Ricardo Identifies Seven Key Economic Principles Summary

  • Last updated on November 10, 2022

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.

Summary of Event

Two of the most influential figures in the history of economic theory are Karl Marx Marx, Karl (1818-1883), who is associated with the development of communist theory, and John Maynard Keynes Keynes, John Maynard (1883-1946), whose best-known economic theory concerns deficit spending and argues that it is the government’s responsibility to control and regulate fluctuations in the economy. A third major figure is David Ricardo, the foremost classical economist, who published his main theories in 1817. Classical economic theory is based on the principles of individual liberty, which allow people to use their own initiative to acquire property and wealth. According to classical economic theory, the best way for the government to encourage accumulation of wealth is to follow laissez-faire policies. Ricardo, David Economic principles [kw]Ricardo Identifies Seven Key Economic Principles (1817) [kw]Identifies Seven Key Economic Principles, Ricardo (1817) [kw]Seven Key Economic Principles, Ricardo Identifies (1817) [kw]Key Economic Principles, Ricardo Identifies Seven (1817) [kw]Economic Principles, Ricardo Identifies Seven Key (1817) [kw]Principles, Ricardo Identifies Seven Key Economic (1817) Ricardo, David Economic principles [g]Great Britain;1817: Ricardo Identifies Seven Key Economic Principles[0900] [c]Economics;1817: Ricardo Identifies Seven Key Economic Principles[0900] [c]Business and labor;1817: Ricardo Identifies Seven Key Economic Principles[0900] Smith, Adam McCulloch, John Ramsay Mill, James Mill, John Stuart

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 Inquiry into the Nature and Causes of the Wealth of Nations, An (Smith) (1776). Ricardo followed Smith, bringing a new level of order and a strong theoretical foundation. James Mill Mill, James and John Ramsay McCulloch, McCulloch, John Ramsay both friends of Ricardo, helped to spread Ricardian economic theory through their own writings. The last of the school was Mill’s son, John Stuart Mill, Mill, John Stuart who continued the process of systematizing economic thought in Principles of Political Economy, Principles of Political Economy (Mill) which he first published in 1848.

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 Mill, John Stuart . Classical economic thought dominated the field from the late eighteenth to the late nineteenth century, with Ricardo’s influence covering the span from the 1820’s to the 1850’s. Ricardo was influenced by Adam Smith, and he in turn influenced Mill. Ricardo’s life spanned the close of the age of mercantilism and the rise of capitalism. In the former age, nations calculated their wealth by the amounts of gold they held. Gold came largely from trade, which was enhanced by possession of overseas colonies. Smith’s theory based the wealth of a nation on the value of the goods it produced, a theory that encouraged reinvestment of at least a portion of the wealth created to create more wealth.

Ricardo’s interest in economics came after he read Adam Smith’s The Wealth of Nations. Inquiry into the Nature and Causes of the Wealth of Nations, An (Smith) Although Ricardo’s ideas have long since been regarded as outmoded, he was the first person to systematize the study of economics. Through his work he inspired both those, such as David Hume, who supported laissez-faire economic policy that advocated separating government and economics and those who opposed it, favoring instead government control of the economy, as in communism, a theory developed by Karl Marx.

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.

(Library of Congress)

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 On the Principle of Political Economy and Taxation (Ricardo) , first published in 1817, Ricardo worked to establish a theory of wealth. His book soon became the definitive work in economics, replacing Smith’s The Wealth of Nations Inquiry into the Nature and Causes of the Wealth of Nations, An (Smith) . Ricardo changed the direction of economic thought when he argued that the fundamental purpose of studying economics was to determine the appropriate relationships among these three groups.

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 Tariffs;British Great Britain, the Corn Laws Corn Laws imposed tariffs on imported grains. Ricardo argued that such tariffs were self-defeating, favoring a system of free trade among nations. Free trade would encourage nations to specialize in the areas in which they excelled, thus increasing their production and thereby their wealth.

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 Corn Laws;repeal of , which established a long period of free trade in Great Britain.

Significance

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) American Revolution (1775-1783);causes of .

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">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.
  • citation-type="booksimple"

    xlink:type="simple">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.
  • citation-type="booksimple"

    xlink:type="simple">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.
  • citation-type="booksimple"

    xlink:type="simple">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.
  • citation-type="booksimple"

    xlink:type="simple">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.
  • citation-type="booksimple"

    xlink:type="simple">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.
  • citation-type="booksimple"

    xlink:type="simple">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

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