David Ricardo by Rui Shu

Who is David Ricardo?

2020-10-05 12:25:12 UTC

Personal Life

I was born into a Dutch-Jewish family in April 1772. As a young boy without a proper past of formal education, I joined my father working at the London Stock Exchange. I found the encouragement I needed to further study political economy, after reading Adam Smith's, The Wealth of Nations at age 27. 10 years before I was first published, in 1809, I contributed to The Monthly Chronicle on the "bullion controversy" and the issue of inflation in England. I was quite successful at the stock exchange and made fortunes as a loan broker and stockbroker. I came to the conclusions that are known today as the theory of comparative advantage. My famous case study looking at the production of wine and cloth in England and Portugal is now presented widely to economics students. When I was 51, in 1823, sickness made me retire from Parliament and I eventually died at Gatcombe Park in Gloucestershire, England on September 11.

INFLUENCE ON FIELD OF ECONOMICS

Some of the key theories which I developed over time are still influential in economics today. I was one of the most important figures in the development of economic theory. Today I am still talked about in economics classes and mentioned for my famous theories and publications.

INFLUENCES

As soon as I started to study economics, I began to acquire friends who influenced me and further developed my intellectual abilities.

One of these friends was the philosopher and economist James Mill, who became my political and editorial counselor.

Other friends included the philosophers: Jeremy Bentham, and Thomas Malthus. Thomas Malthus was best known for his theory that population tends to increase faster than the food supply, an idea that I have accepted and approved. Jeremy Bentham and Thomas Malthus were some of my closest friends I had during that time.

Photo of David Ricardo

22shu_r — 2020-10-05 12:25:25 UTC

This is a painting of me at age 49, It was painted by Thomas Philips.

Main Theories

22anting_m — 2020-10-05 12:35:54 UTC

- Theory Of Wages

- Theory Of Comparative Advantage

- Labour Theory of Value

- Values of Goods Argument

- Theory of Rents

- Ricardian Evidence

Major Publications

22shu_r — 2020-10-05 12:43:16 UTC

1.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 if cash payment is necessary. 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.

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

From 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.

3.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.

Comparative Advantage

22shu_r — 2020-10-12 06:40:02 UTC

Among the notable ideas that I introduced in Principles of Political Economy and Taxation 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. I am prominently associated with the net benefits of free trade and the detriment of protectionist policies. My theory of comparative advantage produced offshoots and critiques that are discussed to this day.

Labor Theory of Value

22shu_r — 2020-10-12 06:41:35 UTC

Another of my 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 stated 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

22shu_r — 2020-10-12 06:42:50 UTC

I was the first economist to discuss the idea of rents, or benefits that increase to the owners of assets solely due to their ownership rather than their contribution to any actually 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. My idea was later also applied to political economy, in the idea of rent-seeking, where the owners of assets who can benefit from public policies that directly increased rents toward them have, and act on, an incentive to influence public policy.

Ricardian Equivalence

22shu_r — 2020-10-12 06:44:24 UTC

In public finance, I 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.

Influences: James Mill

22shu_r — 2020-10-12 19:34:33 UTC

The philosopher and economist who helped and counseled my economic ideas and work

Influences: Jeremy Bentham

22shu_r — 2020-10-12 19:35:53 UTC

The Utilitarian English philosopher who helped me formulate my economic ideas and oversaw my publications.

Influences: Adam Smith

22anting_m — 2020-10-13 07:15:22 UTC

When I was little I read "The Wealth of Nations" by Adam smith. I was inspired by his text. It was what got me to begin pursuing economics for the next 10 years.

Citations

22shu_r — 2020-10-13 07:19:40 UTC

"David Ricardo Definition". Investopedia, 2020, https://www.investopedia.com/terms/d/david-ricardo.asp#:~:text=David%20Ricardo%20(1772%E2%80%931823),law%20of%20diminishing%20marginal%20returns. Accessed 13 Oct 2020.

"David Ricardo". En.Wikipedia.Org, 2020, https://en.wikipedia.org/wiki/David_Ricardo#Publications. Accessed 13 Oct 2020.

"Blink,J&Dorten, I. (2012) Economics Course Companion2, 264."

Friedrich August von Hayek

22czarnecki_j — 2020-10-14 18:00:24 UTC

Dear Mr. Ricardo,

Although you died around 70 years before I was born, I still appreciate your contributions towards economics, even though it seems as if we have opposing ideas. In your Ricardian Equivalence theory, you stated 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. I must disagree with this claim, as I believe that if the government decides to intervene in any way, this will be a false signal to the society. If the government involves itself in the market in any way, it will mislead the consumers and suppliers. So if a government engages in deficit spending to boost the economy, as you stated above, according to my theory this will lead to inflation. Although in the short term this might lead to a boom in the economy, in the long run, this will lead to an even bigger bust than before.

