David Ricardo: Theory of Free International Trade Economic Insights, Volume , Number Dallas Fed

Yüklə 69,39 Kb.

ölçüsü69,39 Kb.



This helped to cement in the pub-

lic’s mind the idea that Ricardo was an

economist of some standing. That sta-

tus brought him into contact with other

famous political economists of his time,

notably James Mill and Thomas Robert

Malthus. Mill became Ricardo’s mentor,

coaching him and inspiring him to write

more in their shared field.

In 1814, Ricardo retired from busi-

ness life and bought an estate in Glou-

cestershire. A year later, he published

his next major work in economics,

Essay on the Influence of a Low Price of

Corn on the Profits of Stock. In that

work, Ricardo laid out what was to

become a key idea in neoclassical eco-

David Ricardo was born in London

in 1772, one of 17 children. His parents

were Sephardic Jews who had emi-

grated to England. His father, Abraham,

was a successful stockbroker. Ricardo’s

business career started when he began

working for his father at age 14, but at

21 he married a Quaker, which created

a family rift that sent Ricardo into the

world completely on his own. He none-

theless prospered as a stockbroker and

left a vast estate at his death.

Having no money problems,

Ricardo could afford to spend a great

deal of time in intellectual pursuits, and

he became interested in many subjects.

Besides political economy, which he

took up after reading Adam Smith’s

Wealth of Nations in 1799, he also stud-

ied mathematics, mineralogy, chemistry

and geology. His career as an active

political economist lasted but 14 years.


Ricardo’s first major work in the

field of economics, The High Price of

Bullion, a Proof of the Depreciation of

Bank Notes, was published in 1810.

This pamphlet became very influential,

making Ricardo’s name familiar to those

in government who sought economic

advice. A parliamentary inquiry into the

high bullion price may have been the

direct result of the pamphlet’s publica-

tion, but that’s speculative. In any case,

the government report’s conclusion —

that the inflation then occurring in

England was the result of too many

paper banknotes being created — was

Ricardo’s own claim in his pamphlet. 



David Ricardo

Theory of Free International Trade

Few ideas have been as widely accepted

by economists and as roundly rejected by

many other people as the doctrine of free

international trade. Economists base their

acceptance of the mutual benefits from such

trade on a concept called comparative

advantage. The theory is most closely associ-

ated with the writings of the great English clas-

sical school economist David Ricardo.

Although his career in the field of political

economy was brief, Ricardo became one 

of the most influential — and financially 

successful—practitioners the discipline has

ever known.

Today, world trade agreements are

under increasing attack. Many people are

deeply concerned about such issues as out-

sourcing and the physical location—and

relocation—of firms doing business across

national borders. In light of these develop-

ments, we offer this latest Economic Insights

on the life and ideas of one of free trade’s most

ardent theoretical defenders. Anyone inter-

ested in this issue should become familiar with

Ricardo’s work. We hope this short piece pro-

vides a useful starting point.

Bob McTeer


Federal Reserve Bank of Dallas

David Ricardo





nomics: the so-called law of diminish-

ing returns as it applied to labor and

capital. Generally, as it applies to culti-

vation of crops, this law states that

increasing the quantities of inputs will

increase total production up to a point,

but then output must decline, given

that the land used is fixed in size.

Although increasing production is pos-

sible, and perhaps common at first, at

some point the marginal returns to

additional inputs must decline, fol-

lowed by their average returns and,

thus, total output must decline as well. 

Ricardo’s purpose in exploring the

issue of land rents was British legisla-

tion called the Corn Laws. Passed in

1815, these laws forbade the importa-

tion into England of food grown else-

where and sought to maintain the 

rising prices for British agricultural

products that had occurred during the

Napoleonic wars, when the French navy

had embargoed British ports. Facing

the loss of food imports, Britain had to

use more of its own land to feed its

population. This caused crop prices,

and hence, land rents to rise at rapid

rates during the war period. The pro-

tectionist Corn Laws were an attempt to

maintain the agricultural status quo after

Napoleon’s defeat and a return to peace-

ful conditions. 

Ricardo, himself a landowner who

was profiting from the rising rents, nev-

ertheless argued that the Corn Laws

should not be enacted and, after they

were, continued to argue strenuously

for their repeal. Beyond that, the ob-

served rent increases suggested to Ri-

cardo a general theory of land rent.

