Ricardian Theory of Development (12 Facts)

Ricardo was the fore-runner of modern economists and his ideas on economic development were adopted by them.

He emphasized the importance of raising savings and profit rate for capital accumulation but it has also certain weaknesses.

Ricardian Theory of Development (12 Facts)

1. Impracticable Laissez Faire Policy:

The theory is based on the impracticable notion of laissez faire. According to this policy, “there is no government interference and economy operates through perfect competition”. But in practice, there is no such economy which is free from government interference.

2. Baseless Notion Regarding Population:

Ricardo’s development model is based on the Malthusian theory of population and this theory is less valid in present time. It is stressed in this model that real wages never reach the subsistence level. As development proceeds, the share of wages rise in national income and brings improvement in standard of living of the labourers. The workers now-a-days not only receive wages on the basis of productivity but they receive other benefits like bonus, medical aid etc. So it is absurd to think of subsistence wages in modern time.

3. Law of Diminishing Returns Criticized:

The Ricardian system is based on the law of diminishing returns. The operation of this law in agriculture is quite different from his theory of rent. But this theory has been falsified by modern technological developments. The law of diminishing returns can be considered as a matter of past and from this point of view this theory is less convincing and has no relevance today.

4. Neglects Impact of Technology:

Ricardo points out that the improved technology in the industrial field leads to displacement of labour and other adverse consequences. When the technological progress is exhausted, diminishing returns set in and economy moves towards stationary state. In this way, Ricardo has given unnecessary importance to law of diminishing returns and failed to visualize the impact of science and technology on rapid economic development of the developed nations.

5. Wrong Notion of Stationary State:

Ricardian view that economy reaches a stationary state is baseless because economy in which profits are increasing, production is rising and capital accumulation is taking place cannot attain a stationary state.

6. Neglects Institutional Factors:

This theory neglects the role of institutional factors. Since they play a crucial role in the economic development, so they cannot be overlooked.

7. Neglects Interest Rate:

Ricardian concept neglects the rate of interest in the economic growth. The rate of interest is not regarded as independent reward but it is included in profits. This fails to distinguish between the capitalist and entrepreneurs.

8. Capital and Labour not fixed:

The Ricardian assumption that capital and labour are fixed co-efficient of production is not correct because labour and capital are independent variables.

9. Distribution Rather Than Growth Theory:

Schumpeter observes that Ricardian theory is not a growth theory but a theory of distribution which determines the share of workers, landlords and capitalists. He failed to present a functional theory of distribution because he did not determine the rate of each factor separately.

10. Land also produces Goods other than Corn:

Ricardo believed that only one product corn is produced on land. But this is an old notion because land can produce variety of products other than corn.

11. Static Model:

According to Hicks, Ricardo uses the static method for the analysis of dynamic process by confining himself in circulating capital and capital homogeneity. This model is not one of a regularly progressive economy. It is confined to the comparison of static equilibrium of even stationary states and, therefore, cannot be extended to the analysis of dynamic process.

12. Unrealistic Assumptions:

Ricardo’s model is a classical model and these models are based on certain assumptions like perfect competition, state non intervention, free mobility of factors of production, free international trade, law of diminishing returns etc. These assumptions are not valid in present time, as the world has undergone a tremendous economic and social change.