Ricardo, David 1772-1823

CAREER AND WRITINGS

RICARDO ON VALUE, DISTRIBUTION, AND CAPITAL ACCUMULATION

BIBLIOGRAPHY

David Ricardo was born into a prolific Sephardic Jewish family in London on April 18, 1772. His father was a well-to-do stockbroker. David, already “when young, showed a taste for abstract and general reasoning” (Ricardo 1951–1973, Works, vol. 10, p. 4). At the age of fourteen he joined the business of his father. When at the age of twenty-one he married Priscilla Ann Wilkinson, a Quaker, his parents broke with him. Ricardo then began a highly successful career as a stockjobber. He made a fortune on the occasion of the Battle of Waterloo (June 18, 1815) by betting on a defeat of the Napoleonic troops.

CAREER AND WRITINGS

Ricardo’s interest in political economy was ignited by Adam Smith’s Wealth of Nations (1776), and it was amplified by economic events at the time, especially the Bank of England’s suspension of the convertibility of bank notes into gold in February 1797 and inflationary tendencies during the Napoleonic Wars. In 1809 Ricardo anonymously published his first article, “The Price of Gold,” in the Morning Chronicle. One year later he published the pamphlet The High Price of Bullion, a Proof of the Depreciation of Bank-Notes, which swiftly made him known in learned and political circles. The famous Bullion Report to the British House of Commons reflects his influence, and Ricardo became a major contributor in the Bullion controversy. (The controversy unrolled after the Bank of England in 1797 had suspended convertibility of its notes into gold. The Bullionists, including Ricardo, argued that the ensuing increase in money supply would lead to rising prices, whereas the Anti-Bullionists maintained that the money supply was driven by the “needs of trade” reflected by the real bills presented to the Bank for discount. The Bullion Report was strongly influenced by the monetary theorist Robert Thornton, a Bullionist.) In several letters to the Morning Chronicle and in a pamphlet titled Reply to Mr. Bosanquet’s “Practical Observations on the Report of the Bullion Committee” (1811), he defended the Bullion Report. In his hands, the quantity theory of money became a powerful weapon against the Bank of England’s inflationary expansion of money circulation, which, while beneficial to a few, was detrimental to the interests of the nation at large.

Eventually, Ricardo came to know James Mill (1773–1836) and Thomas Robert Malthus (1766–1834). Mill incessantly urged Ricardo to write down his ideas and publish them. With Malthus, Ricardo engaged in many controversial discussions until the end of his life. It was Malthus’s relentless criticism that forced Ricardo to rethink his positions and develop what he considered “a very consistent theory” (Works, vol. 7, p. 246).

Probably prompted by a move before Parliament to restrict the corn trade in early 1813, Ricardo started to investigate the impact of the accumulation of capital on the rate of profits. This resulted in March 1814 in some “papers on the profits of Capital,” which unfortunately have never been found, and in February 1815 in the publication of his Essay on the Influence of a Low Price of Corn on the Profits of Stock; Shewing the Inexpediency of Restrictions on Importation. The Essay was eventually to grow into his magnum opus, On the Principles of Political Economy and Taxation, published in April 1817. The book sold out in a few months. A second, substantially revised edition came out in 1819, and a third, carrying the new chapter “On Machinery,” in 1821. Ricardo’s “principal problem” in this work was to determine the “laws” that regulate the distribution of the product between the three classes of society—landowners, capitalists, and workers (Works, vol. 1, p. 5).

By late 1815 Ricardo had decided to withdraw from the Stock Exchange and invest his money in landed estates—a move supported by his theory of rent, according to which, in an “improving society,” ever larger parts of the soil of a country would become scarce and rise in price. In February 1816 Ricardo published some Proposals for an Economical and Secure Currency, in which he put forward anew his “ingot plan.” The plan suggested a return to the gold standard by making bank notes convertible into gold ingots rather than coins. This practice would allow Britain to continue to use paper as the actual means of payment and it would curb the huge profits of the Bank of England (a private institution until 1946), which in Ricardo’s view ought to accrue to the public rather than to the bank’s directors. In 1821, with the resumption of cash payments by the Bank of England, Ricardo’s plan was implemented.

In 1819 Ricardo became a member of Parliament by buying the seat of Portarlington, Ireland. He participated in many debates, mostly on monetary and financial matters. He became famous for his suggestion in 1819 to repay the whole of the national debt in a few years by means of a tax on property. Ricardo argued that such a tax would not diminish total wealth and would also not unduly hit the propertied classes because the capital value of the current taxes levied on them to cover interest charges and amortization of the national debt was equal to the lump-sum property tax suggested. This proposal became known as “Ricardo’s equivalence theorem.”

After the publication of the first edition of the Principles, Ricardo was predominantly concerned with the problems of value and distribution, the measure of value, and the machinery question. The second edition brought substantial changes in the chapter “On Value.” In the third edition, he withdrew his earlier optimistic view on the swift compensation of labor displacement due to the introduction of improved machinery.

Ricardo died at his country seat, Gatcomb Park in Gloucestershire, on September 11, 1823, from an “infection of the ear, which ultimately extended itself to the internal part of the head” (Works, vol. 10, p. 12).

RICARDO ON VALUE, DISTRIBUTION, AND CAPITAL ACCUMULATION

In this entry, emphasis will be placed on Ricardo’s contributions to the theory of value, distribution, and capital accumulation. For his views on money, taxation, public debt, and politics, see Giancarlo de Vivo (1987), Samuel Hollander (1979), and Murray Milgate and Shannon Stimson (1991).

Ricardo, a man with considerable practical sense and experience, always defended economic theory against the “vulgar charge” of those who are “all for fact and nothing for theory. Such men can hardly ever sift their facts. They are credulous, and necessarily so, because they have no standard of reference” ( Works, vol. 3, pp. 160, 181).

Ricardo adopted Smith’s long-period method, which focuses attention on “natural” as opposed to “market” prices and thus on the persistent and systematic as opposed to the temporary and accidental factors at work in the economic system. However, Ricardo gave greater emphasis to the members of the “monied class” in bringing about, in conditions of free competition, a tendency toward a uniform rate of profits (see Works, vol. 1, p. 88).

