David Ricardo (1772 – 1823)
English political economist, often credited with systematizing economics, and was one of the most influential of the classical economists.
Under a system of perfectly free commerce, each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically: while, by increasing the general mass of productions, it diffuses general benefit, and binds together, by one common tie of interest and intercourse, the universal society of nations throughout the civilized world.
To alter the money value of commodities, by altering the value of money, and yet to raise the same money amount by taxes, is then undoubtedly to increase the burthens of society.
The wheat bought by a farmer to sow is comparatively a fixed capital to the wheat purchased by a baker to make into loaves.
The produce of the earth - all that is derived from its surface by the united application of labour, machinery, and capital, is divided among three classes of the community, namely, the proprietor of the land, the owner of the stock or capital necessary for its cultivation, and the labourers by whose industry it is cultivated.
Rent is that portion of the produce of the earth which is paid to the landlord for the use of the original and indestructible powers of the soil.
Adam Smith, and other able writers to whom I have alluded, not having viewed correctly the principles of rent, have, it appears to me, overlooked many important truths, which can only be discovered after the subject of rent is thoroughly understood.
The opinions that the price of commodities depends solely on the proportion of supply and demand, or demand to supply, has become almost an axiom in political economy, and has been the source of much error in that science.
Whether a bank lent one million, ten million, or a hundred millions, they would not permanently alter the market rate of interest; they would alter only the value of the money they issued.
Ricardo’s theory is absolutely right—within its narrow confines. His theory correctly says that, accepting their current levels of technology as given, it is better for countries to specialize in things that they are relatively better at. One cannot argue with that.
His theory fails when a country wants to acquire more advanced technologies so that it can do more difficult things that few others can do—that is, when it wants to develop its economy. It takes time and experience to absorb new technologies, so technologically backward producers need a period of protection from international competition during this period of learning. Such protection is costly, because the country is giving up the chance to import better and cheaper products. However, it is a price that has to be paid if it wants to develop advanced industries. Ricardo’s theory is, thus seen, for those who accept the status quo but not for those who want to change it.
No extension of foreign trade will immediately increase the amount of value in a country, although it will very powerfully contribute to increase the mass of commodities and therefore the sum of enjoyments.
If I have to hire a labourer for a week, and instead of ten shillings I pay him eight, no variation having taken place in the value of money, the labourer can probably obtain more food and necessaries with his eight shillings than he before obtained for ten: but this is owing, not to a rise in the real value of his wages,as stated by Adam Smith, and more recently by Mr. Malthus, but to a fall in the value of the things on which his wages are expended, things perfectly distinct; and yet for calling this a fall in the real value of wages, I am told that I adopt new and unusual language, not reconcilable with the true principals of the science. To me it appears that the unusual and, indeed, inconsistent language is that used by my opponents.
Neither machines, nor the commodities made by them, rise in real value, but all commodities made by machines fall, and fall in proportion to their durability.
Utility then is not the measure of exchangeable value, although it is absolutely essential to it.
The price of corn will naturally rise with the difficulty of producing the last portions of it,...
The demand for money is regulated entirely by its value, and its value by its quantity.
It is, perhaps, a well founded objection to Mr. Ricardo, that he sometimes reasons upon abstract principles to which he gives too great a generalization.
The farmer and manufacturer can no more live without profit than the labourer without wages.
Mr. Malthus says, " It has been justly observed by Adam Smith that no equal quantity of productive labour employed in manufactures can ever occasion so great a reproduction as in agriculture. " If Adam Smith speaks of value, he is correct; but if he speaks of riches, which is the important point, he is mistaken; for he has himself defined riches to consist of the necessaries, conveniences, and enjoyments of human life. One set of necessaries and conveniences admits of no comparison with another set; value in use cannot be measured by any known standard; it is differently estimated by different persons.
The factors left out of the Ricardian equation are falling wages and idle capacity.
But it is clear that the price of labour has no necessary connection with the price of food, since it depends entirely on the supply of labourers compared with the demand.