David Ricardo was a modern orthodox economist whose main ideas centered on positive economics. He is notable for his contribution in economics during the classical period of economics. The period lasted about 100 years and his book “On the Principles of Political Economy and Taxation” that was published in 1817 was among the important treaties of the period. Ricardo’s work came immediately after Adam Smith’s and it was succeeded by William Nassau Senior’s work before the classical period of economics ended with John Stuart Mill. Ricardo emphasized on long-run tendencies in his economic theories and these teachings led to dissonant results in reality. Ricardo supported market responses to economic problems and shunned away from political responses for the same. The rest of the discussion will now highlight important concepts that Ricardo supported and contributed to the present knowledge of economics.
Key Contributions by Ricardo to Basic Economic Questions
Ricardo used the labor theory of value to show that distribution of income follows a systematic pattern over time. He sought to promote laissez faire in a non-contextual way. In his works, Ricardo expounded the conflict between the landlord’s interests and the capitalist’s interests. As a stockbroker who turned to an economist, Ricardo was fixated on methodologies and theories of value. He also looked into public finance, diminishing returns, rent, and international trade. Ricardo took over from Adam Smith, and that is why many economic questions addressed in his book were responses to the questions raised in the “Wealth of Nations”, which was published by Adam Smith.
In addition to offering pure theory, Ricardo also redirected economics away from method and scope that were used and supported by Smith. During his time, the burning issue for economists and politicians was tariffs, and Ricardo did not shy away from the agenda. He abstracted from the economy of his time and then set up an analysis of his ideas using a deductive method (Landreth & Colander, n.d.). The perspective was novel because Smith combined theory and history to come up with his conclusions. Nevertheless, Ricardo’s pure theory approach was imperfect.
His mathematical techniques were put in a clumsy way. Overall, the economics of Ricardo was meant to direct policy. Since tariffs were the burning issue, Ricardo sought to provide a basis for formulating policy that would regulate importation of grain into England. He also explored the effects of the existing policies and proposed policies on the distribution of income. Thus, a major part of his exploration question became the distribution of income. In addition, this exploration brought back his work to match real world expectations and applications, even though his analysis was abstract and would assume no impediments to free trade, unlike the views by Friedrich List (Klocke, 2012).
At the time, rents, grain prices, and changes in political and social structures were paramount. The industries were growing while agriculture was declining. This change in economic structure led to increases in comparative political power of manufacturing and agricultural interests and brought up concerns about free or regulated international trade. For Ricardo, the proper way of formulating policy would be by getting away from the nonessential matters and then having a theory model that would show the causes and effects of several variables being analyzed.
When following the method, it is important to stop considering other factors in reality and assume they remain stagnant. However, such an approach will always lead to problems because the assumed factors are not always stagnant when it comes to applying the policy in the real world. In fact, they could have changed during the policy formulation. Thus, this was one of the main weaknesses of Ricardo’s formulation of policy (Landreth & Colander, n.d.).
From Ricardo’s contributions to economics, the use of highly abstract theory and the non-contextual policy making approach that uses abstract models remain in the present day discipline of economics. Ricardo is also remembered in a scholarly way for introducing new basic tasks for economics. According to Ricardo, economics was about determining the law that regulates the distribution of income. The beneficiaries of income distribution are landlords, laborers, and capitalists. Ricardo paid more attention to the functional distribution of income. The factor prices as they are currently named in national income accounting correspond to the distribution centers that Ricardo studied. The functional distribution of income concept has similarities with the aggregate production function of the economy (Landreth & Colander, n.d.).
After bringing up his idea of functional distribution of income, Ricardo proceeded to analyze its trend. He saw it as part of the macroeconomics. This went contrary to the effects that his works had because they led to the investigation of microeconomic issues. One main feature of Ricardo’s approach was that he began his inquiries and suggestions with an examination of the labor theory of value. Three main groups of the Ricardian model of economics arise from the discussion so far.
The groups are capitalists, laborers, and landlords. Ricardo borrowed the concept from Thomas Malthus to explain the real wage of labor. He used the wages fund doctrine to show that wages fund depends on capital accumulation. He also showed that real wage is the same as wage fund divided by labor force. He explained that as wages increase, the population increases to a level that lowers wages to the cultural subsistence level. Today, the cultural subsistence level would be the same as the basic cost of living in a particular country (Landreth & Colander, n.d.).
