David

Ricardo
1772 - 1823
D. Ricardo and his contributions
➔ David Ricardo, a stockbroker turned economist, made
significant contributions to a number of areas of
economic theory, including methodology, theories of
value, international trade, public finance, diminishing
returns, and rent.

➔ He was a classical economist who developed several

key theories that remain influential in economics.

➔ Began his study of economics in 1799 and in 1810

published his first pamphlet, The High Price of Bullion.
His first gained notice among economists over the
“bullion controversy.”
➔ At this time Ricardo acquired friends who influenced his further intellectual development - James
Mill , Jeremy Bentham, Thomas Malthus.

➔ His essays on the Corn Law controversy, published around 1815 - law of diminishing marginal
returns - established him as one of England’s most able economists.

➔ In arguing for free trade, Ricardo formulated the idea of comparative costs, today called
comparative advantage.

➔ In Principles of Political Economy and Taxation (1817), Ricardo analyzed the laws determining the
distribution of everything that could be produced by the “three classes of the community”— the
landlords, workers and owners of capital.

➔ He defined the scope of economics more narrowly than had Smith - In 1819 Ricardo purchased a
seat in the House of Commons and entered Parliament as a member.

➔ Illness forced Ricardo to retire from Parliament in 1823. He died that year at the age of 51.
➔ Ricardo achieved a leading position
among the economists of his time.
His views won considerable support
in England despite the abstract style
in which he set them forth and in the
face of heavy counterfire from his
opponents.

➔ Ricardo is still esteemed for his

ability to arrive at complex
conclusions without any of the
mathematical tools now deemed
essential.
Core theories of Ricardo
❏ Quantity Theory Of Money
❏ Law Of Diminishing Returns
❏ Corn Theory Of Profit
❏ The Theory Of Rent
❏ Labour Theory Of Value
❏ The Theory Of Distribution
❏ Comparative Advantage
❏ Perspectives
 Quantity Theory of Money

➔ Bank of England

➔ Napoleonic Wars (1792-1815)

➔ Bank Run, 1797

➔ Suspension of Specie Payments

➔ The Bullion Payments

 The Bullions Debate
The extent to which the economic crises are real or
monetary in nature was the central dispute.
Bullionist Anti - Bullionist

➔ Inflation due to monetary ➔ Inflation due to real causes

expansion
➔ Favoured Real Bills Doctrine
➔ “Quantity theorists”
➔ “Real bills theorists”
Henry Thornton
Robert Torrens
Ricardo - The high price of Bullion
 Theory of Rent
Assumptions :
1. Land differs in fertility and each is
associated with a rank from the highest
fertile to the least.
2. Competition always equalized rate of
profit for farmers renting land from
landlords.

Net Produce :
It is the total quantity produced minus
all of the necessary costs of production,
including the replacement of capital
used up in production and the wages of
workers.
Diminishing Productivity in Agriculture

Since we assume that land has

diminishing returns, each of the
boxes depicted in the figure
resemble the parcel of land that
gives lesser fertile conditions for
agriculture.

NP here is the net produce per small

unit of land that diminishes as the
quantity of land under cultivation
increases.
 Corn Theory of Profit
➔ It was a single commodity model, which was corn and hence the name.
➔ In his first approach to his profit theory, he assumed a simple economy, consisting
of landlords, capitalists, and laborers, which produced only corn.
➔ Ricardo accepted Malthus's population theory and its most important corollary that
population growth would tend to force the wages of labor to the subsistence level.
➔ Therefore , profit here was what was left after paying wages.
➔ He believed that manufactured commodities followed the same characteristics as
that of the agricultural produce of decrease in profits with increase in labour.
 Conflict between Capitalists & Landlords
Ricardo identified economic prosperity with capital accumulation and the economic growth
and prosperity that this accumulation fostered

● Capitalists and Landlords he insisted

were always at odds.
● He insisted on the reduction of profits
with competition due to the capitalist
nature of the farmers as shown in the
diagram.
● On the basis of these arguments Ricardo
opposed the Corn law.
● Although he articulated his theory very
well , a well supported Malthus pointed
out certain key flaws in the theories
which ricardo later addressed in his
principles.
Labour Theory of Value
➔ Developed in response to the Corn Laws
➔ Ricardo found Adam Smith’s theory
unsatisfactory
➔ A Value Theory must explain the economic
forces that cause changes in relative prices
over time

