david ricardo

University Degree Business and Administrative studies

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Explain how Ricardo’s economic theories provided the essential theoretical critique of the Corn Laws.

Introduction

David Ricardo was born in London on 19th April 1772, son of Jewish merchant-banker from Holland; Ricardo joined his father as a stockbroker at the age of 14. When Ricardo married to a Quaker, his father cut him up from the business. Ricardo became a Unitarian and at the age of 22 with a capital of £800 with the support of financial community, he became an independent stockbroker. He was also known to be the successful businessmen, who retired at 42 with a fortune of approximately £1 million and established himself as a landowner.

Ricardo was an independent member of the parliament from 1819 until his death. During his time, he supported a tax on capital to pay off the national debt; currency reform; abolition of Corn Law.

The Corn Laws

In 1804, Corn Law was first introduced in Britain because of the landowners at that time who elected in the parliament thought to have protected their profits by imposing a duty on the imported corn. During the war period, it was very hard to import corn from Europe. This result to an expansion of British wheat and because of the shortage of bread prices was touching the sky.

Farmers at that time feared that as soon as the war ended prices of corn will decrease which did happen as they predicted and the price of corn decreased from 126.6d a quarter to 65 shillings a quarter. The landowners protested against this to protect the profits of the farmers. The parliament passed on a law, which permitted the import of foreign wheat without any duty only when the domestic price of wheat reached to 80 shilling a quarter.

People living in Britain at that time were not happy with this legislation because the population living in the fast growing towns will have to pay higher bread prices. The industrial sector criticised this as they thought that Corn Law is passed by the parliament in favour for the big landowners. The manufacturers were only concerned that the Corn Law would result in higher wages.

However, David Ricardo believed in free trade so Britain could use its capital and population to their comparative advantages.

“Foreign trade, then, though highly beneficial to a country, as it increases the amount and variety ...

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However, David Ricardo believed in free trade so Britain could use its capital and population to their comparative advantages.

“Foreign trade, then, though highly beneficial to a country, as it increases the amount and variety of the objects on which revenue may be expended, and affords, by the abundance and cheapness of commoditites, incentives to saving, and to the accumulation of capital, has no tendency to raise the profits of stock unless the commodities imported be of that description on which the wages of labour are expended.” www.daviddfriedman.com/Academic/Course_Pages/History_of_Thought_98/Ricardo

In 1836, Anti-Corn Law association had been formed in London between 1841 and 1845. This association grew into a very powerful and political force. It used every opportunity to attack the government, which was backed up by anti Corn Law and anti government forces.

Ricardo’s Theory Of Rent

One of the chief contributions of Ricardo is his theory of rent. In this theory, Ricardo broke with the physicians, who believed that rent resulted from the bounty of nature alone, by showing that is was created only “when the progress of population calls into cultivation land of an inferior quality, or less advantageously situated.” When population of a certain area rises, more food is required and less land is planted. Rent is the difference in the price of wheat per acre between the superior and inferior productive land. As population grows, rent increases with capitals profits and labours wages. Landlords and capitalist were necessary enemies.

Ricardo explained that due to increase in the population rate, farmers should also prefer less productive land. According to Ricardo’s experience, a bushel of corn which was from a less productive land should sold for the same price as a bushel of corn produced from a highly productive land. Therefore, tenant farmers would have to pay more to rent the highly productive land.

This means there is no absolute rent i.e.-e rent paid for cultivating land of the poor quality. The rent that is differential rent which is paid to the owner for the use of superior quality land, as farmers prefer land of increasing inferior quality under cultivation. The rent as a whole goes to the owner of the land resulting in the landowner making a profit and the farmer actually losing money by paying to much rent.

"Rent is that portion of the earth, which is paid
to the landlord for the use of the original
and indestructible powers of the soil."

There are two stages of Ricardo’s argument. He argued on the fact that the price of corn, including the wages of labour remains same. At the start of a given economic development, we suppose that the food requirements can be met by using only the superior and better-located land. In this case, there is no rent and the result from a given land total of all expanses, is completely changed into the profit of the capitalist who has invested his capital in the land.

After a rise in population, one must put under cultivation less fertile land. In these circumstances, one will obtain less rate of profit. However, due to competition, the land cultivated during the first phase will not be able to earn more profit than that earned on the second phase. This gives rise to a differential rent. Therefore, we concluded that as the process slowly goes on, the profit rate decreases while rent increases.

Ricardo’s Theory Of Comparative Advantage

According to Ricardo’s theory, even if a country could produce everything more efficiently than another country, it could still maximise trade from the commodities one country is best at producing and trading with other countries. David Ricardo believed that nation should be left to free competition, so there should be no restrictions on the importation of agricultural goods from abroad.

Ricardo extended the theory of Adam Smith on comparative advantages. So that country can import or export on goods with other nations without any cost. According to the comparative theory, if one nation can produce a good at low production cost than the other nation, while other nation can produce some other good at low production cost then they can exchange each other’s goods. This will result in each nation gaining power to the goods, which they do not specialise in, which cost it least to produce.

David Ricardo was the first economist to argue that nations should be trading free even though they are producing the commodities which they specialises in very efficiently than other nations.

Thus, Ricardo argued that a country do not have to have absolute advantage of any goods they specialise in to carry out international trade between other countries to be benefited. He also argued that two nations could both benefit from trade if each has either comparative or relative advantage. This means that the ratio of labour used in two goods will be different between two countries, in a way that each country will have one good where the labour of the production of commodity will be less then the other county.

Conclusion

In conclusion, by discussing the theories we can see that a rise in population affect wages in the same way it affects rent. An increase in population results in rent to increase because less fertile land must be cultivated in order to provide the necessity of food for the people. There fore the land with the higher value must pay a rent that is equal to the difference between the produces of higher and the lesser valued land.

Similarly, a country should become specialised in products and services in which they have a comparative advantage. They should then trade with other countries that have products in which that country also has a comparative advantage. If so both countries will be, better off and continue to grow in wealth and financial status.

I think Ricardo’s theory plays a significant role with in the corn laws as according to Ricardo country must be allowed to trade free of duty with foreign countries in order to maximise their capital.