April 19, 2012
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David Ricardo (19 April 1772 – 11 September 1823) was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator, who amassed a considerable personal fortune. Perhaps his most important contribution was the law of comparative advantage, a fundamental argument in favour of free trade among countries and of specialisation among individuals. Ricardo argued that there is mutual benefit from trade (or exchange) even if one party (e.g. resource rich country, highly skilled artisan) is more productive in every possible area than its trading counterpart (e.g. resource poor country, unskilled laborer), as long as each concentrates on the activities where it has a relative productivity advantage.

Born in London, Ricardo was the third of 17 children of a Sephardic Jewish family of Portuguese origin who had recently relocated from Holland. His father was a successful stockbroker.

At age 21, Ricardo eloped with a Quaker, Priscilla Anne Wilkinson, leading to estrangement from his family. His father disowned him and his mother apparently never spoke to him again.

Without family support, he started his own business as a stockbroker, in which he became quite successful thanks to the connections he made when working with his father. During the Battle of Waterloo, just like Nathan Mayer Rothschild he bet against the French victory and invested in British securities. By the time he retired from the Exchange at the age of 43, his fortune was estimated at about £600,000 of his time.

At the time of his marriage, Ricardo disconnected from Judaism and became a Unitarian. He had eight children including three sons, of whom Osman Ricardo (1795 – 1881; MP for Worcester 1847 – 1865) and another David Ricardo (1803 – 1864, MP for Stroud 1832 – 1833) became members of parliament, while the third, Mortimer Ricardo, served as an officer in the Life Guards and was a deputy lieutenant for Oxfordshire. He was one of the original members of The Geological Society.

Ricardo became interested in economics after reading Adam Smith's The Wealth of Nations in 1799 on a vacation to the English resort of Bath. This was Ricardo's first contact with economics. He wrote his first economics article at age 37 and within another ten years he reached the height of his fame.

Ricardo's work with the stock exchange made him quite wealthy, which allowed him to retire from business in 1814 at the age of 42. He then purchased and moved to Gatcombe Park, an estate in Gloucestershire.

In 1819, Ricardo took a seat in the House of Commons representing Portarlington, an Irish rotten borough. He held the seat, which had initially been made available to him by his friend, Conversation Sharp, until his death in 1823. In 1846 his nephew, John Lewis Ricardo, MP for Stoke-on-Trent, advocated free trade and the repeal of the Corn Laws.

Ricardo was a close friend of James Mill, who encouraged him in his political ambitions and writings about economics. Other notable friends included Jeremy Bentham and Thomas Malthus, with whom Ricardo had a considerable debate (in correspondence) over such things as the role of land owners in a society. He also was a member of London's intellectuals, later becoming a member of Malthus' Political Economy Club, and a member of the King of Clubs.

Ricardo's most famous work is his Principles of Political Economy and Taxation (1817). Ricardo opens the first chapter with a statement of the labour theory of value. Later in this chapter, he demonstrates that prices do not correspond to this value. He retained the theory, however, as an approximation. The labour theory of value states that the relative price of two goods is determined by the ratio of the quantities of labour required in their production. His labour theory of value, however, required several assumptions: 1- both sectors have the same wage rate and the same profit rate; 2- the capital employed in production is made up of wages only; 3- the period of production has the same length for both goods. Ricardo himself realised that the second and third assumptions were quite unrealistic and hence admitted two exceptions to his labour theory of value: 1- production periods may differ; 2- the two production processes may employ instruments and equipment as capital and not just wages, and in very different proportions. Ricardo continued to work on his value theory to the end of his life. But the first chapter is but the introduction to a long book that discusses back and forth an extended series of comparisons and contrasts of the various points of views and of Ricardo's own reasoning.

In the Chapter "On Value and Riches," Ricardo makes effort to illustrate that exchange value is not the same as "value in use". In this way one can factor two often contradictory results. Point 2, above, that the capital employed in production must be made up of wages only for his value theory to hold, is answered by this: that production may be made up of capital and machinery, but it doesn't change the principle (which he attributes to Adam Smith) that he tries to lay out in this chapter. Machinery may add to one measure of value beyond almost all measure without adding one penny to the other measure of value. In this way, one is able, Ricardo seems to show, to factor out somewhat contradictory assumptions which if confounded lead to equally contradictory results. By making all things perfectly clear, or in attempting to, Mr. Ricardo, seeks to resolve some of those ills of the democratic society in which he lived in so far as reason, and action, could resolve them. In this pursuit, he took action, sitting in parliament, moving with his stirring, and amusing, speeches the inner policies of the British Empire.

The key point Ricardo seems to be aiming at, though, goes something like this: Accumulation of capital may add riches without detracting from the trade-able value of things, producing the possibility of a win-win situation. He first attempts to show that new riches are not adding as much value as one would think because they always are detracting somewhat from the exchangeable value of what was previously being produced. The decreasing value in exchange as value-in-use increases he finally extrapolates to infer that the sum world total of value in exchange is a fixed constant. And so, with the growth of the world economy, the first-world countries, he states, will eventually begin to lose value per trade, even to the purely theoretical extent of cutting into the base capital. But on the other hand, Ricardo goes on to say, with more value-in-use, what one is likely to get a hold of personally, for Rich and Poor alike will be quite a bit more as the sharp-edge of competition is blunted by physical economic growth. Adam Smith, for instance, had thought that due to its effect on value, the growth of wealth of the poor beyond subsistence levels is likely to cut into the wealth of the society. Economists on the left and the right to this day worry about that and undercut the wealth of the poor to maintain economic growth. Ricardo shows this not to be the case, if we simply measure value in exchange together with the growth of value-in-riches rather than by its monopolisation value. The extemeties of competition then, leave for Rich and poor alike an appearance of the growth of wealth without anyone personally feeling its result. Taking a step back and noticing the growth of actual value-in-use allows us, corporations and laborers, rich and poor alike, to see a way forward.

Ricardo is responsible for developing theories of rent, wages, and profits. He defined rent as "the difference between the produce obtained by the employment of two equal quantities of capital and labour." The model for this theory basically said that while only one grade of land is being used for cultivation, rent will not exist, but when multiple grades of land are being utilised, rent will be charged on the higher grades and will increase with the ascension of the grade. As such, Ricardo believed that the process of economic development, which increased land utilisation and eventually led to the cultivation of poorer land, benefited first and foremost the landowners because they would receive the rent payments either in money or in product.

In a careful analysis of the effects of different forms of taxation, Ricardo concludes in chapters 10 and 12 that a tax on land value, equivalent to a tax on the land rent, was the only form of taxation that would not lead to price increases; it is paid by the landlord, who is not able to pass it on to a tenant. He stated that the poorest grade land in use has no (land) rent and so pays no land value tax; as prices are determined at this marginal site for the whole economy, prices will not be increased by a land value tax. His analysis distinguishes between rent of (unimproved) land and rent associated with capital improvements such as buildings.