Introduction to Ricardo

Introduction to Ricardo


One of the most important classical
economist in England was David Ricardo. He started out as a stockbroker
following in his father’s footsteps joining the family firm. He retired from being
a stockbroker at a young age having a massive enough wealth to live on
and become a gentleman of leisure, and was on vacation with the family, and tried to do some light beach reading, and picked up Adam Smith’s “An Inquiry into
the Nature and Causes of the Wealth of Nations.” Ricardo was riveted, absolutely riveted. And so for his retirement career he took up political economy. Ricardo developed a strong correspondence and working relationship with Thomas Malthus. In many ways, — Malthus’ population theory arguments — undergirded Ricardo’s theories. But at the same time they were
also antagonist in certain ways. So they both very actively wrote letters, back and forth, to newspapers, various periodicals. So they had this very lively — public epistolary — working antagonism that was
a healthy and constructive one — and generated a lot of ideas exploration
and a lot of new knowledge. The Napoleonic War’s going on. So, — in about 1804, with — the British blockade in the English Channel. And Napoleon’s response
to the English blockade of their continental system
that basically said: All right, if you’re gonna put a blockade up
against French ships in the English Channel, we are going to close all of our ports
and all of our market towns to any kind of British merchandise whatsoever. That meant that
their traditional import of wheat, or grains more generally,
as they were called at the time corn, corn means grain more generally. Their traditionally import of wheat
from places like Russia were interrupted. So a lot of the increase in wheat prices
were being felt by the poorest workers, the poorest residents in England. And one of the other consequences was that those who grew wheat and sold wheat were profiting very handsomely. So, some parties are arguing for trying
to find substitute import of grains. And farmers or land owners, who also themselves are often
neither members of parliament at this time or very very friendly with
other members of parliament at this time, do a very effective job of implementing,
in England in 1804, corn laws. And corn laws basically impose
a tariff on any imported grain. Taking this idea that price is determined
by wages, rent and profits, — how does that high rent
to land affect prices? This is Ricardo’s argument. And how does that affect
income and wealth distribution? Because, if people who consume
bread are paying higher prices tend to be lower income workers, and people who are receiving
higher prices are land owners. Ricardo was concerned about the income
distribution that’s implied by that impact. So, he wants to build a theory. What he is gonna do is he is gonna take the economist Turgot’s ideas
of diminishing returns. Turgot was finance administer
briefly in France for Louis XVI, was friendly with the physiocrats, and developed a lot of new ideas. And in the late 1860s, he wrote a piece where he developed
this idea of diminishing returns. Turgot more generally thought
of diminishing returns in terms of land. And that the more land
you bring under cultivation, that that incremental land is not necessarily
going to yield you as much per acre as the previous ones did. Ricardo takes Turgot’s idea
of diminishing returns and runs with it. He starts by defining rent as the original indestructible powers of the soil. Ricardo’s idea is that the land itself, this fixed supply factor,
this fixed supply input into production has original and indestructible characteristics that contribute to
the production of commodities, agricultural commodities in this case. And that the return to land is the return to these original
and indestructible powers of the soil. So he builds this theoretical
model with two inputs. And the two inputs are land, and this land is going to be
a fixed factor with no alternative uses other than growing crops. And the other input is — a composite input of labor and capital
that I call “man with shovel.” The idea with man with shovel
is obviously labor plus capital. If you hire an other worker, that worker is not going
to increase agricultural output unless that worker also has a shovel. You can think of it as a fixed
proportion production function where each unit of labor
is paired with a unit of capital. So, man with shovel. This is what Ricardo’s question is: What happens to the rent that accrues to
the indestructible power of the soil — as you introduce successive
doses of labor and capital. So notice here that he’s not developing
in a way that we’ve come to developed it, but he’s very much using
a marginal analysis here. What he ultimately is going to argue is that because labor and capital are more flexible and are more easy to increase where land is in fixed supply that if you think in terms of the split of the share of national income that’s
gonna go to the wages, rents and profits that because land is in fixed supply,
it’s always gonna be the scarce resource. And so rents are gonna increase
as a shared national income. And so that’s his concern when he thinks
about the distribution implications of these protectionist policies
such as the corn laws. So the policy implication that he draws
from this is pretty straightforward. That reducing trade barriers,
reducing importing tariffs, allowing for free trade will reduce — those what he sees is as artificial
augmentations to the rent that accrues to land and the shift of the share of national income from labor to land owners to land. And so that’s Ricardo’s argument
in his rent theory for free trade policy. In the 1830s, the Anti-Corn Law League was established by some of the classical liberal
policy makers of the day, Richard Cobden and John Bright. And they worked vigorously for a decade and ultimately got the political coalition
they needed to end a changing government to bring about the repeal
of the Corn Laws in 1846. And Ricardo’s rent theory and
his theory of comparative advantage both laid the theoretical foundation for this political move towards free trade and the lower barriers and lower grain prices.

