David Ricardo and What Is He Famous For?

By THE INVESTOPEDIA TEAM

Updated September 01, 2023

Reviewed by ERIC ESTEVEZ

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).

KEY TAKEAWAYS

David Ricardo was a classical economist who developed several key theories that remain influential
in economics.

Ricardo was a successful investor and member of Parliament who took up writing about economics
after retiring young from his fortunes.

Ricardo is best known for his theories of comparative advantage, economic rents, and the labor
theory of value.

Ricardo's widely acclaimed comparative advantage theory suggests that nations can gain an
international trade advantage when they focus on producing goods that produce the lowest
opportunity costs as compared to other nations.

Ricardo suggested that a good's value is determined by the labor hours invested in its production.

Early Life and Education

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, 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.

Notable Accomplishments

Comparative Advantage Theory

Among the notable ideas that Ricardo introduced 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.

Published Works
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.

What Did David Ricardo Argue in His Iron Law of Wages Theory?

David Ricardo argued that attempts to increase or improve workers' wages were pointless because
wages would, in time, return to or hover around the subsistence level.

What Is the Economic Theory of David Ricardo?

David Ricardo, although well known for his vast contributions to economics, is best known for developing
the comparative advantage economic theory. Comparative advantage theorizes that, for international
trade, countries most benefit from producing goods with low production opportunity costs.

What Did David Ricardo Contribute to Economics?

David Ricardo's contributions to economics are immeasurable, but he is highly regarded for his
contributions to major theories like the law of diminishing returns, comparative advantage, theory of
rents, and the labor theory of value. With the law of diminishing returns theory, Ricardo and other
economists suggest that after an ideal point in production, adding an additional unit will result in smaller
increases in output. Ricardo suggests, in the comparative advantage theory, that nations fare better
when they focus on producing goods with the lowest production opportunity costs. The labor theory of
value states that the value of a good is measured by the labor hours it took to produce it, not how much
is paid for the labor. Ricardo is also widely known for the introduction of the concept of rents. In his
theory of rents, he asserted that asset owners reap accrued benefits only because of their ownership
rights.

The Bottom Line

David Ricardo was an 18th-century English economist renowned for his contributions to economic
theory. He developed the comparative advantage theory, labor theory of value, and the theory of rents,
which have founded other schools of thought and form the basis of current economic policies and
decisions. Although best known for his work in economics, his influence also extended into the political
arena, where he occupied a seat in Parliament.