The reason rent exists, he argued, was

that as more and more land of dimin-

ishing fertility was applied to growing

food, the better lands commanded a

premium. This was an argument for

rent on the extensive margin, that is, as

more land was cultivated. But Ricardo

also argued for rent on the intensive

margin, that is, where similar lands

experienced different diminishing returns

to capital and labor. In Ricardo’s view,

the Corn Laws generated rents both ex-

Under a system of perfectly free com-

merce, each country naturally devotes its

capital and labour to such employments 

as are most beneficial to each. This pursuit

of individual advantage is admirably con-

nected with the universal good of the

whole. By stimulating industry, by reward-

ing ingenuity, and by using most effica-

ciously the peculiar powers bestowed 

by nature, it distributes labour most effec-

tively and most economically: while, by in-

creasing the general mass of productions,

it diffuses general benefit, and binds to-

gether by one common tie of interest and

intercourse, the universal society of

nations throughout the civilized world. It is

this principle which determines that wine

shall be made in France and Portugal, that

corn shall be grown in America and Poland,

and that hardware and other goods shall be

manufactured in England.

In one and the same country, profits

are, generally speaking, always on the

same level; or differ only as the employ-

ment of capital may be more or less secure

and agreeable. It is not so between differ-

ent countries. If the profits of capital em-

ployed in Yorkshire should exceed those of

capital employed in London, capital would

speedily move from London to Yorkshire,

and an equality of profits would be ef-

fected; but if in consequence of the dimin-

ished rate of production in the lands of

England, from the increase of capital and

population, wages should rise, and profits

fall, it would not follow that capital and

population would necessarily move from

England to Holland, or Spain, or Russia,

where profits might be higher. 


— On the Principles of Political Economy

and Taxation (Cambridge, UK: 

Cambridge University Press, 1983),

133 – 34

The Beneficent Effects of 

Free Trade and National

Profit Equalization

There are no taxes which have not a

tendency to lessen the power to accumu-

late.  All taxes must either fall on capital or

revenue. If they encroach on capital, they

must proportionably diminish that fund by

whose extent the extent of the productive

industry of the country must always be

regulated; and if they fall on revenue, they

must either lessen accumulation, or force

the contributors to save the amount of the

tax, by making a corresponding diminution

of their former unproductive consumption

of the necessaries and luxuries of life.

Some taxes will produce these effects in a

much greater degree than others; but the

great evil of taxation is to be found, not so

much in any selection of its objects, as in

the general amount of its effects taken col-


Taxes are not necessarily taxes on

capital because they are laid on capital; nor

on income because they are laid on in-

come…. The desire which every man has 

to keep his station in life, and to maintain

his wealth at the height which it has once

attained, occasions most taxes, whether

laid on capital or on income, to be paid 

from income; and therefore as taxation pro-

ceeds, or as government increases its

expenditure, the annual enjoyments of 

the people must be diminished, unless they

are enabled proportionally to increase 

their capitals and income. It should be the

policy of governments to encourage a dis-

position to do this in the people, and never

to lay such taxes as will inevitably fall on

capital; since by so doing, they impair the

funds for the maintenance of labour, and

thereby diminish the future production of

the country. 


— On the Principles of Political Economy

and Taxation, 152 – 53

Taxation Impedes Growth, 

and Its Incidence Falls 

Not Necessarily Where 

the Law Says




One of the ideas for which Ricardo

is most remembered is the theory of

comparative advantage. Ricardo demon-

strated that for two nations without

input factor mobility, specialization and

trade could result in increased total

output and lower costs than if each

nation tried to produce in isolation.

Since Ricardo’s exposition, the distinc-

tion between absolute and comparative

advantage has been taught as one of

the field’s most brilliant insights.

Nations will export not only what they

have an absolute advantage in produc-

ing, but also what they have a compar-

ative cost edge in producing. Some his-

torians of economic thought have

sought to show that others, specifically

James Mill and Robert Torrens, stated

the idea, or something close to it, prior

to Ricardo. Such writers tend to dis-

count Ricardo’s version of the theory as

very short and possibly even incorrect.


tensively and intensively. His analysis of

the effects of the Corn Laws produced

the famous Ricardian theory of rent.


