David Ricardo
David Ricardo (April 18, 1772 – September 11, 1823), a British political economist, is often credited with systematizing economics, and was one of the most influential of the classical economists. He was also a successful businessman, financier and speculator, and amassed a considerable fortune.
Biography
Born in London, Ricardo was the third of seventeen children in a Sephardic Jewish family (from Portugal) that emigrated from The Netherlands to Englandjust prior to his birth. At age 14 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 Quakeress, Priscilla Anne Wilkinson, when he was 21; he became a Christian ,a Unitarian, and was disinherited from his family leading to estrangement from his close family. It seems likely, 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.
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 purchased 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.
Rirardo’s works
Ricardo first gained notice among economists over the "bullion controversy." In 1809 he wrote that England's inflation was the result of the Bank of England's propensity to issue excess bank notes. In short, Ricardo was an early believer in the quantity theory of money, or what is known today as monetarism.
”Essay on the Influence of a Low Price of Corn on the Profits of Stock”
In this work ( Ricardo 1815), Ricardo articulated what came to be known as the law of diminishing returns. One of the most famous laws of economics, it holds that as more and more resources are combined in production with a fixed resource-for example, as more labor and machinery are used on a fixed amount of land-the additions to output will diminish.
Ricardo also opposed the protectionist Corn Laws, which restricted imports of wheat. In arguing for free trade, Ricardo formulated the idea of comparative costs, today called comparative advantage. Comparative advantage-a very subtle idea-is the main basis for most economists' belief in free trade today. The idea is this:
A country that trades for products that it can get at lower cost from another country is better off than if it had made the products at home.
The gains in foreign trade for both of his imaginary countries, “Richland” and “Poorland”, come, Ricardo observed, because each country specializes in producing the good for which its comparative cost is lower ( ibid. ).
Ricardo’s famous example :”.... Let us say that Poorland can produce one bottle of wine with five hours of labor and one loaf of bread with ten hours. Richland's workers, on the other hand, are more productive. They produce a bottle of wine with three hours of labor and a loaf of bread with one hour. One might think at first that because Richland requires fewer labor hours to produce either good, it has nothing to gain from trade. Think again....."
"...Poorland's cost of producing wine, although higher than Richland's in terms of hours of labor, is lower in terms of bread. For every bottle produced, Poorland gives up half of a loaf, while Richland has to give up three loaves to make a bottle of wine. Therefore, Poorland has a comparative advantage in producing wine. Similarly, for every loaf of bread it produces, Poorland gives up two bottles of wine, but Richland gives up only a third of a bottle...."
"...Therefore, Richland has a comparative advantage in producing bread. If they exchange wine and bread one-for-one, Poorland can specialize in producing wine and trading some of it to Richland, and Richland can specialize in producing bread. Both Richland and Poorland will be better off than if they hadn't traded. By shifting, say, ten hours of labor out of producing bread, Poorland gives up the one loaf that this labor could have produced...."
".....But the reallocated labor produces two bottles of wine, which will trade for two loaves of bread. Result: trade nets Poorland one additional loaf of bread. Nor does Poorland's gain come at Richland's expense. Richland gains also, or else it would not have traded. By shifting three hours out of producing wine, Richland cuts wine production by one bottle but increases bread production by three loaves....."
"....It trades two of these loaves for Poorland's two bottles of wine. Richland has one more bottle of wine than it had before, and an extra loaf of bread.... …”( ibid. )
These gains come, Ricardo observed, because each country specializes in producing the good for which its comparative cost is lower.
Writing a century before Paul Samuelson and other modern economists popularized the use of equations, Ricardo is still esteemed for his uncanny ability to arrive at complex conclusions without any of the mathematical tools now deemed essential.
As economist David Friedman put it in his 1990 textbook, Price Theory, "…..The modern economist reading Ricardo's Principles feels rather as a member of one of the Mount Everest expeditions would feel if, arriving at the top of the mountain, he encountered a hiker clad in T-shirt and tennis shoes……."
”Principles of Political Economy and Taxation”
"....The produce of the earth - all that is derived from its surface by the united application of labour, machinery, and capital, is divided among three classes of the community; namely, the proprietor of the land, the owner of the stock or capital necessary for its cultivation, and the labourers by whose industry it is cultivated. But in different stages of society, the proportions of the whole produce of the earth which will be allotted to each of these classes, under the names of rent, profit, and wages, will be essentially different; depending mainly on the actual fertility of the soil, on the accumulation of capital and population, and on the skill, ingenuity, and instruments employed in agriculture...."( Ricardo 1817, Preface )
“….To determine the laws which regulate this distribution, is the principal problem in Political Economy: much as the science has been improved by the writings of Turgot, Stuart, Smith, Say, Sismondi, and others, they afford very little satisfactory information respecting the natural course of rent, profit, and wages…..…” ( Ricardo, ibid.).
“…….In 1815, Mr. Malthus…..presented to the world the true doctrine of rent; without a knowledge of which, it is impossible to understand the effect of the progress of wealth on profits and wages, or to trace satisfactorily the influence of taxation on different classes of the community; particularly when the commodities taxed are the productions immediately derived from the surface of the earth. …Adam Smith…. not having viewed correctly the principles of rent, have, it appears to me, overlooked many important truths, which can only be discovered after the subject of rent is thoroughly understood. To supply this deficiency, abilities are required of a far superior cast to any possessed by the writer of the following pages; yet, after having given to this subject his best consideration … …. have yielded to the present generation…. opinions on the laws of profits and wages, and on the operation of taxes are presented….”( ibid.).
