David Ricardo, 1772-1823

The brilliant British economist David Ricardo was one the most important figures in the development of economic theory.  He articulated and rigorously formulated the "Classical" system of political economy.  The legacy of Ricardo dominated economic thinking throughout most of the 19th Century.  

David Ricardo's family was descended from Portuguese Jews who had fled to Holland during a wave of persecutions in the early 18th Century.  His father, Abraham Israel Ricardo, was a Dutch-born stockbroker in Amsterdam who emigrated to London, England around 1760 to trade British funds on behalf of Dutch clients.  (It was after arrival in London when the long-time family surname "Israel Ricardo" became simply reduced to "Ricardo").  Abraham rose to prominence in the City of London, holding one of the twelve brokerships open to Jews on the London Stock Exchange.  He also became an active and distinguished figure among the local Sephardic Jewish community.  Abraham married Abigail Delvalle in 1769, who went on to bear him seventeen children - fifteen of whom grew up to adulthood!  David Ricardo, born on April 18, 1772, was the third of nine sons (six of whom, like David, ended up entering the stockbrokering trade in London).

David Ricardo was raised in the family home on Bury Street in the City of London.  His early education is unclear and he may have been home-schooled until 1783, when David was sent to Amsterdam for a couple of years, staying with his uncle, in order to attend a school there (conjectured to have been the Talmud Torah school attached to the Portuguese Synagogue of Amsterdam). Upon his return, at the age of fourteen, Ricardo's father employed him full-time at the London Stock Exchange, where he quickly acquired a knack for the trade.  In 1793, at the age of 21, Ricardo broke with his family and his orthodox Jewish faith when he decided to marry a Quaker, Priscilla Ann Wilkinson.  According to Ricardo himself, the controversial marriage was the culmination rather than the cause, of a long-gestating breach.. A rationalist by inclination, Ricardo was already drifting away from the faith of his fathers, and flirting with Unitarianism, a Dissenting Christian sect embraced by many leading London intellectuals.   Estranged from both Jewish and Quaker communities, the young couple (Ricardo more than his wife) became attached to the Unitarian church.  They originally  set up their home in the Lambeth district of London.  They would later move to Mile End on the East End in 1803 and subsequently to Grosvenor Square on the West End in 1812. 

After being cut off from his father's business, David Ricardo struck out on his own.  With the assistance of acquaintances and on the strength of his already considerable reputation in the City of London, Ricardo managed to set up his own business as a dealer (jobber) in government securities.  He became immensely rich in a very short while. Among his notable financial feats was the establishment of a consortium with John Barnes and James Steers, which went on to win the bid on the Government Loan of 1807 on behalf of the London Stock Exchange. Ricardo & Co. went on to repeat the feat (albeit partitioned with others) every year between 1811 and 1815.  In 1814, at the age of 41, finding himself "sufficiently rich to satisfy all my desires and the reasonable desires of all those about me" (Letter to Mill, 1815), Ricardo began to retire from city business.  Ricardo bought the former royal estate of Gatcombe Park in Gloucestershire and set himself up as a country gentleman.  In the years after 1815, Ricardo invested much of his fortune in real estate, mortgages and French stocks. (Although having wound down his brokering business, Ricardo re-emerged to submit a bid for the 1819 loan - although he lost that to Rothschild, and resigned from the Stock Exchange permanently in the aftermath) 

During his stockbrokering years, Ricardo moved in various circles in London society.  He was a member of the London Institution (of which Henry Thornton was also a member) and the Geological Society (one of its earliest members and trustees).  He was a member of several prominent Whig social clubs, notably King of Clubs and Brooks's, where he mingled with rising Whig luminaries like Baron Holland, Richard Sharp, and the Edinburgh Review quartet (Francis Horner, Henry Brougham, Sydney Smith and Francis Jeffrey).  Although intellectually curious, Ricardo's earliest interests were in natural sciences (esp. geology).  Ricardo did not come across political economy until his late twenties, when he first read Adam Smith's Wealth of Nations by chance, while on vacation in Bath in 1799.