In 1817, he expanded his pamphlet

on rent and retitled it On the Principles

of Political Economy and Taxation. By

1819, he had been elected to the House

of Commons, where he continued to

be an active participant in the policy

discussions of his time. 

Ricardo died suddenly of an ear

infection in 1823, leaving an estate esti-

mated at $126 million (current dollars).

As Mark Blaug comments: “Ricardo may

or may not have been the greatest

economist that ever lived, but he was

certainly the richest.”


Ricardo’s Contributions

and System

Ricardo’s approach to economics

differed markedly from that of Adam

Smith. Ricardo was a pure theoretician,

an architect of a simple, highly abstract

model from which he drew policy con-

clusions. His most important assump-

tion was that economic growth must

decline and end due to the scarcity of

land and its falling marginal productiv-

ity. In this, we see the origin of John

Stuart Mill’s later contention that eco-

nomic stagnation would flow from the

working out of the capitalist productive

process. It also is very suggestive of later

arguments by John Maynard Keynes of

the continuing potential macrostagnation

that, according to Keynes and many of

his followers, flows from a chronic

insufficiency of aggregate demand in

any relatively closed-market economy.

Ricardo’s foremost contemporary

critic was Malthus, author of the famous

pamphlet An Essay on the Principle of

Population. It was from Malthus that

Ricardo took the argument of an ever-

growing population that pressed

against all economic expansions, an

assumption that lay at the heart of

Ricardo’s model. His central considera-

tion in his Principles was to show how

distributional changes between wages,

rent, interest and profit affected the

prospects for long-run capital accumu-

lation and economic growth.



his model produced a falling rate of

profit and an ever-rising price for corn

(grains), Ricardo favored an end to the

Corn Laws, arguing that Britain ought

to import corn from countries better

equipped to produce it at lower cost.

He hated the rising rents he attributed

to the laws, since they came, in his

view, at the expense of the driving

force of the economy — profits. 

Twenty-three years after his death,

the laws were repealed and Ricardo’s

international free trade agenda became

one with British public policy. Ricardo

had provided an answer to Britain’s

long-term growth problems, and Britain

became the “workshop of the world,”

importing most of its food and “out-

sourcing” most of its agricultural employ-

ment. Ricardo’s ideas became “the

fountainhead of all nineteenth-century

free trade doctrine!”


There is no point more important in issuing paper money, than to be fully impressed with the

effects which follow from the principle of limitation of quantity. It will scarcely be believed fifty

years hence, that Bank directors and ministers gravely contended in our times, both in parliament,

and before committees of parliament, that the issue of notes by the Bank of England, unchecked

by any power in the holders of such notes, to demand in exchange either specie, or bullion, had

not, nor could have any effect on the prices of commodities, bullion, or foreign exchanges. After

the establishment of Banks, the State has not the sole power of coining or issuing money. The cur-

rency may as effectually be increased by paper as by coin; so that if a State were to debase its

money, and limit its quantity, it could not support its value, because the Banks would have an equal

power of adding to the whole quantity of circulation. On these principles, it will be seen that it is

not necessary that paper money should be payable in specie to secure its value; it is only neces-

sary that its quantity should be regulated according to the value of the metal which is declared to

be the standard. If the standard were gold of a given weight and fineness, paper might be

increased with every fall in the value of gold, or, which is the same thing in its effects, with every

rise in the price of goods…. Experience, however, shows, that neither a State nor a Bank ever have

had the unrestricted power of issuing paper money, without abusing that power: in all States,

therefore, the issue of paper money ought to be under some check and control; and none seems

so proper for that purpose, as that of subjecting the issuers of paper money to the obligation of

paying their notes, either in gold coin or bullion. 


— On the Principles of Political Economy and Taxation, 353 – 54, 356

The Potential Pitfalls 

for Paper Monies




money change prices instead of real


Ricardo’s theory of rent was tied

directly to the marginal productivity of

land, his theory of value was tied

directly to labor costs, and his theory of

distribution stood atop both concepts,

with Malthusian economic stagnation

as a major assumption. Ricardo was not

so naive as to attempt to explain all

market prices by labor costs. He recog-

nized the importance of “nonreproduc-

ible” commodities whose value was

solely determined by their rarity in the

market. However, he considered these

things — rare paintings, fine wines — to

be a small portion of overall market

consumption. He also allowed a role

for capital in determining value and

argued that an increase in fixed (more

permanent) capital as opposed to cir-

culating (perishable) capital would in-

crease value. By allowing value to be

influenced by capital, Ricardo indirectly

suggested that time played a major role

in value, a discovery later generally

attributed to other economists.


