Portrait of David Ricardo by Thomas Phillips

Ricardian economics are the

economic theories Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes w ...

David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist. He was one of the most influential of the classical economists along with Thomas Malthus, Adam Smith and James Mill. Ricardo was also a politician, and a ...

, an English

political economist Political economy is the study of how economic systems (e.g. markets and national economies) and political systems (e.g. law, institutions, government) are linked. Widely studied phenomena within the discipline are systems such as labour m ...

born in 1772 who made a fortune as a

stockbroker A stockbroker is a regulated broker, broker-dealer, or registered investment adviser (in the United States) who may provide financial advisory and investment management services and execute transactions such as the purchase or sale of stock ...

and loan broker.Henderson 826Fusfeld 325 At the age of 27, he read '' An Inquiry into the Nature and Causes of Wealth of Nations'' by

Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——� ...

and was energized by the theories of economics. His main economic ideas are contained in ''

On the Principles of Political Economy and Taxation '' the Principles of Political Economy and Taxation'' (19 April 1817) is a book by David Ricardo on economics. The book concludes that land rent grows as population increases. It also presents the theory of comparative advantage, the theory tha ...

'' (1817). This set out a series of theories which would later become theoretical underpinnings of both Marx's ''

Das Kapital ''Das Kapital'', also known as ''Capital: A Critique of Political Economy'' or sometimes simply ''Capital'' (german: Das Kapital. Kritik der politischen Ökonomie, link=no, ; 1867–1883), is a foundational theoretical text in materialist phi ...

'' and Marshallian economics, including the theory of

economic rent In economics, economic rent is any payment (in the context of a market transaction) to the owner of a factor of production in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment ...

, the labour theory of value and above all the theory of

comparative advantage In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. C ...

. Ricardo wrote his first economic article ten years after reading Adam Smith and ultimately, the "

bullion Bullion is non-ferrous metal that has been refined to a high standard of elemental purity. The term is ordinarily applied to bulk metal used in the production of coins and especially to precious metals such as gold and silver. It comes fro ...

controversy" gave him fame in the economic community for his theory on

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

in 19th-century England. This theory became known as

monetarism Monetarism is a school of thought in monetary economics that emphasizes the role of governments in controlling the amount of money in circulation. Monetarist theory asserts that variations in the money supply have major influences on nati ...

, the theory that excess

currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general ...

leads to inflation. He also played a part in the emergence of

classical economics Classical economics, classical political economy, or Smithian economics is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam S ...

, which meant he fought for

free trade Free trade is a trade policy that does not restrict imports or exports. It can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold econ ...

and

free competition Free may refer to: Concept * Freedom, having the ability to do something, without having to obey anyone/anything * Freethought, a position that beliefs should be formed only on the basis of logic, reason, and empiricism * Emancipate, to procure ...

without government interference by enforcing laws or restrictions.

The law of diminishing returns

Another idea Ricardo is known for in his ''Essay on the Influence of a Low Price of Corn on the Profits of Stock'' is the Law of Diminishing Returns (Ricardo, Economic Essays, Henderson 826). The law of diminishing returns states that if you add more units to one of the factors of production and keep the rest constant, the quantity or output created by the extra units will eventually get smaller to a point where overall output will not rise ("diminishing returns"). For example, consider a simple farm that has two inputs: labor and land. Suppose the farm has 100 hectares of land and one worker (the labor input). This land-labor combination produces some level of output. If the amount of land is increased, and the amount of labor stays the same, the worker will have to give less attention to each acre of land (provided that nothing else changes). So, output may increase, though the ''additional'' (marginal) output from adding an acre of land may decrease. If more and more land is added that must be tended by this one worker, there will eventually be so much land that output starts to decrease as the worker becomes overwhelmed (that is, less labor time, on average, is devoted to each acre). This is the typical stylized result of increasing one productive input while holding the others constant (versus increasing all inputs, generating

economies of scale In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...

Comparative advantage

Ricardo was opposed to

tariff A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and p ...

s and other restrictions on

international trade International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. (see: World economy) In most countries, such trade represents a significa ...

. Ricardo devised an idea that is well known as the

theory of comparative advantage In an economic model, agents have a comparative advantage over others in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade. Com ...

(Henderson 827, Fesfeld 325). According to the Washington Council on International Trade, comparative advantage is the ability to produce a good at a lower cost, relative to other

good In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice between possible actions. Good is generally considered to be the opposite of evil and is of interest in the study of ethics, morality, ph ...

s, compared to another country. In the ''Principles of Economics'', Ricardo states that comparative advantage is a specialization technique used to create more efficient production (52) and describes

opportunity cost In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for example ...

between producers (53). With

perfect competition In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In theoretical models whe ...

and undistorted markets, countries tend to export goods in which they have a comparative advantage. For example, we should think of two countries that both make cards and pencils and use the same amount of time to make one unit of items (see table). Country one can make 4 pencils if they specialize just in pencils at the expense of one card, but this country can also make ¼ of a card at the expense of one pencil. The same logic goes for country two: if country two makes only pencils, it will make 2 pencils at the expense of 1 card. If country two specializes only in cards, it will make ½ of a card at the expense of a pencil. For this example, country one has a comparative advantage in pencils over country two (4 pencils to 2 pencils), whereas, country two has a comparative advantage in cards over country one (½ of a card to ¼ of a card). In Ricardo's idea of comparative advantage, these two countries should specialize in what they do best. According to ''The Fortune Encyclopedia of Economics'', Ricardo's idea of comparative advantage is "the main basis for most economists' belief in free trade today" (827).