Ricardo was not a prolific writer - indeed, he considered writing an ordeal and did not take to it naturally.  Bright and talkative, Ricardo discussed economic issues with his friends, and it was only at their persistent urging that Ricardo finally (but reluctantly) took up the pen.  Ricardo broke into print in August 1809, with a letter to the Morning Chronicle on the high price of gold and the depreciation of banknotes.  Back in 1797, parliament had suspended the convertibility of Bank of England notes to gold coin or bullion, leaving England effectively with a fiat paper currency parallel to its coinage.  The Bullionist Controversy had raged on-and-off since then as pamphleteers lined up to raise the alarm about the divergence of the value of paper pound from its gold equivalent and urge the resumption of convertibility.  As a leading member of the London financial community, Ricardo felt compelled to comment, authoring three newspaper articles in the Morning Chronicle in 1809 (Aug 29, Sep 20, Nov 23) subsequently evolving into a pair of tracts (1810, 1811).  Ricardo was a strong partisan of  the Bullionist position (originally articulated by James Wheatley) and blamed the suspension for rising inflation.  Ricardo urged the immediate resumption of convertibility of paper money into gold.   In preparing his arguments, Ricardo outlined what has since become known  as the  "classical approach" to the theory of money.

Ricardo's letters had more impact than perhaps even he expected.  It led to the formation of a Parliamentary Committee under Francis Horner in early 1810 to investigate the bullion question.  The Bullion Committee's report (delivered in May 1810) largely agreed with Ricardo's conclusions and recommended resumption.  However, too late in the season for any legislative action, it would simmer for another year.   In the interval, critics took the opportunity to assail the report,.  Ricardo published a couple of pamphlets (1810, 1811) defending it, while at the same time toning down some of its more worrisome recommendations (e.g. in his 1811 reply to Bosanquet, Ricardo proposed maybe only a partial resumption was necessary) .  Nonetheless, the critics did their damage, and by the time resumption legislation was ready in May 1811, it was resoundingly defeated. 

The bullion question receded quickly into the background when inflation turned around and the new worry became deflation - in particular, the rapid fall in grain prices after 1812. With Napoleon's disastrous campaign in Russia, an end to the long-running war was in sight and grain traders and farmers, anticipating a surge in grain imports in the aftermath, were selling off.  Another parliamentary committee was created, under Henry Parnell in 1813, and in its report, delivered in May 1813, it proposed a dramatic revision of the Corn Laws, setting up a protectionist system that would prohibit the importation of  grain altogether unless domestic grain prices rose above a certain high threshold (80 shillings per quarter).  Legislative action was postponed on this too, until February 1815.  

It was in the hope of influencing this debate that Ricardo returned to print with his groundbreaking 1815 Essay on..Profits.   Parnell had made some elaborate economic arguments in defense of the proposed Corn Laws - in particular, Parnell tried to prove it was not merely a narrow bill to favor aristocratic landlords, pointing out recent declining share of rents on land, the prospects of agricultural improvement and concluding that the law would have no impact on long-run prices and wages nor income distribution (a hypothesis Smith had earlier articulated).  To oppose the Corn Laws, Ricardo needed to prove every one of Parnell's arguments were incorrect.  To bear against it, Ricardo's Essay introduced the differential theory of rent and the "law of diminishing returns" to land cultivation.  Although commonly called the "Ricardian theory of rent", it was not Ricardo's original invention - indeed, it had been discovered simultaneously and independently by T. Robert Malthus, Edward West and Robert Torrens (all four published their tracts within three weeks - Malthus on February 3rd & 10th, West on February 15th and Ricardo and Torrens on February 24th).  Indeed, Ricardo's Essay was explicitly a response to Malthus (who was mildly supportive of the laws), and while it is unlikely Ricardo had read West's essay, their theories were nearly identical.

In his 1815 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 and commercial sectors.   With his theory of distribution set up, Ricardo could show that a rise in wages did not lead to higher prices, but merely lowered profits.  The causality, Ricardo argued, went from prices to wages.  Ricardo went on to show how the proposed protectionist regime of the Corn Laws would increase food prices, raise the overall share of rents, thereby increasing the landlords' income share, and be destructive of the growth of British industry, while a free trade regime would lower prices of grain permanently, and thus lower wages, raise profits and improve growth.  Nonetheless, the Essay failed to get the politicians to change their mind - and the Corn Laws were passed in March 1815.