Ricardo’s economics principles seen in all his works
"....Money, from its being a commodity obtained from a foreign country, from its being the general medium of exchange between all civilized countries, and from its being also distributed among those countries in proportions which are ever changing with every improvement in commerce and machinery, and with every increasing difficulty of obtaining food and necessaries for an increasing population, is subject to incessant variations...." ( McCulloch 1881, p. 31 ).
"....A rise in wages, from an alteration in the value of money, produces a general effect on price, and for that reason it produces no real effect whatever on profits. On the contrary, a rise of wages, from the circumstance of the laborer being more liberally rewarded, or from a difficulty of procuring the necessaries on which wages are expended, does not, except in some instances, produce the effect of raising price, but has a great effect in lowering profits....." ( ibid. p. 50 ).
"....Labor, like all other things which are purchased and sold, and which may be increased or diminished in quantity, has its natural and its market price. The natural price of labor is that price which is necessary to enable the laborers, one with another, to subsist and to perpetuate their race, without either increase or diminution...." ( ibid. )
"....With the progress of society the natural price of labor has always a tendency to rise, because one of the principal commodities by which its natural price is regulated, has a tendency to become dearer, from the greater difficulty of producing it. As, however, the improvements in agriculture, the discovery of new markets, whence provisions may be imported, may for a time counteract the tendency to a rise in the price of necessaries, and may even occasion their natural price to fall, so will the same causes produce the correspondent effects on the natural price of labor...." ( ibid. p.52 )
"....The natural price of all commodities, excepting raw produce and labor, has a tendency to fall, in the progress of wealth and population; for though, on one hand, they are enhanced in real value, from the rise in the natural price of the raw material of which they are made, this is more than counterbalanced by the improvements in machinery, by the better division and distribution of labor, and by the increasing skill, both in science and art, of the producers....."
"....Thus, then, with every improvement of society, with every increase in its capital, the market wages of labor will rise; but the permanence of their rise will depend on the question, whether the natural price of labor has also risen; and this again will depend on the rise in the natural price of those necessaries on which the wages of labor are expended....."
"....As population increases, these necessaries will be constantly rising in price, because more labour will be necessary to produce them. If, then, the money wages of labor should fall, whilst every commodity on which the wages of labor were expended rose, the laborer would be doubly affected, and would be soon totally deprived of subsistence. Instead, therefore, of the money wages of labor falling, they would rise; but they would not rise sufficiently to enable the laborer to purchase as many comforts and necessaries as he did before the rise in the price of those commodities...." ( ibid. pp. 53 - 57 ).
Legacy
“…..These, then, are the laws by which wages are regulated, and by which the happiness of far the greatest part of every community is governed. Like all other contracts, wages should be left to the fair and free competition of the market, and should never be controlled by the interference of the legislature.......the clear and direct tendency of the poor laws is in direct opposition to these obvious principles: it is not, as the legislature benevolently intended, to amend the condition of the poor, but to deteriorate the condition of both poor and rich; instead of making the poor rich, they are calculated to make the rich poor; and whilst the present laws are in force, it is quite in the natural order of things that the fund for the maintenance of the poor should progressively increase till it has absorbed all the net revenue of the country, or at least so much of it as the state shall leave to us, after satisfying its own never-failing demands for the public expenditure…..”( McCulloch, 1881, p, 58 ).
David Ricardo maintained that the economy generally moves towards a standstill. His analysis is rooted in a modified version of the labor theory of value. He held out the belief that the rate of profit for society as a whole depends on the amount of labor necessary to support the workers who farm "the most barren land that can still maintain agriculture."
Ricardo also believed that the Corn Laws, in particular, constituted a burden to the agricultural economy. He believed that these trade barriers kept food prices artificially high and encouraged a bloated rent rate. In Parliament Ricardo actively campaigned against the Corn Laws as well as other government interventions.
Essentially this economic stance mirrors Adam Smith's teachings: the market, although imperfect, is best left untouched. Government action only prevents the economy from righting itself. Although Ricardo did not share Smith's complete confidence in the market he recognized that tampering with the system would only result in further economic stagnation.
And, finally, he maintained that England's inflation was the result of the Bank of England's propensity to issue excess bank notes. Which means that Ricardo was an early believer in the quantity theory of money, or what is known today as monetarism.
ReferencesISBN links support NWE through referral fees
- Case, Karl E. & Fair, Ray C).,'Principles of Economics, (5th ed.). Prentice-Hall, 1999, ISBN 0-13-961905-4.
- McCulloch, J. R., (ed. ),The Works of David Ricardo, John Murray, London 1881, pp. 31, 50-58.
- Ricardo, D., The High Price of Bullion, a Proof of the Depreciation of Bank Notes, 1810
- Ricardo, D., Essay on the Influence of a Low Price of Corn on the Profits of Stock ,1815,
- Ricardo, D., Principles of Political Economy and Taxation, 1817 ( reprint: Case & Fair, 1999 )
- Samuel Hollander, The Economics of David Ricardo, University of Toronto Press, Toronto 1979
External links
- 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
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