David Ricardo is one of the greatest classics of economics, he was considered a follower of the works of Adam Smith. His most famous work "Principles of political economy and taxation" is considered to be the peak achievement of the classical school.
David Ricardo was born 18 April 1772. in London. Son the banker who came to England from the Netherlands. He was one of seventeen brothers and sisters. Never received formal education. From the age of 14 worked in the family business. At age 21, he married and changed his religion to Catholicism. The family did not approve of his choice, which subsequently led to the deprivation of the inheritance of his property. After this event, he decided to start work as Government bond broker. At age 25 he became one of the richest men in the country. At the age of 41 years, he decided to devote himself entirely to scientific and political activities. He was involved in such areas as chemistry, mineralogy, geology and mathematics. In 1807 he founded the Geological Society of England. Later he devoted himself to political activities that inspired him to research focused on the economy.
Most important theories
Comparative advantage Theory
David Ricardo denied the view that the premise of the international division of labor are differences in the absolute level of expenditures that have to be incurred to produce goods which are the subject of international trade. The theory that he created demonstrates that the benefits of foreign trade arise when there is a difference in the relative cost of production of goods traded. Comparative advantage allows the benefits of international exchange of goods also for countries located on the lower level of economic development.
Theory of land rent
Land rent is the income that is received by the landowner and the amount depends primarily on the demand for land. In the situation in which demand for land increases, land rent rises, which in turn will lead to an increase in the income of landlords. While supply land is maintained at the same level. If we consider this case in terms of the efficient use of land, we will notice that both increase the income of owners, nor its reduction, eg. by taxation have no impact on the efficiency. Don't degrade it and do not improve. Ricardo noted that in the case of taxation of land rents, income owners of owners decline, while the rate of land will remain at the same level, and therefore there are no changes in the demand for land. There will also be no change in the supply of land because it is assumed constant. He came so to the conclusion that in a constant supply of land, taxation of ground rent will not change the behavior of economic agents and do not distort the allocation of resources.
The theory of wages
In the long run, prices reflect the costs of production and thus are natural prices. Natural price of production is, in practice, the cost of the work arising from the employment of workers. If the wage corresponds to the natural price of labor, it means that they are maintained on the lowest possible level, i.e. a level that allows the worker to survive and exist. Ricardo goes one step further than Smith. In its deliberations he chooses certain minimum wage which depends not only on the biological determinants for survival, but also on the culture of a given society. However, good economic situation may cause that wages will rise clearly above the level of the minimum subsistence. Then, in order to lower cost, companies fire some employees, and then they become unemployed. In order to be re-employed, they must accept a lower wage.
The quantitative theory of money
Ricardo was a supporter of the paper money, which is treated as a substitute for gold. He believed that he should be covered fully in real gold metal. He came out with the assumption that the amount of money does not depend on the price formation process, and it is rather an active factor in price-setting processes. The entire amount of money in circulation affects the formation of prices, and as a result the policy of the state there can be too large or too small amount. The increase in the quantity of money in circulation in relation to the needs will have its effects in the form of reduced purchasing power of money in relation to the value of gold metal. And in the case of too small quantity of money in circulation, the purchasing power of money will increase. This theory says that amount of money in circulation should be as much as the value of the products on the market.
- Landreth H., Colander D.C., Historia myśli ekonomicznej, Wydawnictwo Naukowe PWN, Warszawa 1998
- Zagóra-Jonszta U., Wykłady z Historii Myśli Ekonomicznej, Wydawnictwo Akademii Ekonomicznej w Katowicach, Katowice 1996
- David Ricardo @ wikipedia