David Ricardo

David Ricardo

Overview
David Ricardo was an English
England
England is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...

 political economist
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...

, often credited with systematising economics, and was one of the most influential of the classical economist
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....

s, along with Thomas Malthus
Thomas Malthus
The Reverend Thomas Robert Malthus FRS was an English scholar, influential in political economy and demography. Malthus popularized the economic theory of rent....

, Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

, and John Stuart Mill
John Stuart Mill
John Stuart Mill was a British philosopher, economist and civil servant. An influential contributor to social theory, political theory, and political economy, his conception of liberty justified the freedom of the individual in opposition to unlimited state control. He was a proponent of...

. He was also a member of Parliament
Parliament
A parliament is a legislature, especially in those countries whose system of government is based on the Westminster system modeled after that of the United Kingdom. The name is derived from the French , the action of parler : a parlement is a discussion. The term came to mean a meeting at which...

, businessman, financier
Financier
Financier is a term for a person who handles typically large sums of money, usually involving money lending, financing projects, large-scale investing, or large-scale money management. The term is French, and derives from finance or payment...

 and speculator, who amassed a considerable personal fortune. Perhaps his most important contribution was the law of comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

, a fundamental argument in favour of free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...

 among countries and of specialisation among individuals.
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Encyclopedia
David Ricardo was an English
England
England is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...

 political economist
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...

, often credited with systematising economics, and was one of the most influential of the classical economist
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....

s, along with Thomas Malthus
Thomas Malthus
The Reverend Thomas Robert Malthus FRS was an English scholar, influential in political economy and demography. Malthus popularized the economic theory of rent....

, Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

, and John Stuart Mill
John Stuart Mill
John Stuart Mill was a British philosopher, economist and civil servant. An influential contributor to social theory, political theory, and political economy, his conception of liberty justified the freedom of the individual in opposition to unlimited state control. He was a proponent of...

. He was also a member of Parliament
Parliament
A parliament is a legislature, especially in those countries whose system of government is based on the Westminster system modeled after that of the United Kingdom. The name is derived from the French , the action of parler : a parlement is a discussion. The term came to mean a meeting at which...

, businessman, financier
Financier
Financier is a term for a person who handles typically large sums of money, usually involving money lending, financing projects, large-scale investing, or large-scale money management. The term is French, and derives from finance or payment...

 and speculator, who amassed a considerable personal fortune. Perhaps his most important contribution was the law of comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

, a fundamental argument in favour of free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...

 among countries and of specialisation among individuals. Ricardo argued that there is mutual benefit from trade (or exchange) even if one party (e.g. resource-rich country, highly skilled artisan) is more productive in every possible area than its trading counterpart (e.g. resource-poor country, unskilled laborer), as long as each concentrates on the activities where it has a relative productivity advantage.

Personal life


Born in England, Ricardo was the third of 17 children of a Sephardic Jewish
Sephardi Jews
Sephardi Jews is a general term referring to the descendants of the Jews who lived in the Iberian Peninsula before their expulsion in the Spanish Inquisition. It can also refer to those who use a Sephardic style of liturgy or would otherwise define themselves in terms of the Jewish customs and...

 family of Portuguese origin who had recently relocated from the Dutch Republic
Dutch Republic
The Dutch Republic — officially known as the Republic of the Seven United Netherlands , the Republic of the United Netherlands, or the Republic of the Seven United Provinces — was a republic in Europe existing from 1581 to 1795, preceding the Batavian Republic and ultimately...

. His father was a successful stockbroker.

At age 21, Ricardo eloped with a Quaker
Religious Society of Friends
The Religious Society of Friends, or Friends Church, is a Christian movement which stresses the doctrine of the priesthood of all believers. Members are known as Friends, or popularly as Quakers. It is made of independent organisations, which have split from one another due to doctrinal differences...

, Priscilla Anne Wilkinson, leading to estrangement from his family. His father disowned him and his mother apparently never spoke to him again.

Without family support, he started his own business as a stockbroker, in which he became quite successful thanks to the connections he made when working with his father.

During the Battle of Waterloo
Battle of Waterloo
The Battle of Waterloo was fought on Sunday 18 June 1815 near Waterloo in present-day Belgium, then part of the United Kingdom of the Netherlands...

, just like Nathan Mayer Rothschild
Nathan Mayer Rothschild
Nathan Mayer, Freiherr von Rothschild , known as Nathan Mayer Rothschild, was a London financier and one of the founders of the international Rothschild family banking dynasty...

