David Ricardo, among the brightest and best - and richest
The economist David Ricardo, who died aged 51 on September 11th, 1823, of septicaemia following an ear infection, had an extraordinary career. He was the third of 17 children of a Portuguese then Dutch Sephardic Jewish family, and when he eloped with a Unitarian Christian and adopted her faith, his parents ostracized him.
He went into a banking house and made a fortune, perhaps over £1 million sterling, speculating on the outcome of the battle of Waterloo. That would be equivalent to hundreds of millions of pounds today. He immediately retired to spend the rest of his life in economics and politics. He bought a seat in Parliament for £4,000 in 1818, as one could do in those days, and remained an MP until his death. He campaigned against slavery, and was in general on the side of reform.
He’d first made a name as an economic thinker in 1809 when he wrote that the inflation then in evidence was caused by the Bank of England issuing too many banknotes. Today we call this monetarism, the quantity theory of money.
His 1815 essay on the Influence of a Low Price of Corn on the Profits of Stock expressed what today is called the law of diminishing marginal returns. It pointed out that if extra resources are mixed with something (such as land) in fixed supply, the increases in output will be less than they were. He opposed the Corn Laws which kept up the price of corn by limiting imports, pointing out that they benefitted the landlords rather than their tenant farmers. This still holds, in that agricultural price supports have been shown to enrich the owners of farmland rather than those who work it. He also suggested that because landowners spend wealth on luxuries instead of investing it, that the Corn Laws were leading to economic stagnation.
He made some errors, supposing the worth of something to be the product of the labour that went to produce it. But Smith made the same mistake, as did Marx. It was only later that people realized that value arises from demand, not supply. If nobody wants it, it’s worthless, no matter how much labour it took to produce it. He was also wrong about technology, believing that machines would act against the interests of working people, not foreseeing that the increased productivity they brought would increase wealth generally, most of all for the less well-off.
Following Adam Smith, he rejected the idea that nations became rich by accumulating gold and silver through a trade surplus. Instead he argued in favour of specialization and free trade. Famously he suggested that even some industries that were profitable and competitive should be abandoned in favour of those that were even more competitive. Thus, even if a nation was better at producing everything, it should still buy from other countries to replace the things it did less competitively, in order to commit its resources to those that were its most competitive. This is the famous notion of comparative advantage. When the economist Paul Samuelson was asked to name an economic proposition that is true but not obvious, the only one he named was the theory of comparative advantage.
To modern economists, Ricardo seems unique in arriving, via plain language and logical thought, at concepts they need complex mathematical tools to arrive at. David Friedman put it succinctly, “The modern economist reading Ricardo’s Principles feels rather as a member of one of the Mount Everest expeditions would feel if, arriving at the top of the mountain, he encountered a hiker clad in T-shirt and tennis shoes.”
Ricardo is reckoned to be second only to Adam Smith in the field of economics and, like Smith, he did it in ways that are accessible to non-professionals. For that, among his other contributions, the word owes him a huge favour.