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Jagdish N. Bhagwati Karl Marx |
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David Ricardo had a varied upbringing. He was born in 1772 and was the third of 17 children. David Ricardo's family was descended from Iberian Jews who had fled to Holland during a wave of persecutions in the early 18th Century. His parents were very successful and his father was a wealthy merchant banker. They lived at first in the Netherlands and then moved to London. Ricardo himself had little formal education (obviously not a modern role model!) and went to work for his father at the age of 14. Ricardo's father employed him full-time at the London Stock Exchange, where he quickly acquired a knack for the trade. However, when, at the age of 21, he married a Quaker (against his parents wishes) he was disinherited and so set up on his own as a stockbroker. He was phenomenally successful at this and was able to retire at 42 and concentrate on his writings and politics. (Whether there are any morals to be drawn from this tale, I’ll leave you to decide!) Illness forced Ricardo to retire from Parliament in 1823 and he died on 11 September at Gatcombe Park (which is now the home of the Princess Royal and her family). He was 51. He developed many important areas of economic theory and was great friends with other classical economists - Thomas Malthus and Jean-Baptiste Say. Along with Malthus he was fairly pessimistic about the long-term prognosis for society, and so has been proved well and truly wrong on that score (so far?). However, much of the theory he developed is still used and taught today. David Ricardo - TheoriesRicardo developed two key theories that are still important in economics courses today. They are:
Distribution theoryAlong with Malthus, Ricardo was very concerned about the impact that rising populations would have on the economy. He argued that with more people, more land would have to be cultivated - nothing controversial so far! However, the return from this land would not be constant as the amount of capital available would not grow at the same rate. In fact the land would suffer from diminishing returns. Extra land that was brought into cultivation would become more and more marginal in terms of profitability, and eventually returns would not be enough to attract any further capital. At this point the maximum level of economic rent would have been earned. The allocation of each factor of production to each area of economic activity would therefore be determined by the level of economic rent that could be earned. As this gradually fell due to diminishing returns, capital would shift to more profitable activities. International trade theoryRicardo's theory on international trade focused on comparative costs and looked at how a country could gain from trade when it had relatively lower costs (i.e. a comparative advantage). The original example focused on the trade in wine and cloth between England and Portugal. Ricardo showed that if one country produced a good at a lower opportunity cost than another country, then it should specialise in that good. The other country would therefore specialise in the other good, and the two countries could then trade. It's not too difficult to figure which good Portugal should specialise in - wine or cloth?! The same would almost certainly be true today. If all countries specialised where they had a comparative advantage, then the level of world welfare should increase. David Ricardo - WorksAlong with many other Classical economists, the titles of Ricardo's works do not have the ring of best-sellers about them, but in their time (and now!) they are judged to be very significant. Because of his background in the money markets and Stock Exchange, much of his early work was on these subjects. Some of these works included:
His more significant works were on market economics though:
It was in this latter work that he developed much of the theory we know about diminishing returns, and economic rent. |
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Story of David Ricardo (1772-1823)