, he bet against the French victory and invested in British securities. By the time he retired from the Exchange at the age of 43, his fortune was estimated at about £600,000. He then purchased and moved to Gatcombe Park
Gatcombe Park
Gatcombe Park is the private country home of Anne, Princess Royal, situated in England between the Gloucestershire villages of Minchinhampton and Avening, five miles south of Stroud and around six miles north of Highgrove House, the country residence of Prince Charles.The house and farming estate...

, an estate in Gloucestershire
Gloucestershire
Gloucestershire is a county in South West England. The county comprises part of the Cotswold Hills, part of the flat fertile valley of the River Severn, and the entire Forest of Dean....

.

At the time of his marriage, Ricardo disconnected from Judaism and became a Unitarian
Unitarianism
Unitarianism is a Christian theological movement, named for its understanding of God as one person, in direct contrast to Trinitarianism which defines God as three persons coexisting consubstantially as one in being....

. He had eight children, including three sons, of whom Osman Ricardo (1795–1881; MP for Worcester
Worcester (UK Parliament constituency)
Worcester is a borough constituency represented in the House of Commons of the Parliament of the United Kingdom. Since 1885 it has elected one Member of Parliament by the first past the post system of election; from 1295 to 1885 it elected two MPs....

 1847–1865) and another David Ricardo (1803–1864, MP for Stroud
Stroud (UK Parliament constituency)
Stroud is a county constituency represented in the House of Commons of the Parliament of the United Kingdom. It elects one Member of Parliament by the first past the post system of election....

 1832–1833), became members of parliament, while the third, Mortimer Ricardo, served as an officer in the Life Guards
Life Guards (British Army)
The Life Guards is the senior regiment of the British Army and with the Blues and Royals, they make up the Household Cavalry.They originated in the four troops of Horse Guards raised by Charles II around the time of his restoration, plus two troops of Horse Grenadier Guards which were raised some...

 and was a deputy lieutenant
Deputy Lieutenant
In the United Kingdom, a Deputy Lieutenant is one of several deputies to the Lord Lieutenant of a lieutenancy area; an English ceremonial county, Welsh preserved county, Scottish lieutenancy area, or Northern Irish county borough or county....

 for Oxfordshire
Oxfordshire
Oxfordshire is a county in the South East region of England, bordering on Warwickshire and Northamptonshire , Buckinghamshire , Berkshire , Wiltshire and Gloucestershire ....

. He was one of the original members of The Geological Society. His daughter was Sarah Ricardo-Porter, who married George R. Porter
George R. Porter
George Richardson Porter was a British statistician. He was head of the statistical department of the Board of Trade.-Publications:* 1835: Das Ganze der Seiden-Manufactur: nach ihrem Ursprunge, Fortschritten und .....

 and was an author in her own right (e.g. "Conversations in Arithmetic'").

Ricardo became interested in economics after reading Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

's
The Wealth of Nations
The Wealth of Nations
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith...

 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.

In 1819, Ricardo took a seat in the House of Commons
British House of Commons
The House of Commons is the lower house of the Parliament of the United Kingdom, which also comprises the Sovereign and the House of Lords . Both Commons and Lords meet in the Palace of Westminster. The Commons is a democratically elected body, consisting of 650 members , who are known as Members...

, representing Portarlington
Portarlington (UK Parliament constituency)
Portarlington was a rotten borough and is a former United Kingdom Parliament constituency, in Ireland, returning one MP. It was an original constituency represented in Parliament when the Union of Great Britain and Ireland took effect on 1 January 1801....

, an Irish rotten borough
Rotten borough
A "rotten", "decayed" or pocket borough was a parliamentary borough or constituency in the United Kingdom that had a very small electorate and could be used by a patron to gain undue and unrepresentative influence within Parliament....

. He held the seat, which had initially been made available to him by his friend Richard "Conversation" Sharp, until his death in 1823. In 1846, his nephew John Lewis Ricardo, MP
Member of Parliament
A Member of Parliament is a representative of the voters to a :parliament. In many countries with bicameral parliaments, the term applies specifically to members of the lower house, as upper houses often have a different title, such as senate, and thus also have different titles for its members,...

 for Stoke-on-Trent
Stoke-upon-Trent (UK Parliament constituency)
Stoke-upon-Trent was a parliamentary borough in Staffordshire, which elected two Members of Parliament to the House of Commons from 1832 until 1885, and then one member from 1885 until 1918, when the borough was enlarged, renamed Stoke-on-Trent, and split into three single-member...

, advocated free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...

 and the repeal of the Corn Laws
Corn Laws
The Corn Laws were trade barriers designed to protect cereal producers in the United Kingdom of Great Britain and Ireland against competition from less expensive foreign imports between 1815 and 1846. The barriers were introduced by the Importation Act 1815 and repealed by the Importation Act 1846...