Ricardo offered clear statements of the principles of extensive and intensive diminishing returns in agriculture due to the scarcity of land. While Ricardo was not the first to discover these principles, he deserves credit for their incorporation into a system of political economy whose main aim was the determination of the general rate of profits. With extensive diminishing returns, different plots of land can be brought into a ranking of natural “fertility” that corresponds to the ranking of unit costs of the agricultural product, say corn. With very low levels of production of corn, only land of the highest fertility will be cultivated and there will be no rent, for essentially the same reason that nothing is given for “the gifts of nature which exist in boundless quantity” (Works, vol. 1, p. 69). It is only as capital accumulates and population grows that land of second and third quality, and so forth, will have to be cultivated in order to satisfy a growing social demand. As a consequence, the price of corn will have to rise relative to that of other commodities. The price is determined on no-rent-bearing (i.e., marginal) land and equals unit costs (including profits at the normal rate) on it; the owners of intramarginal lands obtain differential rents reflecting lower unit costs. From this Ricardo concluded against Smith that rent “cannot enter in the least degree as a component part of its price” (see Works, vol. 1, p. 77). In addition, rent was not an expression of the generosity of nature, but of its “niggardliness”: it was not the cause of the high price of corn, but its effect.

Setting aside “improvements” in agriculture and assuming a given and constant real wage rate, an extension of cultivation while increasing the surplus product involves an ever larger part of it being appropriated as rent. It follows that the “natural tendency of [the rate of] profits then is to fall” (Works, vol. 1, p. 120). The fall is not due to an intensified “competition of capitals,” as Smith had maintained, but to diminishing returns in agriculture (and mining).

Profits in turn depend on wages. As is the case with all commodities, Ricardo distinguished with regard to labor between its “natural” and its “market” price. The former is defined in conjunction with the rate of capital accumulation: in an “improving society,” natural wages are typically higher than in a stagnant one because, via the wage rate, the growth of population is attuned to the requirements of accumulation. Ricardo also stressed the historical and social dimensions of the natural wage and warned that it must not be mistaken for a purely physiological minimum of subsistence (Works, vol. 1, pp. 96–97). He even contemplated the possibility that the “population may be so little stimulated by ample wages as to increase at the slowest rate—or it may even go in a retrograde direction” (Works, vol. 8, p. 169). Therefore, Ricardo can hardly be called a strict adherent to Malthus’s “law of population.” He also discussed the possibility of workers participating in the sharing out of the surplus product. In this case, he felt the need to replace the concept of a given real (i.e., commodity) wage rate by a share concept, or “proportional wages” (Sraffa 1951, p. lii), that is, “the proportion of the annual labour of the country … devoted to the support of the labourers” (Works, vol. 1, p. 49). It was on the basis of the new wage concept (and on the premise that the social capital consisted only of, or could be reduced to, wages) that Ricardo then asserted what was called his “fundamental proposition on distribution”: that the rate of profits depends on proportional wages, and on nothing else.

One element of Ricardo’s theory of profits has particularly puzzled his interpreters. In a letter written in March 1814 he stated: “It is the profits of the farmer which regulate the profits of all other trades, and as the profits of the farmer must necessarily decrease with every augmentation of Capital employed on the land, provided no improvements be at the same time made in husbandry, all other profits must diminish and therefore the rate of interest must fall” (Works, vol. 6, p. 104). According to the Italian economist Piero Sraffa (1898–1983), the “rational foundation” of the “basic principle” of the determining role of the profits of agriculture was that “in agriculture the same commodity, namely corn, forms both the capital (conceived as composed of the subsistence necessary for workers) and the product,” so that “the determination of the ratio of this profit to the capital, is done directly between quantities of corn without any question of valuation” (Sraffa 1951, p. xxxi). In order for other trades to earn the same competitive rate of profits, their prices have to adjust relative to corn. Sraffa was careful to stress that this model was “never stated by Ricardo in any of his extant letters and papers.” Yet although direct evidence is missing, Sraffa saw enough indirect evidence to support this view (Sraffa 1951, p. xxxi). It is interesting to note that the “basic principle” that Sraffa ascribes to Ricardo was clearly spelled out by Robert Torrens (1780–1864), who called it a “general principle” and acknowledged his indebtedness to Ricardo (1820, p. 361).

Malthus’s insistence that capital never really consists of a single commodity that is identical with the product obviously required a deeper analysis. This forced Ricardo in the Principles to abandon his corn-ratio theory in favor of the labor-embodiment principle of value. Whereas in his early theory the rate of profits was conceived as the ratio between two quantities of corn, it was now conceived as the ratio between two quantities of labor : the amount of labor “embodied” in the surplus product (exclusive of the rents of land) and the amount embodied in the social capital (where Ricardo frequently identified capital with wages). This change was possible by introducing the hypothesis that commodities exchange according to the direct and indirect labor necessary in their production. In this way, bundles of heterogeneous commodities are made commensurable. The new theory replicated the important finding that the rate of “profits would be high or low in proportion as wages were low or high” (Works, vol. 1, p. 111). The labor theory of value enabled Ricardo to dispel the idea deriving from Adam Smith’s “adding-up theory” of prices (Sraffa 1951) that wages and the rate of profits could move independently of one another and to establish the constraint binding changes in the two distributive variables, given the system of production. It was an ingenious move that allowed him, or so he thought, to free the simple inverse relationship between wages and the rate of profits from “a labyrinth of difficulties” (Works, vol. 6, p. 214) caused by price movements.

However, Ricardo was aware of the fact that his “general rule” of value was “not rigidly true” (Works, vol. 7, p. 279) and was “considerably modified by the employment of machinery and other fixed and durable capital” (vol. 7, p. 30). Different proportions of means of production and direct labor, along with different durabilities of capital goods employed in their production, would make the relative prices of commodities depend on income distribution: the higher the rate of profits (and, correspondingly, the lower the wages), the relatively more expensive will be commodities produced with a high proportion of means of production to labor and means of production that are long-lived. The fact that “profits [are] increasing at a compound rate … makes a great part of the difficulty” (Works, vol. 9, p. 387).

This fact threatened to undermine Ricardo’s novel solution to the theory of profits. The task of finding a way out of the impasse occupied him until the end of his life. Apparently, to play down the modifications to the labor theory of value as unimportant was not good enough (see Works, vol. 9, p. 178). He sought to cope with this problem in terms of his concept of an “invariable measure of value” (see Kurz and Salvadori 1993). Originally, that concept was designed by Ricardo for the purpose of carrying out interspatial and intertemporal comparisons, that is, comparisons relating to different technical environments. An invariable standard of value would consist of a commodity produced with an unvarying quantity of total labor. Hence, if another commodity varied in value relative to the standard, it would be clear that this was due to a change in the quantity of labor bestowed on the production of that commodity.

