While Adam Smith is regarded as the father of classical economics, the science of economics would not have developed as it did without the contributions of David Ricardo. Fittingly, it was a chance reading of Smith’s magnum opus, Wealth of Nations (1776), that inspired Ricardo to pursue the study of economics.1 From there, Ricardo began to make waves in the British political economics sphere. He tackled controversial topics, from the Bank Restriction Act to the Corn Laws, and played a key role in the development of theories pertaining to rent, wages, and profits.
The ideas put forth by Ricardo shaped the discipline of classical economics and have been highly influential to the thinkers who came after him – both those who agreed and disagreed with him. While many of his innovations have been adapted or replaced by other models, there is no doubt that Ricardo’s work was foundational.
Free trade – Why all countries involved can benefit from it
One of Ricardo’s most famous contributions to economics is his promotion of free trade, including his development of the theory of comparative advantage, which he presented as an argument in favor of this economic ideology. Other noteworthy economists, such as Adam Smith, were opposed to protectionism, and Ricardo built off of their work in his efforts to move the British economy towards free trade. A particular point of controversy during Ricardo’s time were the Corn Laws. Between the growing population and the blockades resulting from the Napoleonic Wars, Britain was facing a grain shortage.2 As a result, tariffs were imposed on imported grains, in order to protect British agriculture.3 As a proponent of free trade, Ricardo was opposed to these protectionist laws, which prompted him to pen his Essay on the Influence of a Low Price of Corn on the Profits of Stock in 1815. In 1817, Ricardo published his highly lauded Principles of Political Economy and Taxation, in which he introduced his theory of comparative advantages to illustrate how free trade between two countries can be mutually beneficial. Free trade is a trade policy wherein imports and exports are free of restrictions, and no duties or quotas are imposed.
Famously, Ricardo illustrated comparative advantage and the benefits of free trade in Principles of Political Economy and Taxation (1817) using trade between England and Portugal as an example. He presented a case where Portugal can produce both cloth and wine at lower costs than England, thus giving Portugal what is referred to as the “absolute advantage”. However, in Portugal, the opportunity cost, that is, the potential gains that are given up by selecting one alternative over others, is less for the production of wine than cloth, while the inverse is true in England. This means that Portugal has a comparative advantage in the production of wine, while England has a comparative advantage in the production of cloth. Ricardo reasoned that, if Portugal were to specialize in the production of wine, while England were to specialize in the production of cloth, both countries would benefit.4
Ricardo’s theory of comparative advantage provided compelling support for free trade. While it did not happen in Ricardo’s lifetime, the Corn Laws were repealed in 1846, denoting the beginning of free trade in Britain,5 something his papers and theories certainly contributed to. While Britain’s trade policies have changed multiple times since then, it is clear that Ricardo had a significant impact.
“Under a system of perfectly free commerce, each country naturally devotes its capital and labor to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. … It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.”
— David Ricardo on comparative advantages in Principles of Political Economy and Taxation
The Labor Theory of Value
The value of a commodity is determined by the amount of labor required for its production
In order to understand the value of marketable commodities, Ricardo presented his labor theory of value, an innovation that would influence economic theory for years to come. Adam Smith presented his own thoughts on the concept of value on this topic in Wealth of Nations (1776), which inspired Ricardo to develop his own theory, which accounted for the aspects of Smith’s work he agreed with, and those he did not. Ricardo’s labor theory of value posits that the value of a commodity is based solely on the amount of labor necessary to produce it.6
An example of Ricardo’s labor theory of value could be explained using the concept of clothing production. The amount of labor time needed to produce a shirt includes both direct labor time, that is, the amount of time it takes a worker to put together the shirt itself using the materials and technology provided to them, as well as indirect labor time, which is the amount of time it takes to produce the materials and technology used in the making of the shirt, like the cloth, thread, needles, and sewing machine. According to Ricardo’s theory, the value of the shirt would be based on the combined direct and indirect labor time.
