2. David Ricardo(1772-1823)
• Biography
– Son of a Jewish immigrant stockbroker
– 3rd of 17 children
– Read Wealth of Nation in 1799
– Encouraged by James Mill
– Principles of Political Economy 1817
– Member of Parliament 1819-1823
• Ricardian System differs from Smith’s in method and
analysis
• Deductive method— “strong case”
• Importance of diminishing returns in agriculture
3. The Ricardian System
• Labour theory of exchange value (relative
prices)
• Theory of rent and diminishing returns in
agriculture
• Theory of wages and Malthusian population
theory
• These three combined in the “Corn Model” of
the growth process
• Related themes--international trade,
machinery, taxation and banking policy
4. Social background of Ricardian
Theories:
• Ricardo and Malthus are known as pessimists in
the history of economic thought.
• During the life of Ricardo , industrial revolution
had already take place with all its attendant evil.
• There was factory system and growth of
population and poverty of working masses
increases.
• There was increase in price of grains, caused by
depreciation of money and increased urban
population.
5. • Lands of inferior quality were brought into
cultivation and lands rent were increases.
• The economy of the day were known as
capital economy because use of capital were
increases.
• The rising prices for food made ‘corn laws’ a
tropic of great controversy.
• The landowner were interested in the
continual of corn law, because they get high
prices of corn and consequently high prices of
rent.
6. • The Ricardian system:
• The salient features of ricardian system are as
follows
1)First of all , Ricardo had an analytical genus. He
was deductive thinker. He did not give statistical
or historical facts to support his conclusion.
2)He was firm believer of Laissez fair.
3)He consider money as evil. Ricardo believe on the
quantity theory of money in which the level of
prices in the economy is proportional to
quantity of money in the economy.
4)He incorporate the pessimistic views of Malthus
with respect to population and food supply.
7. • 5) Ricardian analysis of rent based on the law
of diminishing return.
• On the scope of political economy:
• Ricardo considered political Economy as “an
inquiry into laws which determine the division
of the produced of the industry among the
classes who occur in its formation.”
• In his preface (introduction) to his ‘principles of
political economy and taxation’ Ricardo stated
that the produce of the earth was divided into
rent , profit and wage and that ‘to determine
the laws which regulate this distribution, is the
principle problem in the political economy’
8. • Value:
• Ricardo theory of value is essentially a labour
theory of value.
• According to Ricardo, the value of
commodities depend upon two things,
1)Scarcity
2)The quantity of labour required to obtain
them.
• Ricardo agree with Smith that value of most
things depend on the amount of labour
required to produce them.
• But there are another group of things, whose
supply cannot be increased by labour.
9. • Smith applied labour theory of value to primitive
society, Ricardo applied it to the capitalist society as
well.
• Ricardo has made a distinction between the natural
price and market price.
• Market price may deviate from natural price
because of temporary fluctuations of supply and
demand.
• If market price rises above the normal price, profits
will rise and more capital will be used to produce
the commodity and vice versa.
• In other words short run price depend upon the
supply and demand and long run price depend on
the cost of production.
10. • And the relative cost of production of two
commodities are proportional to the relative amount
of labour required to produce it.
• Ricardo theory of Rent
• In the beginning of 19th century between 1814 and
1816,there arose a political debate in England which
led to so many theoretical discussions in the economic
history of Europe
• In fact in the period of 1711 to 1794 the prices of corn
(a general name of all kinds of grains in UK) remain very
stable. But during the period of 1795 to 1800 there was
three fold increases in the prices of corn, and it went on
increases in the coming two decades. As the corn was
basic food items, the increase in the prices create
trouble to the labors.
11. • This creates political instability, thousand of people
die due to starvation, and the employers
unwillingly increase the wages as the prices of corn
increases.
• Among the economist of that time there was a
group which thought that prices of corn went up
due to collusive behavior of landlord so they could
earned higher rent.
• At that time most of the corn production made
with the help of land avail on rent
• The other group headed by David Ricardo who
wrote his book, “Principle of Political economy and
taxation”, in 1827 was quite opposite to that of
above group.
12. • According to Ricardo, the corn prices increases
due to Napoleonic war in the Europe from
1804 to 1815. These wars created the
shortage of corn in Europe leading to increase
its prices. This made more profitable to
produce corns. As the result the demand for
the land increases pushing the use of piece of
land, so the price or rent of land increases.