Ricardo now had to face the entirely different problem that even in a given technical environment two commodities may vary in relative value consequent upon a change in income distribution. This was due to the “variety of circumstances” under which commodities are produced (Works, vol. 4, p. 368). Ricardo tried to tackle the problem in terms of searching for a standard of value that would have to be a “medium between the extremes” (vol. 4, p. 372). While Ricardo’s discussion of this problem is layered with different meanings, and is not always very clear, there can be no doubt that the main purpose of his investigation was to elaborate a consistent theory of value and distribution. This necessitated first and foremost unraveling the properties of a given system of social production as regards the set of alternative constellations of distribution and relative prices compatible with it. However, since he did not fully master the subject, Ricardo, for lack of a more satisfactory theory, clung to a doctrine that, he felt, offered a sufficiently solid ground to stand on: the labor theory of value. Embodied labor was seen by him to be the main determinant of value and somehow, he thought, both “invariability” requirements could be formulated in terms of a standard that fared well on both counts. The standard had to be produced by a constant amount of labor and by medium circumstances. As regards the second requirement, by expressing bundles of commodities such as the surplus product distributed as profits on the one hand and social capital on the other in terms of such a standard, the positive and negative deviations of prices from labor values could, in each aggregate, be expected to balance. This would allow one to continue to envisage the rate of profits as a ratio of two quantities of labor and thus depend on “the proportion of the annual labour of the country devoted to the support of the labourers” (Works, vol. 4, p. 49). The measure was designed to corroborate Ricardo’s dictum that the laws of distribution “are not essentially connected with the doctrine of value” (Works, vol. 8, p. 194).

While there is no general theoretical solution to Ricardo’s first problem, Sraffa (1960), in terms of the concept of “standard commodity,” provided a solution to a somewhat reformulated version of Ricardo’s second problem. It goes without saying that Ricardo was wrong in assuming that two birds can be killed with one stone (see Kurz and Salvadori 1993).

The theory of value and distribution formed the analytical centerpiece of Ricardo’s political economy. It was designed to lay the foundation of all other economic analysis, including the investigation of capital accumulation and technical progress, of development and growth, of trade, and of taxation and public debt.

Like Adam Smith, Ricardo advocated free trade, but he felt that an explanation of the pattern of trade in terms of absolute cost advantages was unsatisfactory. He elaborated the principle of comparative cost and illustrated it in terms of a famous numerical example involving two countries, Portugal and England, and two commodities, cloth and wine. He showed that even if Portugal were to have an absolute advantage in the production of both commodities, there would be room for mutually beneficial trade provided Portugal specialized in the production (and export) of that commodity where its absolute advantage was relatively larger, wine, while England specialized in the production (and export) of the commodity where its absolute disadvantage was relatively smaller, cloth. The effect of foreign trade could be an augmentation of the riches of both trading countries. Ricardo’s principle of comparative cost was called the “deepest and most beautiful result in all of economics” (Findlay 1987, p. 514).

In the Principles, a great deal of attention is devoted to taxes, the problem of tax incidence, and the impact of taxes on capital accumulation. Ricardo stressed that “there are no taxes which have not a tendency to lessen the power to accumulate. All taxes must either fall on capital or revenue.” However, he added: “Taxes are not necessarily taxes on capital, because they are laid on capital; nor on income, because they are laid on income.” (Works, vol. 1, p. 152). The problem of tax incidence is then illustrated in a number of cases. For example, on the premise that workers are paid a subsistence wage, a tax on wages could not be borne by workers: nominal wages would have to rise, leaving real wages constant, and the tax would accordingly be borne by capitalists. (This premise also underlies Ricardo’s tax proposal to repay the national debt.) The situation is similar when a tax is laid on a wage good. In accordance with his doctrine that rent does not enter price, Ricardo concluded that “a tax on rent would affect rent only; it would fall wholly on landlords, and could not be shifted to any class of consumers” (vol. 1, p. 171). A tax on profits would raise the prices of products: “if a tax in proportion to profits were laid on all trades, every commodity would be raised in price” (vol. 1, p. 205). Depending on the consumption patterns of the different classes of society, this would affect their members differently. A rise in the price of wage goods would again entail a corresponding adjustment of nominal wages: “whatever raises the wages of labour, lowers the profits of stock; therefore every tax on any commodity consumed by the labourer, has a tendency to lower the rate of profits” (vol. 1, p. 203).

Ricardo’s treatment of taxes, while containing many interesting ideas and suggestions, is generally not considered to be the strongest part of his book and is said to suffer from a poor arrangement of the material and an argument that is frequently tied to excessively restrictive assumptions, such as constant real wages.

BIBLIOGRAPHY

de Vivo, Giancarlo. 1987. Ricardo, David, 1772–1823. In The New Palgrave: A Dictionary of Economics, eds. John Eatwell, Murray Milgate, and Peter Newman, Vol. 4, 183–198. London: Macmillan.

Findlay, Ronald. 1987. Comparative Advantage. In The New Palgrave: A Dictionary of Economics, eds. John Eatwell, Murray Milgate, and Peter Newman, Vol. 1, 514–517. London: Macmillan.

Hollander, Samuel. 1979. The Economics of David Ricardo. Toronto, Ontario: University of Toronto Press.

Kurz, Heinz D., and Neri Salvadori. 1993. The “Standard Commodity” and Ricardo’s Search for an “Invariable Measure of Value.” In The Dynamics of the Wealth of Nations: Growth, Distribution, and Structural Change: Essays in Honour of Luigi Pasinetti, eds. Mauro Baranzini and G. C. Harcourt, 95–123. New York: St. Martin’s Press.

Milgate, Murray, and Shannon Stimson. 1991. Ricardian Politics. Princeton, NJ: Princeton University Press.

Ricardo, David. 1951–1973. The Works and Correspondence of David Ricardo, ed. Piero Sraffa with Maurice H. Dobb. 11 vols. Cambridge, U.K.: Cambridge University Press.

Schumpeter, Joseph A. 1954. History of Economic Analysis. New York: Oxford University Press.