According to the model, the owners of capital and laborers share an economy’s output. This argument helped to defend free trade, instead of protectionism. Landlords act as parasites, taking income and rent, yet they are not contributing anything to active production of goods and services. They only hold onto the land as a factor of production. The total output from an economy that does not go towards labor payment or capitalists will go to landlords. Ricardo was able to demonstrate that an economy would realize its net revenue by considering all its income and subtracting the total wages. He also showed that only profits went to savings or capital accumulation because workers and landlords always spent their full income on consumption (Landreth & Colander, n.d.).
During Ricardo’s time, the Corn Laws were controversial in terms of their effect on the economy. Britain at the time was not self-sufficient in agricultural production. There was also war in Europe, which caused shortages in the supply of corn. However, as war neared the end, landlords and farmers in Britain gained protection from the parliament in the form of import tariffs that would ensure supply remained low to support high prices. The Corn Laws introduced a price floor on corn and landlords wanted the floor raised to a higher figure. The argument for raising the floor was that it would lead to a greater interest in production, which would eventually lead to increased supply that pushed prices lower, in accordance with the market equilibrium theory (Rima, 2009).
For Ricardo, the high tariffs meant a higher income for landlords. Thus, the question of the Corn Laws became a question about the distribution of income. It eventually developed into his theory of land and rent. In coming up with the theory, Ricardo maintained that everyday terms were not precise for explaining economic relations. According to Ricardo, rents were present because fertile land was scarce and the law of diminishing returns worked.
Apart from looking at the output of land, one can also look at the problem from a cost perspective to see that an addition of labor and capital leads to intensified production. However, competition among farmers to sell amid stagnant levels of demand will force them to lower prices, such that additional labor and capital do not always lead to increased revenues. After showing that rents did not play a part in production, Ricardo succeeded in showing that land rent was not a cost of production for determining societal total production.
However, for individual cases, it is a cost because a person pays rent and deducts it from revenue. Ricardo also showed that the demand of a product is not its price, but it determines its price. On the other hand, the price of a product in a market will also influence the demand (Why did The Economist favor free trade?, 2013). Ricardo said that if supply does not change over the long run, then the demand curve will determine the price. The existing demand curve at a specific time shows a person’s preferences and income. Thus, when these factors change, successive demand curves are plotted to represent the factors in time (Landreth & Colander, n.d.).
When looking at the cost of product, Ricardo considered total labor quantity as the determinant labor cost and favored measuring labor by the total number of hours worked. Unfortunately, the approach did not effectively address variations in skills for laborers. The other formulation of production costs involved capital goods, where Ricardo noted that capital was equivalent to store-up labor. He also added that for production in an economy, prices fall as production increases. However, rents increase at the same time, leading to a fall in profits. Conversely, the realization of zero profits in all sectors of the economy will take time.
Finally, Ricardo saw the benefits of specialization and showed that having a comparative advantage, instead of an absolute advantage was enough reason to support the production of a particular good by a country. When applied in large scale, the concept of comparative advantage shows that differences exist as long as opportunity costs are present (Bouare, 2009).
Conclusion
In the end, some of Ricardo’s eventual theories were questionable because they were conceived in the abstract sense. Nevertheless, the theories were instrumental in influencing or analyzing different economic and political policies during his time and today in regards to free trade. The discussion shows that many of Ricardo’s assumptions on the benefits of free trade and claims work best when other factors affecting the relationship of the variables are constant. For example, when analyzing price and demand curves, one has to assume that the supply remains constant. Overall, the concepts work best in a perfect competition scenario.
References
Bouare, O. (2009). An evaluation of David Ricardo’s theory of comparative costs: Direct and indirect critiques. Journal of Economic Development, 34(1), 99-126.
Klocke, S. (2012). Friedrich List’s “The national system of political economy” -A critical analysis from the perspective of the Austrian School of Economics (Bachelor’s Thesis, Goethe University, Frankfurt am Main). Web.
Landreth, H., & Colander, D. C. (n.d.). History of economic thought. Boston, MA: Houghton Mufflin Company.
Rima, I. H. (2009). Development of economic analysis (7th ed.). New York: Routledge.
Why did The Economist favor free trade? (2013). The Economist. Web.