.

Ricardo was a close friend of James Mill
James Mill
James Mill was a Scottish historian, economist, political theorist, and philosopher. He was a founder of classical economics, together with David Ricardo, and the father of influential philosopher of classical liberalism, John Stuart Mill.-Life:Mill was born at Northwater Bridge, in the parish of...

, who encouraged him in his political ambitions and writings about economics. Other notable friends included Jeremy Bentham
Jeremy Bentham
Jeremy Bentham was an English jurist, philosopher, and legal and social reformer. He became a leading theorist in Anglo-American philosophy of law, and a political radical whose ideas influenced the development of welfarism...

 and Thomas Malthus
Thomas Malthus
The Reverend Thomas Robert Malthus FRS was an English scholar, influential in political economy and demography. Malthus popularized the economic theory of rent....

, with whom Ricardo had a considerable debate (in correspondence) over such things as the role of landowners in a society. He also was a member of London's intellectuals, later becoming a member of Malthus' Political Economy Club
Political Economy Club
The Political Economy Club was founded by James Mill and a circle of friends in 1821 in London, for the purpose of coming to an agreement on the fundamental principles of political economy...

, and a member of the King of Clubs.

Value theory


Ricardo's most famous work is his Principles of Political Economy and Taxation (1817). Ricardo opens the first chapter with a statement of the labour theory of value. Later in this chapter, he demonstrates that prices do not correspond to this value. He retained the theory, however, as an approximation. The labour theory of value states that the relative price of two goods is determined by the ratio of the quantities of labour required in their production. His labour theory of value, however, required several assumptions: 1- both sectors have the same wage rate and the same profit rate; 2- the capital employed in production is made up of wages only; 3- the period of production has the same length for both goods. Ricardo himself realised that the second and third assumptions were quite unrealistic and hence admitted two exceptions to his labour theory of value: 1- production periods may differ; 2- the two production processes may employ instruments and equipment as capital and not just wages, and in very different proportions. Ricardo continued to work on his value theory
Value theory
Value theory encompasses a range of approaches to understanding how, why and to what degree people should value things; whether the thing is a person, idea, object, or anything else. This investigation began in ancient philosophy, where it is called axiology or ethics. Early philosophical...

 to the end of his life.

But the first chapter is but the introduction to a long book that discusses back and forth an extended series of comparisons and contrasts of the various points of views and of Ricardo's own reasoning.

In the chapter "On Value and Riches," Ricardo makes effort to illustrate that exchange value
Exchange value
In political economy and especially Marxian economics, exchange value refers to one of four major attributes of a commodity, i.e., an item or service produced for, and sold on the market...

 is not the same as "value in use
Use value
Use value or value in use is the utility of consuming a good; the want-satisfying power of a good or service in classical political economy. In Marx's critique of political economy, any labor-product has a value and a use-value, and if it is traded as a commodity in markets, it additionally has an...

". In this way one can factor two often contradictory results. Point 2, above, that the capital
Capital (economics)
In economics, capital, capital goods, or real capital refers to already-produced durable goods used in production of goods or services. The capital goods are not significantly consumed, though they may depreciate in the production process...

 employed in production must be made up of wages only for his value theory to hold, is answered by this: that production may be made up of capital and machinery, but it doesn't change the principle (which he attributes to Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

) that he tries to lay out in this chapter. Machinery may add to one measure of value beyond almost all measure without adding one penny to the other measure of value. In this way, one is able, Ricardo seems to show, to factor out somewhat contradictory assumptions which if confounded lead to equally contradictory results. By making all things perfectly clear, or in attempting to, Mr. Ricardo, seeks to resolve some of those ills of the democratic society
Democracy
Democracy is generally defined as a form of government in which all adult citizens have an equal say in the decisions that affect their lives. Ideally, this includes equal participation in the proposal, development and passage of legislation into law...

 in which he lived in so far as reason, and action, could resolve them. In this pursuit, he took action, sitting in parliament, moving with his stirring, and amusing, speeches the inner policies of the British Empire
British Empire
The British Empire comprised the dominions, colonies, protectorates, mandates and other territories ruled or administered by the United Kingdom. It originated with the overseas colonies and trading posts established by England in the late 16th and early 17th centuries. At its height, it was the...

.