• On the other hand if prices decrease, it will be
less profitable to produce corn. Accordingly
the rent of the land and demand for the land
decreases.
13. • Thus according to Ricardo rent is determine
by prices, not the prices of corn which is
determined by rent .
• Ricardo and his associates have had a long
struggle to abolish English corn law and
(tariff) 1815 with the purpose of importing
more quantities of corn, in the country so that
their prices will decreases and the supply of
corn increases.
• Land of inferior quality will be brought into
cultivation,rent will there fore rise.
14. • Wages will also rise to give labour their
minimum of subsistence. And profit will fall.
• Ricardo said that rent did not enter into price.
• This had serious policy implications. It implied
that even if high tax was imposed on rent , it
would not raise the price of corn.
15. • Implication of the Ricardo theory of Rent:
• The Physiocrats, Smith and Ricardo considered
rent as surplus.
• But there is one difference While the
Physiocrats and Smith considered rent as gift of
the nature,
• Smith believed on the harmony of interest
between landlord and rest of society, Ricardo
was conflict of interest between the land lord
and the rest of society.
• As population increases the increase demand
for food will rise its price.
16. • Wages:
• Wages are the price of labour. Like all other
things , labour has its natural price and market
price.
• The market price of labour depend on the
supply and demand.
• If there is abundant supply of labour , wages
will be low and vise versa.
• The natural price of the labour depend upon
the prices of necessities of life.
17. • If the prices of food and other necessaries
rise, wage will rise and when the price of food
fall, wage fall.
• Ricardo believed that in the long run , both
the natural price of labour and money wage
tend to rise because of the increase in the cost
of producing food for increasing population.
• Ricardo idea that in the long run the wages of
the workers will enable them to live only at
the subsistence level, is sometime referred as
‘Iron law of wages’.
18. • When the market price of labour rises above the
natural price, there will be expansion in the
families of worker.
• As population rises wages will come down to
the natural level.
• When the market price of labour below the
natural price, poverty and misery will reduce the
working population and wages will rise.
• Thus in the long run labour will receive the
wages at minimum subsistence level.
19. • Ricardo has not given a clear cut theory of
profit but he was emphatic about one thing.
• He firmly believed wages increased at the
expense of profits.
• In other words, whenever there was an
increasing in wages, profits would fall.
• Thus according to him, wage and profit are
opposed to each other
20. • Money:
• On the question of money, we should
remember that Ricardo was interested in the
urgent currency problems of this day.
• Ricardo wrote on currency problems at the
time when the market price of gold was
increasing because of the introduction of
irredeemable (inconvertible ) paper standard
by the bank of England.
• He maintained that printing of bank notes
was the main cause of rising prices of gold
and other commodities.
21. • Ricardo advocates that Bank of England should
restore gold standard. He believed the gold
standard by acting as a check on the over-issue of
currency would curb inflation.
• He advocated the economy in the use of gold and
silver. Ricardo’ currency reforms was adopted by
the parliament in 1819 and gold standard was
introduced in 1821.
• And the gold standard remained the dominant
monetary standard in Britain and many other
countries for over a century, except during the
major wars.
22. The theory of Comparative advantage.
• It is the major contribution of Ricardo to the
theory of foreign trade.
• Smith advocated free competition in foreign
trade and his theory of trade was based on
the difference of absolute cost.
• According to Smith every country would buy
in the cheapest market.
23. • But Ricardo develops the theory of comparative
cost.
• According to him ‘trade might take place of the
advantages of both trading partner’ even one of
them was more efficient in the production of both
commodities produced.
• Ricardo advocate that the more efficient country
should export those commodities whose
comparative cost is lowest and it should import
those commodities whose comparative cost is
highest.
24. • The theory of comparative cost was the theoretical
basis on which Ricardo advocated free trade policy.
• We can illustrate the theory of comparative cost by the
famous example given by Ricardo himself.
• Let us assume that Portugal is more efficient than
England in both lines of production. Portugal can
produce a certain quantity of wine by the labour of 80
men and a certain quantity of cloth by labour of 90
men. But in England, the production of the same
quantities of wine and cloth takes, respectively, the
labour of 120 and 100 men.
Portugal England
Wine 80 120
Cloth 90 100
25. • Under these circumstances it would be of
mutual advantages for both countries if
Portugal specialized in wine and imported
cloth, while England specialized in cloth and
imported wine.
