David Ricardo: Biography and Influence - Essay Example

David Ricardo - A biography A: David Ricardo - biography David Ricardo, the eminent British economist, was born to Iberian Jewish parents on 19 April 1772. He received his basic schooling in Holland and at the age of 14 he was employed in the London Stock Exchange by his father, himself a stock broker. Ricardo picked up the nuances of the stock trade quickly and became well known. Breaking from his family's orthodox Jew traditions, Ricardo married a Quaker, Priscilla Anne Wilkinson, at the age of 21 in 1793 and established his own business as a dealer in Government securities. Having acquired immense riches in his business, at the age of 41, in 1814, he decided to retire from his business, bought the estate of Gatcomb Park and settled down to lead the life of a country gentleman. Ricardo was elected to the British parliament in 1819 as an independent representative of a borough in Ireland, Portarlington, which he served till his death in 1823. B: Ricardo -times and influences David Ricardo, lived in the times just at the beginning of the Industrial revolution and this is what perhaps influences his thinking on 'Machinery' (discussed below). Ricardo took a keen interest in the study of economics and formulated the 'Classical' system of political economy. His interest in economics was sparked by a chance reading of Adam Smith's 'The Wealth of Nations' while on vacation in 1799, in which Adam Smith focuses most of his attention on the problem of economic growth and his belief that an evolving capitalist system could benefit society as a whole. According to Smith's analysis the economy possesses unlimited upward potential. C. Ricardo - his ideas Ricardo's first written comments on economics appear to be two essays written in 1810 and 1811 (The High Price of Bullion, a Proof of the Depreciation of Bank Notes) articulating his position in favour of the 'Bullionist' position. He argued in favour of a metallic currency, giving a fresh stimulus to the controversy about the policy of the Bank of England. This has since become known as the classical approach to the theory of money, which argued for the resumption of the convertibility of paper money into gold. The Bullion Committee appointed by the House of Commons in 1819 confirmed Ricardo's views and recommended the repeal of the Bank Restriction Act. Ricardo was a firm believer in Say's Law that states that there can be no demand without supply and that recession does not occur because of failure in demand or lack of money. In these tracts Ricardo also suggested the impossibility of a 'general glut', or an excess supply of all goods in an economy as proposed by Thomas Robert Malthus. This provoked a debate with Malthus that culminated in Ricardo writing a series of notes on Mathus's 1820 'principles'. These notes were published posthumously as Notes on Malthus. In 1815 he published his first complete work 'Essay on the Influence of a Low Price of Corn on the Profits of Stock' where he introduced the differential theory of rent and the "law of diminishing returns" to land cultivation. He argued that raising the duties on imported grain had the effect of increasing the price of corn and hence increasing the incomes of landowners and the aristocracy at the expense of the working classes and the rising industrial class. In Essay Ricardo formulated his theory of distribution in a one-commodity ("corn") economy. With wages at their "natural" level, Ricardo argued that rate of profit and rents were determined residually in the agricultural sector. He then used the concept of arbitrage to claim that the agricultural profit and wage rates would be equal to the counterparts in industrial sectors. With this theory, he could show that a rise in wages did not lead to higher prices, but merely lowered profits. Ricardo took economics to an unprecedented degree of theoretical sophistication by formalising the 'Classical' system more clearly and consistently than anyone before had done and what became known as the "Classical" or"Ricardian" School (of thought). In Principles he analysed the distribution of money among the landlords, workers, and owners of capital. He found the relative domestic values of commodities were determined by the quantities of labour required in their production; rent being eliminated from the costs of production. He concluded that profits vary inversely with wages, which move with the cost of necessaries, and that rent tends to increase as population grows, rising as the costs of cultivation rise. He was concerned about the population growing too rapidly, in case it depressed wages to the subsistence level, reduce profits and checked capital formation. Ricardo suggested two things which might hold this law of diminishing returns at bay and keep accumulation going at least for a while: technical progress and foreign trade. On technical progress, Ricardo was ambivalent. One the one hand, he recognized that technical improvements would help push the marginal product of land cultivation upwards and thus allow for more growth. But, he also noted that technical progress requires the introduction of labour-saving machinery. This is expensive and so would reduce the wages fund and thus either wages must fall or workers must be fired. Some of these unemployed workers may be mopped up by the greater amount of accumulation that the extra profits will permit, but it might not be enough. A pool of unemployed might remain, placing downward pressure on wages. On foreign trade, Ricardo set forth his famous theory of comparative dvantage. Using his famous example of two nations (Portugal and England) and two commodities (wine and cloth), Ricardo argued that trade would be beneficial even if Portugal held an absolute cost advantage over England in both commodities. Ricardo's argument was that there are gains from trade if each nation specializes completely in the production of the good in which it has a "comparative" cost advantage in producing, and then trades with the other nation for the other good. He assumed that the labour theory of value does not hold across countries because, according to him, factors, particularly labour, are not mobile across borders. D. Ricardo in the Spectrum of Economic Thought If we classify economic thought in the same spectrum as political thought; ranging from communist - Socialist - Liberal - Capitalist - Fascist we can clearly identify Ricardo and indeed Smith and Malthus as sited clearly in the Capitalist bracket. The classical economics did not emerge as a scientific theory, but as a polemic in defence of the trading classes (Heilbronner, 2000)1. These economists' discourses clearly considered the poor were essentially a problem: raise their wages and the wretches would proliferate, putting pressure on the land and threatening profits; provide "excessive" welfare and they would not work, discouraging new capital investments. Modern economics retains this general orientation; where it has difficulty accommodating a concern for the poor or the implementation of inequality-reducing policies since the latter can easily become a fetter to competition. E. Ricardo - relevance in current economic scenario As per Ricardo, the benefits of trade increase with relative specialization. The idea of comparative advantage - with its implication that trade between two nations normally raises the real incomes of both is a concept that is eminently applicable in today's world. If we examine the emergence of the East Asian and Chinese economies where we find highly successful strategies where nations forewent current consumption to invest in their own proficiencies. In addition to these examples of protectionism and the rise of the eastern economies, there is the United States' huge advantage in the field of computer chip design, which gestated behind trade restrictions and with generous regular infusions of government investment, an example of gross example of economic inefficiency, the results of which are evident. Read More