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David Ricardo’s Theories

David Ricardo was a British Political Economists and one of the most prominent figures

who contributed to the development of economic theories. Born on April 18, 1772, Ricardo

started his career at an early age. At 14 years, Ricardo was involved in his father’s business who

was a successful stock broker. In 1793, Ricardo converted from Judaism to Christianity after

marrying his longtime girlfriend, Anne Wilkinson. As a result, his family disowned him, and he

stopped helping his father in the business. He then started his career as a stock broker since then.

David Ricardo gained interest in economics after reading Adam Smith’s “The Wealth of

Nations. Ricardo focused on economic policies and how they affect the economy. Among his

theories is the labor theory of value which stated that the price of a good or service was affected

by the amount of labor used in producing it. The theory of comparative advantage stated that

when two countries are involved international trade, both countries benefit since a zero sum gain

does not exist. Other approaches include wages, profits and rent. He distinguished his approach

to economics by focusing on the theoretical and quantitative approach rather than a contextual

approach.
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Labor Value of Money

David Ricardo presented the Labor of money to prove that labor has a natural and market

price. The natural price of labor refers to a rate that allows laborers to live. When an increase in

the price of food occurs, the natural price of food also increases. Likewise, a decrease in the price

of food results in a reduction in the natural price of labor.

The natural price of labor has a tendency to rise with the progress of the society.

However, the growth may be slightly altered by changes such as agricultural automation and the

discovery of new markets. Their natural fall may also occasion food and other necessities, hence,

a corresponding decrease in the natural price of labor. The market price of labor is the price paid

for labor from the natural operation of the proportion of supply to demand. When labor is in

plenty, the price paid for it is low while the price is high when labor is scarce.

The condition of laborers flourishes when the market price of labor exceeds its natural

price. The laborers have the power to command a lot of necessaries and, therefore, can bring up a

healthy family. When a high wage rate is given and encourages the population, the labor force

may increase, resulting in a decrease in the price of labor to their natural price. It may also fall

below the natural price of labor if a reaction occurs. A drop in the price of labor affects the

lifestyle of the laborers. The poverty experienced deprives them off the necessaries that they

enjoy. It is only after an increase in demand for labor that the market price of labor will rise to

the natural price, and the labors will lead a comfortable life which the natural rates of wage will

afford (Pearcy 1).

An improvement in society and an increase in its capital will affect the labor; the

steadiness of the rise will depend on whether the natural price of labor has also increased. The
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increase in the natural price of labor will depend on the increase in natural prices of necessaries

on which labor wages are expended.

The Theory of comparative advantage

The law of comparative advantage refers to the ability of a part to produce a good or

service at a lower marginal and opportunity cost that the other party. The law of absolute

advantage refers to the ability of one party to produce a good at a lower absolute cost. (Findlay

515). Countries engaging in international trade can create value for each other even when one of

the parties can produce all goods with fewer resources as compared to the other party.

David Ricardo used the example of England and Portugal to illustrate the theory of

comparative advantage. Portugal employs 80 men to produce its annual wine supply. The labor

value is 80 years of labor and the value of Portugal cloth production amounts to 90 years of labor

(Bouare 105). In this case, years of labor represents the amounts of labor time an average worker

takes in one year.

England produces the same amount of cloth and wine. Ricardo assumed that England has

a higher labor productivity than Portugal due to the lower labor productivity in England. England

must spend 100 labor years to produce its annual supply of cloth and 120 labor years to produce

its annual wine production.

In Portugal, it is relatively possible to produce wine and cloth with less labor than it

would cost England to produce the same quantities, i.e. Portugal will take 170 years or labor

while England will take 220 Labor years. In England, it is relatively hard to produce wine and

moderately difficult to produce cloth. In Portugal, both products are relatively easier to produce

than in England. It is, therefore, cheaper to produce cloth in Portugal than in England. It is also
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cheaper for Portugal to produce excess wine and buy cloth from England. England benefits from

this type of trade since it can get wine at a lower price, closer at the cost of producing cloth. In

conclusion, each country can benefit from the trade by specializing in the goods they have an

advantage in and trading it for the other good.

Theory of Rent

David Ricardo defined rent as payment for the use of the only land for the original

powers of the soil. The return on the investment made by the landlord, after it is deducted from

the contractual rent, what remains in called land rent. The law of rent applies to land in the urban

and rural land (Sammut 4). Ricardo was mainly focusing on the economic rent and locational

value and not the soil alone.

Rent arises from the difference existing in the productiveness of different soils place

under cultivation for the purpose of supplying to the same market. The amount of rent will be

determined by the degree of productiveness of the land (Schneider 8). The productiveness

depends on the fertility and location.

Ricardo views the supply of land from the societal perspective. The scarcity of land gives

rise to rent. If the problem of scarcity did not exist, land rent would not exist. When land units

appear as homogenous, land rent arises. Therefore, land rent arises due to scarcity and quality of

lands.

Were the theories accurate?

The arguments presented by David Ricardo have attracted criticism and support in equal

measure. The theory of comparative advantage stated that citizens of each country involved in

the trade are better of specializing in producing goods or services which they have an advantage
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in, even if one country has an absolute advantage in producing the good or service. Critics argue

that in trade, there is a need for trade restrictions to facilitate the economic development of

countries. The critics hold that the theory of trade is not a continuous process and is sometimes

affected by natural disasters that can disrupt the production process.

The labor value of money is still applicable in the modern society. When the market price

of labor is higher than the natural price of labor, the laborers lead a healthy life since they earn a

favorable wage. However, a favorable wage encourages the members of the population who then

join the labor force, resulting in a decline in the wage rate. The decline affects the condition of

life of the workforce. If the demand for labor rises, then an increase in the workforce will occur.

The situation presented by Ricardo is still prevalent today and the market price of labor affected

by some factors. The factors also have a corresponding effect on food and other necessaries.

Might they be useful in the present?

Ricardo’s theories are still applicable in the present. Ricardo’s theories of economics lay

a foundation for economic analysis, and other economists widely borrow his work. Modern

economists use Ricardo’s theory of rent to explain why agricultural prices support do not help

farmers as expected but make land owners wealthier. The changes in labor market prices are also

explained through Ricardo’s theory of labor value of money. Though Ricardo’s theories were

presented several centuries back, his analysis and examples are still widely used to explain

changes that occur in the economy.

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Works Cited

Bouare, Oumar. "An Evaluation of David Ricardo's Theory of Comparative Costs: Direct and

Indirect Critiques." Journal of Economic Development 34.1 (2009): 99-123.

http://www.jed.or.kr/full-text/34-1/7.pdf.

Findlay, Ronald. Comparative Advantage. Ed. John Eatwell, Murray Milgate and Peter Newman.

London: MacMillan, 1987.

Pearcy , Thomas. David Ricardo: The Labor Theory of Value. 4 February 1997.

http://www.wwnorton.com/college/history/ralph/workbook/ralprs27c.htm. 1 April 2016.

Sammut , Vince. David Ricardo and the Theory of Economic Rent. University of Mata, 2005.

Schneider , Michael. The Discovery of the 'Ricardian' Theory of Rent-Mutiple and Therefore

exceptinal/. Thesis. Victoria: School of Economics, 2005.

http://www.business.uwa.edu.au/__data/assets/pdf_file/0004/2326288/Michael-

Schneider.pdf.