David Ricardo

Who Was David Ricardo?

David Ricardo (1772–1823) was a classical economist best known for his theory on wages and profit, the labor theory of value, the theory of comparative advantage, and the theory of rents. David Ricardo and several other economists also simultaneously and independently discovered the law of diminishing marginal returns. His most well-known work is Principles of Political Economy and Taxation (1817).

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 disowned by his father at 21, however, for marrying outside his religion. His wealth came from his success with a business he started that dealt with government securities. He retired at the age of 41 after earning an estimated £1 million speculating on the outcome of the Battle of Waterloo.

After retiring at age 42, Ricardo purchased a seat in Parliament for £4,000, and he served as a member of Parliament. Influenced by Adam Smith, Ricardo held company with other leading thinkers of the time, such as James Mill, Jeremy Bentham, and Thomas Malthus. In his Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815), Ricardo conceptualized the law of diminishing returns with respect to labor and capital. 

Ricardo wrote his first article on economics, published in The Morning Chronicle, at the age of 37. The article advocated for the Bank of England to reduce its note-issuing activity. His 1815 book, Principles of Political Economy and Taxation, contains his most well-known ideas. Ricardo's principal contributions to economic theory are described below.

David Ricardo's Economic Theories

Comparative Advantage

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 in production even if they do not have an absolute advantage in the production of any particular good.

For example, a mutual trade benefit would be realized between China and the United Kingdom from China specializing in the production of porcelain and tea and the United Kingdom concentrating on machine parts. Ricardo is prominently associated with the net benefits of free trade and the detriment of protectionist policies. Ricardo's theory of comparative advantage produced offshoots and critiques that are discussed to this day.

Labor Theory of Value

Another of Ricardo's best-known contributions to economics was the labor theory of value. The labor theory of value states that the value of a good could be measured by the labor that it took to produce it. The theory states that the cost should not be based on the compensation paid for the labor, but on the total cost of production. One example of this theory is that if a table takes two hours to make, and a chair takes one hour to make, one table is worth two chairs, regardless of how much per hour the makers of the table and chairs were paid. The labor theory of value would later become one of the foundations of Marxism.

Theory of Rents

Ricardo was the first economist to discuss the idea of rents, or benefits that accrue to the owners of assets solely due to their ownership rather than their contribution to any actual productive activity. In its original application, agricultural economics, the theory of rents shows that the benefits of a rise in grain prices will tend to accrue to the owners of agricultural lands in the form of rents paid by tenant farmers. Ricardo's idea was later also applied to political economics, in the idea of rent-seeking, where the owners of assets that benefit from public policies that directly increased rents toward them have, and act on, an incentive to influence public policy.

Ricardian Equivalence

In public finance, Ricardo wrote that whether a government chooses to finance its expenditures through immediate taxation or through borrowing and deficit spending, the results for the economy will be equivalent. If taxpayers are rational, then they will account for any expected increase in future taxation to finance current deficits by saving an amount equivalent to current deficit spending, so the net change to total spending will be zero. So if a government engages in deficit spending to boost the economy, then private spending will just fall by an equivalent amount as people save more, and the net effect on the aggregate economy will be a wash.