Key Thinking

Ricardo was one of the most influential economists to develop the classical system of political economy,
along with Thomas Malthus, and Adam Smith, and is credited with systematizing economic thought.

He first gained recognition during the bullion controversy of 1809, when he argued that inflation had
resulted from the Bank of Englands propensity to over-issue bank notes.

In his famous treatise, Principles of Political Economy and Taxation, Ricardo laid out the foundations for
the principles of a market economy. He also described the guiding concepts behind economic theories
such as the law of diminishing returns, and economic rent.

In Principles of Political Economy and Taxation, he integrated his theory of value with his theory of
distribution.

The law of comparative advantage that Ricardo formulated made a significant contribution to political
economics. It was developed from Adam Smiths theory of the division of labor, discussed in his seminal
work, An Inquiry into the Nature and Causes of the Wealth of Nations, and has since become a central
tenet of free trade, open markets, and anti-protectionism.

In An Essay on the Influence of a Low Price of Corn on the Profits of Stock, he presented the law of
diminishing returns, which states that as more and more resources are combined in production with a
fixed resource, the additions to output will diminish.

In his Essay on Profits, he contended that profits depend on high or low wages; wages on the price of
necessaries; and the price of necessaries chiefly on the price of food.

His views have been influential in the work of many more recent economists, including Friedrich Hayek,
who discussed the Ricardo Effect based on his theories on the interrelationships between capital, labor,
output, and investment.

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In Perspective
Ricardos law of comparative advantage argues that a nation, which trades in products purchased at a
lower cost from another country, is likely to be more prosperous than if it had made the products at
home.

This concept ensures international trade will bring benefits for all countries, but that each country
should specialize in making the products in which it possesses a comparative advantage.

He developed theories of rent, wages, and profits, to explain that as more land was cultivated, farmers
would have to start using less-productive land, so that landowners are the ones who gain from
productive land.

He argued that, in the long run, prices reflect the cost of production, calling this long-run price a natural
price. The natural price of labor was the cost of its production, the cost of maintaining the laborer.

His concept of Ricardian equivalence contends that in some circumstances a governments choice of
how to pay for its spending might have no effect on the economy.

Ricardo was admired for his ability to arrive at complex conclusions without the use of mathematics.

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Quotation
There can be no rise in the value of labour without a fall of profits.