The key point that Ricardo seems to make, though, is something like this: Accumulation of capital adds riches without decreasing the value of things to be traded, which may bring the various economic actors to a win-win. Ricardo first attempts to show that new riches are not adding as much value as one would think because they are always decreasing somewhat from the exchangeable value of what was produced. The decreasing value in exchange as value-in-use increases he extrapolates to infer that the sum world total of value in exchange is a fixed constant. Therefore, in the growth of the global economy, the first-world countries, he states, will begin to lose value per trade, even to the purely theoretical extent of taking from the capital base. Yet, Ricardo notes that with more value-in-use for the rich
and the poor, both will likely obtain more security as the aggression of competition is mitigated by physical economic growth. Adam Smith had thought that due to its effect on value, the growth of wealth of the poor beyond subsistence levels is likely to take from the overall wealth of the society. All economists (neoliberal through progressive) still worry about that and so they weaken the wealth of the poor to maintain economic growth. Ricardo shows this as unnecessary when we measure value in exchange together with the growth of value-in-riches, rather than by the monopolization value. The extreme aspects of competition then leave, for the rich and poor alike, an appearance of the growth of wealth, yet without the actual result of it. Taking a step back and noticing the growth of actual value-in-use may allow people as corporations and laborers, both rich and poor, to realize this and see a way and means forward.

Rent


Ricardo is responsible for developing theories of rent, wages, and profits. He defined rent
Economic rent
Economic rent is typically defined by economists as payment for goods and services beyond the amount needed to bring the required factors of production into a production process and sustain supply. A recipient of economic rent is a rentier....

 as "the difference between the produce obtained by the employment of two equal quantities of capital and labor." The model for this theory basically said that while only 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.

In a careful analysis of the effects of different forms of taxation, Ricardo concludes in chapters 10 and 12 that a tax on land value
Land value tax
A land value tax is a levy on the unimproved value of land. It is an ad valorem tax on land that disregards the value of buildings, personal property and other improvements...

, equivalent to a tax on the land rent, was the only form of taxation that would not lead to price increases; it is paid by the landlord, who is not able to pass it on to a tenant. He stated that the poorest grade land in use has no (land) rent and so pays no land value tax
Land value tax
A land value tax is a levy on the unimproved value of land. It is an ad valorem tax on land that disregards the value of buildings, personal property and other improvements...

; as prices are determined at this marginal site for the whole economy, prices will not be increased by a land value tax. His analysis distinguishes between rent of (unimproved) land and rent associated with capital improvements such as buildings.
  • Accumulation of Inequality of Distribution of varied quantities of Accumulatable Scarce Necessary Means of Production.

Ricardo's concept of rent is laid out in his book Principles of Political Economy and Taxation. Due to variation in scarcity of land (or some other accumulatable scarce necessities of varied utility), some land pays a higher monopoly value due to its scarcity than other land. This return on investment is higher than what one would otherwise expect based simply on the value and scarcity of the produce; this return on investment comes from the incident of ownership that allows a monopoly price to be paid. Such premium over real social value that an individual is able to reap due to incident of ownership constitutes real value to an individual but is at best a paper monetary return to society. The portion of such purely individual benefit, and exclusively that portion, that accrues to scarce, accumulatable resources such as land or gold or houses, over and above any socially beneficial exchange, Ricardo labels Rent.

If all land were equally situated, however scarce, one could determine that all market exchange of the produce thereof was free and equal and that the exact value of the trade was conveyed simultaneously to both parties and to society. In the case of increasing scarcity of the land of higher absolute utility, the free market principle fails to either properly measure or convey value. This gap between personal value accrual and social value accrual, in the case of land, is Ricardian Rent. Rent therefore constitutes value for nothing and as such constitutes a loss to society above maximum production, and one that increases at a faster rate than the decline in production that comes from the scarcity of the land, as land becomes more scarce. Proposals to solve this by various types of land tax are explored further. The key problem then, Ricardo discusses, would be to find a tax that is able to maximally differentiate between tax on profit and tax on such purely Ricardian rent. No easy task, he points out, as in the case of how one differentiates between basic land return, that portion that constitutes such excess above social productivity that he labels rent, and the portion that comes from non-rent producing capital investment in fertilizer, irrigation, deep plowing and land improvements of all types, barns, etc.
  • Malthus's criticism and Extrapolation of the problem of Ricardian Rent

