David Ricardo as an Influential Economist - Essay Example

David Ricardo al affiliation David Ricardo, a political economist, was born in 1772. Ricardo was an influential ical economist who started his career as a financial speculator and stock broker. Ricardo was inspired to pursue economics after he read Adam Smith’s Wealth of Nations. Subsequently, Ricardo began writing his own ideas on economics. Ricardo’s most important contribution to economics is his theory on comparative advantage which formed the basis of international trade. In 1815 he wrote the Essay on the Influence of Low Price of Corn on the Profits of Stock. In this article he expressed the idea of the law of diminishing returns. Principles of Political Economy and Taxation was published in 1817. In this publication, Ricardo developed law of rent as well as the labor theory of money (Gonner, 2013). The theory of comparative advantage, as developed by Ricardo, tries to explain the benefit of engaging in international trade. The theory was initially discussed by Adam Smith in the Wealth of Nations. The theory was, however, clearly developed by Ricardo in the book On the principles of Political Economy and Taxation. In the development of the comparative advantage theory, Ricardo observed that if two countries with a capability of producing two products participate in free trade, each of the two countries will increase productivity by exporting the commodity that it has a comparative advantage in production. The country would then import the other commodity. In this theory, Ricardo implies that comparative advantage, and not absolute advantage, is responsible for international trade (Gonner, 2013). The example used by Ricardo to explain comparative advantage involved England and Portugal. In this example, the two countries produce cloth and wine. However, Portugal is more efficient in the production of the two commodities compared to England. England needs 100 hours to produce a unit of cloth and 120 hours to produce a unit of wine. Portugal on the other hand requires 90 hours to produce unit of cloth and 80 hours to produce a unit of wine. In this case, England requires 100 hours to produce cloth, which can instead produce an incomplete unit of wine. Portugal can produce a unit of cloth with few hours compared to England. However, Portugal must forego the production of more units of wine in order to produce a single unit of cloth. Although Portugal has an absolute advantage in the production of cloth, England has a comparative advantage in the production of cloth. In this example, England has a comparative advantage in the production of cloth while Portugal has a comparative advantage in the production of wine. Accordingly, Ricardo argued that if the two countries specialized in the production of the commodity they possess a comparative advantage; a trade between the two countries would be beneficial. In his observation, a free trade between the two countries with the exportation of the commodity with comparative advantage and importing the commodity without comparative advantage would increase overall consumption (Costinot & Donaldson, 2012). Another notable contribution by Ricardo is the law of rent. Following the Corn Law controversy, Ricardo with other economists developed the principle of diminishing returns. This principle follows that if one factor of production is increased while keeping the other factors constant, the rate of increase in total production diminishes. The law of rent assumes that the quantity of land is fixed and an increase in the demand of land would result in an increase in land rent. According to Ricardo, land rent is necessary due to the law of diminishing returns and scarcity of good land. Additionally, the amount of rent will vary due to competition for good land, which will result in unequal profits for all types of land. With an increase in population more land would have to be brought into cultivation. The additional land brought under cultivation would, however, yield increased marginal profitability. The reduced profits from land would be a result of diminishing returns. In his explanation of the Law of rent, Ricardo observed that as more land is brought under cultivation, less productive land would have to be used. However, because the prices of the products in the less productive land have a similar price to those from more productive land, farmers would be willing to pay more to cultivate the more productive land. Accordingly, the land owners, but not the farmers, will benefit from the productive land (King, 2013). Ricardo also developed the labor theory of value. In his theory, Ricardo notes that the value of a commodity is proportional to the amount of labor required to produce that commodity. In this theory, Ricardo is keen to note the distinction between the quantity of labor that is required to produce a commodity from the wages that is paid to the laborers for the production of the commodity. This distinction was to clarify the circular reasoning of evident in Smith’s labor cost theory of relative prices. According to this theory, the prices of a commodity are determined by the amount of labor required to produce it. However, Ricardo found exceptions where the labor theory would not hold. Ricardo’s theory of value, which was developed as a result of the Corn Laws, was against tariffs and supported free trade. His reasoning was that increased tariffs would reduce the amount of profits which would result in a reduced rate of capital accumulation. Since the rate of economic growth is determined by the rate of capital accumulation, tariffs would slow economic growth (Costinot & Donaldson, 2012). David Ricardo was an influential economist who made significant contributions to the concept of comparative advantage, the law of diminishing returns, economic rent and the labor theory of value. He was inspired by Adam Smith and most of his work was built upon the ideas of Smith. However, unlike Smith, he took a more narrow approach while including ideas of social philosophy. His views were widely supported and he achieved a leading position in the fields of economics. His work influenced many and his considered one of the founders of classical economics. Although most of his work has been modified or superseded by new approaches, he remains an important figure who revolutionized economics (King, 2013). Reference list Costinot, A., & Donaldson, D. (2012). Ricardos theory of comparative advantage: old idea, new evidence (No. w17969). National Bureau of Economic Research. Gonner, E. C. K. (Ed.). (2013). Economic Essays by David Ricardo. Routledge. King, J. E. (2013). David Ricardo. 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