Classical
Political Economy

David Ricardo

1772 - 1823

 

 

David Ricardo
by Pubali Chakravarty

 

Excerpts from:
"On The Principles
of Political Economy
and Taxation"


 

 

DAVID RICARDO  at the New School

RICARDO  at the Victorian Web

RICARDO  The New Palgrave

DAVID RICARDO   Brief Biography

RICARDO Principles of Pol. Econ.

RICARDO   Iron Law of Wages

On Value, Rent, Wages and Profits

On Principles of Political Economy

On Comparative Advantage

   An Essay on Profits

   

The produce of the earth - all that is derived from its surface by the united application of labour, machinery, and capital, is divided among three classes of the community; namely, the proprietor of the land, the owner of the stock of capital necessary for its cultivation, and the labourers by whose industry it is cultivated......To determine the laws which regulate this distribution, is the principal problem in Political Economy.

The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production.....commodities derive their exchangeable value from two sources: from their scarcity, and from the quantity of labour required to obtain them.

 There are some commodities, the value of which is determined by their scarcity alone. No labour can increase the quantity of such goods, and therefore their value cannot be lowered by an increased supply. Some rare statues and pictures, scarce books and coins, wines of a peculiar quality, which can be made only from grapes grown on a particular soil, of which there is a very limited quantity, are all of this description... These commodities, however, form a very small part of the mass of commodities daily exchanged in the market.

By far the greatest part of those goods which are the objects of desire, are procured by labour, and they may be multiplied, not in one country alone, but in many, almost without any assignable limit, if we are disposed to bestow the labour necessary to obtain them. 

There can be no rise in the value of labour without a fall of profits. If the corn is to be divided between the farmer and the labourer, the larger the proportion that is given to the latter, the less will remain for the former.....Adam Smith, and all the writers who have followed him, have, without one exception that I know of, maintained that a rise in the price of labour would be uniformly followed by a rise in the price of all commodities. I hope I have succeeded in showing, that there are no grounds for such an opinion.

 

 

David Ricardo

by Pubali Chakravarty

 Karl Marx, when adopting theories and ideas from various economists to fashion his revolutionary views against capitalism, was very influenced by the concepts introduced by David Ricardo.  In particular, Ricardo’s Labor Theory of Value, which Marx felt embodied the inner workings of capitalism and shed light on the unjust system[1].

David Ricardo was born in London in 1772 to a wealthy Jewish family.  His father, a stockbroker, chose not to educate him in the traditional Jewish manner, choosing instead to school him at a private school in Amsterdam.  When Ricardo returned from Amsterdam, his formal schooling was almost at an end.  But school is only a part of education and in this particular case, a very small part.  His education in the arts and sciences was to be the long process of self-education.  His education in finance began when at the age of fourteen he joined his father on the London stock market[3].

 

 The Bank of England is where it all came together for the young David Ricardo.  It was there that he learned the practical details of business, obviously by observing the dealings and on-goings of his father and his peers at this prestigious financial institution.  He was an apprentice there for seven years, and when his apprenticeship was over, David Ricardo had amassed a fortune

In 1809 Ricardo published the first of his economic writings, The High Price of Bullion, a Proof of the Depreciation of Bank notes, in which he argued for a sound currency based on metal.[4]   Ricardo was very proud of this work, and he thought well enough of it to send it to the Prime Minister of London.

The book was so controversial that it had circulated throughout the British parliament and by 1810, moved into the House of Commons where it caused the Bullion Committee to publish a formal report about the book and later hold a debate about the material Ricardo covered. 

 

 The debates were intense, and it was during these times that Ricardo wrote what is now considered to be his finest of all his controversial works, and what was considered at the time to be the finest controversial work ever written on an economic subject[5].  It was another book, titled A Reply to Mr. Bosanquet’s Practical Observations on the Report of the Bullion Committee.

  Upon the public’s reception of the latest Ricardo publication, he had become a quite famous economist whose opinions were very important to society.  So it was not a surprise when another great controversy arose which involved the ideas of David Ricardo. 

In March 1814, the termination of the Napoleonic wars brought society’s attention back to the old problems, namely the Corn Laws. The chief purposes of the Corn Laws were to secure an adequate supply of grain to meet domestic requirements and to maintain grain prices at profitable levels. The laws principally provided for duties on imported and exported grains.[6] Thus, the laws would ensure that significant profits would be made by monopolizing the business of grain farming in England. Though the actual laborers would not gain anything from the laws, the landowners and the crown would benefit from the trades.

