DAVID RICARDO (1772-1823)
David Ricardo is one of the few people who achieved great success and enduring
fame. After his family oppressed him to marry outside the Jewish faith, Ricardo made
his fortune as a stockbroker and loan broker. When he died, his real was worth more
than $100 million in dollars today. At the age of 27, Ricardo was passionate about
economics after reading Adam Smith's The Wealth of Nations. He wrote his first
economic article at the age of 37 and then spent his 14 years which—like the last of a
professional economist. Ricardo first got a notice among economists over the
"controversial bullion." In 1809 he wrote that English inflation was a result of the Bank
of England's tendency to issue excess bank notes. In short, Ricardo was a believer in
the early theory of the quantity of money, or what is known today as monetarism. In
his Essay on the Effect of Low Corn Prices on Stock Profits (1815), Ricardo articulated
what came to be known as the law of diminishing. One of the most well-known laws of
economics, it states that as more resources are combined in production with examples
of resources to remain, as more labor and machinery are used at a fixed amount of
land the increase in output will be reduced.
Ricardo also opposed the protectionist Wheat Law, which restricted wheat
imports. In arguing for free trade, Ricardo formulated the idea of comparative cost,
today called comparative advantage. Advantage—a very subtle comparative idea—is
the main basis for most economists' confidence in free trade today. The idea is this: a
country that trades for products that can get lower costs than other countries is better
than if it has made products at home. Say, for example, that Poorland can produce
one bottle of wine with 5 hours of work and one loaf with 10 hours. These Richland
workers, on the other hand, are more productive. They produce a bottle of wine with 3
hours of work and a loaf of bread with 1 hour. One might think at first that since
Richland needed fewer hours of work to make good money, there was no profit from
trading.
Think again. Poorland's cost of producing wine, although higher than Richland's
in terms of working hours, is lower in terms of bread. For each bottle produced,
Poorland gave half of the bread, while Richland had to give up three loaves to make
a bottle of wine. Therefore, Poorland has a comparative advantage in producing wine.
Similarly, for every loaf it produces, Poorland gives up 2 bottles of wine, but Richland
gives up only a third of the bottle. Therefore, Richland has a comparative advantage
in producing bread.
If they exchanged wine and bread one-for-one, Poorland could specialize in
producing wine and trade some for Richland, and Richland could specialize in
producing bread. Both Richland and Poorland would be better off than if they were not
traded. By shifting, say, 10 hours of work from producing bread, Poorland gave up the
bread that this labor could produce. But the allotted labor yielded 2 bottles of wine,
which would trade for 2 loaves of bread. The result: Poorland trade net one bread extra
bread. Nor did Poorland gain come at Richland's expense. Richland profits as well, or
else it won't be traded. By shifting three hours from producing wine, Richland cut wine
production by one bottle but increased bread production by three loaves. Trade 2
loaves for 2 bottles of Poorland wine. Richland has one more bottle of wine than
before, and an extra bread of bread.
This advantage comes, Ricardo observed, because each country specializes in
producing good which has a lower comparative cost. Writing a century before Paul
Samuelson and other modern economists popularized the use of equations, Ricardo
is still revered for his remarkable ability to arrive at complex conclusions without
mathematical tools now considered essential. As economist David Friedman put it in
his 1990 textbook, Price Theory, "A modern economist reading Ricardo's Principle
feels more like a member of one of Mount Everest's expeditions would feel if, arriving
at the top of the mountain, he met a hiker wrapped in a T-shirt and tennis shoes."
One of Ricardo's main contributions, arriving in without mathematical tools, was
the theory of rent. Borrowing from Malthus, with whom Ricardo is close, but often
diametrical, related, Ricardo explains that as more land is cultivated, farmers should
start using less productive land. But because bushels of corn from less productive land
sell for the same price as bushels from highly productive land, tenant farmers will be
willing to pay more to rent highly productive land. The result: landowners, not tenant
farmers, are the people who profit from productive land. These findings have stood the
test of time. Economists use Ricardian's reasoning today to explain why price support
agriculture does not help farmers but makes farmlandowners rich. Economists use the
same reasoning to explain why the beneficiaries of the law limiting the number of taxis
were not taxi drivers per se but people who had a limited number of taxi medals
(licenses) when this restriction was first enacted.
Works:
1. Economic Principles in Politics and Taxation 1817.
2. The Work and Correspondence of David Ricardo, edited by Piero Sraffa, in
collaboration with M. H. Dobb, 11 volumes. 1951-1973.