Sraffa, Piero. 1951. Introduction. In The Works and Correspondence of David Ricardo, ed. Piero Sraffa with Maurice H. Dobb, Vol. 1, xiii–lxii. Cambridge, U.K.: Cambridge University Press.

Sraffa, Piero. 1960. Production of Commodities by Means of Commodities: Prelude to a Critique of Economic Theory. Cambridge, U.K.: Cambridge University Press.

Torrens, Robert. 1820. An Essay on the External Corn Trade. London: Longman.

Heinz D. Kurz

Ricardo, David

Economic thought

Appraisal

BIBLIOGRAPHY

David Ricardo (1772–1823), English economist, is best remembered for his theory of rent and his theory of comparative cost. He was the first to show that the ultimate incidence of a tax is governed by the laws of economic distribution, laws whose determination he regarded as “the principal problem of Political Economy.”

Ricardo was born in London, the third child in a Sephardic Jewish family that had emigrated from Holland in 1760. At the age of 11 he was sent back to Holland to attend a special school, the Talmud Tora, attached to the Portuguese Synagogue in Amsterdam. He returned to London three years later to work for his father, who had become a successful member of the stock exchange. In 1793, against the wishes of his parents, he married the daughter of a Quaker, and they promptly disinherited him. Striking out on his own, he soon accumulated a small fortune as a stockjobber and loan contractor. In 1814, at the age of 42, he retired from business, purchased an estate in Gloucestershire, and began to devote himself to literary pursuits.

Ricardo’s interest in economics dated back to 1799, when he accidentally came across a copy of Adam Smith’s Wealth of Nations. Ten years later he made his debut in print with a newspaper article on the bullion controversy, subsequently expanded into a vigorous pamphlet entitled The High Price of Bullion: A Proof of the Depreciation of Bank Notes (1810; in Works, vol. 3, pp. 47–127). The Bullion Committee report, which appeared the following year, agreed with Ricardo that the current inflation was due to the Bank of England’s failure to restrict the issue of currency. The fame of the committee’s report lent prestige to Ricardo’s tract, so much so that later generations incorrectly credited Ricardo with inspiring the report.

In 1814 he turned his attention to commercial policy and a year later published the important Essay on the Influence of a Low Price of Corn on the Profits of Stock (in Works, vol. 4, pp. 1–41). It appeared close upon similar essays by Robert Torrens, Edward West, and Thomas Robert Malthus. With varying degrees of clarity, all four pamphlets expressed the idea that was soon to become the cornerstone of classical political economy, the law of diminishing returns to additions of capital and labor applied to land. But only Ricardo went on to develop the implications of this proposition in a major treatise, On the Principles of Political Economy and Taxation (1817; see Works, vol. 1). The story of how he was urged, goaded, and even bullied into completing this task by his friend James Mill is now well known, owing to Piero Sraffa’s recovery of the Ricardo-Mill correspondence, which is included in the Works and Correspondence (vols. 6–9).

Further tracts by Ricardo appeared in 1817, 1819, and 1822. In 1821 he published the third edition of the Principles, adding a controversial chapter “On Machinery,” in which he conceded that technological progress might prove injurious to the working class (see Barton, John). In 1819 Ricardo obtained a seat in the House of Commons and for the next few years took an active part in parliamentary discussions of current issues. He made a grand tour of the Continent in 1822, keeping a travel journal, which is included in the Works and Correspondence (vol. 10, pp. 175–352). He died of a cerebral infection in 1823, at his estate, Gatcomb Park, leaving a wife and seven children. At his death his estate was valued at about £750,000, of which a third was in landed property and the rest in English and French government bonds (the present purchasing power of the estate would be approximately five times as much).

There never was an economist so single-minded in his devotion to “the dismal science” as Ricardo. He did spend some time studying the natural sciences, particularly geology—which then enjoyed something of the glamour that nuclear physics does nowadays—collecting minerals and participating in the management of the Geological Society of London. But with these exceptions, all his intellectual efforts were given to economics, and his correspondence rarely touches on other topics. Politically he was a Benthamite in that he favored universal male suffrage and as much parliamentary reform as was necessary to bring this about. If he had definite philosophical convictions, they were those of British empiricism as embodied in the works of Bacon, Hobbes, and Locke. He became a Unitarian after his marriage but was probably as near to atheism as Bentham was. There is reason to think that Ricardo followed James Mill in advocating the spread of birth control devices among the working class, although, unlike Mill, he never committed himself on the subject in print.

Economic thought

The influence of Ricardo’s treatise made itself felt almost as soon as it was published, and for over half a century Ricardo dominated economic thinking in Britain. The leading periodicals and even the Encyclopaedia Britannica fell into the hands of his disciples; popular literature echoed Ricardian ideas; and Parliament increasingly succumbed to Ricardian policy proposals. Ricardo’s appeal rested on his ability to seize hold of a wide range of significant problems with a simple analytical model that involved only a few strategic variables and yielded, after a few elementary manipulations, dramatic conclusions of a distinctly practical nature. In short, he was the first to master the art that later brought success to Keynes.

At the heart of Ricardo’s system is the notion that economic growth must sooner or later be arrested owing to a scarcity of natural resources. In the simple version of his model, as expounded in the 1815 essay, the whole economy is a giant farm, distributing its product among landlord, tenant farmer, and hired laborer. The Malthusian tendency of population to increase up to the limits set by the means of subsistence provides a virtually unlimited supply of labor that can be employed at a constant real wage fixed in terms of corn (or wheat). This, of course, is the notorious “iron law of wages.” Every worker is equipped with the same amount of fixed capital (say, a spade), which, being combined with every worker in the same proportion, enters as a simple multiple and, hence, can also be measured in terms of corn. In other words, corn is the only output of the giant farm, and it is also the only input. As the labor force increases, extra corn to feed the extra mouths can be produced only by extending cultivation to less fertile land or by applying additional capital-and-labor to land already under cultivation with diminishing results. The difference between the net corn product per worker on the least fertile land and the constant corn wage per worker goes to the tenant farmer as profit. Since farmers outbid each other for the best land, the real advantages of working superior land accrue to the landowner in the form of rising rents. As more land is taken up, the net produce per worker falls, whereas the real wage remains the same. Obviously, profits per worker decline. At the same time, the corn value of the capital per worker increases because corn is continually becoming more expensive to produce in terms of real resources used up. Divide the falling profits per worker by the rising capital per worker, and it follows that the rate of profit on capital, which supplies the motive for investment, declines. Eventually, capital accumulation must come to an end.