Labour Cost Theory of Value

➔ Free from Smith’s fallacy of circular reasoning
➔ Value in use and value in exchange
➔ Commodities whose price is determined by
scarcity - Value not determined by labour
Competitively Produced Goods
➔ Exclusion of scarce, non-reproducible goods from the theory
➔ Assumes constant manufacturing costs

Difficulties of a Labour Cost Theory of Value

➔ A measure of the quantity of labour
➔ The differing skills of labour
➔ Capital goods
➔ Land rent
➔ Profits
Ricardo’s Contentions towards
the Labour Theory of Value
➔ Did not hold a theoretical labour theory of value
➔ The amount of labour necessary to produce a good
was the most crucial element in explaining changes
in relative price
➔ 93% Labour Theory of Value

Criticism of Labour Theory of

Value
➔ Later utility theories were more general and explanatory
➔ Inability to combine different kinds of labour at different
wage rates
➔ Did not account for the increase in productivity due to capital
➔ Did not recognise the social relationships surrounding capital
The Controversy of Glut
Glut - overproduction in the economy. Supply exists,
but no demand eg. The great depression
Ricardo
Malthus
● Lack of demand will not continue
indefinitely
● The power to produce is not equal to
the power to consume
● Forces of demand and supply will
automatically adjust prices
● The power to produce will always
exceed the power to consume
● As investment increases, so will
the demand for labour and raw
● Labour consumption will not be
materials, which will increase the
enough to clear glut in the market.
cost of production and reduce
profits
Ricardo’s view: Impossibility of gluts
➔ Money is only a means of exchange, and is not desired for itself

➔ For each dollar in commodities a capitalist produces, they have one dollar
demand for another commodity

➔ Widespread unemployment of the previous decade attributed to change in

tastes and preferences

➔ Temporary reversals are due to the removal of capital from one form of
employment to another

➔ Capitalism automatically creates full employment despite cyclical

depressions
Machinery as a cause of unemployment
BEFORE

➔ Machinery significantly reduces a capitalist’s cost

of production
➔ Lower cost of production = increased production
➔ Increased production = lower prices
➔ All of society benefits
AFTER

➔ Substitution of machinery for human

labor is injurious to the interests of the
labor class
➔ Labor generated due to introduction of
machinery < Labour lost due to
introduction of machinery
 Views on Social Harmony
Utility theory of value:

➔ Social harmony prevails through the “invisible hand”

➔ The remedy to all problems is a freer market

➔ Laws of property ownership and distribution of wealth are fixed

➔ Enjoyments of those with purchasing power considered synonymous with

overall social welfare

➔ Policy changes that alter distributions of wealth, privilege or power are

not considered
Ricardo’s Theory of Comparative Advantage
Absolute advantage - This refers to the ability of a party to produce a good
or service more efficiently than its competitors.

Comparative advantage - The ability to produce a good or service at a lower

opportunity cost than its trading partners

➔ Ricardo believed that the benefit from international trade can be

determined by comparative advantage and wanted to make use of
lower opportunity costs.

➔ By resorting to trade due to comparative advantage both countries can

benefit and improve production more efficiently than what they could
have produced alone.
Ricardo’s Theory of Comparative Advantage
 Ricardo’s Distribution Theory
➔ Ricardo faced the problem of determining the division of total product among rent, profit
and wages.
➔ The three variables he had to determine were solved for their various shares by
subtraction and due to this reason Ricardo’s theory of income distribution is known as a
residual theory.
 Distribution of Income over Time
➔ This was a question of great interest to Ricardo, the change over time of the relative shares of
national income received by capitalists, landlords and labourers.
➔ He found the answers provided by Smith and other writers on this subject to be unsatisfactory.
Main Conflicts: Malthus & Ricardo

➔ The impossibility of gluts

➔ Corn laws controversy

➔ The value controversy

References

History of economic thought - a critical perspective by

E.K Hunt and Mark Lautzenheiser

History of economic thought (fourth edition) -

Harry Landreth and David Colander

History of economic thought -

Lewis Haney
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