David Ricardo

Who was he: David Ricardo, often credited with systematizing economics, was a very influential classical economist, a Member of the British Parliament, businessman, financier and speculator. The law of comparative advantage, a fundamental argument in favor of free trade among countries and of specialization among individuals, was arguably the most important contribution he made to economics.

Ricardo reasoned that there are mutual advantages from trade, even if one party is more productive in every capacity than its trading counterpart, as long as each focuses on the activities where it has a comparative productivity advantage.

Another of Ricardo's primary contributions is his theory of rents. He explained that the more land was cultivated, the more often farmers would have to start utilizing less productive land. Since a bushel of corn from less productive land sells for the exact price as a bushel from highly productive land, tenant farmers would be willing to pay more for highly productive land, the results being that the landowners, not the farmers, are the ones gaining from productive land.

Background: David Ricardo was born on April 19th, 1772 in London, England, the third of 17 children. At 21, Ricardo eloped with a Quaker, which led to the estrangement of his family. His father repudiated him and his mother ceased speaking with him. Without the support of his family, he started his own business as a stockbroker and became quite successful.

During the Battle of Waterloo, he wagered against a French victory and invested in British securities. When he retired from the Exchange at 43, his worth was estimated at about £600,000. In 1819, Ricardo took a seat in the House of Commons, representing Portarlington, an Irish rotten borough. He held the seat until his death in 1823.

Ricardo became interested in economics after he read The Wealth of Nations by Adam Smith in 1799. This was Ricardo's initial contact with economics. His first economics article was written when he was 37. He reached the height of his fame a decade later. Ricardo first became noticed among economists over the "bullion controversy." In 1809, he wrote that England's inflation was the consequence of the Bank of England's tendency to issue excess banknotes. In short, Ricardo was an early believer in the quantity theory of money, known today as monetarism.

In his "Essay on the Influence of a Low Price of Corn on the Profits of Stock," published in 1815, Ricardo expressed what came to be known as the law of diminishing marginal returns. One of the most prominent laws of economics, it states that as more and more resources are integrated in production with a fixed resource—for example, as more labor and machinery are used on a fixed amount of land—the additions to output will lessen.

Ricardo was an intimate friend of James Mill, who encouraged him in his political ambitions and works about economics. Other noteworthy friends included Jeremy Bentham and Thomas Malthus, with whom Ricardo held a discussion over things such as the role of landowners in a society. He was a member of London's intellectuals and later became a member of Malthus' Political Economy Club and a member of the King of Clubs.

Ricardo also opposed the preferential Corn Laws, which constrained imports of wheat. In arguing for free trade, Ricardo expressed the idea of comparative costs, today called comparative advantage, a much understated idea that is the main basis for most economists' belief in free trade today. This is the idea: a nation that trades for goods it can get at lower rates from another nation is better off than if it had made the goods at home. These increases come, Ricardo noted, because each state specializes in manufacturing the goods for which its comparative cost is lower.