difference between extensive cultivation and intensive cultivation?
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Modern theory of rent: Ricardo was the first economist to develop a theory of rent. Land is a factor of production with a marginal productivity or land, and rent is the discounted value of future marginal product of rent, discounted value of rent is the price of, rent comes from scarcity and varies based on the unequal quality of land. This can be explained by the cobb douglas production function. Mentioned the diminishing returns in agriculture and location/fertility matter too
Theory of rent relies on assumptions of 1) competition equalizes rates of profits among capitalist farmers who rent land from landlords and 2) land differs in fertility and productivity of land is in terms of fertility of growing food
Adam Smith - was sketchy and contradictory on his theory of rent
Extensive Margin - assume nobody pays rent in a newly settled country in which fertile soil is abundant (i.e. when someone gets to land to colonize it they don't want to pay rent, this happens when land is abundant), capitalist farmers use up fertile land and then use less fertile land, but the competition due to the desire to want to use more fertile land equalizes rent prices
Higher grade land leads to higher rent
Competiton leads to equalization of profits among all types of land
As long as net produce with less fertile land is brought under cultivation and as long as the corn wage rate remains the same the profits will decrease. It will fall in the long run because of growing food for an expanding population will lead to bringing less fertile land to cultivation. Diminishing productivity in agriculture would cause profits to be squeezed. Ultimately, all profits are equalized between different qualities of land.
Intensive cultivation approach: rent also arises if the cultivation of the first grade of land becomes more intensive, using more labor and capital means each added unit of investment will yield less output than the previous ones (diminishing marginal returns)
The last unit of labor and capital must pay for itself and provide an average rate of profit.
Net produce decreases (profit because the land is abundant) over time as we apply more capital and labor
Conflict between landlords (get rent) and capitalist farmers (pay rent)
Agricultural sector: The increase in the price of corn (workers are paid in corn so this leads wages to increase above the subsistence level, population grows, the land becomes less fertile)
Manufacturing sector: wage increases but labor embodied doesn't change because capital and labor can't be interchanged)
Profits in manufacturing sector is higher than profits in agricultural sector, but factors of production have free mobility so ricardo assumed constant average levelized prices in the economy
Prices of manufacturing goods decreased to equalize agriculture and manufacturing prices, and this leads to a decline in profit rate in manufacturing so the capital growth rate declines
Therefore, ricardo opposed corn laws/tariffs because high prices of corn led to low prices of manufacturing growth
Value of a house is equal to present discounted value of future rents and rent is the discounted sum of future marginal productivity of land, marginal productivity of land in housing is determined by location (similar to fertility)
People who live in coastal cities don't want more housing so rent in coastal cities are higher which leads people to move inland
Housing prices increasing disproportionately, high demand location (more productive/fertile) land is more expensive
California land is high because the location is prime
What is the labor theory of value?The price of a good is determined by the wage rate and unit labor required. Relative prices of commodities are proportional to labor used to make them, including to the labor used in the production of machinery, tools and intermediate goods.Ricardo ran into difficulties about the labor theory of value with different compositions of capital. What are the three ways of thinking about different compositions of capital?capital to labor ratios differ across industries capital across industries may have different durability the time to produce across industries maySuppose that in addition to labor capital is required for production of commodities, and the time required to make the commodities differ. Under what circumstances can we predict relative prices from labor coefficients, why?Let us first suppose that there is no capital and labor is the only factor of production, where a1 is the labor inputs per unit of output 1 and a2 is the labor requirement for output 2. p1= w1a1 and p2=w2a2 and w1=w2 P1/p2=a1/a2 This is the basis of labor theory of value. Assume that capitalist advance wages to workers and earn interest on it price becomes, relative price is equal to relative unit labor required P1=wa1(1+r). If there is time requirement for production and it takes good one t1 periods and good two t2 periods we can write the price equations as follows: (in other words capitals are differentiated) p1= wa1 [(1+r) (to the power of t1)] p2= wa2 [(1+r) (to the power of t2)] p1/p2= (a1/a2) [(1+r) (to the power t1-t2)] It follows that we can no longer predict relative prices from labor coefficients alone unless t1=t2, so that the expression (1+r) vanishes. In short, labor theory of value cannot account for relative prices when