Ricardo

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DAVID RICARDO (1772-1823)

The works of Ricardo were around the same time as those of Malthus, often discussions between the two took place. Ricardo was from a rich family, he was well educated and spent much of his youth working in the London stock exchange.

The early works of Ricardo looked at currency depreciation and how it could effect the economy. Ricardo, through writing letters to newspapers, was seen as a major thinker of his time. Indeed he was presented to the House of Commons to discuss his views on the economy. Ricardo’s major work was ‘Principles of Political Economy & Taxation’ which was published in 1817. The basic premise of his work was that the economy was like a giant agricultural farm, which depending on how much crop was yielded, affected the entire economy. We shall now briefly discuss the main areas of his work:

AGRICULTURE – Like all the early writers, agriculture was used to define how an economy was looked into, purely as a method by which like Smith inputs and outputs were viewed. Profits from the agricultural sector were seen as being the corn produced at the end of a harvest minus the corn used at the start of a harvest. Ricardo viewed profits as determining the rent charged by landowners, where land was less fertile and yielded less crops then the profits would be lower and the rent received by the landowners much smaller.

ECONOMIC GROWTH – Ricardo viewed changes in the rate profit for agriculture as being the main indicator for growth in the economy. The logic of the early writers was as prices for agricultural products increased, so would the need to cultivate land further to generate increased profits. This in turn was viewed as promoting economic prosperity.

DEPARTURE FROM OTHER WRITERS – Ricardo argued that Agriculture should not be seen as the only productive sector in the economy, there were other areas that could be viewed. Agriculture was merely one method at looking at the economy, which could be used as an indicator for the general state of the economy.

LABOUR – Ricardo’s perspectives on Labour changed over time, his initial belief was that as prices rose, profits increased, so would wages. However at the time of his writing the industrial revolution was beginning to take shape. At first, the use of machinery was seen as both aiding profit later on Ricardo became concerned ‘I am convinced, that the substitution of machinery for human labour, is often very injurious to the interests of the class of labourers … the same cause which increase the net revenue of the country, may at the same time render the population redundant, and deteriorate the condition of the labourer’. Later on, Ricardo felt the pace of machinery should be at a gradual process.

DISTRIBUTION OF WEALTH - Like Smith, Ricardo was concerned with the division of wealth, in his work he stated ‘The laws which regulate this distribution (of rent, profits and labour), is the principle problem in political economy’. Ricardo did feel that the relationship between the landowners, farmers and labourers would reach a point where it would be unworkable. What he was suggesting was that as profits declined there might be a point where the workers would revolt. Ricardo was suggesting that measures be in place to ensure the workers were compensated to prevent any uprising.

Despite his annoyance at the distribution of wealth in society, it was very odd that Ricardo actually became a landlord himself, it must also not be forgotten that his early wealth was attributable to his dealings in the stock exchange.

SAVINGS - Ricardo speculated on the possibility of a general glut/depression which could arise as a result of people saving and investing, he stated:

'There is only one case and that will be temporary, in which the accumulation of capital with a low price of food may be attended with a fall of profits, and that is, when the funds for the maintenance of labour increase much more rapidly than populations, wages will then be high and profits low.

A quantity of necessaries might be produced for which there could not be any immediate consumption of commodities so limited in number, there might be a glut'

GOVERNMENT- Like other observers of his time, Ricardo was in favour of the free market. Indeed with respect to the distribution of wealth, he felt imported agricultural produce would mean lower prices and hence deter the introduction of machinery in agriculture. Unfortunately the pace of the industrial revolution did not agree with him.

COMPARATIVE ADVANTAGE – Perhaps the major contribution from Ricardo. Comparative advantage is a very simple concept to grasp, but has immense importance today as it had back in the early 1800’s. The core belief was that as nations around the world traded with one another they would become specialists in producing one or more types of product.

As nations mass-produced certain goods they would be able to supply them at cheaper costs than competing nations, therefore become the market leaders. The competitor nations would find their own specialist products, in turn, Ricardo argued nations around the world would have a comparative advantage in one area of produce, by which they could reduce unemployment, and maintain economic growth. You must remember at the time of his writing agriculture was seen as the main way nations traded with each other, what Ricardo suggested was ground breaking.

FOREIGN EXCHANGE - Ricardo stressed the need to use gold, as the basis of international trade as it was more stable than a nations own currency. In his writings we see the development of the gold standard for international monetary policy. This was in use up until the 1970’s.

TAXATION – Ricardo argued for a reduced taxation system to allow everyone in the economy to benefit.

ESSENTIAL FEATURES OF THE WORKS OF DAVID RICARDO

Rent received by landowners is linked to yield from agriculture, the better the crop the higher the rent.
Food prices higher = more land cultivated = better economic growth.
Agriculture was not the only means for observing an economy, it merely an indicator.
There may be a point in time when the workers revolt against farmers and landowners.
Technology was seen to be both a blessing to generate increased profits whilst at the same time a menace to generating unemployment.
Free trade is essential.
Out of free trade is born the concept of comparative advantage, which in turn should be used to eradicate unemployment.
The use of gold as an international trading standard.
Reduced taxation leads to economic growth.

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