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David Ricardo’s Economic Theories Essay

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Updated: Apr 26th, 2021

David Ricardo was among the most successful economic theorists who lived in the early nineteenth century. Ricardo started to explore economics when he had less than thirty years. At the age of thirty-seven, Ricardo wrote his first journal. He would later spend another fourteen years as a renowned economist. He attracted the attention of economists for the first time with his reaction to the Bullion Controversy. He was the first to develop the monetary value of the currency and the effects of issues excess notes to the economy. As a result, Ricardo became one of the earlier political economists to support the quantity theory of money. His ideas on this concept were renamed monetarism, which is still applied in contemporary economics.

While analyzing the influence of low corn prices on the profits earned from stocks, Ricardo developed series of arguments that would the basic framework of the contemporary law of diminishing marginal returns. It posits that production with a fixed resource results from a combination of more resources. For instance, the land is a fixed resource, which can accommodate many resources such as labor and machinery. As a result, the output will reduce.

At the same time, Ricardo established a theory that criticized the Corn Laws that because it included restrictions on the foreign wheat1. Rather, he supported free trade through the formulation the comparative costs. The idea is currently known as the comparative advantage. The theoretical position of Ricardo concerning the theory of money was based on provisions of specific gold coin standard, according to which the law stipulated the amount of gold coin minted for circulation subject to free bargaining and guaranteed on paper money. His ideas on this concept were renamed monetarism, which is still applied in contemporary economics.

Economists who came before Ricardo such as Paul Samuelson used equations as the popular approach in explaining their economics theories. Nevertheless, Ricardo applied strange approaches to providing solutions to complex economic problems2. He did not use mathematics, which is now an essential tool to study and analyze economic situations. One of the main contributions in the field that Ricardo developed without the use of mathematics as a tool is the theory of rents3. Following the footsteps of his close friend Thomas Malthus, Ricardo developed the concept of rents as a comparative analysis between the less productive and highly productive pieces of land. The contemporary analysis of economic situations still applies the idea.

Ricardo argued that as farmers cultivated more of the land, they would begin utilizing the less productive land. However, harvests from the less productive land are sold at the same price as those from highly productive pieces of land4.

Because of that, tenants would want to pay more to acquire the highly productive pieces of land. As a result, the landowners of productive pieces of land benefit while the tenants do not get anything substantial. The theory has stood the test of time, and it still applies in the current economic context. The contemporary economists still use the concept in explaining the fact that subsidizing the prices of agricultural products does not support farmers per se. His successors would use similar ideas that significant beneficiaries of economic activities in an industry do have direct roles in those activities5.

Another most essential economic theory developed by Ricardo is the theory of value. In this concept, he opened a new chapter in the study of the political and economic aspects of a country. According to the theory, Ricardo posits that the value of an economy in terms of goods and services is determined by the amount of labor needed to work. It is not determined by the pleasure they get from the economy6. However, the theory is based on three main assumptions. It assumes that all economic sectors have the same rates of wages and profits. The second assumption is that wages are the only capital used in production.

Lastly, it assumes that the length of the production period is the same for all goods. The first assumption is realistic in a practical economic environment7. However, the last two assumptions are impractical. As a result, he developed new exceptional ideas to support the argument. He posited that the production periods might be different. On the other hand, he suggested that production processes might use other forms of capital such as machinery apart from wages.

The theory of value is still applicable in the current economic contexts. It is based on the idea that the economic value of something is directly proportional to the labor that was expended to create the thing. However, Karl Marx would later develop the theory into details to become one of the most influential political-economic ideas. Even though they share the same idea, Marx argued that the value of a commodity is directly proportional to the amount of the necessary social labor, which can produce it in a given time8.

The people employed as laborers earn wages in exchange for the time they spend working. Meanwhile, the capitalist or the bourgeois owns both the production means and the product9. For the proletariats to survive, they will have to depend on the bourgeois, who sustains by paying for the services their render at workplaces.

Ricardo used the idea of “socially necessary” to define the labor necessary for the production of a product quantity under normal circumstances and within a duration. In a capitalistic economy, the value of labor is illustrated in three different ways. The first one is the constant capital, which comprises of equipment, location, and space needed. The second one is the variable capital, which consists of wages paid to workers.

