On the Principles of Political Economy and Taxation by David Ricardo was written in 1817. The Economic themes in this book were value and free trade. The book also addresses many subsidiary issues.
You can download it here:
I recommend you download it above, over reading someone else’s summary. Even reading a chapter or two of Ricardo’s book will give you greater insight, and puts you on better footing to understand the pros and cons of free trade or the idea of the comparative advantage than any general description.
From Mercantilism to Free Trade
- Ricardo, like Adam Smith, believed free trade would overcome many of the issues connected with Mercantilist economics.
In the post Napoleonic era, England switched from mercantilism to free trade, or a closer semblance of free markets and a free movement of labor and capital, it reached its gilded age.
Although still an empire, under the influence of classical economic thinking such as Adam Smith or David Ricardo, England flourished while empires like Spain waned, and it was no coincidence.
The idea of mercantilism was to accumulate bullion by an export driven economy.
Metaphorically mercantilism which saw countries economies as two tubs of baths, one hot and one cold, and when free trade is introduced or accelerated the hotter tub loses thermal energy and the cooler tub gains. For example, when the US trades with China, the US wealth or at least wealth creation is cooled off and Chinese wealth creation heats up or accelerates. Ricardo disagreed. These arguments initially seem counter intuitive until you understand economics and consumer and producer surplus gains from a comparative advantage.
- Ricardian ideas on comparative advantage and free trade was the greatest contribution to economics found in On the Principles of Political Economy and Taxation.
Ricardo answers the above objection, that free trade is one sided, by use of logic and examples relevant to this 19th century world. His theory was based on specialization and a nation would concentrate on production and of resources that each country could generate wealth in an optimal way in comparison to other nations.
Any reallocation of the production process would be offset by efficiency gains. Ricardo used examples of Portugal producing cloth and wine at a lower cost than England but both England and Portugal would net out ahead.
Criticisms of Comparative Advantage Theory
Although his theory does contain weaknesses, he was aware of, his theory showed the benefits of free trade vastly outweighed the costs. For example, there were situations when capital was mobile as opposed to fixed and this would have different consequences.
Subsequent critiques included Keynesian Joan Robinson’s note that Portugal stayed underdeveloped in comparison to England. That is real world situations with dynamic equilibrium and less than full employment and with trade imbalances Ricardo’s theory of did not prove out.
However, in the end free trade would be a optimal. Specifically a country does not even have to have an absolute advantage to gain a comparative advantage. These terms Ricardo did not even use, but were coined and popularized by those like Johns Stuart Mill.
I (Mark Biernat) suggest if you couple Ricardo’s trade theory with free banking, that is an unregulated currency or sound money, trade imbalances can not sustain themselves. They have a self correcting mechanism. Free trade policy needs to be paired with a free money policy.
Ricardo in Modern Economic Terms
If Florida grows sugar cane and makes molasses and Connecticut grows apples and makes apple cider, it benefits both states to have no restriction on interstate trade. It would not make economic sense for Connecticut to become a vertically integrated molasses producer.
States are little different then countries. Free trade between regions or even towns and or households is similar free trade between countries. In the Middle Ages medieval faires and markets between towns ushered a new prosperity.
For example, if the soil and conditions and the expertise to create cheese and grow grapes in France is established, and India is better suited to grow cotton and send this to Vietnam to create clothes which are designed in the US. Why not allow this free economic process to unfold.
The net result is consumers get lower prices and it takes less cost to produce a comparable good. Society can employ resources that were used in less efficient production processes and allocated them in a different way.
Metaphorically when the PC was popularized if would have been inefficient to employ a legion of typists to do what a word processor could do. Those typist or the next generation could work in medical research and do higher level tasks.
Similarly, if India now grows cotton cheaper than the State of Georgia, people in Georgia can be employed in another field of work such as accounting or IT. Economics is dynamic and this will change every decade. However, the world is becoming more efficient with free trade and the most obvious consequence is general price stability and relative price deflation.
Theories are obvious after it has been stated.
Ricardo’s Theory of Value
Other topics in the book included a discussion on rent, wages and profit, and the labor theory of value.
The value of an object was based on the value of labor put into the creation of an object.
The value of a commodity, or the quantity of any other commodity for which it will exchange, depends on the relative quantity of labour which is necessary for its production, and not on the greater or less compensation which is paid for that labour.David Ricardo
In the preface, you can read Ricardo’s critique of, Adam Smith, Jean-Baptiste Say, Turgot, Stuart, Sismondi.
Ricardo felt Adam’s Smith theory of value lacked conceptual rigorous. He refined it to a labor theory of value, something Marx would use as his core theory of value. It was not until the marginal revolution with Jevons, Carl Menger and Léon Walras was value uncoupled with labor directly. However, many people conceptually still hold to a Ricardian theory of value.
Ricardo noted that as population increased rents, because land was scarce and fix, would increase. He had made his money in the stock market but was concerned about the welfare of others. He believed free trade would help alleviate this issue as it would increase the wealth of both countries involved.
Ricardo and the AI revolution – On Machinery
Ricardo foresaw technology improving the production process but at least in the short-term it created issues with labor and wages. More important he saw mechanization, increasing the Gini coefficient. That is the capitalist would benefit from the new technology and this would decrease the cost of production. While workers wages would decrease as competition included new machines as well as labor as an input in production.
This is the situation we have today. Increased competition with machines and vector learning lowers the wages of workers. I know many people college educated people who are thrilled with a $15/hr job.
The reason Ricardo’s mind was so great as a classical economist is his idea are relevant in today political economic discussion. However, his ideas are not only applicable, they are foreshadowing. If you read his work from the original context you can gain insights into the future of our global economies today.
If you have question about the free trade debate, tariffs and how David Ricardo would respond if he were living today, please leave a comment or write me. These are important issues in economics and misconceptions can affect people’s lives.