David Ricardo: The History of Economics

Introduction

He is one of the greatest classical economist next to adam smith at times was born in England. He started his career as a stock trader and later turned as an economist having met with Adam Smith's 'wealth of nations' book. He used deductive method and is more concerned about long term economic growth. The famous article of Ricardo is The high price of bullion a proof of the depreciation of bank notes(1810) in which he stated how the printing of bank notes has increased the prices of gold in the market and an essay on the implementation of corn laws (1815) where he opposed the corn laws and led to the foundation of theory of comparative advantage and free trade.

Contribution Of Ricardo To Classical Economics:

He wrote the book 'on the political economy and taxation' published in 1817. Which presents various theories of which the most famous theories of Ricardo are the theory of rent, theory of wages and profit, theory of value, theory of comparative advantage and theory of distribution.

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Theory of Rent

According to him , rent is the portion of produce that is paid by the farmer to the land owner for using the original and indestructible form of the soil. This theory is based on the law of diminishing returns which he borrowed from turgo. He assumed that the production of a particular piece of land is constant and it couldn't be increased with the addition of extra labour. This theory is explained by him with the help of colonization , where people at first has the freedom of selection of land and they would choose the most fertile land where it has no rent and later as the time pass the population get increased and in order to supply food to the population the land which is second best is brought to cultivation which yields less but the market price of the food from both the lands is same and thus surplus produced by the first land is called as rent and the second grade has no rent.

This trend continues until the last fertile land is brought into cultivation and the last piece of land has no rent as the income obtained equals the capital costs and labour wages.

Theory of Value

As of smith he to recognised two forms of value, they are value in use and value in exchange. Ricardo described that the value of commodity is dependent upon two factors, those are scarcity and amount of labour. He assumed that mostly the value of products is proportional to the amount of labour involved in producing the product. But he also mentioned that the value of exchange of non reproducible products is depended upon is scarcity. As mostly Ricardo considered labour as the pioneer in the value of product, It is also referred to labour theory of value. This theory laid the foundation for marx on how capitalist exploited the labour.

Theory of Wages and Profit

Similar to the goods labour is also sold in the market and Ricardo considered that the labour wages(price) had natural price and market price. Where he said that natural price is the wage given to the labour for their subsistence i.e for their family survival and for their perpetuation, which the capitalists thought needed for the continuous production of products and market price is the fluctuation in the price either due to the demand of the labour or else due to the change in the prices of basic needs. He described that when the market price is high then the livelihood of the labour would be improved and when the price drops down to the natural wage rate it would be difficult for the labour to afford a good quality of life.he also mentioned that as time passes the natural wage rate of the labour increases but the market price of the labour decreases as the population increases and the wages are sufficient only for their subsistence.

In his theory of profit , it mentions the inverse relation between the profits and wages. He states that as the wages increase their will be decline in the profit level and the owners would oppose the interests of the labour. So that they could maintain higher profit margin.

Theory of Comparative Advantage:

Unlike adam smith Ricardo emphasised on comparative cost advantage rather than absolute cost advantage. He assumed that labour is the major factor of production and the trade between the two countries is of barter system with homogeneous labour. He said that the countries where the trading takes place they should specialise in the commodity where it has least disadvantage of cost of production even when one country is superior in producing the two goods than the least developed one and thus the least developed country gets developed in the commodity that it is exporting over time. This theory has led to the concept of free trade. This has been explained by him in his book with the example of the trade between England and Portugal by establishing the relation between the wine and the cloth exchange benefit the two countries.

Theory of distribution: He is the first to make a systemic attempt on how the national income is distributed in the country and he also mentioned on how the income is distribution of income happens in a institution and how the capitalists invest their profit in producing the goods in order to obtain higher profits.

Criticism:

Some of the critisms of his theories are as follows: He mainly emphasised on the labour as major factor in value determination and has neglected the demand in the market In the rent theory he considered the properties of soil are unchanged which is wrong as the fertility or productivity of soil changes as time passes. He hasn't considered the role of technology in production.