The end of Napoleonic war in 1815 raised the value of government securities - and made Ricardo an extremely wealthy man and accelerated his retirement to Gatcombe Park. Hearing of Ricardo's new leisure,  James Mill urged his friend to dedicate his time to political economy and to put his ideas into a book. Ever anxious about writing, Ricardo was reluctant, but Mill effectively commanded him to do so, serving as Ricardo's cheerleader, editorial mentor, and disciplinarian schoolmaster all along the way.  With Mill's encouragement and guidance, Ricardo dutifully produced chapter after chapter for Mill's editorial inspection.  Mill greeted them with enthusiasm and prodded Ricardo on to swift conclusion. (Busy with his own History of British India, Mill changed very little of Ricardo's drafts - only a few stylistic recommendations here and there).  Ricardo's resulting treatise, the formidable Principles of Political Economy and Taxation, finally came out in April 1817.  It was given a glowing review by John Ramsay McCulloch in the Edinburgh Review and sold so well, that the publisher begged Ricardo for a second edition - which came out (with only minor revisions) in 1819.

Arguably, a proper theory of value had been missing in the 1815 tract.  In a one-commodity model of the Essay, this is not an big issue.  But, prodded on by Malthus's criticisms, Ricardo realized that in a multiple-commodity economy, for rents and profits to remain residuals, then prices must be pinned down somewhere.  It was in the 1817 Principles that Ricardo finally articulated and integrated a theory of value into his theory of distribution.  For Ricardo, the appropriate theory was the "labor-embodied" theory of value or LTV, i.e. the argument that the relative "natural" prices of commodities are determined by the relative hours of labor expended in their production.   Indeed, Ricardo began his 1817 book by criticizing Adam Smith's  alternatives -- the "labor-commanded" and "adding up" theories of value -- because, he argued, that made value a function of wages and thus income distribution.   For Ricardo, this was untenable.  In his vision, value was independent of distribution, and thus only the "labor-embodied" theory made sense. 

However,  Ricardo realized that when the question of capital comes in, a problem arose: specifically, as different industries apply different amounts of capital per laborer, then the rate of profit will also differ across industries.  Ricardo understood that if he then assumed that the rates of profit across different industries were equalized (as free competition would imply), then, mathematically, relative prices would now vary with wages -- exactly what he had criticized Smith for!  Ricardo realized that the labor theory of value would only work if the degree of capital-intensity was the same across all sectors, casting doubt on the generality of his cherished theory.   

Ricardo proposed two ways out of this dilemma.  The first was the empirical argument that firms apply capital in a roughly proportional manner to the amount of labor invested.  In this case,  the resulting prices when profits are equalized would not differ much from the values implied by the LTV.  This is what Stigler (1958) has called Ricardo's "93% labor theory of value".  The second solution was to find a commodity which has the average capital per worker, so that its price would reflect labor-embodied value and thus not vary with changes in distribution.  He called this the "invariable standard of value" .  If one can find what this "standard" commodity is, Ricardo argued, then the rest of the analysis is simple.  One can, say, change technology, trace the change in value of the standard commodity, and then extrapolate the change in value for all other commodities by the degree to which their capital composition deviates from this standard.  Despite his search, Ricardo never found this standard commodity.  On his death, an incomplete paper entitled "The Invariable Standard of Value" was found on his desk.  Eventually, Karl Marx (1867) proposed one way out of it, but the proper solution would have to wait until Piero Sraffa (1960).

A little tripped up on value, Ricardo (1817) pressed on nonetheless.  With prices (more or less)  pinned down by the LTV, he restated his old theory of distribution.    Dividing the economy into classes of landowners (who spend their rental income on luxuries), workers (who spend their wage income on necessities) and capitalists (who save most of their profit income and reinvest it), Ricardo showed once again how the size of profits is determined residually by the extent of cultivation on land and the historically-given real wage.  He then added on a theory of growth.  Specifically, with profits determined in the manner given above, then the amount of capitalist saving, accumulation and labor demand growth could also be deduced.  This, in turn, would increase population and thus bring more land, of less and less quality, into cultivation.  As the economy continued to grow, then, by his theory of distribution, profits would be eventually squeezed out by rents and wages.  In the limit, Ricardo argued, a "stationary state" would be reached where capitalists will be making near-zero profits and no further accumulation would occur.

