Who was David Ricardo?
David Ricardo (1772-1823) was a classical economist best known for his theory of wages and profits, the theory of labor on value, the theory of comparative advantage and the theory of rent. David Ricardo and several other economists have also discovered the law of diminishing marginal returns simultaneously and independently. His most famous work is the Principles of political economy and taxation (1817).
Key points to remember
- David Ricardo was a classical economist who developed several key theories that remain influential in economics.
- Ricardo was a successful investor and MP who started writing about the economy after retiring young on his fortune.
- Ricardo is best known for his theories of comparative advantage, economic rents and the theory of work on value.
Understanding David Ricardo
Born in England in 1772, one of 17 children, David Ricardo began working with his father as a stockbroker at the age of 14. He was however disowned by his father at 21, for having married outside of his religion. His wealth comes from his success in a company he started and which dealt with state titles. He retired at the age of 41 after earning around £ 1 million by speculating on the outcome of the Battle of Waterloo.
After retiring at 42, Ricardo bought a seat in Parliament for £ 4,000, and he was a member of parliament. Influenced by Adam Smith, Ricardo kept company with other great thinkers such as James Mill, Jeremy Bentham and Thomas Malthus. In his Essay on the influence of a low corn price on equity profits (1815), Ricardo conceptualized the law of diminishing returns in relation to labor and capital.
Ricardo wrote his first article on the economy, published in “The Morning Chronicle”, at the age of 37. The article argued for the Bank of England to reduce its note issuance activity. His 1815 book, Principles of political economy and taxation, contain his most famous ideas. The main contributions of Ricardo to economic theory are:
Among the notable ideas that Ricardo introduced in Principles of political economy and taxation was the theory of comparative advantage, which argued that countries can benefit from international trade by specializing in the production of goods for which they have a relatively lower opportunity cost of production even if they do not have not an absolute advantage in the production of a particular good. For example, a mutual trade advantage would be realized between China and the United Kingdom of China specializing in the production of porcelain and tea and the United Kingdom focusing on machine parts. Ricardo is closely associated with the net benefits of free trade and at the expense of protectionist policies. Ricardo’s theory of comparative advantage has produced ramifications and criticisms which have been discussed to date.
Theory of value work
Another of Ricardo’s best known contributions to the economy was the theory of the value of work. The labor value theory states that the value of a good can be measured by the labor it took to produce it. The theory stated that the cost should not be based on the compensation paid for labor, but on the total cost of production. An example of this theory is that if a table takes two hours to make and a chair takes an hour to make, a table is worth two chairs, regardless of the hourly amount paid by the manufacturers of the table and chairs. The theory of work on value will later become one of the foundations of Marxism.
Ricardo was the first economist to discuss the idea of rents or benefits that accrue to asset owners solely because of their ownership rather than their contribution to a truly productive activity. In its original application, agricultural economics, rent theory shows that the benefits of rising grain prices will tend to benefit owners of agricultural land in the form of rents paid by tenant-managers. Ricardo’s idea was then applied to political economy, in the idea of rent-seeking, where asset owners who can benefit from public policies that direct an increase in rents to them have, and act accordingly , an incentive to influence public policy.
In public finance, Ricardo wrote that if a government chooses to finance its spending through immediate taxation or through borrowing and deficit spending, the results for the economy will be equivalent. If taxpayers are rational, they will explain any expected increase in future taxes to finance current account deficits by saving an amount equivalent to current account deficit spending, so that the net change in total expenditure will be zero. So if a government spends deficit spending to stimulate the economy, private spending will simply fall by the same amount as people save more, and the net effect on the overall economy will be washed out.