David Ricardo
David Ricardo (
April 18,
1772 –
September 11,
1823), a
political economist, is often credited with systematizing economics, and was one of the most influential of the
classical economists. He was also a businessman, financier and speculator, and amassed a considerable fortune.
Born in
London, Ricardo was the third of seventeen children in a
Sephardic Jewish family (from
Portugal) that emigrated from the
Netherlands to
England just prior to his birth. At age 14, after a brief schooling in Holland, Ricardo joined his father at the
London Stock Exchange, where he began to learn about the workings of finance. This beginning set the stage for Ricardo's later success in the stock market and real estate.
Ricardo rejected the
orthodox Jewish beliefs of his family and eloped with a
Quaker,
Abigail Delvalle, when he was 21, leading to estrangement from his close family. It seems likely, for example, that his mother never spoke to him again. This was around the same time Ricardo became a
Unitarian.
Ricardo became interested in economics after reading
Adam Smith's
The Wealth of Nations in
1799 on a vacation to the English resort of
Bath. This was Ricardo's first contact with economics. He wrote his first economics article at age 37 and within another ten years he reached the height of his fame.
Ricardo's work with the stock exchange made him quite wealthy, which allowed him to retire from business in
1814 at the age of 42. He then purchased and moved to
Gatcombe Park, an estate in
Gloucestershire.
In
1819, Ricardo took a seat in the
British parliament as a
representative of
Portarlington, a
borough of Ireland. He held the post until the year of his death in
1823. As an
MP, Ricardo advocated
free trade and the repeal of the
Corn Laws.
Ricardo was a close friend of
James Mill, who encouraged him in his political ambitions and writings about economics. Other notable friends included
Jeremy Bentham and
Thomas Malthus, with whom Ricardo had a considerable debate (in correspondence) over such things as the role of land owners in a society. He also was a member of London's intellectuals, later becoming a member of Malthus' Political Economy Club, and a member of the King of Clubs.
He died at Gatcombe Park at 51 years of age.
Ricardo's most famous work is his
Principles of Political Economy and Taxation. Ricardo opens the first chapter with a statement of the
labor theory of value. Later in this chapter, he demonstrates thatprices do not correspond to this value. He retained the theory, however, as anapproximation. Ricardo continued to work on his value theory to the endof his life.
This book introduces the theory of
comparative advantage. According to Ricardo's theory, even if a country could produce everything more efficiently than another country, it would reap gains from specializing in what it was best at producing and trading with other nations. (Case & Fair, 1999: 812–818). Ricardo believed that wages should be left to free competition, so there should be no restrictions on the importation of agricultural products from abroad.
The benefits of comparative advantage are both distributional and related to improved real income. Within Ricardo's theory distributional effects included that foreign trade could not directly affect profits because profits respond only in changes to the level of wages. The effects on income are always beneficial because foreign trade does not effect value.
Comparative advantage forms the basis of modern trade theory, reformulated as the
Heckscher-Ohlin theorem, which states that a country has a comparative advantage in the production of a product if the country is relatively well-endowed with inputs that are used intensively in producing the product. (Case & Fair, 1999: 822).
Like Adam Smith, Ricardo was also an opponent of protectionism for national economies, especially for agriculture. He believed that the British "
Corn Laws" — tariffs on agriculture products — ensured that less productive domestic land would be harvested and rents would be driven up. (Case & Fair, 1999: 812, 813). Thus, the surplus would be directed more toward feudal landlords and away from the emerging industrial capitalists. Since landlords tended to squander their wealth on luxuries, rather than investments, Ricardo believed that the Corn Laws were leading to the economic stagnation of the British economy. Parliament repealed the Corn Laws in 1846.
Another idea associated with Ricardo is
Ricardian equivalence, an argument suggesting that in some circumstances a government's choice of how to pay for its spending (
i.e., whether to use tax revenue or issue debt and run a deficit) might have no effect on the economy. Ironically, while the proposition bears his name, he does not seem to have believed it. Economist
Robert Barro is responsible for its modern prominence.
Ricardo is responsible for developing theories of rent, wages, and profits. He defined rent as the difference in the costs of the production between different tracts of land. The model for this theory basically said that while only of one grade of land is being used for cultivation, rent will not exist, but when multiple grades of land are being utilized, rent will be charged on the higher grades and will increase with the ascension of the grade. As such, Ricardo believed that the process of economic development, which increased land utilization and eventually led to the cultivation of poorer land, benefited first and foremost the landowners because they would receive the rent payments either in money or in product.
Ricardo believed that in the long run, prices reflect the cost of production, and referred to this long run price as a Natural price. The natural price of labor was the cost of its production, that cost of maintaining the laborer. If wages correspond to the natural price of labor, then wages would be at subsistence level. However, due to an improving economy, wages may remain indefinitely above subsistance level:
"Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse, which an increased capital gives to a new demand for labour, be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labour may give a continued stimulus to an increase of people...
"It has been calculated, that under favourable circumstances population may be doubled in twenty-five years; but under the same favourable circumstances, the whole capital of a country might possibly be doubled in a shorter period. In that case, wages during the whole period would have a tendency to rise, because the demand for labour would increase still faster than the supply."(On the Principles of Political Economy, Chapter 5, On Wages).
In his Theory of Profit, Ricardo stated that as real wages increase, real profits decrease because the revenue from the sale of manufactured goods is split between profits and wages. He said in his
Essay on Profits "Profits depend on high or low wages, wages on the price of necessaries, and the price of necessaries chiefly on the price of food."
Ricardo's publications included:
*
The High Price of Bullion, a Proof of the Depreciation of Bank Notes (
1810), which advocated the adoption of a metallic
currency*
Essay on the Influence of a Low Price of Corn on the Profits of Stock (
1815), which argued that repealing the
Corn Laws would distribute more wealth to the productive members of society
*
Principles of Political Economy and Taxation (
1817), an analysis that concluded that
land rent grows as population increases. It also clearly laid out the theory of
comparative advantage, which showed that all nations could benefit from
free trade, even if a nation was less efficient at producing all kinds of goods than its trading partners.
*Case, Karl E. & Fair, Ray C. (1999).
Principles of Economics (5th ed.). Prentice-Hall. ISBN 0-13-961905-4.
*
Samuel Hollander - The Economics of David Ricardo (University of Toronto Press, 1979)
*
Comparative advantage*
List of international trade topics*
Harry Ricardo*
On the Principles of Political Economy and Taxation, by David Ricardo. Complete, fully-searchable text at the Library of Economics and Liberty.
*
Biography, at the
Concise Encyclopedia of Economics*
Biography at New School University
*
Biography on Ricardo for A level students on tutor2u
*
Biography at EH.Net Encyclopedia of Economic History
