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“Virtue is more to be feared than vice, because its excesses are not subject to

the regulation of conscience.”

Adam Smith
Philosopher, 1723 - 1790
Adam Smith was born in Kirkcaldy, Fife, Scotland. The exact date of his birth is
unknown, however, he was baptized on June 5, 1723. Smith was the Scottish philosopher
who became famous for his book, “The Wealth of Nations” written in 1776, which had a
profound influence on modern economics and concepts of individual freedom.

In 1751, Smith was appointed professor of logic at Glasgow university, transferring in
1752 to the chair of moral philosophy. His lectures covered the field of ethics, rhetoric,
jurisprudence and political economy, or “police and revenue.” In 1759 he published his
Theory of Moral Sentiments, embodying some of his Glasgow lectures. This work was
about those standards of ethical conduct that hold society together, with emphasis on the
general harmony of human motives and activities under a beneficent Providence.

Smith moved to London in 1776, where he published An Inquiry into the Nature and
Causes of the The brilliant British economist David Ricardo was one the most important
figures in the development of economic theory. He articulated and rigorously formulated
the "Classical" system of political economy. The legacy of Ricardo dominated economic

A lfred Marshall was the dominant figure in British economics (itself
dominant in world economics) from about 1890 until his death in
1924. His specialty was MICROECONOMICS—the study of individual markets
and industries, as opposed to the study of the whole economy. In his
most important book, Principles of Economics, Marshall emphasized
that the price and output of a good are determined by both SUPPLY and
demand: the two curves are like scissor blades that intersect at
equilibrium. Modern economists trying to understand why the price of
a good changes still start by looking for factors that may have shifted
demand or supply, an approach they owe to Marshall.
To Marshall also goes credit for the concept of price elasticity of demand,
which quantifies buyers’ sensitivity to price (see DEMAND).
The concept of consumer surplus is another of Marshall’s contributions. He
noted that the price is typically the same for each unit of a commodity that a
consumer buys, but the value to the consumer of each additional unit
declines. A consumer will buy units up to the point where the marginal value
equals the price. Therefore, on all units previous to the last one, the
consumer reaps a benefit by paying less than the value of the good to
himself. The size of the benefit equals the difference between the consumer’s
value of all these units and the amount paid for the units. This difference is
called the consumer surplus, for the surplus value or utility enjoyed by
consumers. Marshall also introduced the concept of producer surplus, the
amount the producer is actually paid minus the amount that he would
willingly accept. Marshall used these concepts to measure the changes in
well-being from government policies such as TAXATION. Although economists
have refined the measures since Marshall’s time, his basic approach to what
is now called welfare economics still stands.

Wanting to understand how markets adjust to changes in supply or demand
over time, Marshall introduced the idea of three periods. First is the market
period, the amount of time for which the stock of a commodity is fixed.
Second, the short period is the time in which the supply can be increased by
adding labor and other inputs but not by adding capital (Marshall’s term was
“appliances”). Third, the long period is the amount of time taken for capital
(“appliances”) to be increased.

To make economics dynamic rather than static, Marshall used the tools of
classical mechanics, including the concept of optimization. With these tools
he, like neoclassical economists who have followed in his footsteps, took as
givens technology, market institutions, and people’s preferences. But
Marshall was not satisfied with his approach. He once wrote that “the Mecca
of the economist lies in economic biology rather than in economic dynamics.”
In other words, Marshall was arguing that the economy is an evolutionary
process in which technology, market institutions, and people’s preferences
evolve along with people’s behavior.

Marshall rarely attempted a statement or took a position without expressing
countless qualifications, exceptions, and footnotes. He showed himself to be
an astute mathematician—he studied math at St. John’s College, Cambridge
—but limited his quantitative expressions so that he might appeal to the

Marshall was born into a middle-class family in London and raised to enter
the clergy. He defied his parents’ wishes and instead became an academic in
mathematics and economics.

thinking throughout the 19th Century.

David Ricardo's family was descended from Iberian Jews who had fled to Holland during
a wave of persecutions in the early 18th Century. His father, a stockbroker, emigrated to
England shortly before Ricardo's birth in 1772. David Ricardo was his third son (out of

At the age of fourteen, after a brief schooling in Holland, Ricardo's father employed him
full-time at the London Stock Exchange, where he quickly acquired a knack for the
trade. At 21, Ricardo broke with his family and his orthodox Jewish faith when he
decided to marry a Quaker. However, with the assistance of acquaintances and on the
strength of his already considerable reputation in the City of London, Ricardo managed to
set up his own business as a dealer in government securities. He became immensely rich
in a very short while. In 1814, at the age of 41, finding himself "sufficiently rich to
satisfy all my desires and the reasonable desires of all those about me" (Letter to Mill,
1815), Ricardo retired from city business, bought the estate of Gatcomb Park and set
himself up as a country gentleman.

