Influence of a Low Price of Corn on the Profits of Stock (1815)

In this publication, I described what came to be known as the law of diminishing marginal returns, one of the most famous laws of economics. It states that as more and more resources are combined in production with a fixed resource, we gain more from it, but at some point, adding an additional factor of production results in smaller increases in output.

Furthermore, I also opposed the protectionist Corn Laws, which restricted imports of wheat. When arguing for free trade, I formulated the idea of comparative costs, today called Comparative Advantage, a very subtle idea that is the main basis for most economists’ belief in free trade today. 

The idea is as follows: a country that trades for products it can get at lower cost from another country is better off than if it had made the products at home.

Smith on the other hand thinks differently

Despite the clash of opinion on this matter, Smith and I still remained friends and he remained as someone I admire very much.

The High Price of Bullion(1810)

My first piece of work that was published was The High Price of Bullion, a proof of the depreciation of bank notes.

It was published surrounding the controversy of the Bank Of England, which was about the necessity of cash payment. Strains from the wars with France prompted the government to bar the Bank of England from paying for its notes in gold.

During that time, The Bank of England increased their note issues and the volume of their lending. They clarified that the sudden increase in prices to the public and claimed that the depreciation of the pound had no correlation to the increase in bank credit.

However, I believed that there was in fact a link between the volume of bank notes and the level of prices. Moreover, I also argued that the price levels affected foreign exchange rates and the inflow and outflow of gold.

The controversy at that time was essential to the development of theories concerning central banking. In regards to my theory, a committee called House of Commons, known as the Bullion Committee, confirmed my views and gave credits to my work, which put a spotlight on me, making me popular among other economists. 

Principles of Political Economy and Taxation (1817)

I analyzed the laws determining the distribution of everything that could be produced by the “three classes of the community” in this publication.

As part of my theory of distribution, I concluded that profit differs inversely with wages, which rise or fall in line with the cost of necessities. 

I also determined that rent tends to increase as population grows due to the higher costs of cultivating more food for the larger population. 

Furthermore, I concluded that trade between countries was influenced by the costs of production and by the differences in internal price structures that could maximize the comparative advantage of the trading countries.

I believed that there was little change to unemployment as the population grew, but I kept my opinion that rapid population growth that could crush wages to a substantial level. This would thereby limit both profits and capital formation by extending the margin of cultivation. 

Italy’s cost of producing wine, although higher than Germany’s in terms of hours of labor, is lower in terms of bread. 

For every bottle produced, Italy gives up half of a loaf, while Germany has to give up three loaves to make a bottle of wine. Therefore, Italy has a comparative advantage in producing wine. Similarly, for every loaf of bread produced, Italy gives up two bottles of wine, but Germany gives up only a third of a bottle. Therefore, Germany has a comparative advantage in producing bread.

If both countries exchange wine and bread one for one, Italy can specialize in producing wine and Germany can specialize in producing bread. They can then trade with each other. Both Italy and Germany will be better off than if they had not traded. This is a simple example of my theory of comparative trade. 

“David Ricardo.” Wikipedia, Wikimedia Foundation, 5 Aug. 2018, en.wikipedia.org/wiki/David_Ricardo.

Fonseca, Gonçalo L. “David Ricardo.” The History of , www.hetwebsite.net/het/profiles/ricardo.htm.

I agree with some of your ideas, but I also have a slight suggestion for some of your ideas. I believe that prices and economic growth are a result of innovations of entrepreneurs. If an entrepreneur invent something new, it may replace old systems and in turn cause progress among society. 

I am Alfred Marshall. I very much agree with your theory of comparative advantage and the example that you used. It relates very closely to the supply and demand theory, and the theories of production. Firms can maximize profits by make the production cost less than the cost of the output (product.) To give up one thing will have advantages and consequences.

- Alfred Marshall.