David Ricardo

The theory of wages and profits, the labor theory of value, the theory of comparative advantage, and the theory of rents were all proposed by one classical economist. David Ricardo was born in 1772 and died in 1823. He was also one of those who independently discovered the law of diminishing marginal returns at the same time. In 1817, The Principles of Political Economy and Taxation was published. It is his most famous work.

Early life and education

David Ricardo was born in 1772 in England. He was one of 17 children. His father took him as a stockbroker at the age of 14. At the age of 21, David Ricardo married beyond religion, which caused his father to disown him. He opened his own business and became involved in government securities, which allowed him to become rich. At the end of the Battle of Waterloo he was able to make about £1 million from speculation. Then he retired at the age of 41.

While retired, Ricardo became a parliamentarian by paying £4,000. He was in contact with the leading thinkers of that period (James Mill, Jeremy Bentham and Thomas Malthus) and was under the influence of Adam Smith ideas.

Notable developments

Comparative advantage theory. It is one of the most outstanding theories in economics. This theory is about the fact that international trade is profitable for countries, if they focus on producing goods with relatively low costs of production. It is beneficial even if there is no absolute advantage in the manufacture of any specific product. This theory gave a lot of deviations and things to discuss even nowadays, but still is one of the most noticeable ideas in economics.

For example, China has ideal conditions for tea production and many porcelain craftsmen. Great Britain is good at machinery and manufacturing machine parts. Trade between the two countries in these industries is mutually beneficial.

Labor theory of value. It was another one of David Ricardo's outstanding ideas. This theory is about the product price can be valued by the labor to produce it. In other words, the basis of the product's price is not the labor's compensation, but the total cost of production. This theory has become one of the fundamental ideas of Marxism.

Using furniture production as an example. It is supposed that the production of a chair takes 1 hour of labor time, and the production of a table takes 2 hours of labor time. Thus, 2 chairs equal 1 table, not taking into account the payment to the manufacturers for their labor.

Theory of Rents. Previously, no one thought about the benefit of owning assets without investing in the production of goods or services. Ricardo was the first to see the benefit in the example of agricultural activity. This theory clearly represented that it is the agricultural landowners, who receive income from grain price increases. This income is paid by farmer renters in rent form.

Ricardian Equivalence. Ricardo claimed that when taxes are raised by the state to finance spending and current deficits, taxpayers will save an amount equivalent to deficit spending. As a result, the net change in spending would be zero.

Thus, when the state stimulates the economy through deficit spending, private spending would simply decrease by an equivalent sum. People would save more. There will be no effect on the aggregate economy.

Published works

The Morning Chronicle was the first newspaper to publish Ricardo's article on economics. In the article, Ricardo made a plea for the Bank of England to reduce the issue of banknotes. He was 37 years old at the time.

In 1815 Ricardo wrote an Essay on the Influence of a Low Price of Corn on the Profits of Stock. He described the concept of the law of diminishing returns regarding labor and capital.

Also, in the same year, 1815, his book Principles of Political Economy and Taxation was published. It collects his most famous ideas.

Conclusions

David Ricardo was an English economist of the 18th century. He made a great impact on the theory of economics by developing several fundamental ideas. These ideas formed the basis of different schools of thought and modern economic policy. In addition to the economic sphere, his influence extended to the political sphere (he was a member of Parliament).