One very popular idea for which David Ricardo is given rather little credit in general education is his position on international trade. It was David Ricardo who, with his Comparative Advantage Theory, introduced us to the idea that countries can trade and get a win-win situation if everyone specialised and focused on what they did best and could produce more efficiently.
By Anthony Kila
Our unforgettable today is David Ricardo and he is one of those thinkers whose ideas are widely studied by all but whose name is rarely mentioned in general education. This is rather strange and counterproductive because David Ricardo is one man that can easily be used as a poster boy to attract young people into economics and motivate others in our business schools.
As a thinker, David Ricardo introduced some very valuable concepts without the use of equations that many dread but consider essential in economics today. About 167 years after David Ricardo died, David Friedman, in 1990, observed that “The modern economist reading Ricardo’s principles feels rather as a member of one of the Mount Everest expeditions would feel if, arriving at the top of the mountain, he encountered a hiker clad in T-shirt and tennis shoes.”
As a businessman, David Ricardo was also very wealthy. He made his wealth in finance as a banker, loan broker, stockbroker and he distinguished himself as a very shrewd speculator. He therefore was able to combine the fame of being a man of intellect as well as of fortune thanks to the wealth he got from being a businessman. Whilst at it, he even made his way into becoming a member of parliament.
David Ricardo was born in London in April 1772 to a family of émigrés of Portuguese origin that settled in England from the Dutch Republic. The family had 17 children and David Riccardo was the third child. He started working with his father in the family finance firm at the age of 14 but he soon fell out of the big family for family reasons. At the age of 21, he decided to marry against his family’s wishes and for that his father disowned him and his mother stopped talking to him till she died.
This estrangement and the consequent need to be independent and shrewd in business and all matter of economics are traits that will later shape the way David Ricardo sees the world in terms of opportunities, risks and how resources should be managed. He was certainly a distinct member of the classic school and he was very influenced by the thoughts and writings of Adam Smith but he brought in some difference and drew some lines between the teachings he received and his own ideas.
David Ricardo’s first input that gained him attention amongst policy makers and fellow economists of his time was his position on the role of banking and the issue of inflation. In what will later be known as the “Bullion Controversy” Ricardo linked inflation to the availability of excess banknotes which he argued was caused by the Bank of England’s role in issuing too much money and putting too much notes in circulation.
The idea that controlling the quantity of money in circulation can lead to a control on the level of inflation is the origin of monetarist policies. So much was the impact of this idea of David Ricardo that the government set up a committee, known as the Bullion Committee, in the House of Commons to review banking laws and in the end the committee embraced the position argued by David Ricardo and suggested the repeal of the Bank Restriction Act.
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One very popular idea for which David Ricardo is given rather little credit in general education is his position on international trade. It was David Ricardo who, with his Comparative Advantage Theory, introduced us to the idea that countries can trade and get a win-win situation if everyone specialised and focused on what they did best and could produce more efficiently.
Using the example of Portugal and England as two countries trading two things: cloth and wine. He argued that even if two countries could equally produce two items, each country should focus on producing what it did best and sell to acquire what it produced less efficiently, rather than existing in isolation or trying to be self-sufficient. For David Riccardo, a country that spends 120 hours of labour to produce cloth should stop producing cloth and buy from a country that spends 80 hours in producing it.
Another concept that David Ricardo brought to the corpus of economics thoughts is that of his theory of rent. He was the first thinker in economics to articulate the notion of rents or the advantage that goes to owners of assets for merely owning such assets. He outlined that some people like landowners without any contribution to the productive process got benefits for just their privileged position of owning.
This notion is what in later years will be developed into the concept of “rent seeking”, a term generally used to derogatively describe a situation where individuals or organizations use their privileged position to gain and consolidate an advantage for themselves in a system.
David Ricardo’s most popular idea is perhaps his elaboration of the labour value which puts him as a labour centric economist. David Ricardo’s labour theory of value argues that the value of a good or service could be measured by the amount of labour required to produce such good or service.
For David Ricardo however, this value of labour should not be based on or linked to the compensation to be paid to labourers but it should be seen as a means or measurement of the total cost of production. So, in line with his theory, in a system where it takes two hours to make a table and it takes one hour to make a chair, the table is worth more than the chair: that table is worth two chairs. The table is worth twice the chair regardless of how much the labourers are paid.
Of all his ideas and positions, David Ricardo’s ideas as expressed in his labour theory of value and that of rent are perhaps the clearest links that take a student of economics from David Ricardo to Karl Marx. Literature is awash with positions that argue that a lot of Marxist ideas are built around the Ricardian economics, everything is possible but that certainly was not the idea or intention of David Ricardo. If Ricardo is the father of Marxism, then he was an accidental father.
Join me if you can on twitter @anthonykila to continue these conversations.
- Prof Anthony Kila is Centre Director at CIAPS Lagos.
