Comparative Advantage Theory of David Ricardo  Introduction (original) (raw)

David Ricardo (1772-1823) was a classical British economist. He is best known for his theory on wages and profit, labor theory of value, theory of comparative advantage, and theory of rents. He born in England in 1772 and is one of 17 children. David Ricardo begins working with his father as a stockbroker at the age of 14. He retired at the age of 41 form dealt government securities after earning at estimated £1 million speculating on the outcome of the Battle of Waterloo. After retiring at age 42, Ricardo purchased a seat in Parliament for £4,000, and he served as a member of Parliament. Influenced by Adam Smith, Ricardo held company with other leading thinkers such as James Mill, Jeremy Bentham and Thomas Malthus. In his Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815) Ricardo conceptualized the law of diminishing returns with respect to labor and capital. Ricardo wrote his first article on economics, published in "The Morning Chronicle," at the age of 37. The article advocated for the Bank of England to reduce its note-issuing activity. Like Smith, Ricardo saw the economic world tending to expand, with capitalists accumulating capital that earlier would have been used for profits, building factories, and employing more workers while increasing wages. From the French economist Jean-Baptiste Say (1767-1832) Ricardo derived the idea that "supply creates its own demand" as producers employed and paid workers who, by spending, generated consumption and formed demand. However, Ricardo added a critical dimension to the theory of economic growth. With an expanding population and an increased demand for food, the margins of agricultural production would expand, bringing into cultivation land of lesser fertility, increasing the cost of grain (wheat, the food staple in Britain), yet increasing returns to landlords owning the better lands, earning them differential rents (above the minimum earned on the marginal lands). In turn, the capitalist would be faced with the higher wage costs necessary for buying more expensive grain to sustain workers. While the landlords got more revenues even though, Ricardo concluded, they themselves contributed little to the wealth-creating process (because they owned land and yet did not work it themselves).