No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Fifteen: Issues in International Economics 385 GREAT ECONOMISTS IN HISTORY DAVID RICARDO 1772-1823 If Adam Smith was the father of systematic economic thought, David Ricardo was the father of systematic economic theory. David Ricardo took Smith’s theory to the next level with his Principles of Political Economy and Taxation , which provided a theoretical baseline for economic theory. Full of abstract modeling, it is the progenitor of modern mathematical economics, yet widely criticized. In fact, Joseph Schumpter called his reasoning the “Ricardian Vice,” since abstract modeling and logical reasoning do not necessarily make a good theory. There is much to like in Ricardo’s economics, but also much error. His longest lasting positive contribution is the law of comparative advantage, where Ricardo demonstrated that gains from trade are possible as long as there are differing opportunity costs of production. This is true even if one country or individual has an absolute advantage in the production of all goods; there are still possible gains from trade by individuals or countries specializing in those goods and services where they have the lowest opportunity cost of production. They benefit by using the proceeds from the sales of those goods to trade for goods and services which have a higher opportunity cost of production. The truth of this law is independent of whether we are referring to two people, two counties, two states, or two countries, and forms the basis of modern free trade theory. His theory in part helped him defeat the infamous Corn Laws in England, which greatly benefitted landowners at the expense of the poor. After the repeal, food costs dropped rapidly to the benefit of consumers, especially the working poor. Ricardo’s work on rents was crucial in the development of the law of diminishing returns. In his model, for corn farmers to grow additional quantities of corn, they must progressively use less hospitable land. This leads to lower additional output for a given increase in land farmed; this is the intellectual foundation of the law of diminishing returns. This would become the basis for the law of diminishing returns. Despite his good works, Ricardo’s focus on the labor theory of value and distribution stifled the growth of economic knowledge and ultimately lent support for Marxist theories of exploitation. Nevertheless, his contribution to free trade makes him a giant in the field of economics. Ricardo has another distinction: he was perhaps the richest economist ever. No one could ever tell him, “if you’re so smart, how come you’re not rich?” Ricardo made a fortune in the stock market as dealer and broker in government securities. After making his fortune, he became a member of parliament and focused on economics. Portrait of David Ricardo 2