capital as well as labor is involved in the production process.John Stuart Mill summaryImportant economist and philosopher in the 19th century during militarism, revolution, etc. Links happiness to moral behavior, had some socialist ideals with favor of markets but with government intervention, believed that the state must aid for the poor, big feminist. Additional units of capital are good because it would generate jobs or lead to higher pay, limiting wealthy luxury spending would lead to a rise in wages/population growth that offsets the luxury goods bought by the wealthy. Increase of capital depends on surplus product and disposition to save (higher profits = incentives to accumulate), and capital supply can be increased easily but land supply can't (diminishing returns). Labor theory of value only works if capital and labor are the same across industries, which usually isn't the case. International world equilibrium prices are based on imports and exports if there is free trade. He believed wages were determined by a competitive struggle between capitalists and workers, and that distribution was a result of human institutions not maximizing profits. There is a tendency for the rate of profit to fall due to a growth of capital in markets leading to a desirable stationary state. Private ownership and property distribution comes from conquest and violence, so socialism may prevail. Unlike Smith, he didn't believe the role of the government was to protect people with property (government intervention as necessary to eliminate poverty and extreme wealth)How did Mill differ from Bentham?Bentham believed that pleasure and pain were objective quantitative states, but Mill believed that pleasure differs not only quantitatively but also qualitatively. It's better to be a person dissatisfied than a pig satisfied. All pleasures are not the same: high (intellectual)-low pleasures (physical). all motives can't be reduced to a self-interested quest for pleasure. The calculus of happiness is unreasonable, and all motives can't be reduced to a self interested quest for pleasure. Unlike Bentham's view of utilitarianism, he believed that there was a tyranny of the majority that must be addressed by the government.On what grounds Mill advocates liberty of thought, speech, and writing?Individual liberty and limited government intervention leads to the greatest happiness to the greatest number. Suppressing causes harm. Let people be unless it causes harm. Truth depended upon the free expression of opinion. Opinions can be True: suppressing them denies us from finding if there is an error in the opinions False: silencing them undermines their public refutation False with some element of truth: Silencing prevents the true part from being known. All in all, the public should see opinions and decide if they are false or not.Why have liberty of action?A precondition of the emergence and vitality of individuality was the largest possible liberty of action. An individual became more valuable to himself and others through cultivating his individuality. Mill relates advancement, general progress, and improvement of mankind to individuality.When should there be limits to freedom of action?Society was allowed to impose two conditions upon the individual: a) an individual must not injure the interests of another, b) each individual had to undertake "labors and sacrifices incurred for defending the society or its members from injury and molestation." If we are injuring someone our liberties can be infringed on, otherwise we should let people be.What are Mill's key ideas on how to bring about women's equality?He advocated legislation for increasing opportunities for women, for education, suffrage, punishment for domestic assault, women having a right to their property, and earning. However, he viewed that law alone would not be sufficient. Education, social inculcation, habits, and family life had to change towards supporting women's equality.What are the advantages of the removal of inequality between sexes according to Mill?The first is justice. There are also moral benefits. In the important agencies of character formation and the chief steps in the progress of civilization, the influence of mothers in their boys' education and the desire of young men to gain the admiration of women play an important role. Costs for men are decreased or eliminated: Servitude corrupts both men and women.What was Mill's view on differences between men and women?There would not be any difference between men and women in their capacities and character if they were not kept in an "unnatural state" in which "... their nature [is] greatly distorted and disguised..." (Mill, 1869, p. 41). It is not possible to know about any natural differences between men and women, and thatWhat was Mill's views on opening up opportunities for women?the things which women are not allowed to do are the very ones for which they are peculiarly qualified... (Mill, 1869, p. 38) such as teaching and leadership. The ability for women to earn is "essential to their dignity" and that women are able to do good thingsWhat was Mill's vision of marriage?The vision of marital partnership is based on the principles of equality, partnership, cooperation, and reciprocity between woman and man, however marriage at that time was like a master-slave relationship. Equality in a marriage leads to happiness for both people, but women are in a double-blind in which they