The leading classical economic theorist, David Ricardo systematized the study of economics by identifying the most basic economic principles, and his theories played an important role in Great Britain’s repeal of restrictive economic laws.
Two of the most influential figures in the history of economic theory are Karl Marx
Adam Smith, the first of the major classical economists, began to examine economic theory in An Inquiry into the Nature and Causes of the Wealth of Nations
Known as a theorist’s theorist, Ricardo began his career as a stockbroker and began dabbling in economic theory in 1799. In 1813, he retired from his stockbroker work a wealthy man and devoted the remainder of his life to economics, including a period of four years of service when he represented Gloucestershire in Great Britain’s Parliament. He died in Gloucestershire in 1823 at the age of fifty-one.
Chronologically, Ricardo falls between Adam Smith and John Stuart Mill
Ricardo’s interest in economics came after he read Adam Smith’s The Wealth of Nations.
Ricardo thought inductively, working from abstract principles to establish economic laws. For example, he saw that population was increasing, a fact that resulted in more humans competing for resources. As population expanded, people needed to produce more food through more intensive methods of farming and through increasing the amount of land under production. As technology improved, so would people’s ability to increase food production, but since population would continue to rise, there would be no increase in surplus production, thus keeping the majority of the population at a subsistence level.
David Ricardo.
Whereas Smith’s writings emphasized a nation’s ability to produce, those of Ricardo focused on the distribution of resources among the three major classes: landowners, capitalists, and workers. In his major treatise, On the Principle of Political Economy and Taxation
Ricardo’s basic principle was the wage fund theory, in which he argued that the available amount of money was fixed. This theory built upon the laissez-faire assumptions that free and unlimited exchanges of labor existed in a self-regulating market economy. Laissez-faire economic theory, which is fundamental to the classical economists, argued that the economic laws of supply and demand needed to be allowed to function freely without outside interference. In such an economic climate, Ricardo argued, as did the other classical economists, to take money for poverty relief was to withhold it from the industrious, an action that would reduce the standard of living for all workers, thus hurting, rather than helping, the poor.
Each of Ricardo’s three groups had its own unique source of capital. Landlords received income from rents charged for the use of real property. The income of the capitalists came from profits and interest on investments. Laborers earned their funds from their labor. Of these three groups, Ricardo had the least use for landlords, whom he characterized as parasites. Their income, rent, rose simply because they held the title to an increasingly valuable factor of production—the land. Because landlords needed only to continue to hold the land to earn a living, it could be argued that they provided nothing to the advancement of society. Associated with rent was Ricardo’s “law of diminishing returns.” Land produces food through the application of capital and labor. As more capital and labor are applied, more food can be produced. There comes a point, however, when additional capital and labor will not result in a proportional increase in production, and that point represents his law of diminishing returns.
Laborers were in the unfortunate position, Ricardo argued, of always living at a subsistence level. In his “iron law of wages” theory, nothing could be done to raise the level of compensation for workers above the minimum. Although wages might rise in the short term, he theorized, such an increase would in turn create an increase in population that would tend to depress wages, returning them to their subsistence level. Further adding to the plight of wage earners, profits and wages represented opposite interests. Ricardo argued that, because there existed a finite amount of money, the only way wages could rise would be if profits declined. To use more money to pay wages would result in lower profits, which would be harmful because fewer people would invest their time and talent in creating new ventures. Further adding to the plight of labor was the increasing industrialization of society. More machinery resulted in lower production costs, allowing capitalists to set aside more funds for investment.
Beyond explaining relationships among rent, capital, and labor, Ricardo’s other main area of interest focused on the trade among nations. In nineteenth century
In his theory of comparative advantage, Ricardo argued that as each nation found its own productive specialization, it could produce its special commodity for its own people and then export the surplus to others at a cost lower than that of other nations. It could then exchange its special commodity with other nations for goods that it could not produce for itself at an advantageous price. For example, as Britain industrialized, it would be in a position to export surplus industrial goods, thus creating a profit, while it imported food for its growing population. Ricardo’s work contributed to Parliament’s repeal of the Corn Laws
In addition to fostering free trade, Ricardo’s writing helped bring to an end many of Britain’s intrusive economic policies. By popularizing Adam Smith’s policy of laissez-faire, Ricardo was instrumental in the simplification of England’s taxation. Further, his influence was felt in the repeal of the Navigation Acts, which symbolized government control of the economy and stood as one of the main causes of the American Revolution (1775-1783)
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Blaug, Mark. Ricardian Economics: A Historical Study. New Haven, Conn.: Yale University Press, 1958. Blaug studies the rise and fall of Ricardian economics in England, focusing on both its successes and its failures. -
Cameron, Rondo. A Concise Economic History of the World. New York: Oxford University Press, 1993. A valuable survey placing classical economics and David Ricardo in an appropriate historical context. -
Churchman, Nancy. David Ricardo on Public Debt. New York: Palgrave, 2001. Study of Ricardo’s ideas about public debt that places those ideas in the context of his other economic theories. -
Henderson, John P., and John B. Davis. The Life and Economics of David Ricardo. Edited by Warren J. Samuels and Gilbert B. Davis. Boston: Kluwer Academic, 1997. Comprehensive intellectual biography, recounting Ricardo’s early years, career, economic theories, and relationships with Thomas Malthus and other classical economists. -
Hollander, Samuel. The Economics of David Ricardo. Toronto: University of Toronto Press, 1979. Hollander puts Ricardo’s theories in perspective relative to the work of Adam Smith and the other classical economists. -
Landreth, Harry, and David C. Colander. History of Economic Thought. Boston: Houghton Mifflin, 1994. An excellent introduction that places Ricardo and classical economics in perspective. -
Ricardo, David. The Principles of Political Economy and Taxation. Introduction by Michael P. Fogarty. London: J. M. Dent & Sons, 1969. Although difficult for nonspecialists, this treatise is Ricardo’s main work in the field of political economy.
British Parliament Repeals the Combination Acts
British Parliament Passes the Factory Act
Blanc Publishes The Organization of Labour
Wilson Launches The Economist
British Parliament Repeals the Corn Laws
Marx and Engels Publish The Communist Manifesto
Mill Publishes On Liberty
Marx Publishes Das Kapital
Thomas Robert Malthus; Karl Marx; James Mill; John Stuart Mill; David Ricardo.