 

Ricardo’s theoretical system emerged directly from debating the efficiencies of the law.  Ricardo felt that the growth of capital and population lead to extension of cultivation to less fertile and less accessible land and to decreasing returns on cultivated land upon the application of heavy farming.[7]  As a result, there would be a decrease in profit, resulting in increased labor with no reimbursement.

 Ricardo’s debates against the Corn Laws eventually brought them to an end in 1846, when the next generation of economists influenced by his theories took control of the committees and put an end to the controversial laws

Unlike many of his colleagues in the history of economics, Ricardo was not flamboyant.  He did not stage revolutions or protest.  Rather, he used the power of knowledge and know-how to silently state his opinions.  He made an impact in the field of economics, and developed a new system of thinking.  He wrote several books and papers emphasizing international trade, national specialization, and freedom of competition. 

Ricardo did all of these things without ever having formal education in the field of economics, rather he learned by doing, and to this day people are effected by his thoughts on modern economics. 

 

1"economics," Microsoft(r) Encarta(r) 97 Encyclopedia. (c) 1993-1996 Microsoft Corporation. All rights reserved.

2"Ricardo, David," Microsoft(r) Encarta(r) 97 Encyclopedia. (c) 1993-1996 Microsoft Corporation. All rights reserved.

3 Weatherall, David : David Ricardo, A Biography. The Hague, Netherlands, 1976.

4"Ricardo, David," Microsoft(r) Encarta(r) 97 Encyclopedia. (c) 1993-1996 Microsoft Corporation. All rights reserved.

5 Weatherall, David:  David Ricardo: A Biography. The Hague, Netherlands,1976.

6"Corn Laws," Microsoft(r) Encarta(r) 97 Encyclopedia. (c) 1993-1996 Microsoft Corporation. All rights reserved.

7 Blaug, Mark. Ricardian economics. Greenwood Press, Connecticut, 1958.

 

 

        

 

 

 

      

 

 

 

Excerpts from
On The Principles of Political Economy and
Taxation

by David Ricardo

 

The produce of the earth - all that is derived from its surface by the united application of labour, machinery, and capital, is divided among three classes of the community; namely, the proprietor of the land, the owner of the stock or capital necessary for its cultivation, and the labourers by whose industry it is cultivated

 To determine the laws which regulate this distribution, is the principal problem in Political Economy,   

 

On Value  

 

The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour.

 

It has been observed by Adam Smith, that 'the word Value has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called value in use; the other value in exchange. The things,' he continues, 'which have the greatest value in use, have frequently little or no value in exchange;

Utility then is not the measure of exchangeable value, although it is absolutely essential to it. If a commodity were in no way useful, … it would be destitute of exchangeable value, however scarce it might be, or whatever quantity of labour might be necessary to procure it.

 

 Possessing utility, commodities derive their exchangeable value from two sources: from their scarcity, and from the quantity of labour required to obtain them.

There are some commodities, the value of which is determined by their scarcity alone. No labour can increase the quantity of such goods, and therefore their value cannot be lowered by an increased supply. These commodities, however, form a very small part of the mass of commodities daily exchanged in the market

 

In the early stages of society, the exchangeable value of these commodities, or the rule which determines how much of one shall be given in exchange for another, depends almost exclusively on the comparative quantity of labour expended on each.

  …it is the comparative quantity of commodities which labour will produce, that determines their present or past relative value, and not the comparative quantities of commodities, which are given to the labourer in exchange for his labour.

Labour of different qualities differently rewarded. This is no cause of variation in the relative value of commodities.

I must not be supposed to be inattentive to the different qualities of labour, and the difficulty of comparing an hour's or a day's labour, in one employment, with the same duration of labour in another.

 

, ..... If a day's labour of a working jeweller be more valuable than a day's labour of a common labourer, it has long ago been adjusted, and placed in its proper position in the scale of value.

Not only the labour applied immediately to commodities affect their value, but the labour also which is bestowed on the complements, tools, and buildings, with which much labour is assisted.