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, in his famous Chapter 31 "On Machinery" (added in 1821 to the third edition of his Principles), he noted that technical progress requires the introduction of labor-saving machinery.  This is costly to purchase and install, and so will reduce the wages fund.  As a result, 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 and wages and leading to the general misery of the working classes.  Technical progress, for Ricardo, was not a many-splendored thing.

On foreign trade, Ricardo set forth his famous theory of comparative advantage.   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.  Notice that the differences in initial position mean that the labor theory of value is not assumed to hold across countries -- as it should be, Ricardo argued, because factors, particularly labor, are not generally mobile across borders.  As far as growth is concerned, foreign trade may promote further accumulation and growth if wage goods (not luxuries) are imported at a lower price than they cost domestically -- thereby leading to a lowering of the real wage and a rise in profits.  But the main effect, Ricardo noted, is that overall income levels would rise in both nations regardless. 

Ricardo's conclusions fit in well the political ideas and policy goals of the Benthamite radicals.  James Mill had been urging Ricardo to run for parliament since his 1815 retirement, and serve as their spokesman.  However, Mill was under no illusions - he knew Ricardo was incapable of running a political campaign, and must purchase a seat.  Ricardo could certainly afford it, but, as usual, he was reluctant.  But after his treatise was out of the way, Mill turned up the pressure and Ricardo finally consented.  Mill arranged it all quickly in the course of 1818, negotiating with the Whig leader Henry Brougham to arrange a "rotten borough" for Ricardo, while privately drilling Ricardo on the dos-and-don'ts of parliamentary debates.  Ricardo entered parliament in February 1819 as an independent representing a borough in Ireland, which he served up to his premature death in 1823.  His maiden speech was in condemnation of the Poor Laws.  In parliament, Ricardo was primarily interested in the currency and commercial questions of the day, such as resumption of convertibility (finally passed in 1819), the repayment of public debt, capital taxation and the repeal of the Corn Laws (not achieved during his tenure).

Ricardo was in parliament during the economic depression that hit Britain in 1819-21.  His friend Rev. Thomas Robert Malthus had contemplated that the depression may have been caused by insufficient consumption, leading to a "general glut" -- an excess supply of all goods -- in an economy.   In his works, Ricardo was a firm believer in Say's Law, which asserted the impossibility of a general glut.  Production may be ill-assorted, and there may be excesses in one sector rather than another, but not an overall excess supply.  Malthus and Ricardo engaged in a vigorous debate with each other over the possibility of general gluts.  This is found in their extensive correspondence with each other, culminating in a series of notes Ricardo wrote on Malthus's 1820 Principles (these were later published posthumously as Notes on Malthus).  Ricardo stood firm in his support of Say's Law and dismissed Malthus's underconsumption thesis as theoretically impossible.  Yet, in spite of their disagreements on economic doctrines, Ricardo and Malthus took to each other personally and fostered a legendary friendship.  Ricardo even passed on investment tips to Malthus -- the most famous case being when Ricardo urged Malthus to invest in the bond market in anticipation of a British victory at Waterloo in 1815.  Ever the conservative parson, Malthus declined. Ricardo, as usual, made a killing.

With his 1817 treatise, Ricardo took economics to an unprecedented degree of theoretical sophistication.  He formalized the Classical system more clearly and consistently than anyone before had done.  For his efforts, Ricardo acquired a substantial following in Great Britain and elsewhere -- what became known as the "Classical" or  "Ricardian" School.  His system, however, was improved very little by his disciples.  Arguably, only John Stuart Mill (1848) and Karl Marx (1867-94) added new insights of any great weight.

Ricardo's theory was dominant through much of the 19th Century, but fell out of favor, and died a slow death soon after the Marginalist Revolution of 1871-74.  But research continued in some corners of the world, e.g. Vladimir Dmitriev (1898).  Only much later did Piero Sraffa (1960) finally solve the "invariable measure of value" problem and re-ignited interest in Ricardo's theory.  The "Neo-Ricardian" research program continues to advance today.

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