David Ricardo
Candlefocus EditorRicardo is best known for his theories of comparative advantage, economic rents, and the labor theory of value. His defining work, Principles of Political Economy and Taxation, published in 1817, summarizes his economic theories and remains influential in modern neoclassical economics.
His most famous contribution is his theory of comparative advantage, which suggests that two nations can gain from international trade even if one of them is relatively more efficient than the other in all fields of production. He explained this principle with an example of a country making wine and another making cloth. In this analogy, Ricardo proposed that even if the cloth producing country was far less efficient in making wine, it can still use its “absolute” advantage in cloth production to gain an international trade advantage. Thus, Ricardo’s theory of comparative advantage makes the case for free trade, claims that nations should specialize in what they create best, and improves global efficiency.
Ricardo’s other key contribution was his theory of economic rent. According to this theory, land owners are able to earn an unnaturally high income on their investments, which results from their monopolizing power over a scarce resource, such as in land or agricultural products. Ricardo further explained that a rent's benefit is distributed unequally, disproportionately favoring those with the greatest economic privilege.
Finally, the core of Ricardo’s economic theories was his labor theory of value. This argues that value is determined by the labor hours invested in the production of a given commodity. Ricardo stated that, while costs of production may rise due to the skyrocketing prices of raw materials, the amount of labor used in production remains constant. By this, Ricardo proposed that the value of a good is determined by the labor costs put forth in creating it.
David Ricardo's theories remain at the forefront of economic thought today, influencing economists from Karl Marx to Adam Smith. It is clear that Ricardo's groundbreaking economic contributions will continue to shape economic discourse for many years to come.