If we look to a state of society in which greater improvements have been made, and in which arts and commerce flourish, we shall still find that commodities vary in value conformably with this principle: ... their value, comparatively with other things, depends on the total quantity of labour necessary to manufacture them, and bring them to market.

Economy in the use of labour never fails to reduce the relative value of a commodity, whether the saving be in the labour necessary to the manufacture of the commodity itself, or in that necessary to the formation of the capital, by the aid of which it is produced.

 

The principle that the quantity of labour bestowed on the production of commodities regulates their relative value, considerably modified by the employment of machinery and other fixed and durable capital. Two trades then may employ the same amount of capital; but it may be very differently divided with respect to the portion which is fixed, and that which is circulating. 

.. although commodities produced under similar circumstances, would not vary with respect to each other, from any cause but an addition or diminution of the quantity of labour necessary to produce one or other of them, yet compared with others not produced with the same proportionate quantity of fixed capital, they would vary from the other cause also which I have before mentioned, namely, a rise in the value of labour, although neither more nor less labour were employed in the production of either of them.

There can be no rise in the value of labour without a fall of profits. If the corn is to be divided between the farmer and the labourer, the larger the proportion that is given to the latter, the less will remain for the former. So if cloth or cotton goods be divided between the workman and his employer, the larger the proportion given to the former, the less remains for the latter.

Adam Smith, and all the writers who have followed him, have, without one exception that I know of, maintained that a rise in the price of labour would be uniformly followed by a rise in the price of all commodities. I hope I have succeeded in showing, that there are no grounds for such an opinion, and that only those commodities would rise which had less fixed capital employed upon them than the medium in which price was estimated, and that all those which had more, would positively fall in price when wages rose.

 

Of Wages

 

Labour, like all other things which are purchased and sold, and which may be increased or diminished in quantity, has its natural and its market price. The natural price of labour is that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution.       

The power of the labourer to support himself, and the family which may be necessary to keep up the number of labourers, does not depend on the quantity of money which he may receive for wages, but on the quantity of food, necessaries, and conveniences become essential to him from habit, which that money will purchase. The natural price of labour, therefore, depends on the price of the food, necessaries, and conveniences required for the support of the labourer and his family. With a rise in the price of food and necessaries, the natural price of labour will rise; with the fall in their price, the natural price of labour will fall.     

 

With the progress of society the natural price of labour has always a tendency to rise, because one of the principal commodities by which its natural price is regulated, has a tendency to become dearer, from the greater difficulty of producing it. As, however, the improvements in agriculture, the discovery of new markets, whence provisions may be imported, may for a time counteract the tendency to a rise in the price of necessaries, and may even occasion their natural price to fall, so will the same causes produce the correspondent effects on the natural price of labour.

The market price of labour is the price which is really paid for it, from the natural operation of the proportion of the supply to the demand; labour is dear when it is scarce, and cheap when it is plentiful. However much the market price of labour may deviate from its natural price, it has, like commodities, a tendency to conform to it.

 It is when the market price of labour exceeds its natural price, that the condition of the labourer is flourishing and happy, that he has it in his power to command a greater proportion of the necessaries and enjoyments of life, and therefore to rear a healthy and numerous family. When, however, by the encouragement which high wages give to the increase of population, the number of labourers is increased, wages again fall to their natural price, and indeed from a reaction sometimes fall below it.

 

When the market price of labour is below its natural price, the condition of the labourers is most wretched: then poverty deprives them of those comforts which custom renders absolute necessaries. It is only after their privations have reduced their number, or the demand for labour has increased, that the market price of labour will rise to its natural price, and that the labourer will have the moderate comforts which the natural rate of wages will afford.  

 

On Profits

 

The profits of stock, in different employments, having been shewn to bear a proportion to each other, and to have a tendency to vary all in the same degree and in the same direction, it remains for us to consider what is the cause of the permanent variations in the rate of profit, and the consequent permanent alterations in the rate of interest.

The natural tendency of profits then is to fall; for in the progress of society and wealth, the additional quantity of food required is obtained by the sacrifice of more and more labour. This tendency, this gravitation as it were of profits, is happily checked at repeated intervals by the improvements in machinery, connected with the production of necessaries, as well as by discoveries in the science of agriculture which enable us to relinquish a portion of labour before required, and therefore to lower the price of the prime necessary of the labourer.

 

 

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