In demonstrating that Ricardian Rent constitutes value for nothing (Ricardo was momentarily neglecting Say's Law that all savings by-definition-equals investment), Ricardo overlooks that such value-for-nothing doesn't necessarily disappear upon "mis-payment" to a landlord. This is what Malthus, Ricardo's personal friend and intellectual opponent, states in his own book on Rent, one of his works that expounds from a point of view of Malthus's Surplus Value theories, rather than Malthus's earlier and more quoted Scarcity Value Theory. Thus, says Malthus, Rent, however misplaced, constitutes a prime source of savings and investment for the future. We need then, if contented by Malthus, only look for such portion of Ricardian Rent that due to its over-investment (due to its miscalculation) represents lost economic value to the society as a whole. Malthus' Criticism of Ricardian Rent does not in Malthus' book on Rent touch on this problem of Ricardian over-investment as expounded by Malthus (the General Glut controversy); rather, in his later works, Malthus does so. So: to Ricardo, Economic Rent is a surplus of individual investors' paper profit (which has its value in control over resources rather than directly in the resources themselves) over societal gain. As such, it does not represent any gain but rather an unearned transfer of wealth. To Malthus, there is material gain created in the re-investment which is rent, but at some point such gain may as says Ricardo in regards to the paper profit he believes Economic Rent to be, be in excess of social utility.

Earlier writers touched on Economic Rent too. Ricardo advises caution in responses to the problem of Economic Rent
To be clear, the topic of Economic Rent, as expounded by Ricardo, was by earlier writers such as Smith. Ricardo's book forms a sort of textbook of such earlier expounded theories, in which he adds his own analysis while comparing and contrasting different views and pointing out the flaws in them. Ricardo, after spending many chapters contented with this view of Rent, ascribes it to Smith and then says it is true but probably not so important in an expanding economy and measures to address it should be marked with caution as they would likely produce different effects in different situations.

Protectionism


Like Adam Smith, Ricardo was also an opponent of protectionism
Protectionism
Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...

 for national economies, especially for agriculture. He believed that the British "Corn Laws
Corn Laws
The Corn Laws were trade barriers designed to protect cereal producers in the United Kingdom of Great Britain and Ireland against competition from less expensive foreign imports between 1815 and 1846. The barriers were introduced by the Importation Act 1815 and repealed by the Importation Act 1846...

"—tariffs on agriculture products—ensured that less-productive domestic land would be harvested and rents would be driven up. . 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 stagnation of the British economy. Parliament repealed the Corn Laws in 1846.

Comparative Advantage

  • The Problem of Competitive Advantage

Ricardo extrapolates the problem of monopolistic rent on the land itself to other situations/resources that are fundamentally scarce: the buildings that sit on the land, due to the long time frame of use and large lump-sum cost of building new ones; or gold, which is also a partial monopoly due to its scarcity, and which is not consumable. He then questions whether all trade has a fundamental problem of inequality that is inevitably hard to bridge. This is the problem of absolute competitive advantage—where one party has an unbridgeable competitive advantage due to wealth or productive advantages in every field. If so, can trade profitably continue? Ricardo solves this with Comparative Advantage.
  • Comparative Advantage: The Solution

This book, Principles of Political Economy, introduces the theory of comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

. 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
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...

, 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 implied that foreign trade could not directly affect profits, because profits change only in response to the level of wages. The effects on income are always beneficial because foreign trade does not affect value.

Comparative advantage forms the basis of modern trade theory, reformulated as the Heckscher-Ohlin theorem
Heckscher-Ohlin theorem
The Heckscher–Ohlin theorem is one of the four critical theorems of the Heckscher–Ohlin model. It states that a country will export goods that use its abundant factors intensively, and import goods that use its scarce factors intensively...

, 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. . See the section The Ricardian theory of international trade of this page for another side of the theoretical development.

The theory of comparative advantage as he described it seems to be that both those rich in ability and the poor alike concentrate each their own analytical powers on meeting the needs and abilities of the richer, more skilful party to an otherwise unequal exchange and thereby both benefit. Ideas often extrapolated are: that both benefit equally; and that somehow in such exchange each nation, or person, is enabled to focus on its own area of real specialisation in a bi-directional equal trade—but we only start with an idea of purely comparative specialisation in one direction.

For the contemporary development of Ricardo's idea on international trade, see the section The Ricardian theory of international trade in the part His Legacy and Influence.

Ricardian equivalence


Another idea associated with Ricardo is Ricardian equivalence
Ricardian equivalence
The Ricardian equivalence proposition is an economic theory holding that consumers internalize the government's budget constraint: as a result, the timing of any tax change does not affect their change in spending...

, 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
Robert Barro
Robert Joseph Barro is an American classical macroeconomist and the Paul M. Warburg Professor of Economics at Harvard University. The Research Papers in Economics project ranked him as the 4th most influential economist in the world as of August 2011 based on his academic contributions...

 is responsible for its modern prominence.