F.A. Hayek

Dear Mr. Hayek

Thank you for your comment, Mr. Hayek, You have brought up some fair points, however according to my theory I would still believe that no matter how a government chooses to increase spending, whether through borrowing more or taxing less, the outcome is the same and demand remains unchanged. And I have only been in this time for 24 hours so I am yet to find out how my theory works in this time and how long and short-term benefits would look in this modern era.

F.A. Ricardo

Karl Marx

22bruczko_j — 2020-10-15 13:03:21 UTC

Dear David Ricardo,

As a strong and prominent economic thinker, I am pleased to say some of your ideas were used as the basis for my theories. Before expanding on this, I would like to say that some of your theories are quite impressive and detailed, and they made great contributions to the field of economics. When expanding on your Labour Theory of Value, I was intrigued with what you had established but did not think it truly analysed the potential this theory had. In my opinion you set out the basis that the value of a good could be measured by the average number of labour hours that were required to produce a good, but you left it there. This created a sub par theory that lacked depth. When I expanded on your basic theory, I included the component that it wasn’t enough for good to have an equivalent amount of labour, they had to have the same amount of social labour. I created these adjustments because I wanted to critique the classical economists, like yourself, that supported the free-market system.

Although I am grateful for your influence on the field of economics, we clearly have our differences and I believe that my expansion to your theory created the depth it deserved.

Sincerely

Karl Marx

Dear Karl Marx
Thank you Mr. Marx for adding on to my theory, and I'm happy to hear that my theory helped you to become such a prominent economist, and of course, we have different belive in different economic fields. Maybe we can work on putting our work together to improve the depth even further.

Sincerely

David Ricardo

John Maynard Keynes

22shafe_j — 2020-10-15 13:06:29 UTC

Dear Mr. Ricardo,

In response to your theory on Ricardian Equivalence I must disagree. If the government were to intervene in deficit spending to boost the economy it would do so to solve a short term problem As I have stated many times “in the long run we are all dead” so we must solve the short term problem first before thinking about the long term problem. How else do you suggest that the economy would be pulled out of a recession so that another situation like the Great Depression doesn’t repeat itself?

Regards,
John Maynard Keynes

Dear Mr. Kenynes,
I appreciate that you read my "Ricardian Equivalence", and wrote this response to me, and once again I think my point is clear that government spending to stimulate the economy is not effective. Due to the fact that people with more money are going to save money, and nowadays people are more educated, and know how important it is to save money, so the saving can save them in the future. And for your second question I would still say the same thing, save your money.

Regards,
David Ricardo

Thomas Malthus

22barratt_n — 2020-10-15 13:24:33 UTC

My dear friend, you were always one for blind optimism. You base your ideas of “Ricardian Equivalence” on the rationality of our human race, and that is something I could never seem to believe in. I don’t think it is a good idea to assume taxpayers will save more or less money to account for heavier or lighter taxes, or to assume they will spend more or less. You think of people as completely rational and calculating beings, while Mr David Hume, a certain idol of mine, has led me to believe that us people make our decisions based on emotions, rather than rationale or reason. I can’t say anything about your ideas of international trade, that was never a big topic that interested or bothered me.

See you back at the society meetings, Thomas Malthus

My dear friend, it seems you didn't change at all. You are still hating humans, come on put some hope into people, we change all the times, especially now we are in different time periods now, I think we have learned how to use our brain better. And as always I will support you in any way.

Your best friend David Ricardo.

Adam Smith

22yoo_a — 2020-10-15 18:28:21 UTC

Dear Mr. Ricardo,

I am glad to hear that my book “The Wealth of Nations” inspired you. I can see that we share some ideas for example the Labor Theory of value. You wrote that the value of a good could be measured by the labor that it took to produce it. I strongly believe that that is how the price of goods should be determined. In “The Wealth of Nations,” which I know you have read, I wrote that price of goods is determined by the amount of labor that went into their production. Great job on this theory.
One area I disagree with you is comparative advantage. In your comparative advantage theory, you argue that the ability to produce a good at a lower opportunity cost than others even if they do not have an absolute advantage in the production of any particular good. In my opinion, countries should only produce goods in which they have an absolute advantage, the ability to produce a good using fewer inputs than another producer.
Other than that, I enjoyed your ideas. Like you, I believe minimal government intervention best served an economy. The role of the government is national defense, administration of justice, and the provision of public goods, not intervening in the economy.

Thank you for your contributions to economics.

Sincerely,
Adam Smith

Thank you for your comment Mr. Smith. I'm glad to hear that you agree with many of my ideas regarding the theory of comparative advantage and the labor theory of value. Although there are differences in some of our ideas on the comparative advantage theory, with mine focusing on the produce a good at a lower opportunity cost and yours focusing produce goods in which they have an absolute advantage, I still respect your ideas and the way that they are presented. I believe that my approach is more tenable, but despite this minor disagreement over comparative advantage theory, I still admire your work. After all, you and your publications are what inspired me to study economics in the first place.

Sincerely,
David Ricardo