Egged on by his good friend James Mill, Ricardo got himself elected into the British
parliament in 1819 as an independent representing a borough in Ireland, which he served
up to his death in 1823. In parliament, he was primarily interested in the currency and
commercial questions of the day, such as the repayment of public debt, capital taxation
and the repeal of the Corn Laws. (cf. Thomas Moore's poems on Cash, Corn and

Ricardo's interest in economics was sparked by a chance reading of Adam Smith's
Wealth of Nations (1776) when he was in his late twenties. Bright and talkative, Ricardo
discussed his own economic ideas with his friends, notably James Mill. But it was only
after the persistent urging of the eager Mill that Ricardo actually decided to write them
down. He began in 1809, authoring newspaper articles on currency questions which drew
him into the great Bullionist Controversy that was raging at the time In that affair, he
was a partisan of the Bullionist position, which argued for the resumption of the
convertibility of paper money into gold. He wrote a pair of tracts (1810, 1811)
articulating their arguments and outlining what has since become known as the
"classical approach" to the theory of money.
In these very same tracts, Ricardo also suggested the impossibility of a "general glut" --
an excess supply of all goods -- in an economy. This provoked the Rev. Thomas Robert
Malthus to respond to Ricardo. The course of this debate continued in their extensive
correspondence with each other, culminating in a series of notes Ricardo wrote on
Malthus's 1820 Principles (these were later published posthumously as Notes on
Malthus). Ricardo stood firm in his support of Say's Law and dismissed Malthus's
underconsumption thesis as theoretically impossible. Yet, in spite of their disagreements
on economic doctrines, they took to each other personally and fostered a legendary
friendship. Ricardo even passed on investment tips to Malthus -- the most famous case
being when Ricardo urged Malthus to invest in the bond market in anticipation of a
British victory at Waterloo. Ever the conservative parson, Malthus declined. Ricardo, as
usual, made a killing.

In 1815, Ricardo published his groundbreaking Essay on..Profits. There he introduced
the differential theory of rent and the "law of diminishing returns" to land cultivation.
Coincidentally, this principle was discovered simultaneously and independently by
Malthus, Robert Torrens and Edward West. (more astoundingly, all of them published
their tracts within three weeks in February, 1815!) In his 1815 Essay, Ricardo
formulated his theory of distribution in a one-commodity ("corn") economy. With wages
at their "natural" level, Ricardo argued that rate of profit and rents were determined
residually in the agricultural sector. He then used the concept of arbitrage to claim that
the agricultural profit and wage rates would be equal to the counterparts in industrial
sectors. With this theory, he could show that a rise in wages did not lead to higher
prices, but merely lowered profits.

Arguably, a proper theory of value was missing in the 1815 tract. In a one-commodity
model, this is not an big issue. But, prodded on by Malthus's criticisms, Ricardo realized
that in a multiple-commodity economy, for rents and profits to remain residuals, then
prices must be pinned down somewhere. In his formidable treatise, Principles of
Political Economy and Taxation (1817), Ricardo finally articulated and integrated a
theory of value into his theory of distribution.

For Ricardo, the appropriate theory was the "labor-embodied" theory of value or LTV,
i.e. the argument that the relative "natural" prices of commodities are determined by the
relative hours of labor expended in their production. Indeed, he began his 1817 book by
criticizing Adam Smith's alternatives -- the "labor-commanded" and "adding up" theories
of value -- because, he argued, that made value a function of wages and thus income
distribution. For Ricardo, this was untenable. In his vision, value was independent of
distribution, and thus only the "labor-embodied" theory made sense.

However, Ricardo realized that when the question of capital comes in, a problem arose:
specifically, as different industries apply different amounts of capital per laborer, then the
rate of profit will also differ across industries. Ricardo understood that if he then
assumed that the rates of profit across different industries were equalized (as free
competition would imply), then, mathematically, relative prices would now vary with
wages -- exactly what he had criticized Smith for! Ricardo realized that the labor theory
of value would only work if the degree of capital-intensity was the same across all
sectors, casting doubt on the generality of his cherished theory.

Ricardo proposed two ways out of this dilemma. The first was the empirical argument
that firms apply capital in a roughly proportional manner to the amount of labor invested.
In this case, the resulting prices when profits are equalized would not differ much from
the values implied by the LTV. This is what Stigler (1958) has called Ricardo's "93%
labor theory of value". The second solution was to find a commodity which has the
average capital per worker, so that its price would reflect labor-embodied value and thus
not vary with changes in distribution. He called this the "invariable standard of value" .
If one can find what this "standard" commodity is, Ricardo argued, then the rest of the
analysis is simple. One can, say, change technology, trace the change in value of the
standard commodity, and then extrapolate the change in value for all other commodities
by the degree to which their capital composition deviates from this standard. Despite his
search, Ricardo never found this standard commodity. On his death, an incomplete paper
entitled "The Invariable Standard of Value" was found on his desk. Eventually, Karl
Marx (1867) proposed one way out of it, but the proper solution would have to wait until
Piero Sraffa (1960).