Ricardo's theories of wages and profits


Some credit Ricardo with the concepts behind the so-called Iron Law of Wages, that wages naturally tend to a subsistence level. Others dispute the assignment to Ricardo of this idea.

Ricardo believed that in the long run, prices reflect the cost of production
Cost-of-production theory of value
In economics, the cost-of-production theory of value is the theory that the price of an object or condition is determined by the sum of the cost of the resources that went into making it...

, and referred to this long run price as a Natural price. The natural price of labour was the cost of its production, that cost of maintaining the labourer. If wages correspond to the natural price of labour, then wages would be at subsistence level. However, due to an improving economy, wages may remain indefinitely above subsistence level:

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."

His Legacy and Influence


David Ricardo's ideas had a tremendous influence on later developments in economics. With his highly logical arguments, he has become the theoretical father of the classical political economy. Schumpeter
Joseph Schumpeter
Joseph Alois Schumpeter was an Austrian-Hungarian-American economist and political scientist. He popularized the term "creative destruction" in economics.-Life:...

 coined an expression Ricardian vice, which indicates that rigorous logic does not provide a good economic theory. This criticism applies also to most neoclassical theories, which make heavy use of mathematics, but are, according to him, theoretically unsound, because the conclusion being drawn does not logically follow from the theories used to defend it.

Unequal Exchange


Chris Edward includes Emmanuel's Unequal Exchange
Unequal exchange
Unequal exchange is a much disputed concept which is used primarily in Marxist economics, but also in ecological economics, to denote forms of exploitation hidden in or underwriting trade...

 theory among variations of neo-Ricardian trade theory. Arghiri Emmanuel
Arghiri Emmanuel
Arghiri Emmanuel was an economist who became known in the 1960s and 1970s for his theory of 'unequal exchange'. The theory was an attempt to explain the falling trend in the terms of trade for underdeveloped countries, while criticising the different approaches of Raúl Prebisch, Hans Singer, and...

 argued that the Third World
Third World
The term Third World arose during the Cold War to define countries that remained non-aligned with either capitalism and NATO , or communism and the Soviet Union...

 is poor because of the international exploitation of labour.

The unequal exchange theory of trade has been influential to the (new) dependency theory
Dependency theory
Dependency theory or dependencia theory is a body of social science theories predicated on the notion that resources flow from a "periphery" of poor and underdeveloped states to a "core" of wealthy states, enriching the latter at the expense of the former...

.

Neo-Ricardians


After the rise of the 'neoclassical' school, Ricardo's influence declined temporarily. It was Piero Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...

, the editor of the Collected Works of David Ricardo and the author of seminal Production of Commodities by Means of Commodities, who resurrected Ricardo as the originator of another strand of economics thought, which was effaced with the arrival of the neoclassical school. The new interpretation of Ricardo and Sraffa's criticism against the marginal theory of value gave rise to a new school, now named neo-Ricardian or Sraffian school. Major contributors to this school includes Luigi Pasinetti (1930–), Pierangelo Garegnani (1930–2011), Ian Steedman (1941–), Georffrey Harcourt (1931–), Heinz Kurz (1946–), Neri Salvadori (1951–), Pier Paolo Saviotti (-) among others. See also Neo-Ricardianism
Neo-Ricardianism
The neo-Ricardian school is an economic schoolthat derives from the close reading and interpretation of David Ricardo by Piero Sraffa, and from Sraffa's critique of Neoclassical economics as presented in his The Production of Commodities by Means of Commodities, and further developed by the...

. Neo-Ricardian school is sometimes seen to be a composing element of Post-Keynesian economics
Post-Keynesian economics
Post Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson...

.

Evolutionary growth theory


Several distinctive groups have sprung out of the neo-Ricardian school. One is the evolutionary growth theory, developed notably by Luigi Pasinetti
Luigi Pasinetti
Luigi L. Pasinetti is an Italian economist of the Post-Keynesians school. Pasinetti is considered the heir of the "Cambridge Keynesians" and a student of Piero Sraffa and Richard Kahn. Along with them, as well as Joan Robinson, he was one of the prominent members on the "Cambridge, UK" side of the...

, J.S. Metcalfe, Pier Paolo Saviotti, and Koen Frenken and others.

The first step came from Pasinetti. He argued that the demand of any commodity came to stagnate and frequently decline as Engel curve shows it. The commodities are produced by each industry with different growth rate of labour productivity. The consequences are different rate of growth of output and employment. To any economic development structural change is invitable. If the commodity variety remains constant, demand saturation occurs for any rich eceonmy. Introduction of new commodities (goods and services) is necessary to evade from economic stagnation.

