What is the Ricardian vice?

By Andrew Beattie AAA
A:

The Ricardian vice refers to abstract model-building and mathematical formulas with unrealistic assumptions. In simpler terms, the Ricardian vice is the tendency for economists to make and test theories that aren't troubled by the complexities of reality, resulting in theories that are mathematically beautiful but largely useless for practical applications. The Ricardian vice is prevalent in economics and is named after David Ricardo, one of the first economists to bring mathematical rigor to the discipline.

David Ricardo came up with many useful theories and laws that defended free trade and sound monetary policies, including them the law of comparative advantage and the law of diminishing returns. As time passed, however, Ricardo depended more and more on model-building and large (sometimes erroneous) assumptions to achieve the results he wished.

For example, Ricardo focused on the distribution of income rather than the growth of economic activity to "prove" that everyone but landlords was doomed to subsistence wages. He also spent time seeking an ironclad measure of value, trying to link it to the cost of labor while calculating out any benefits of machine labor. Even in his law of diminishing returns, Ricardo simplified all agricultural crops into one field all farmed with the same technique and having an equal yield on all sections. Adding to these already sizable assumptions, he factored the cost of wages as being equal to the subsistence level that he believed to be unavoidable. While it yielded a result that showed that tariffs harm the domestic economy, it oversimplified the case.

Even today, many economic models mathematically remove, simplify, or fix dynamic components like competition with an arbitrary value. While these exercises in pure deductive reasoning can yield useful clues about how things might work, they need to be held against the way things actually work to have any value.

For more insight, read How Influential Economists Changed Our History.

RELATED FAQS

  1. What is the difference between stated annual return and effective annual return?

    Essentially, the effective annual return accounts for intra-year compounding, and the stated annual return does not. The ...
  2. How do I calculate the adjusted closing price for a stock?

    When trading is done for the day on a recognized exchange, all stocks are priced at close. The price that is quoted at the ...
  3. What are the odds of getting a perfect bracket in Warren Buffett's $1 billion March ...

    In 2014, Warren Buffett announced that he would give whoever could correctly guess every game of the NCAA men's basketball ...
  4. What's the difference between Bollinger Bands® and Keltner Channels?

    In technical analysis, there is a small difference between Keltner Channels and Bollinger Bands®. We'll explain it for you ...
RELATED TERMS
  1. Compound Annual Growth Rate - CAGR

    The year-over-year growth rate of an investment over a specified ...
  2. Mean-Variance Analysis

    The process of weighing risk against expected return. Mean variance ...
  3. Systematic Sampling

    A type of probability sampling method in which sample members ...
  4. Variance

    The spread between numbers in a data set, measuring Variance ...
  5. Leptokurtic

    A statistical distribution where the points along the X-axis ...
  6. Platykurtic

    A type of statistical distribution where the points along the ...
comments powered by Disqus
Related Articles
  1. Can Investors Trust Official Statistics?
    Economics

    Can Investors Trust Official Statistics?

  2. Hypothesis Testing in Finance: Concept ...
    Active Trading Fundamentals

    Hypothesis Testing in Finance: Concept ...

  3. Using Historical Volatility To Gauge ...
    Markets

    Using Historical Volatility To Gauge ...

  4. Strategies And Secrets Of High Frequency ...
    Trading Strategies

    Strategies And Secrets Of High Frequency ...

  5. How Influential Economists Changed Our ...
    Fundamental Analysis

    How Influential Economists Changed Our ...

Trading Center