David Ricardo

David Ricardo
See also
Monetarism Austrian business cycle theory Etatism Austrian theory of money IS-LM model Engel's law Interventionism Arthur Okun Alfred Marshall

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.

Biography

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, e.g. 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.

Examples of David Ricardo

• Ricardo's most famous contribution to economics was his theory of comparative advantage, which argues that countries can still benefit from trading even if one country is more efficient in producing all goods than the other. This theory has been used to explain why countries specialize in certain industries, and why, even though one nation may be able to produce all goods more efficiently than another, both countries still benefit from trading.
• Ricardo is also known for his analysis of rent, which explains why land owners can charge more for land in more desirable locations. According to Ricardo, the price of land is determined by its scarcity and the demand for it. He argued that landowners should not be able to charge more for land just because they own it.
• Ricardo also developed a theory of taxation, which states that the most efficient way to tax is to impose a tax on the highest earners. This theory is still used today, and has been used as the basis for many modern tax reforms.
• Ricardo's influence can also be seen in his theory of money. He argued that the value of money should be determined by the amount of labour required to produce it. This theory is used in many modern economies today.

Limitations of David Ricardo

David Ricardo's contributions to economics are vast and his ideas are still relevant today. However, his work also had some limitations. These include:

• His theories were based on a static model, which did not account for changes over time. This meant that his analysis could not account for economic cycles, technological advances and other dynamic factors that influence economic growth.
• He assumed that the labor force was fixed, meaning that the number of workers did not change over time. This ignored the influence of immigration, automation, and the aging population.
• Ricardo's theories of comparative advantage are based on the assumption of perfect competition, which is rarely met in the real world. This means that his theories may not be applicable to all markets.
• Ricardo's theories did not include public goods, such as infrastructure and education. This means that these important components of economic growth were not taken into account when formulating his theories.

Other approaches related to David Ricardo

In addition to the classical school of economics, David Ricardo's theories and approaches have been influential in a number of other areas of economic thought. These include:

• Marginalism: Marginalism was an approach developed by economists such as William Stanley Jevons, Carl Menger and Leon Walras, and was based on the idea that individuals make decisions based on the marginal cost and benefit of a given action. This approach was heavily influenced by Ricardo's theories of rent, which argued that the value of a good or service was determined by the amount of labor needed to produce it.
• Neoclassical Economics: Neoclassical economics is a school of economic thought developed in the late 19th century which was based on classical economics but also incorporated ideas from marginalism. It was heavily influenced by Ricardo's work and incorporates many of his theories, including the notion of the "law of diminishing returns" and his ideas about the factors of production.
• Keynesian Economics: Keynesian economics was developed by John Maynard Keynes in the early 20th century, and was based on the idea that governments could intervene in the economy in order to stimulate economic growth. This approach was heavily influenced by Ricardo's theories on money and the role of government in the economy.

In summary, Ricardo's theories and approaches have been influential in many areas of economic thought, from marginalism to neoclassical and Keynesian economics. His work continues to be studied and debated by economists around the world.

References

• 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