are not free within or without marriage.What is Mill's view on the division of labor?He was generally in favor of the traditional division of labor where women were responsible for childcare and the household. His view was that household work could not be done by others. Mill offers only generalizations of what he thinks is the best division of labor. However, he also states that utmost latitude must be given to each situation. In particular, if women want to work outside the home, women should be given every opportunity on an equal basis to men. With his view that that dignity is obtained through the power of earning Mill realizes the benefits of working outside the home for women. At the same time, Mill thinks that if women work outside the home they will have twice as much work. He took the position of husbands being the wage earners because with the participation of women in the labor force wages would fall thus the family income would decrease.Mill's legal and cultural solutions to gender inequality?Women's suffrage, the opening of higher education and public professions to women, punishment of domestic assaultMill's relevance for today on his views of feminismMill advocated for equality and emphasized that people's identiites determine their situation in life, it was important for modern liberalism and created two assumptions Equality of women is important for social justice Equality of women is good for women and menWhat determines wealth according to Mill?Wealth is defined as including all useful things that possess exchange value; only material objects are included because only they can be accumulated.What does the increase of capital depend upon according to Mill?The increase of capital depends on two things: 1) the surplus product after the necessities supplied to all engaged in production, 2) the disposition to save.How is the value determined according to Mill?He argued that labor theory of value held when the ratios of capital to labor were the same in all industries. In that case, the cost of production would be proportional to the labor embodied in various commodities. But this was not the case for most commodities. Mill reverted to adding up the cost of production theory He considered three scenarios for long-run prices: - Where supply is absolutely limited (the supply curve is perfectly inelastic), only demand determines prices, but these commodities are relatively unimportant. (monopolist can create this situation). Demand and supply determine prices, though demand plays a larger role. - The majority of goods, including manufactured goods, have a perfectly elastic (horizontal) supply curve and the cost of production determines their prices. He focused on this - Commodities with a relatively elastic supply (in between-group). Their value depends on "the costs necessary for producing and bringing to market the more costly portion of the supply required" as we would say that marginal costs.What does Mill say about exchange?Price expresses the value of a thing in relation to money; the value of a commodity is measured by its general power to purchase other commodities.How is distribution determined according to Mill?His view was that distribution was a result of human institutions. He meant that the laws of property and other institutions that affected the distribution of wealth were human institutions that had been changed in the past and would be changed in the future.What counters the falling rate of profit according to Mill?If a country exports capital and the foreign profit rate is higher then the average profit rate will increase. On the second he argued that periodic business crises would destroy capital and stemmed the downward tendency of capital. Foreign trade makes it possible to obtain cheaper commodities. It indirectly decreases the cost of labor and increases profits.What did Mill think of socialism?He did not defend private ownership of the means of production as sacrosanct. He also believed that the capitalist class structure would ultimately be abolished. He believed that a communist society would be morally superior to a capitalist society. He also believed that socialism would become a possibility when people's characteristics had been elevatedWhen should the government intervene according to Mill?He advocated that the government should intervene to modify the socially adverse effects of the free market economy in principle areas. The first was about poverty. Second, the natural complement of this extreme poverty was that a small minority of mankind was born to the enjoyment of all the external advantages which life can give, without earning them by any merit. Third, monopolies Laws protecting unions, protecting labor rightsHow are international prices determined in Mill's perspective?The international prices would depend exclusively on the supply and demand-not the cost of production. Mill proposed that international supply and demand could be analyzed on the supposition that each country would always be forced to balance its international payments, that is the income from exports would have to be equal to the outlay for imports. Therefore, at each possible price (between the limits of the cost ratios between the cost ratios prevailing in the two countries), each country would offer a certain quantity of its exports in exchange for a certain quantity of the exports of the other country. As the prices vary, the quantities offered and