The problem of demand saturation and satiety became one of the most topical themes of evolutionary economists. Many articles and books have been written.

As for the causes and mechanisms of demand saturation, I, Steedman pointed that time plays as important a role as income. Indeed, the neocalssical economics admits monetary budget as unique constraint, but for any busy person the time counts as much as price to enjoy the purchased commodities. Another constraints, such as house surface, are effective for example in the Japanese economy, where people live in a "rabbit hutch."

Demand saturation problems are pursured, parallel to evolutionary economists, by Aoki and Yoshikawa and other Japanese reserchers.

The Ricardian theory of international trade


The Ricardian theory of comparative advantage also became a basic constituent of neoclassical trade theory. Any undergraduate course in trade theory includes expansions of Ricardo's example of four numbers in for form of a two commodity, two country model. Ricardo intended to show by this classic example the benefits of free trade from comparative advantage, as in his example there is one country that is more proficient in producing both commodities relative to the other country. Adam Smith would likely reason, by logic of absolute advantage, that there would be no incentive for trade between the two countries. This model was expanded to many-country and many-commodity cases and also to include migration of people between countries. Major general results were obtained by the beginning of 1960's by McKenzie and Jones, including his famous formula.

Contemporary theories


Ricardo's idea was even expanded to the case of continuum of goods by Dornbusch, Fischer, and Samuelson This formulation is employed for example by Matsuyama and others.

Neo-Ricardian trade theory


Inspired by Piero Sraffa
Piero Sraffa
Piero Sraffa was an influential Italian economist whose book Production of Commodities by Means of Commodities is taken as founding the Neo-Ricardian school of Economics.- Early life :...

, a new strand of trade theory emerged and was named neo-Ricardian trade theory. The main contributors include Ian Steedman (1941–) and Stanley Metcalfe (1946–). They have criticised neoclassical international trade theory, namely the Heckscher-Ohlin model
Heckscher-Ohlin model
The Heckscher–Ohlin model is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of commerce and production based...

 on the basis that the notion of capital as primary factor has no method of measuring it before the determination of profit rate (thus trapped in a logical vicious circle). This was a second round of the Cambridge capital controversy
Cambridge capital controversy
The Cambridge capital controversy – sometimes simply called "the capital controversy" – refers to a theoretical and mathematical debate during the 1960s among economists concerning the nature and role of capital goods and the critique of the dominant neoclassical vision of aggregate...

, this time in the field of international trade.

The merit of neo-Ricardian trade theory is that input goods are explicitly included to the analytical framework. This is in accordance with Sraffa's idea that any commodity is a product made by means of commodities. The limit of their theory is that the analysis is limited to small country cases. The wage of the Rest of the World is determined by assumption and there is no internal mechanism which generates international wage differences. In this sense the neo-Ricardian trade theory lacks international value theory.
Traded intermediate goods

Ricardian trade theory ordinarily assumes that the labor
Wage labour
Wage labour is the socioeconomic relationship between a worker and an employer, where the worker sells their labour under a formal or informal employment contract. These transactions usually occur in a labour market where wages are market determined...

 is the unique input. This is a great deficiency as trade theory, for the intermediate goods occupy the major part of the world international trade. Yeats found that 30% of world trade in manufacturing is intermediate inputs. Bardhan and Jafee found that intermediate inputs occupy 37 to 38% in the imports to the US for years 1992 and 1997, whereas the percentage of intrafirm trade grew from 43% in 1992 to 52% in 1997.

McKenzie and Jones emphasised the necessity to expand the theory to the cases of traded inputs. Paul Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...

 coined a term Sraffa bonus to name the gains from trade of inputs.
Theoretical developments

John Chipman
John Chipman
John Chipman may refer to:*John Chipman , judge and politician in Nova Scotia*John Smith Chipman , lawyer and U.S. Representative from Michigan...

 observed in his survey that McKenzie stumbled upon the questions of intermediate products and discovered that "introduction of trade in intermediate product necessitates a fundamental alteration in classical analysis." It took may years until recently Y. Shiozawa succeeded to remove this deficiency. The Ricardian trade theory was now reconstructed to include intermediate input trade in a very general case of many countries and many goods. This new theory is sometimes called Ricardo-Sraffa trade theory.

It is emphasised that the Ricardian trade theory now provides a general theory which includes trade of intermediates such as materials, fuel and machine tools. The traded intermediate goods are then used as inputs of productions. Capital goods are nothing other than inputs to the productions. Thus, in the Ricardian trade theory, capital goods move freely from country to country. Trade in capital goods may transmit the benefit of technological advances across trading countries. Labor is the unique factor of production that remains immobile in the country of its origin.

