David Ricardo’s Enduring Economic Principles
David Ricardo was one of the fathers of classical economics. He began his business career as a clerk in his father’s brokerage firm. Some years later, a London bank, impressed by the young man’s ability, provided him with enough capital to establish his own brokerage. Soon, David Ricardo amassed an enormous fortune.
His most important work was Principles of Political Economy and Taxation, published in 1817. This treatise is considered the most mature and accurate presentation of classical economics. In its preface, Ricardo states that the main problem of political economy is to determine the laws governing distribution. Some of the most important ideas contained within his work include:
The Law of Diminishing Returns
This is a principle central to classical economics (or economic liberalism), which predicts that agricultural yields will necessarily decrease, even if total production grows, when additional units of input are applied that are necessarily inferior or have a lesser impact on the final product than those originally employed. Thus, the price of agricultural products will necessarily tend to grow, and with it, the land rent. This law is especially valid for societies based on agriculture and livestock. Industrialization, however, introduced the concept of increasing returns to scale and the establishment of economies of scale. The Law of Diminishing Returns (LDR) can also be simply stated: as the amount of a good produced increases, its marginal utility tends to fall.
The Theory of Comparative Advantage
This is a principle of economic theory whose basic premise is that even if a country has no absolute advantage in producing any good, it should specialize in those goods for which it has a comparative advantage (or a lesser comparative disadvantage). This theory represents a significant development beyond Adam Smith’s theory of absolute advantage. For Ricardo, the decisive factor in international trade would not be the absolute cost of production in each country, but the relative costs.
The Iron Law of Wages
Also known as the Iron Law of Wages, this economic theory posits that real wages naturally tend towards a minimum, corresponding to the minimum subsistence needs of workers. Any increase in wages above this level would lead to an increase in the population, leading to increased competition for jobs, which in turn reduces wages back to that minimum.
Ricardo’s Economic Context and Policy Proposals
London was sharply divided into two social classes: the wealthy, who had long resided in the city center, and the poor, often “immigrants” who came to London for work and lived in the impoverished suburbs near factories. In this context, anything that helped diminish the value of agricultural products was highly favorable for economic development. This is where Ricardo advocated for the massive importation of grain from countries where land rent was not as high as in England.
In the early nineteenth century, this primarily meant Europe, but soon extended to America. There, land rent was virtually zero due to the availability of new, higher-quality land. The struggle of the English bourgeoisie during this period focused on the abolition of the Corn Laws, which finally occurred in 1846. But in reality, the struggle was much deeper; it sought to redesign the British economy according to a new international division of labor. According to Ricardo, Great Britain would become a manufacturing and trade hub, importing food produced overseas.