Contemporary use

Though David Ricardo was of the 19th century, many people use his work in everyday economics. Ricardo's theory on

consisted mostly of an agricultural model featuring farmers and landowners. Since highly productive land was desired for more crops and the market would pay the same price for crops grown on both favorable and unfavorable land, farmers were eager to pay more for highly productive land to grow more crops for the extra money (Henderson 827). Ricardo also had another influential theory:

minimum wage A minimum wage is the lowest remuneration that employers can legally pay their employees—the price floor below which employees may not sell their labor. Most countries had introduced minimum wage legislation by the end of the 20th century. B ...

s. He knew that once the population rose more greatly, the demand for jobs would increase, making the

wage A wage is payment made by an employer to an employee for work done in a specific period of time. Some examples of wage payments include compensatory payments such as ''minimum wage'', '' prevailing wage'', and ''yearly bonuses,'' and remune ...

s decrease to a level that would not support people because many were willing to take the low-paying jobs to survive (St. Clair 9, Fusfeld 325). This observation of minimum wage work is especially relevant today when looking at the controversy with the enforcement of a minimum wage law. In Ricardo's book, ''

'', he is saying that the jobs we give more value to are paid better than those we do not value as much (11-2). To Ricardo, value had much to do with the cost of production, which included wages and

profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory inter ...

(St. Clair 27) and how much you paid a worker affected the price you put on the item. He also believed the value of a product was related to the quality of labor necessary for the production (Principles of Political 5). An example of this would be paying a slightly higher price for an item that is handmade, rather than being manufactured. Though this is true, Ricardo also thought the labor or machine itself should be considered when selling an item and that a little of every item should be priced to include this factor of labor (St. Claire 24). Ricardo addressed many of the issues we face today in our economic world, such as minimum wage and rent (Fusfeld 325). These issues are perhaps as important today as they were in the 19th century, which is why David Ricardo's economic theories are still an important part of modern economics.

Notes

References

* Adam Smith". Def. 1. ''WordNet Search''. Princeton U. 7 Nov. 2006 . * * Bhagwati, Jagdish N., Arvind Panagariya, and T. N. Srinivasin. ''Lectures on International Trade''. Cambridge: MIT P, 1998. * Caravale, Giovanni. ''Legacy of Ricardo''. New York: B. Blackwell, 1985. * "Classical Economics." Def. 1. ''Online Learning Center''. 2003. McGraw-Hill Higher Education. 4 Dec. 2006 . * "Comparative Advantage." Def. 1. ''Washington Council on International Trade''. 2001. International Trade Education Foundation. 14 Nov. 2006 . * "David Ricardo." Def. 1. ''WordNet Search''. Princeton U. 7 Nov. 2006 . * DeLaval International AB. "Basic Economic Principle." ''DeLaval''. 9 June 2006. DeLaval International AB. 27 Nov. 2006 . * "Diminishing Returns." Def. 1. ''Encarta''. 2006. MSN. 27 Nov. 2006 . * * Fonseca, Gonçalo L. "Piero Sraffa, 1898-1983." ''The History of Economic Thought Website''. 14 Nov. 2006 . * "Freer Trade." Def. 1. ''Washington Council on Economic Trade''. 2001. International Trade Education Foundation. 4 Dec. 2006 . * Fusfeld, Daniel R. "Ricardo, David." ''The World Book Encyclopedia''. 1990 ed. 1990. * * Henderson, David R. "David Ricardo." The Fortune Encyclopedia of Economics. 1993. * Jamelske, Eric M. Lecture. University of Wisconsin-Eau Claire Economics Department. Schneider Social Sciences Building. Fall 2006. * * Mankiw, N. Gregory. "Comparative Advantage: The Driving Force of Specialization." ''Principles of Economics''. 4th ed. * * Peach, Terry. ''Interpreting Ricardo''. New York: Cambridge UP, 1993. * "Perfect Competition." Def. 1. ''On-Line Glossary''. U of North Carolina-Charlotte. 3 Dec. 2006 . * “Ricardian Model.” Def. 1. ''Deardorff's Glossary of International Economics''. 2006. Michigan U-Ann Arbor. 14 Nov. 2006 . * Ricardo, David. ''Economic Essays: Edited with Introductory Essay and Notes by E. C. K. Gonner''. New York: A. M. Kelley, 1966. * Ricardo, David. ''The Principles of Political Economy and Taxation''. London: Dent, 1911. * Ricardo, David. ''Works and Correspondence. Cambridge'': UP for the Royal Economic Society, 1951. * * * * Weatherall, David. ''David Ricardo: A Biography''. The Hague: Martinus Nijhoff, 1976. * St. Clair, Oswald. ''A Key to Ricardo''. New York: Augustus M. Kelly, 1965. * "Tariff." Def. 1. ''Washington Council on International Trade''. 2001. International Trade Education Foundation. 4 Dec. 2006 . * {{Schools of economic thought Classical economics International trade theory

The law of diminishing returns

Comparative advantage

Contemporary use

See also

Notes

References