In the Principles this simple one-sector model was replaced by a three-sector model, but the argument and the conclusions reached were essentially the same as in the essay of 1815. The three-sector model gave rise to the question how best to measure the variables employed, and the first chapter of the Principles turned into a veritable maze for the reader as Ricardo pursued “the invariable measure of value,” which seemed forever to elude him. He failed to realize that an index-number problem such as he had posed cannot, in the nature of the case, be perfectly resolved.

The root of the trouble being the declining yield of wheat per acre of land, it is evident that the short-run solution is to import cheap wheat from countries better endowed with fertile land in exchange for low-cost manufactured goods. In the long run other solutions may be looked for: a change in workers’ diets to lessen the dependence on wheaten bread; an effort to slow down the rate of growth of population; and, last, an attempt to foster technical change, particularly of the land-saving variety. Ricardo did not neglect these long-term solutions, but, it is fair to say, he dealt with them in a perfunctory manner. The fact is that despite the numerous references to capital accumulation and population growth, Ricardo’s model is not really concerned with problems of economic growth in the long run. His interest in practical results—paradoxical in view of the high level of abstraction that he achieved—led him to emphasize the foreign trade solution to the growth dilemma. In so doing he came to attack the existing corn laws, which protected British wheat farmers by prohibiting foreign wheat except in years of famine prices. Eager to show that Britain would benefit from specializing in manufactured goods and importing the bulk of its food supply, he hit upon the law of comparative cost as a proof of his case.

Adam Smith had taught that it pays a country to concentrate on the production of those goods which it can produce more cheaply in absolute terms than any other country can. Earlier in the eighteenth century a few authors had advanced the wider rule that each country will find it profitable to import those goods which it can obtain for exports at less cost than their domestic production would entail. Almost no one realized that this meant that under free trade all goods are not necessarily produced in countries where their real cost of production is lowest—it might pay a country to import a product even though it could be produced at less cost at home than abroad. The Ricardian doctrine of comparative cost is simply a rigorous restatement of the informal eighteenth-century rule.

Ricardo used a single numerical example, involving two countries and two goods. He was able to demonstrate that it would benefit England to specialize in “cloth,” even if Portugal could produce “cloth” and “wine” more cheaply, provided England had a relative cost advantage in cloth. And if Portugal specialized in wine, where it had an even greater cost advantage than in cloth, it turned out that both countries were better off: with given resources, both countries could enjoy more of both cloth and wine because they would reap the advantages of an international division of labor. Here is the fountainhead of all nineteenth-century free trade doctrine! Although the corn laws were not in fact repealed until 1846, Ricardo’s writings helped to make free trade a popular objective of British policy. Unwittingly, Ricardo provided the theoretical justification for the long-run solution to the growth problem which Britain actually adopted in the nineteenth century: Britain became the “workshop of the world” and bought most of her food abroad.

Ricardo did much more than state the law of comparative cost. He also saw its implications for international wage and price levels. David Hume had shown earlier that each country’s exports and imports are automatically brought into balance under an international gold standard by the effect of gold flows acting on domestic price levels. A country with an export surplus must attract gold from abroad; the gold inflow, by raising all prices within the country, then eliminates the excess of exports over imports. Similarly, an import surplus leads to a loss of gold and a self-correcting decline in prices. Ricardo now realized that if Portugal has an absolute advantage in both wine and cloth but a great relative advantage in wine, foreign trade with England is possible only if money wage rates in Portugal are higher than those in England. If the wage rate in terms of gold is the same in the two countries, Portugal will not import cloth, since Portuguese consumers can get cloth more cheaply from domestic suppliers. As a result, England will be forced to ship gold to Portugal to pay for wine imports, and this will continue until gold wages and prices in Portugal rise enough to make it profitable for the Portuguese to import English cloth. In general, then, the low-cost country has the higher money wage rate, and hence higher money prices for similar goods. There is, as Ricardo said, “a natural distribution of specie” beween the trading nations of the world that tends, in the absence of tariffs, not merely to equilibrate each country’s exports and imports, but also to produce such relative price and wage levels between countries as to induce each to produce those goods in which it has a comparative advantage. And although the world is now off the gold standard, it remains true that everyone who has studied Ricardo’s argument can understand why a high level of wages in a country does not necessarily prevent that country from competing successfully in international trade.

The same forces that depress the rate of return on capital in Ricardo’s model also raise rents, although Ricardo never made it very clear whether he meant rents per acre of land or the rental share of the total product. Be that as it may, Ricardo viewed resources as shifting between agriculture and manufacturing in search of maximum returns, but he never conceived of land itself as shifting among competing uses. When, in the Ricardian model, cultivation is said to be extended, the new land is simply taken up freely, because land is treated not only as if it were completely fixed in supply but also as if it were absolutely specialized in use. It is this conception of land as a free “gift of Nature,” having no use other than the production of wheat, that led Ricardo to the conclusion that rent is price-determined, not price-determining; in a famous formula, one of the many with which Ricardo peppered his otherwise pedestrian prose, “Corn is not high because rent is paid, but rent is paid because corn is high.” From the notion that rent is not a reward for any economic service rendered by landowners, Ricardo drew the practical implication that the remission of rents from landlords to tenants would not affect the price of wheat or the rate of profit in agriculture. James Mill went a step further and concluded that the appropriation of rents by the state would not affect agricultural output, a proposition that Henry George made his own when he called for taxing the “unearned increments” in rental values. The popularity of single-tax propaganda in the latter half of the nineteenth century did much to keep the name of Ricardo alive, and via Henry George’s Progress and Poverty Ricardo even cast a shadow on the formation of the Fabian Society. In a period “when the political power of the landowning aristocracy in England still barred the way to effective electoral reform, a theory that attributed economic difficulties to agricultural protection, asserting as a scientific conclusion that “the interest of the landlord is always opposed to that of the consumer and manufacturer,” could not fail to take hold of public opinion.