Ricardo’s theory of value was highly influential to Karl Marx, a nineteenth-century philosopher and economist, and author of The Communist Manifesto (1848). The labor theory of value led Marx to develop the exploitation theory of capitalism since, if the value of an item is equal to the amount of labor needed to produce it, the only way to make a profit is to underpay workers for their labor.7 In his own writings, Marx maintained much of Ricardo’s theory but did make some modifications. In particular, he introduced the concept of socially necessary labor, which is the amount of labor time it takes a worker with an average skill level and access to average technologies to produce an item.8
“The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labor which is necessary for its production.”
— David Ricardo in Principles of Political Economy and Taxation
David Ricardo was born in London, England in 1772 to Dutch parents. He was the third of seventeen children. After some time spent at school in the Netherlands, Ricardo returned to England and, at age 14, went into business with his father, a successful stockbroker.9 Unfortunately, their relationship quickly deteriorated over the next seven years, as Ricardo, who came from a Jewish family, married a Quaker woman against his parents’ wishes.10 Despite the falling out with his family, Ricardo continued to work as a stockbroker until 1814 and gained a sizable fortune doing so.11 Thanks to his comfortable financial situation, Ricardo was able to dedicate much of his time in the late eighteenth and early nineteenth centuries to the pursuit of knowledge. Initially, he studied literature and science, but everything changed upon his reading of Adam Smith’s Wealth of Nations (1776) in 1799. This book, now considered a cornerstone of classical economics, prompted Ricardo to devote himself to the study of economics, which he pursued for the next decade.12
Throughout the early nineteenth century, Ricardo was embroiled in both the Bullionist controversy, in which he argued in favor of paper money being convertible into gold,13 and the Corn Laws controversy, in which he vehemently opposed Parliament’s ruling to increase tariffs on imported wheat.14 While his writings on these topics remain an important part of his legacy, it is his 1817 work, Principles of Political Economy and Taxation, that is the most renowned. Two revised editions of the book were released shortly after, the second in 1819, and the final in 1821. This book was written in an attempt to elucidate upon his theory of distribution, which provides a model for the distribution of income within a society,15 as well as to integrate this existing theory with his novel theory of value, which suggests that the value of a commodity is determined by the cost of production – specifically, the cost of labor. Through a discussion of profits, rent, and wages, he aimed to drive home his basic tenet that profit is inversely related to wages.16 Ricardo also concluded that the rate of rent increases as a function of population size.17
One of the most influential concepts introduced in this book is that of comparative advantage. This theory of international trade was in favor of free trade over mercantilism, and Ricardo was staunch in his opinion that free trade between two countries was always mutually beneficial.18 This theory has been heavily criticized, as it relies on Ricardo’s labor theory of value, which treats labor as the sole factor in production.19 While Ricardo’s theories have been altered or even discarded since their initial diffusion, their influence is not to be understated. His theory of distribution provided one of the first models in the field of economics.20 His theories were widely received at the time and played a key role in shaping classical economics. Without him, the course of development of the science of economics would have been quite different.
In addition to being an economist, Ricardo spent the years after his retirement from the stock market as a Member of Parliament. He was a member for Portarlington, a borough in Ireland, from 1819 to 1823, when he was forced to retire due to the illness that eventually resulted in his death.21 During his time in Parliament, Ricardo led the inquiry into the Peterloo Massacre, during which the cavalry charged a group of 60,000 peaceful protestors calling for political reform, killing 18 and injuring 700.22 Naturally, he also used his platform to propagate his stance on free trade, an opinion that was met with respectful consideration, although not always shared, by the other Members of Parliament.23
Ricardo never met Adam Smith, but it is clear that Smith heavily influenced his work. If not for the Wealth of Nations, Ricardo may never have pursued the study of economics. Of course, Smith was not the only one to inspire Ricardo. His association with James Mill was particularly important. During his time studying economics, Ricardo shared his opinions and ideas with Mill, who encouraged him to put them in writing. It was Mill who prompted him to write newspaper articles on the Bullionist Controversy, which ultimately led to his first publication in 1810, The High Price of Bullion, a Proof of the Depreciation of Bank Notes.24 Thomas Malthus was another contemporary of Ricardo. The two disagreed on many things but formed a friendship nonetheless. In fact, Malthus’ criticism of Ricardo’s theory of distribution led him to integrate that theory with his own theory of value in his Principles of Political Economy and Taxation.25
— David Ricardo in Principles of Political Economy and Taxation on profits and wages
“The produce of the earth – all that is derived from its surface by the united application of labor, 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 laborers by whose industry it is cultivated.”