10 Comments

  1. Garciamrcool says:

    Excellent thank you

  2. Autodidactus Plays JRPGs says:

    I'm reading Ricardo straight from his major work. His way of thinking cannot be summarized into a small review of his major contributions. I would encourage anyone interested in Ricardo to read him directly.

  3. Megalodon Ideas says:

    she's reading off a prompt ? really, and this woman has a PhD !!

  4. Asad Khan says:

    Corn Laws in Britain were enforced in 1815 , not 1804. Please correct that historical error.

  5. Daniel Natal says:

    South Korean economist Ha-Joon Chang points out that England's economy had its biggest growth not under the free trade period, but under its most "protectionist" period (I think it was from 1710-1840). Since the rise of neo-liberalism since the late 20th Century, "free trade" is a mantra, and "protectionism" is taught as a "dirty word". In reality, both the British Empire and the United States had their largest growth spurts when they were most protectionist. And now, having accrued all their wealth and power, they're advising developing nations to adopt free trade–which is designed to keep them poor. "You don't need to use tariffs to protect your infant industries like we did. Just let our mega-corporations come in. Who cares if this will destroy your own internal industries?" Ricardo Hausmann at Harvard (who created the "Atlas for Economic Complexity") points out that David Ricardo's theory of "Comparative Advantage" is a recipe for keeping nations poor. Hence why neo-liberals promote it to developing nations. . . . It's always depressing when I click economic videos on Youtube and see how much group-think rules Academia. "Free trade is an unquestioned good! It's bitchin'! Incredible! . . . Just don't pay attention to the poor countries that have bought into it, and all the economic success stories of the nations who rejected it . . . like South Korea that went from Haiti's GDP in 1962 to Switzerland's in 2018–by using tariffs and protectionism. Or Vietnam. Or China. Don't look at China! You don't need those 11% growth rates. Now Guatemala: THEY embraced free trade. And they're at a respectable 0.0001% growth rate.")

  6. Edward Dodson says:

    Ricardo's contribution to the development of political economy as an objective science was certainly important. Yes, he took from Turgot but did not attempt to analysis on its merits the Physiocratic call for a "impot unique" (i.e., the public collection of the rent of land as the primary source of revenue to pay for public goods and services). The moral arguments were added to those of economic efficiency by the Scot, Patrick Edward Dove, whose work (The Theory of Human Progression) is on a par with Smith or Ricardo but is less well known.

    Edward J. Dodson, Director
    School of Cooperative Individualism
    www.cooperative-individualism.org

  7. Teo Ph says:

    I like Prof. Lynne Kiesling's presentation of the economic thought of some famous economists, including Adam Smith and David Ricardo.

  8. ChicagoTurtle1 says:

    God. She’s stupid.

  9. Edmond Hellawell says:

    i dont get it

  10. AwesomeMan says:

    I would smash. Just saying.

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