The last one is the surplus, which the scrounging deductions taken by the bourgeois from the expected profit. A capitalistic economy has a general profit rate at any instant10. The general profit rate is the average of all rates achieved from different micro-markets. It is because each micro-market has its unique aspects of the trade. Therefore, to analyze an economy in terms of average rate, rates in all micro-markets are added and divided by the number of such markets.

When the profit rate of a certain commodity in the market is equal to the general profit rate, it implies that the value of the surplus will be equal to the profit given to the capitalist or the bourgeois. However, it is important to know that commodities bring varied profits. Depending on nature, quantity, and other attributes, certain products accrue higher profits, some lower profits, while certain commodities give average profit. In such instances, the labor value of the commodity does not match its production cost11. Such comparison is essential when planning economic policies and activities within a capitalistic environment.

Ricardo created an economic model that would be called the Ricardian Model. In this economic framework, Ricardo addresses economic issues in terms of capitalism, labor, and land ownership. According to Ricardo, the capitalists are the most important actors because they are the producers and directors of economic activities. The bourgeois has two main roles in an economy12. Their first role is the allocation of resources because they hold all means of production13. Their second role is the initiation of economic growth through savings and investments.

It also seems of great importance to point out the fact that Ricardo was convinced that the model of value remains in force under capitalism. Ricardo’s works played a significant role in the development of such areas of economics as the circulation of money and credit, international economic relations as well as taxes. In the theory of ground rent as well as in the international division of labor, the ideas expressed by Ricardo were included in the golden fund of economic thought. The central feature of capitalism Ricardo saw in the considerable and integral increase of the production of material goods.

Even though Ricardo uses the labor cost concept in explaining the relative changes in prices over time, labor is a passive element in his model. He used the doctrine of wages and the theory of the Malthusian Population in explaining the actual labor as the quotient of wage fund and labor force. If the wages fund increases because of the capital accumulation, the actual wages increase in the short run14. Subsequently, the increase in wages causes an increase in population and subsequent increase in the labor force. A sufficient increase in the labor force to reduce the actual wages to the subsistence level will create a long-run equilibrium in an economy.

Bibliography

Hollander, Samuel. “The Economics of David Ricardo.”Economica 48, no. 189 (1981): 95-108.

Kurz, Heinz. “The Reception of David Ricardo in Continental Europe and Japan, Edited by Gilbert Faccarello and Masashi Izumo.”The European Journal of the History of Economic Thought 22, no. 2 (2015): 918-922.

Oatley, Thomas. International Political Economy: Interests and Institutions in the Global Economy. 5th ed. New York: Pearson/Longman, 2008.

Stirati, Antonella. The Theory of Wages in Classical Economics: A Study of Adam Smith, David Ricardo, and Their Contemporaries. Aldershot: E. Elgar, 1994.

Seay, W. “The origins of Political Economy.”Virginia Commonwealth University. Fall 2015.

Footnotes

  1. Seay W, “The origins of Political Economy,” Virginia Commonwealth University, Fall 2015.
  2. Samuel Hollander,”The Economics of David Ricardo,” Economica 48, no. 189 (1981): 95.
  3. AntonellaStirati, The Theory of Wages in Classical Economics: A Study of Adam Smith, David Ricardo, and Their Contemporaries (Aldershot: E. Elgar, 1994), 45.
  4. Ibid.
  5. HeinzKurz, “The Reception of David Ricardo in Continental Europe and Japan, ed. Gilbert Faccarello and Masashi Izumo,” The European Journal of the History of Economic Thought 22, no. 2 (2015): 919.
  6. Ibid., 98.
  7. OatleyThomas, International Political Economy: Interests and Institutions in the Global Economy. 5th ed. (New York: Pearson/Longman, 2008), 94.
  8. Ibid., 101.
  9. Ibid., 98.
  10. Ibid., 920.
  11. Ibid., 78.
  12. Ibid.
  13. Ibid., 921.
  14. Ibid., 102.
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