David Ricardo (1772-1823) was an English economist who set out the principles of classical economics.
Ricardo was born in London, April 19, 1772, the son of Abraham and Abigail Ricardo. The Ricardos belonged to the population of Spanish and Portuguese Sephardic Jews who had been forced by the Inquisition to emigrate, in their case to Amsterdam, where they were established by the 18th century. Abraham Ricardo had followed his father into stockbroking on the Amsterdam exchange. He removed to London around 1760 and in 1769 married Abigail, whose father was a tobacco and snuff merchant; he was and was granted denizenship in 1771. A wealthy man, Abraham was a devout Jew and a prominent member of the Jewish community in London. He held strong views regarding religion, politics, and education, and insisted on strict, unquestioning obedience from his children. His independently minded son David reacted sharply against his rigid upbringing.
David was home schooled to follow in his father's career; his early education included a two-year spell in Amsterdam. He was essentially self-educated and later complained bitterly of his lack of a sustained, formal education, especially in the art of writing. At fourteen David started working in his father's office at the London stock exchange, later becoming a member of the exchange.
In December 1793 Ricardo married Priscilla William, the daughter of a Quaker physician. Both sets of parents were aghast. Ricardo was expelled from his father's business, disinherited, and disowned by his parents. (He reconciled with his father only after his mother's death.) Ricardo broke with Judaism and began attending Protestant services; he apparently became an agnostic. He set up his own business marketing government securities and became very wealthy. He retired from business in 1814 to devote himself to scholarship, high society, and politics. At his death his wealth was about £675,000–£775,000.
Ricardo entered England's upper class. Of his three sons, two were elected Parliament and the third was deputy lieutenant of Oxfordshire. Ricardo entertained lavishly in London and at his country estate. A slim short man with a high-pitched voice, Ricardo was sociable, humorous, and addicted to intelligent debate and conversation. He became high sheriff of Gloucestershire in 1818 and served as a prominent Member of Parliament from 1819. His company was increasingly sought by the most intellectual aristocrats, political activists, writers and scientists of London.
In 1799 Ricardo had read Adam Smith's Wealth of Nations and developed an interest in economics. He wrote a number of pamphlets on contemporary problems, as well as a general work, Principles of Political Economy and Taxation (1817).
English currency had become inflated during the war with France. Ricardo attacked the problem in a pamphlet, "The High Price of Bullion, a Proof of the Depreciation of Bank Notes" (1809). His views were influential in molding the report of a parliamentary committee studying the question. His "Proposals for an Economical and Secure Currency" (1816) advanced a plan for a postwar monetary system which was similar in its essentials to that of Great Britain after World War I. He was probably the first to present a clear statement of the quantity theory of money.
Wealth and rent
Ricardo was also interested in the distribution of wealth, unlike his predecessors, who concerned themselves primarily with its production. In his Principles of Political Economy and Taxation (1817), which had an enormous influence on later economic thought, he incorporated some of Adam Smith's ideas, but abandoned Smith's realistic treatment in favor of an abstract one. It was against these abstractions that much of the classical economics was directed.
In his theory of rent, Ricardo definitely broke with the Physiocrats, who believed that rent resulted from the bounty of nature alone, by showing that it was created only "when the progress of population calls into cultivation land of an inferior quality, or less advantageously situated." He argued that the interests of land owners (who dominated British life) were opposed to the interests of society, since the proprietors wanted a continuous increase in population so that poorer lands would have to be brought under cultivation. The proprietor does not produce rent, he said, but merely accepts it. This theory later formed the basis of Henry George's proposal to tax land values.
Labor theory of value
In his "labor theory of value", which became the foundation for Karl Marx's theory of "surplus value", Ricardo held that the value of all commodities was determined by the amount of labor needed for their production. In this he differed from Adam Smith, who believed that labor was only one of the factors determining value. Ricardo (following Smith) suggested that in the long run the value of a product is determined (with a great many qualifications) by the quantity of human labor embodied within it. An article taking, say, 10 hours in all to produce would therefore (on average) be twice as expensive as an article produced in five hours.
Ricardo formulated the law of wages which stated that "the natural price of labor is that price necessary to enable the laborers one with another to subsist and to perpetuate their race without either increase or diminution." Since real wages never change, the only way to increase the standard of living, he believed, was to limit the number of children.
International trade and comparative advantage
Now in some countries, labor efficiency is greater than in others. In these countries, all goods are cheaper than in places where labor is used inefficiently. Moreover, labor is almost everywhere used more efficiently in certain branches of production than in others. Ricardo (in his "theory of comparative advantages") argued that every country could maximize its benefit from international trade by specializing in the export of those goods it produced least inefficiently and importing those it produced most inefficiently.
Ricardo formulated the laws governing movements of goods, and countermovements of money from one place to another. Trade, he said, is essentially the same as barter, since money seldom leaves a country. These ideas were further developed by John Stuart Mill in his theory of international values. Ricardo's theory of comparative cost was fundamental to later thought on the international localization of production.