demanded would vary.Mill believed that the limit of wealth is never a deficiency of consumers but of producers and productive power. Why?If the capitalist spent less on luxury consumption and more on investment, wages fund and demand for labor and wages would rise. If in turn, the population increased, the increased demand for necessities by wage earners would offset the decreased demand for luxuries by capitalists. If the population did not increase in proportion to the growth of capital, wages would rise, and luxury consumption by workers would supplant luxury consumption by theMarx's views/overview/legacyCapitalism includes a series of class struggle, as wealth increased among the few, the many would-be poor but lead to revolution and classless society, communism is inevitable. He believed in the labor theory of value, was influential on left-wing politics, and used the scientific method to develop economic thoughts His legacy was that communism likely failed, but most times it was specifically Leninism that was used and not communismOn what basis did Marx criticize classical economics?It led to a productivity wage cap, and classical economists lacked historical perspective: there are different modes of production like slavery, feudalism, capitalism, etc. But all of these modes of production have common traits. However, in capitalism, a small group of people owns the means of production and the larger groups work for the few. Classical economists didn't realize the power of capital to yield profits, and most bourgeois economists believed that property was sacrosanct. Furthermore, they identified property in general with its existing form as capitalist private property. Marx objected to this, focusing on property and distribution and production, not only on exchange. Lastly, in a capitalist system, a worker's labor is simply viewed as a commodity, so society wasn't harmonious.Why didn't Marx use-value be as the basis for exchange value?Marx rejected use value as a possible determinant of prices because use-value primarily reflects relations between individuals and material things. Use value was not reflective of social relations (each producer depended on the products of other producers) peculiar to capitalist society. His interest was in social relations peculiar to capitalism which was more reflected to exchange value. He viewed that the only common element to all commodities is the labor time required in production (labor theory of value)When does capitalism exist according to Marx?Capitalism exists when, in a commodity-producing society, one small class of people-capitalists has monopolized the means of production, and where the greater majority of the direct producers-workers- would not produce independently because they have no means of production. Capitalism is neither eternal nor natural. It is a specific mode of production that evolved under specific historical conditions and that has a ruling class that rules by virtue of its ability to expropriate surplus value from the producers of commodities.What is labor power?It is potential labor, a person's ability to work and produce commodities. This was what the laborer sold as a commodity. The use-value of labor power was actual labor expended.What is the value of labor power equal to?The value of labor power was equal to the value of the subsistence of a worker's family.What do the wages tend towards and why?It tends towards subsistence wages because members of the industrial reserve army (people who can be pulled to work) of unemployed workers usually lived below the subsistence level and always tried to take jobs, pulling wages down. As accumulation took place (which always happened in a capitalist system), however, a boom period would create such a sharp increase in the demand for labor that the ranks of the reserve would be quickly depleted. When this happened, the capitalist would find that he had to pay higher wages to get enough labor. • Capitalists are unhappy with the higher wages change the techniques of production by introducing new labor-saving machinery so that each laborer would then be working with more capital and output per worker could be increased. This leads to surplus labor, competition of workers, and wages being kept near subsistence. • When most of the capitalists acting individually did this the problem of high wages was temporarily alleviated as the reserve army was replenished by workers displaced by the new techniques of production, workers' wages declined to subsistence level.What do the wage differences between occupations reflect?The wage differences between occupations reflected the fact that special education and training were required for some occupations. All labor could be reduced to some multiple of labor (it's quantifiable). The expenses of this education entered into the total value of various types of labor power.What is necessary labor time?The portion of the working day during which the production of labor power takes place is necessary to labor time, and the labor expended during that time is necessary to labor. I.e if it takes someone two hours of work per day to pay for necessary things, necessary labor time is two hoursWhat is surplus labor time?In capitalism, the working day always extends beyond necessary labor time. This extended portion of the working day is named surplus labor time which creates surplus value.Suppose commodity C' is created after the production process