The Stationary State
Pictured on the right is the long run equilibrium of the stationary state in the classical model of Malthus and Ricardo. Wages would be at the subsistence level. (CBR=CDR). The rest of total product went to landowners as rent. There was no profit and therefore no income from which to save for capital accumulation. (S=I=0). There was no economic growth as well as no population growth. To see a blow up of this graph, click here.
An Increase in Productivity
If the productivity of labor is increased because of the opening up of new lands or a technological advance, profit will appear. At first the labor supply will remain the same and the subsistence wage will remain the same. It is now less than the marginal product of labor. The difference will go to the suppliers of capital. They will save and invest their profits which will further increase productivity. After a period of time, there will be competiton for labor and the wage rate will rise. This will tend to squeeze profits and encourage population growth.
To see a blow up of this graph, click here
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The Classical Transition
Wages remain at subsistence until t(0). Then they begin to rise as capitalists compete for workers. As wages rise, couples begin to marry earlier in life and thus have children earlier in life. The crude birth rate rises. Higher wages also permit better nutrition and infant deaths decline and the CBR falls. The result is an increase in the RNI. Population begins to grow. As it does, wages begin to fall toward the subsistence level and the growth process is reversed until the RNI falls to zero and population returns to a (higher) steady state.
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The Iron Law of Wages
Though wages may temporarily rise above the subsistence level in response to an increase in labor productivity, in the long run population growth will bring wages back to the subsistence level. At that time, all income not going to wages will go to rents. There will be no profits. There will be no economic growth. The system will have returned to the stationary state.
To see a blow up of this graph, click here