A little tripped up on value, Ricardo (1817) pressed on nonetheless. With prices (more or
less) pinned down by the LTV, he restated his old theory of distribution. Dividing the
economy into classes of landowners (who spend their rental income on luxuries), workers
(who spend their wage income on necessities) and capitalists (who save most of their
profit income and reinvest it), Ricardo argued showed once again how the size of profits
is determined residually by the extent of cultivation on land and the historically-given
real wage. He then added on a theory of growth. Specifically, with profits determined in
the manner given above, then the amount of capitalist saving, accumulation and labor
demand growth could also be deduced. This, in turn, would increase population and thus
bring more land, of less and less quality, into cultivation. As the economy continued to
grow, then, by his theory of distribution, profits would be eventually squeezed out by
rents and wages. In the limit, Ricardo argued, a "stationary state" would be reached
where capitalists will be making near-zero profits and no further accumulation would

Ricardo suggested two things which might hold this law of diminishing returns at bay and
keep accumulation going at least for a while: technical progress and foreign trade. On
technical progress, Ricardo was ambivalent. One the one hand, he recognized that
technical improvements would help push the marginal product of land cultivation
upwards and thus allow for more growth. But, in his famous Chapter 31 "On Machinery"
(added in 1821 to the third edition of his Principles), he noted that technical progress
requires the introduction of labor-saving machinery. This is costly to purchase and
install, and so will reduce the wages fund. In this case, either wages must fall or workers
must be fired. Some of these unemployed workers may be mopped up by the greater
amount of accumulation that the extra profits will permit, but it might not be enough. A
pool of unemployed might remain, placing downward pressure and wages and leading to
the general misery of the working classes. Technical progress, for Ricardo, was not a
many-splendored thing.

On foreign trade, Ricardo set forth his famous theory of comparative advantage. Using
his famous example of two nations (Portugal and England) and two commodities (wine
and cloth), Ricardo argued that trade would be beneficial even if Portugal held an
absolute cost advantage over England in both commodities. Ricardo's argument was that
there are gains from trade if each nation specializes completely in the production of the
good in which it has a "comparative" cost advantage in producing, and then trades with
the other nation for the other good. Notice that the differences in initial position mean
that the labor theory of value is not assumed to hold across countries -- as it should be,
Ricardo argued, because factors, particularly labor, are not mobile across borders. As far
as growth is concerned, foreign trade may promote further accumulation and growth if
wage goods (not luxuries) are imported at a lower price than they cost domestically --
thereby leading to a lowering of the real wage and a rise in profits. But the main effect,
Ricardo noted, is that overall income levels would rise in both nations regardless.

With his 1817 treatise, Ricardo took economics to an unprecedented degree of theoretical
sophistication. He formalized the Classical system more clearly and consistently than
anyone before had done. For his efforts, he acquired a substantial following in Great
Britain and elsewhere -- what became known as the "Classical" or "Ricardian" School.
His system, however, was improved very little by his disciples. Perhaps only John Stuart
Mill (1848) and Karl Marx (1867-94) added insights of any great weight.

Ricardo's theory gradually fell out of favor, and died a slow death soon after the
Marginalist Revolution of 1871-74. But research continued in some corners of the world,
e.g. Vladimir Dmitriev (1898). Only much later did Piero Sraffa (1960) finally solve the
"invariable measure of value" problem and re-ignited interest in Ricardo's theory. The
"Neo-Ricardian" research program continues to advance today..

Major Works of David Ricardo

Wealth of Nations, which examined in detail the consequences of economic freedom. It covered such
concepts as the role of self-interest, the division of labor, the function of markets, and the international
implications of a laissez-faire economy. “Wealth of Nations” established economics as an autonomous
subject and launched the economic doctrine of free enterprise.

Smith laid the intellectual framework that explained the free market and still holds true today. He is
most often recognized for the expression “the invisible hand,” which he used to demonstrate how self-
interest guides the most efficient use of resources in a nation's economy, with public welfare coming
as a by-product. To underscore his laissez-faire convictions, Smith argued that state and personal
efforts, to promote social good are ineffectual compared to unbridled market forces.

In 1778, he was appointed to a post of commissioner of customs in Edinburgh, Scotland. He died there
on July 17, 1790, after an illness. At the end it was discovered that Smith had devoted a considerable
part of his income to numerous secret acts of charity.