Who Was David Ricardo?
David Ricardo (1772-1823) was a classical British economist best known for his theory on wages and profit, labor theory of value, theory of comparative advantage, and theory of rents. David Ricardo and several other economists also simultaneously and independently discovered the law of diminishing marginal returns. His most well-known work is the Principles of Political Economy and Taxation (1817).
Breaking Down David Ricardo
Born in England in 1772, one of 17 children, David Ricardo begin working with his father as a stockbroker at the age of 14. He was disowned by his father at 21, however, for marrying outside his religion. His wealth came from his success with a business he started that dealt government securities. He retired at the age of 41 after earning at estimated £1 million speculating on the outcome of the Battle of Waterloo.
After retiring at age 42, Ricardo purchased a seat in Parliament for £4,000, and he served as a member of Parliament. Influenced by Adam Smith, Ricardo held company with other leading thinkers such as James Mill, Jeremy Bentham and Thomas Malthus. In his Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815) Ricardo conceptualized the law of diminishing returns with respect to labor and capital.
Ricardo wrote his first article on economics, published in "The Morning Chronicle," at the age of 37. The article advocated for the Bank of England to reduce its note-issuing activity.
Example of Comparative Advantage
Among the notable ideas that Ricardo introduced in Principles of Political Economy and Taxation was the theory of comparative advantage, which argued that countries should specialize in production of goods in which they not only have an absolute advantage but also a relative advantage over other countries in order to promote benefits of international trade. For example, a mutual trade benefit would be realized between China and the United Kingdom from China specializing in production of porcelain and tea and the United Kingdom concentrating on machine parts. Ricardo is prominently associated with the net benefits of free trade and detriment of protectionist policies. Ricardo's theory of comparative advantage produced offshoots and critiques that are discussed to this day.
Critics of the theory, including Ricardo himself, stated that the theory was domain-specific, meaning that it only worked when ideal conditions were met. In the case of comparative advantage, it only worked when capital was immobile.
Labor Theory of Value
Another of Ricardo's best-known contributions to economics was the labor theory of value. The labor theory of values states that the value of a good could be measured by the labor that it took to produce it. The theory stated that the cost should not be based on the compensation paid for the labor.
One example of this theory is that if a table takes two hours to make, and a chair takes one hour to make, one table is worth two chairs, regardless of how much per hour the makers of the table and chairs were paid.