Ricardo’s model, abstract and highly

deductive, became the means by which

he advocated public policy. A free

trade enthusiast, he also was not a fan

of public expenditure, believing most

such spending to be at worst wasteful

or at best incapable of changing aggre-

gate well-being and output. His influ-

ence should not be underestimated,

especially in Great Britain, for as Keynes

wrote, “Ricardo conquered England as

completely as the Holy Inquisition con-

quered Spain.”


Robert L. Formaini

Senior Economist



“David Ricardo,” by G. de Vivo, in The New 

Palgrave: A Dictionary of Economics

, ed. 

John Eatwell, Murray Milgate and Peter 

Newman, vol. 4, London: Macmillan Press, 

1987, pp. 183 – 98.


See the general discussion in A History of 

Economic Theory and Method,


by Robert B. 

Ekelund, Jr., and Robert F. Hébert, 4th ed., 

New York: McGraw-Hill, 1997, pp. 144–46.


Great Economists before Keynes

by Mark 

Blaug, New York: Cambridge University 

Press, 1986, p. 201.


Ekelund and Hébert (1997), p. 147.


Blaug (1986), p. 203.


Classical Economics: An Austrian 

Perspective on the History of Economic 


by  Murray Rothbard, vol. 2, Hants, 

UK: Edward Elgar, 1995, pp. 96 – 98.


“David Ricardo’s Discovery of Comparative 

Advantage,” by Roy J. Ruffin, History of 

Political Economy

vol. 34, Winter 2002, 

pp. 727 – 48.


Ekelund and Hébert (1997), p. 148.


The General Theory of Employment, Interest 

and Money


 by John Maynard Keynes, New 

York: Harcourt Brace, 1936, p. 32.

Other economic historians defend

Ricardo and argue the contrary.


Regardless of ongoing academic dis-

putes, it is unlikely that historians of

economic thought will reverse their

position on Ricardo’s original author-

ship of this idea. 

Another major contribution Ricar-

do made to economics was the doc-

trine of fiscal equivalence, or, as it has

come to be known today, Ricardian

equivalence. His argument, as put forth

in Chapter 17 of his Principles, is as fol-

lows: It doesn’t matter whether govern-

ment finances itself through taxes 

or debt. They are equivalent and 

have no appreciable effect on house-

hold consumption or capital formation.

This is because either the public 

sector will save or run a deficit, or

households will do likewise and at the

same rate. Further, expectantly, taxpay-

ers view a deficit as a future tax

increase and will save to pay for it,

while a surplus is viewed as a future

tax cut with an opposite result.

Households will arrange their private

affairs to frustrate the long-run effects

of either finance approach, as judged

from a macroeconomic policy perspec-

tive. (To be sure, Ricardo did not want

government to issue debt rather than

raise tax revenue, regardless of the truth

of his equivalence insight.)  

Other concerns that Ricardo de-

voted himself to were monetary re-

form, the distribution of national in-

come and the determination of an

invariant measure of value. Ricardo

favored redemption of paper money in

gold bullion, argued for decoupling 

the Bank of England from that nation’s

money supply creation and contended

that labor costs were the best long-

run invariant measure of the value of

goods and services — a labor cost the-

ory of value not unlike what Smith

had also proposed in Wealth of

Nations. Ricardo was a believer in the

strict quantity theory of money,

whereby the price level is directly pro-

portional to the quantity of money cir-

culating and changes in that quantity of

Economic Insights is a publication of the 

Federal Reserve Bank of Dallas. The views 

expressed are those of the authors and should 

not be attributed to the Federal Reserve System.

Please address all correspondence to

Economic Insights

Public Affairs Department

Federal Reserve Bank of Dallas

P.O. Box 655906

Dallas, TX  75265-5906

Visit our web site at www.dallasfed.org.



Dostları ilə paylaş:

Verilənlər bazası müəlliflik hüququ ilə müdafiə olunur ©genderi.org 2019
rəhbərliyinə müraciət

    Ana səhifə