Portrait of David Ricardo by Thomas Phillips

Ricardian economics are the

economic theories Economics () is a behavioral 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 analys ...

David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, politician, and member of Parliament. He is recognized as one of the most influential classical economists, alongside figures such as Thomas Malthus, Ada ...

, an English political economist born in 1772 who made a fortune as a

stockbroker A stockbroker is an individual or company that buys and sells stocks and other investments for a financial market participant in return for a commission, markup, or fee. In most countries they are regulated as a broker or broker-dealer and ...

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 (baptised 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the field of political economy and key figure during the Scottish Enlightenment. Seen by some as the "father of economics"——— or ...

and was energised by the theories of economics. His main economic ideas are contained in '' On the Principles of Political Economy and Taxation'' (1817). This set out a series of theories which would later become theoretical underpinnings of both Marx's ''

Das Kapital ''Capital: A Critique of Political Economy'' (), also known as ''Capital'' or (), is the most significant work by Karl Marx and the cornerstone of Marxian economics, published in three volumes in 1867, 1885, and 1894. The culmination of his ...

'' and Marshallian economics, including the theory of

economic rent In economics, economic rent is any payment to the owner of a factor of production in excess of the costs needed to bring that factor into production. In classical economics, economic rent is any payment made (including imputed value) or bene ...

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

comparative advantage Comparative advantage in an economic model is the advantage over others in producing a particular Goods (economics), good. A good can be produced at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior t ...

. 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 from ...

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

inflation In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...

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

monetarism Monetarism is a school of thought in monetary economics that emphasizes the role of policy-makers in controlling the amount of money in circulation. It gained prominence in the 1970s, but was mostly abandoned as a direct guidance to monetar ...

, the theory that excess

currency A currency 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 definition is that a currency is a ''system of money'' in common use within a specific envi ...

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

classical economics Classical economics, also known as the classical school of economics, or classical political economy, is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. It includ ...

, which meant he fought for

free trade Free trade is a trade policy that does not restrict imports or exports. In government, free trade is predominantly advocated by political parties that hold Economic liberalism, economically liberal positions, while economic nationalist politica ...

and

free competition In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any ot ...

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 Productivity, output produced per unit of cost (production cost). A decrease in ...

Comparative advantage

Ricardo was opposed to

tariff A tariff or import tax is a duty (tax), duty imposed by a national Government, government, customs territory, or supranational union on imports of goods and is paid by the importer. Exceptionally, an export tax may be levied on exports of goods ...

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 significan ...

. Ricardo devised an idea that is well known as the theory of comparative advantage (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. The specific meaning and etymology of the term and its ...

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 choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, ...

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 Economic model, theoret ...

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. List of countries by minimum wage, Most countries had introduced minimum wage legislation 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 (human activity), work done in a specific period of time. Some examples of wage payments include wiktionary:compensatory, compensatory payments such as ''minimum wage'', ''prevailin ...

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, '' On the Principles of Political Economy and Taxation'', 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 . *

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