Ricardo took economic thinking to a new level with his papers, and the Ricardian school of thought was the most influential school of thought for the majority of 19th century. During his life he had my three main supporters; James Mill (1773-1836), who as I mentioned above helped pushed Ricardo into parliament but not only that, it has also been argued that he acted as a ‘school-master’ helping Ricardo who hadn’t received a lot of formal education to write his treatise in 1817. The second main supporter was John McCulloch (1789-1864), a Scottish journalist who as Fetter said in 1965 was a ‘tireless salesman for Ricardian Economics’. His review of Ricardo’s work in 1818 greatly helped to boost the sales of the treatise. The third supporter was Thomas de Quincy (1785-1859), although he was better known as a writer rather than an economist he was nevertheless a true advocate of Ricardo’s theories. I will now look at some of these theories in more detail.
In 1810 as I mentioned earlier, Ricardo released his first major work titled ‘The High Price of Bullion, A Proof of the Depreciation of Bank Notes’. In this paper he set out what is today known as the Classical Theory of Money. The paper was written with the hope of reinstating the gold standard. The debate came about because in 1797, under the threat of French invasion, the government informed banks that they no longer had to honour the standard that any note could be taken to a bank and redeemed for the equivalent amount of gold. This was done to stop a run and was successful in doing so. However the government with this disaster avoided didn’t reinstate the gold standard and banks continued to issue notes that they could not convert back. Ricardo argued in his paper that banks, if not forced to stick to the gold standard, would excessively issue bank notes and there would be a surplus supply of money, this would push up the general price and lead to inflation across the board. He was not alone in his thinking and just a few months after the papers release Francis Homer requested a committee be set up to investigate the problem. Ricardo was called to give evidence before this committee and although the gold standard wasn’t re-established until an act was passed in 1819 and came into effect in 1821, citing reasons very similar to Ricardo’s initial argument ten years earlier.
In 1815 came his next major work, titled ‘An Essay on the Influence of a Low Price of Corn on Profits’. In this essay Ricardo introduced his theory of distribution, applicable to the corn market and expanded on the law of diminishing returns, as previously mention by writers such as John Locke. Ricardo in this paper was a great advocate of laissez-faire economics. The background to it was that England were protecting their agriculture by imposing tariffs on imported corn, this had the effect of pushing up prices for corn and so making land that wasn’t economically viable before profitable. This then resulted in landowners pushing up the rents on the land and so reducing profits for the capitalists, this in turn meant the capitalists had less profit to re-invest and so economic growth would slow until in the long run becoming zero. On top of this Ricardo stated that in the long-run diminishing returns would set in. He argued that if a factor of production, in his case land, was kept constant and another factor, for example labour, was increased then the increased returns relative to the extra labour would, after a certain point, start to drop. Although this theory had been put forward by other writers, it wasn’t until David Ricardo set it out, that it was truly noticed. Ricardo took some criticism for this piece notably from his good friend the Rev. Thomas Malthus who argued that the model was for a single-good economy and was over simplified as it had no theory of value in it. So in 1817 Ricardo released his main treatise ‘Principles of the Political Economy and Taxation’.
In this paper Ricardo links his theory of distribution to his theory of value in a multi-commodity marketplace. This was really an updated and extended version made vastly more complex of his 1815 Essay. However in this treatise Ricardo illustrates one of the most renowned economic theories, the theory of comparative advantage. This theory was based on relative opportunity costs between countries. It was based on a number of assumptions in order to simplify it but for it’s time it was and still is a brilliant example of Ricardo’s work. He used a numerical example to illustrate what he meant and this is shown below:
The figures represent hours per man and as you can see it would appear that Portugal has absolute advantage in both industries and so would not need to trade with England. However if you look at the relative costs you can see that England have a comparative advantage in cloth as to produce 1 unit of cloth, England sacrifice 1½ units of wine, whereas Portugal would sacrifice 2¼ units of wine. This means that it is in the interest of both countries to produce the good that they have a comparative advantage in and then trade with each other. This empirical evidence is still valid today, and this theory is arguably Ricardo’s most famous.
To sum up everything that David Ricardo has contributed to economics would a huge challenge, he directly influenced government policy both domestic and foreign during his life and he was the founding member of the most influential school of the 19th century. His theories have influenced Karl Marx, John Keynes and even Milton Friedman and today his economic theories although some time adapted still remain true today. It can therefore be conclude with absolute certainty that David Ricardo has contributed to economics on a level that very few others have or will ever.