The neoclassical Heckscher-Ohlin-Samuelson theory assumes only production factors and finished goods. It has not the concept of intermediate goods. Therefore, it is the Ricardo-Sraffa trade theory that provides theoretical bases for the topics as outsourcing
Outsourcing
Outsourcing is the process of contracting a business function to someone else.-Overview:The term outsourcing is used inconsistently but usually involves the contracting out of a business function - commonly one previously performed in-house - to an external provider...

, fragmentation and intra-firm trade.
Recent episode

In a blog post of 28 April 2007, Gregory Mankiw compared Ricardian theory and Heckscher-Ohlin
Heckscher-Ohlin model
The Heckscher–Ohlin model is a general equilibrium mathematical model of international trade, developed by Eli Heckscher and Bertil Ohlin at the Stockholm School of Economics. It builds on David Ricardo's theory of comparative advantage by predicting patterns of commerce and production based...

 theory and stood by the Ricardian side. Mankiw argued that Ricardian theory is more realistic than the Heckscher-Ohlin theory as the latter assumes that capital does not move from country to country. Mankiw's argument contains a logical slip, for the traditional Ricardian trade theory does not admit any inputs. Shiozawa's result saves Mankiw from his slip.

Criticism of the Ricardian theory of trade


Ricardo's plea for free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...

 received attacks from those people who think trade restriction is necessary. Uta Patnaike claims that Ricardian theory of international trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...

 contains a logical fallacy. Ricardo assumed that in both countries two goods are producible and actually are produced, but developed and underdeveloped countries often trade those goods which are not producible in their own country. For example, many Northern countries do not produce tropical fruits. In these cases, one cannot define which country has comparative advantage.

Ricardo's theory of comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

 is also flawed in that it assumes production is continuous and absolute. In the real world, events outside the realm of human control (e.g. natural disasters) can disrupt production. In this case, specialisation could cripple a country that depends on imports from foreign, naturally disrupted countries. For example, if an industrially based country trades its manufactured goods to an agrarian country in exchange for agricultural products, a natural disaster in the agricultural country (e.g. drought) may cause an industrially based country to starve.

Publications


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
    Currency
    In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...

    .
  • Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815), which argued that repealing the Corn Laws
    Corn Laws
    The Corn Laws were trade barriers designed to protect cereal producers in the United Kingdom of Great Britain and Ireland against competition from less expensive foreign imports between 1815 and 1846. The barriers were introduced by the Importation Act 1815 and repealed by the Importation Act 1846...

     would distribute more wealth to the productive members of society.
  • On the Principles of Political Economy and Taxation
    On the Principles of Political Economy and Taxation
    On the Principles of Political Economy and Taxation is a book by David Ricardo on economics. The book concludes that land rent grows as population increases...

    (1817), an analysis that concluded that land
    Land (economics)
    In economics, land comprises all naturally occurring resources whose supply is inherently fixed. Examples are any and all particular geographical locations, mineral deposits, and even geostationary orbit locations and portions of the electromagnetic spectrum. Natural resources are fundamental to...

     rent grows as population increases. It also clearly laid out the theory of comparative advantage
    Comparative advantage
    In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

    , which argued that all nations could benefit from free trade
    Free trade
    Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...

    , even if a nation was less efficient at producing all kinds of goods than its trading partners.


His works and writings were collected in:
  • The Works and Correspondence of David Ricardo, ed. Piero Sraffa with the Collaboration of M.H. Dobb (Indianapolis: Liberty Fund, 2005), 11 vols. This Set Contains The Following Titles:
    • The Works and Correspondence of David Ricardo, Vol. 1 Principles of Political Economy and Taxation
    • The Works and Correspondence of David Ricardo, Vol. 2 Notes on Malthus
    • The Works and Correspondence of David Ricardo, Vol. 3 Pamphlets and Papers 1809–1811
    • The Works and Correspondence of David Ricardo, Vol. 4 Pamphlets and Papers 1815–1823
    • The Works and Correspondence of David Ricardo, Vol. 5 Speeches and Evidence
    • The Works and Correspondence of David Ricardo, Vol. 6 Letters 1810–1815
    • The Works and Correspondence of David Ricardo, Vol. 7 Letters 1816–1818
    • The Works and Correspondence of David Ricardo, Vol. 8 Letters 1819 – June 1821
    • The Works and Correspondence of David Ricardo, Vol. 9 Letters 1821–1823
    • The Works and Correspondence of David Ricardo, Vol. 10 Biographical Miscellany
    • The Works and Correspondence of David Ricardo, Vol. 11 General Index

External links