While Richard Cobden and John Bright were adulterating Ricardo’s arguments to suit the needs of the great campaign they were waging for immediate repeal of the corn laws, certain radical writers were putting forth labor’s exclusive claim to the total national product, a claim which they argued was a simple logical deduction from the labor theory of value. These were the so-called “Ricardian socialists,” forerunners of Karl Marx. The label is to some extent a misnomer, because these men, followers of Robert Owen, cared nothing for Ricardo except insofar as he sanctioned the labor theory of value. The notion that profit and rent constitute a deduction from values created by labor alone stems from The Wealth of Nations, not from Ricardo’s Principles. Indeed, if by a labor theory of value we mean a theory that holds that labor is the sole determinant of relative prices, Ricardo cannot be considered a proponent of the theory. It is true that he believed that the ratios in which goods exchange are quantitatively more influenced by relative labor costs than by, say, relative interest charges. It is also true that he held a cost theory of value which left out the influence of demand. But this is still a far cry from what the Ricardian socialists and Marx himself meant by the labor theory of value. It never occurred to Ricardo to deduce anything about the nature of profit from his theory of value, and it is precisely this that separates Ricardo from Marx. But however misleading the common impression that Ricardo was responsible for the genesis of British socialism, the appeal to Ricardo by socialist writers, particularly the tribute that Marx paid him, gave Ricardo a new audience at a time when his influence was in other respects beginning to wane.

Appraisal

It is revealing to compare Ricardo to Adam Smith, the founder of classical economics. As a rigorous theorist, Ricardo was obviously far ahead of Adam Smith. On the other hand, The Wealth of Nations contains more in the way of substantial generalizations on the workings of economic systems than does Ricardo’s Principles— more, perhaps, than any other treatise written in the nineteenth century, with the exception of Alfred Marshall’s magnum opus. If the problem of economics is the allocation of limited means among unlimited competing ends, as we are sometimes told, then Adam Smith contributed more to economics than did Ricardo; the only place where Ricardo addressed himself specifically to the allocation problem was in the chapter on foreign trade, but here, at any rate, he saw further and deeper than Adam Smith. If the problem of economics is growth and development—a common assertion nowadays—there is again more in Adam Smith than in Ricardo. But if economics is essentially an engine of analysis, a method of thinking rather than a body of concrete results, Ricardo literally invented the technique of economists. His gift for heroic abstractions produced one of the most impressive models, judged by scope and practical import, in the entire history of economic theory.

Ricardo’s style of thinking is exemplified by his treatment of taxation, which takes up more than one-third of the Principles of Political Economy and Taxation. The discussion is very little connected with the actual taxes prevailing in his time, with the technical problems of tax administration, with the crying need for fiscal reform; instead, it traces the broad economic consequences of taxes in general with respect to the accumulation of capital, the distribution of national income, and the price level. The tax chapters simply set forth the general implications of Ricardo’s theoretical scheme, and their value is solely that of demonstrating his superb logical powers.

As long as the corn laws remained in force, the issue of free trade gave significance to Ricardo’s doctrines. When repeal came, John Stuart Mill’s Principles of Political Economy, published two years later, brought new authority to the Ricardian system suitably amended. After 1870, however, most economists turned their backs on what they understood to be the Ricardian theory of value and agreed with William Stanley Jevons that Ricardo had “shunted the car of economic science to a wrong line” (1871). Marx’s praise did not enhance Ricardo’s reputation among academic economists. But the last decade of the nineteenth century saw a change in attitude, as a number of writers were suddenly struck by the idea that the old-fashioned Ricardian theory of rent was really a special case of a much more general theory. Ricardo had shown that the final dose of labor-and-capital on an intensively used rent-yielding piece of land adds nothing to rent but consists solely of wages and interest, rent being due to the superior productivity of the intramarginal units. Philip Henry Wicksteed, Knut Wicksell, and John Bates Clark realized that there is nothing unique about a no-rent margin; when land is the variable factor and labor-and-capital is the fixed factor, the margin will be a no-wage, no-interest margin. With that insight the general marginal productivity theory of distribution was born, and to Ricardo’s other accomplishments must be added that of having anticipated marginal analysis. In recent years concern over the problem of aggregate effective demand has caused many economists to agree with Keynes that “the complete domination of Ricardo’s [approach] for a period of a hundred years has been a disaster to the progress of economics” (Keynes [1933] 1956, p. 33). But this is a harsh judgment which supposes that but for Ricardo’s magisterial influence, economics would have addressed itself in the past to the macroeconomic problem of unemployment. Ricardo’s avowal of the famous “law of markets,” asserting a tendency toward full employment equilibrium, was poorly thought out and remained little more than a dogma. As a monetary theorist Ricardo was not even representative of the best work of his own day. Still, the law of comparative cost and the method of comparative static analysis have survived intact. And the central problem that Ricardo posed, namely, how the changes in the relative shares of land, labor, and capital are connected with the rate of capital accumulation, remains the abiding concern of modern economists. In that sense Ricardo is still with us.

Mark Blaug

[For the historical context of Ricardo’s work, see the biographies ofHume; Malthus; Smith, Adam; Torrens; West; for discussion of the subsequent development of his ideas, seeRent; Value, Labor Theory Of; and the biographies ofClark, John Bates; George; Jevons; Marx; Mill; Wicksell; Wicksteed.]

BIBLIOGRAPHY

Ashton, Thomas S.; and Sayers, R. S. (editors) 1953 Papers in English Monetary History. Oxford: Clarendon. → Discusses Ricardian monetary theory.

Biaujeaud, Huguette 1933 Essai sur la théorie Ricardienne de la valeur. Paris: Sirey.

Blaug, Mark 1958 Ricardian Economics: A Historical Study. Yale Studies in Economics, No. 8. New Haven: Yale Univ. Press. → The rise and fall of the school of Ricardo in the first half of the nineteenth century.

Blaug, Mark 1962 Economic Theory in Retrospect. Homewood, 111.: Irwin. → Chapter 4 is a treatment of Ricardo’s system in modern analytical terms. Also contains bibliographical references.

Franklin, Burt; and Legman, G. 1949 David Ricardo and Ricardian Theory: A Bibliographical Checklist. New York: Franklin. → Contains serious misprints, and the annotation is frequently misleading. It is, however, the only checklist available.

Hollander, Jacob H. 1910 David Ricardo: A Centenary Estimate. Baltimore: Johns Hopkins Press. → Still the best introduction to Ricardo.

Jevons, William S. (1871) 1957 The Theory of Political Economy. 5th ed. New York: Kelley Reprints.