for which commodity C. By how much does the value of C' exceeds the value of C?The value of the commodity C' exceeds the value of the commodity C by an amount exactly equal to the excess of the length of the working day over the necessary time required to produce the laborer's subsistence. The capitalist now has a fund that is greater than the original fund so capital continues to accumulate.What is variable capital?Variable capital (v) is defined as the value of labor power that the capitalist purchases.What is the rate of surplus-value? What does it represent?The rate of surplus-value is the degree of the exploitation of the laborer by the capitalist. Surplus labor/necessary labor = rate of surplus value = surplus value/variable capitalDescribe the model of exploitation.Exploitation arises from control of the production process by the capitalist in two ways - Formal submission of worker to capital The worker who sells his labor assumes an obligation to the capitalist, no technology is introduced. Due to this obligation, capitalists can extract absolute surplus value by increasing the length of the working day while only paying subsistence wages - Real submission of workers The capitalist can introduce a new technology that increases labor productivity, this creates and increases relative surplus value The value of the gross product is based on the labor directly and indirectly used to produce it, living labor is the value of the net product or the labor directly applied while dead labor is the value of constant capital or the labor employed indirectly. When workesr spend the whole working day working for themselves (i.e if capital = 1, exploitation vanishes), exploitation comes from the extension of the length of the dayWhere does the surplus-value arise from?Marx showed that surplus value arose not through the exchange but in the production process.Marx views on private propertyMarx saw that the legal foundation of capital was the law of private priority as it existed in the capitalist mode of production. Property is a right o n the part of the capitalist to appropriate surplus value. The capitalist system leads to accumulation, cycles, fall of profits, economic concentration, and imbalances.Consequences of capitalist accumulation- Economic concentration: due to the strong crushing/absorbing the weak and new techniques/technologies are created to increase productivity. The amount of capital needed grows as technology grows so firms grow until monopolies emerge. - Sectoral imbalances can lead to economic crisis: if there is a labor saving expansion of total production in one of the sectors, there is firing from that sector and excess capacity. The other sector doesn't want to produce that much so workers are fired from that sector too which leads to a declining spiral of glut in both spectors, a general depression, and unemployment.How do cycles occur?- Assume that investment is an increasing function of the rate of profit while the rate of profit is a decreasing function of wages. Depression happens because if wages increase, investment will be discouraged due to a decrease in profits. This will reduce the aggregate demand and trigger a crisis. The market prices will fall together with the levels of output, pushing the average rate of profit down again. Thus, the crisis will deepen. With a reduction in investment, the demand for labor will also decrease and the "industrial reserve army" i.e. (manifest and hidden) unemployment will rise. Wages will fall. - Coming out of a depression happens when the most inefficient firms are expelled from the market and the most obsolete machines will contribute to a rise in labor productivity. Therefore, the average rate of profit will increase again, reactivating economic growth. When employment levels and wages begin to rise again, it will be the beginning of a new cycle.Why does the profit rate have a tendency to fall?The composition of total capital C is determined by constant capital K (value of means of production), and variable capital v, (value of labor power or the sum of total wages). The rate of surplus value is created by variable capital only. Recall rate of surplus-value, q=s/v. The rate of profit is based on all the capital (total capital, not variable capital). Profit rate pr= s/C =s/(K+v) Divide the numerator and th e denominator by v, we get (s/v)/[(K/v)+1] If everything else stays the same, an increase in K/v means a decline in the profit rate. Remembering that only variable capital produces surplus value, if the rate of surplus-value remains unchanged, while the organic composition of capital increases then surplus value created by a given quantity of labor would have to be spread over a larger quantity of total capital, yielding a decrease in the rate of profit.The counteracting forces for the tendency of the rate of profit to fallLengthening the work day If there's overpopulation, wages go below the value of labor power Technological change cheapens constant capital Like Mill, Marx talked about the invluences of capital mobility and how capital invested in a foreign country with a higher rate of profit that can yield a higher profitMeaning of work (Marx)Work is the fundamental and central activity in human life and fulfilling/liberating. It can be vital to activity and fundamental for self-development/self-realization. Economic work is along the continuum with free artistic creation that gives us a meaning to life