— David Ricardo in Principles of Political Economy and Taxation on his theory of distribution
“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, on with another, to subsist and to perpetuate their race, without either increase or diminution.”
— David Ricardo on wages in Principles of Political Economy and Taxation.
“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.”
— David Ricardo, a proponent of a laissez-faire economy
“The exchangeable value of all commodities rises as the difficulties of their production increase.”
— David Ricardo on his theory of value
Ricardo’s most famous work, Principles of Political Economy and Taxation, was published in 1817. It includes his theories of rent, as well as his theory of comparative advantage, which outlines the benefits of free trade.
Ricardo’s first publication was born from a series of articles he published in the newspaper regarding whether or not banknotes should be convertible into gold. Ricardo, among other Bullionists, argued that the Bank of England’s refusal to do so was contributing to inflation.26
In this book, Piero Sraffa analyzes the correspondence of Ricardo and Malthus, with specific focus on the striking differences of opinion of these great friends.
Complied by J.R. McCulloch, this book contains a variety of Ricardo’s most influential works, from pamphlets to essays to his magnum opus, Principles of Political Economy and Taxation.
John Edward King’s offers insight into various writings on Ricardo’s theories, including those penned by people of opposing perspectives, such as Karl Marx. It also provides a biography of Ricardo’s life, which includes a discussion of Ricardo’s own ideas and philosophies.
- Spengler, J.J. (2020). David Ricardo. Encyclopaedia Britannica.https://www.britannica.com/biography/David-Ricardo
- Corn Law. Encyclopaedia Britannica.https://www.britannica.com/event/Corn-Law-British-history
- Maurice, J. (2013). Corn Laws. The Canadian Encyclopedia. https://www.thecanadianencyclopedia.ca/en/article/corn-laws
- Comparative advantage. Policonomics.https://policonomics.com/comparative-advantage/
- See 3
- David Ricardo. University of Minnesota Duluth. https://www.d.umn.edu/cla/faculty/jhamlin/4111/Ricardo/David%20Ricardo.htm
- Chappelow, J. (2018) Labor Theory of Value. Investopedia. https://www.investopedia.com/terms/l/labor-theory-of-value.asp
- Necessary and Surplus Labor Time. ,l[.. https://www.marxists.org/glossary/terms/n/e.htm
- See 6
- See 1
- David Ricardo. Online Library of Liberty. https://oll.libertyfund.org/people/david-ricardo
- See 1
- See 6
- See 1
- Ricardian Distribution Theory. Policonomics. https://policonomics.com/ricardian-distribution-theory/
- Armstrong, Keir. Ricardo, David (1772-1823). Carleton University. https://carleton.ca/keirarmstrong/learning-resources/selected-biographies/ricardo-david-1772-1823/
- See 1
- See 6
- Comparative advantage. Encyclopaedia Britannica. https://www.britannica.com/topic/comparative-advantage
- See 15
- See 1
- History of the Peterloo Massacre. Peterloo Massacre Memorial Campaign. http://www.peterloomassacre.org/history.html
- See 1
- See 6
- See 6
- The Bullionist Controversy. The History of Economics Thought. https://www.hetwebsite.net/het/schools/bullion.htm