Keynes, John M. (1933) 1956 Robert Malthus: The First of the Cambridge Economists. Pages 11–38 in John M. Keynes, Essays and Sketches in Biography. New York: Meridian. → A paperback edition was published in 1963 by Norton.

Ricardo, DavidWorks and Correspondence. Edited by Piero Sraffa. 10 vols. Cambridge Univ. Press, 1951–1955. → For Ricardo’s theory of value, see Sraffa’s introduction. Volume 1: On the Principles of Political Economy and Taxation. Volume 2: Notes on Malthus’s Principles of Political Economy. Volume 3: Pamphlets and Papers, 1809–1811. Volume 4: Pamphlets and Papers, 1815–1823. Volume 5: Speeches and Evidence. Volume 6: Letters, 1810–1815. Volume 7: Letters, 1816–1818. Volume 8: Letters, 1819-June 1821. Volume 9: Letters, July 1821–1823. Volume 10: Biographical Miscellany.

St. Clair, Oswald 1957 A Key to Ricardo. New York: Kelley Reprints; London: Routledge. → An excellent guide to “what Ricardo really said.” Virtually a compilation of Ricardo’s opinions.

Shoup, Carl S. (1950) 1960 Ricardo on Taxation: An Analysis of the Chapters on Taxation in David Ricardo’s Principles. New York: Columbia Univ. Press. → Ricardo’s views on public finance.

Viner, Jacob 1937 Studies in the Theory of International Trade. New York: Harper. → Discusses Ricardo’s contribution.

RICARDO, DAVID

David Ricardo (1772–1823) was an English stockbroker who, working at the beginning of the nineteenth century, emerged as a major economic thinker during the early years of the industrial revolution. He is often referred to as the founder of scientific economics, because he used mathematics and abstract examples in his writing. His view of economics was ultimately a pessimistic one. Ricardo saw European economy torn into warring groups. He believed that in the long run the hardworking industrialist was bound to lose and that the benefits of the Industrial Revolution would end up in the hands of the already wealthy class of aristocratic landowners.

David Ricardo was born in April of 1772 in London, the third son of a wealthy Dutch-Jewish businessman. Ricardo's early passion for scholarship was delayed when he began to work in his father's investment business at age 14. He had a close relationship with his father and excelled in his work. At age 19, he married Abigail Delvalle, a Quaker, and eventually he left the family business to begin on his own, building a fortune by speculating in stock investing and other entrepreneurial ventures. In his late thirties, he began to write and published his first two books, The High Price of Bullion and An Essay on the Influence of a Low Price of Corn on the Profits of Stock.

In 1814, at age 42, David was wealthy enough to retire from his investment business. He could now give his full attention to intellectual pursuits, and by 1817 he had established his reputation as a leading thinker in England. His books by no means made him a cultural celebrity, but economically powerful, thoughtful people regarded him as one of the most influential intellectuals of his era. His life for the next 20 years centered largely around his continuing intellectual activity. He sat in parliament from 1819 to 1823, however, where he brought his knowledge about trade issues and finance to the British House of Commons and informed political debate of his day; thus, his writing had a role in rebuilding the English banking system after England's war with France ended in 1815.

Ricardo's approach to economics was new. Before him, economic writing was more literary than scientifically precise. It was a kind of loose-knit story involving many anecdotes. Ricardo chose to write about economics in a concise way, by eliminating numerous examples and instead explaining his ideas about the economy by using simple, easy-to-understand abstract models. Pursuing economic theory as a science, he explored economics by using basic principles and deductive reasoning to work toward his conclusions.

David Ricardo's notion of how the economics world worked was regarded as simple and elegant. He broke society into three parts: capitalists, landlords, and workers. The workers and the industrial capitalists, he argued, were in an impossible situation over the long run. The profits of hard-working creators of industry were eaten-up by the higher wage demands and by the costs of hiring additional help as business expanded. Ricardo maintained that ordinary workers wasted their income when their lives improved financially. For Ricardo the ordinary worker did not invest his money but only produced additional children to create larger burdens for the entire society.

Ricardo claimed that the only people who really improved under capitalism were the aristocratic landowners, who simply raised and lowered rents as they pleased. Thus they would absorb the extra profits made by the workers laboring for the capitalist industrialists. Ricardo also claimed that landlords, who produced nothing, served no useful purpose.

Ricardo was gloomy about the long term prospects of capitalism. He envisioned industrialists and common laborers "in the same boat." They were both being exploited by aristocrats who owned the land and who charged rent, based on the amount of money circulating in the economy. A situation he found unjust. But Ricardo's dire prophecies never came to pass. Wealth earned from industry was growing faster than that generated by the traditional agricultural-based society. With the cooperation of the British government, the industrial capitalists of Ricardo's era were able to reduce the power of the landowners, who were never able to dominate society as they had in the past.

Ricardo's approach to writing about economics made it more of a science and far more accessible to common readers. His gloomy attitude about capitalism alerted many of his optimistic friends and caused them to question the economic future. Some scholars have written that Ricardo's observations on capitalism led indirectly to the birth of a variety of socialist and progressive movements, all concerned with economic pathways that were not crowded with tax agents and Ricardo's nemesis, the landlords. He died in 1823.

See also: Adam Smith, John Maynard Keynes

FURTHER READING

Barber, William J. A History of Economic Thought. New York: Penguin Books, 1967.

Drabble, Margaret. Oxford Companion to English Literature, 5th ed. New York: Oxford University Press, 1985.

Heilbroner, Robert. The Worldly Philosophers. New York: Simon and Schuster, 1953.

Keynes, John M. Essays in Biography. London: Mac-Millan Press, 1937.

Straffe, Piero, ed. David Ricardo, Works and Correspondence, vol. 4. Cambridge: Cambridge University Press, 1965.

David Ricardo

The English economist David Ricardo (1772-1823) was a founder of political economy. His economics armed reformers attacking the agricultural aristocracy's political, social, and economic privileges.

David Ricardo was born in London on April 19, 1772, the son of a Jewish merchant-banker émigré from Holland. Ricardo joined his father as a stockbroker at the age of 14. When he married a Quaker, his orthodox father cut him off. Ricardo became a Unitarian, and at 22, with a capital of £800 and support from the financial community, he became an independent stockbroker. At 42 he retired with a fortune of about £1 million and established himself as a landed proprietor.

Ricardo was an independent member of Parliament for the pocket borough of Portarlington from 1819 until his death. He supported a tax on capital to pay off the national debt; currency reform; abolition of the Corn Laws protecting British wheat; parliamentary, poor-law, legal, and military reform; a secret ballot; and Catholic emancipation; he also condemned political repression.

Ricardo's reputation rests upon On the Principles of Political Economy and Taxation (1817; rev. 3d ed. 1821), an analysis of the distribution of a fixed amount of wealth among three classes: the owner of land who receives rent, the owner of capital who earns profits, and the laborer who gets wages. Ricardo set out to "determine the laws which regulate this distribution" in relation to both the rate of capital growth and the yield of wheat per acre. Although the analysis is abstract, often ambiguous, and disorganized, seven related economic laws can be extracted.

First, prices are determined by the cost of production. Second, the value of any item is set by the quantity of labor used to produce it. In the revised edition of 1821, Ricardo suggested that value might also be influenced by the cost of production. A third law, a theory of rent, was based upon Malthus's prediction of increasing population. When population increases, more food is needed and less fertile land is planted. Rent is the difference in the price of wheat per acre between the most and least productive land. As population grows, rent increases at the expense of capital's profits and labor's wages. The interests of landlords were not only antithetical to the rest of the community, but landlords and capitalists were necessary enemies.

The fourth and fifth laws deal with the wages fund and the natural price of labor. These laws assumed that the price of labor, like other market prices, fluctuated with supply and demand; but at any given time there was a fixed supply of money for the payment of wages. This wages fund was the amount of capital in circulation. As capital increased, population grew, less fertile land was planted, rent increased, capital profits decreased, and wages dropped. Ricardo held that population will tend constantly to rise above the wages fund, especially in old countries like England, causing the working man's standard of living to fall. Disaster was arrested only by population reduction, essentially through infant mortality. Ricardo, like Thomas Malthus, never anticipated either population control or technological increase of food supplies. If wages fell below subsistence level, population decreased; when wages neither increased nor decreased the labor supply, they reached their "natural" or subsistence level. Popularizers of Ricardo's general model interpreted this to mean that most people were doomed inexorably to bare subsistence.

The sixth law argues the "diminishing returns" of profits, the earnings of the most useful class. As increasingly inferior land is cultivated, rent and food prices rise, and profits fall since the higher wages required for subsistence wages come out of the existing amount of circulating capital. The final law, the quantity theory of money, applies value theory to gold: the rise or fall in prices depends inversely upon the amount of money in circulation.

Ricardo's other important writings were The High Price of Bullion (1810); "An Essay on the Influence of a Low Price on Corn on the Profits of Stock" (1815); "Funding System" (1820), published posthumously in the Encyclopaedia Britannica: Supplement (1824); and the "Plan for the Establishment of a National Bank" (1824), also published posthumously. He died at Gatcombe Park, Gloucestershire, on Sept. 11, 1823.

Further Reading

The definitive edition of Ricardo's Works and Correspondence is edited by P. Sraffa with the collaboration of M. H. Dobb (10 vols., 1951-1955). A helpful guide through the intricacies and inconsistencies of the Ricardian system is Oswald St. Clair, A Key to Ricardo (1957). Mark Blaug, Ricardian Economics: A Historical Study (1958), deals with Ricardo within the general context of his time. A chapter on Ricardo in Robert Lekachman, A History of Economic Ideas (1959), provides a lucid, less technical discussion of Ricardo's ideas. □

RICARDO, DAVID

RICARDO, DAVID (1772–1823), British economist. He was born in London into a Sephardi family which in 1760 had immigrated from Holland. He was sent to Holland for a traditional Jewish education. After his return to London in 1786, Ricardo joined his father, Abraham Ricardo (d. 1812), a successful member of the stock exchange. In 1793 he married the daughter of a Quaker, broke with his family and left the faith, although he persistently advocated religious liberties and the removal of Jewish disabilities. Having become a member of the stock exchange on his own, Ricardo showed unusual ability and soon achieved financial independence. In 1814 he retired from business, turned to the study of economics, and became one of the founding fathers of modern economics. His interest in this field dated back to 1799 when he read Adam Smith's Wealth of Nations. His publications were widely discussed and in 1819 Ricardo entered parliament, and took an active interest in current affairs. Ricardo's major contributions to economics were embodied in his Principles of Political Economy and Taxation (London, 1817).

Ricardo was a rigorous theorist, and much of today's knowledge about currency, taxation, and international trade is based on Ricardo's analysis. His monetary views foreshadowed the 1844 Bank Act and laid the foundations of an "economical and secure currency" which has remained the major objective of modern monetary policy. In the field of fiscal policy he expounded the broad economic consequences of taxes on capital accumulation, the distribution of national income, and price levels. His theory of international trade and his principles of the comparative advantage provided the scientific basis for the rule of free trade. Although critics differ on the validity of Ricardo's doctrines, there is agreement on his permanent merits as a methodologist. Ricardo introduced the first abstract models and established the concept of political economics as a body of principles dealing with material resources. His lasting merit is the definite transformation of economic speculation into a scientific discipline. His collected works and correspondence, edited by the great economist Piero *Sraffa and by M.H. Dobb, were published in 1951–73. With Adam Smith, Thomas Malthus, and Karl Marx, David Ricardo is regarded as among the seminal figures in Britain who, between the late 18^th and mid-19^th centuries, invented modern economics. Ricardo died at the age of only 51, leaving an enormous fortune of £500,000 that he had earned as a stockbroker, and much land. Many among Ricardo's family also had notable careers. His sister sarah ricardo porter (1790–1862) was one of the first Englishwomen to write on education. His nephew john lewis ricardo (1812–1862) was a member of Parliament and a key promoter of the electric telegraph in the 1840s. His collateral descendants include the architect halsey ralph ricardo (1954–1928) and his son, the mechanical engineer sir harry ralph ricardo (1885–1974), who was a crucial figure in the development of the tank for the British army in World War i and who served as president of the Institution of Mechanical Engineers in 1944–45. He wrote an autobiography, Memories and Machines (1968).

bibliography:

P.H. Emden, Jews of Britain (1943), 47–59, index; J.H. Hollander, David Ricardo, a Centenary Estimate (1910); M. Blaug, Ricardian Economics (1958). add. bibliography: odnb online; T. Peach, Interpreting Ricardo (1993).

[Joachim O. Ronall /

William D. Rubinstein 2^nd ed.)]