The Period between Smith’s Wealth of Nations and Ricardo’s Principles of political economy and taxation
David Ricardo (1772-1823), a stock dealer turned economist, made significant contributions to a number of areas of economic theory, including methodology, theories of value, international trade, public finance, diminishing returns, and rent. He began his study of economics sometime around 1799, when he was twenty-eight years old, and in 1810 published his first pamphlet, The High Price of Bullion. His essays on the Corn Law controversy, published around 1815, established him as one of England’s most talented economists. His major work, Principles of Political Economy and Taxation, published in 1817, quickly replaced Adam Smith’s Wealth of Nations as the accepted book on economic questions. It is the third and final edition of this work.
Till the appearance of Ricardo’s Principles of Political Economy and Taxation in 1817, Adam Smith’s Wealth of Nations, published in 1776, dominated English economic thought. In the four decades that intervened, no major new economic theory appeared, although several significant contributions to economic analysis were made. Thomas Robert Malthus (1766-1834) published an essay in 1798 and a book in 1803 on population; in 1815 Edward West, Robert Torrens, Malthus, and Ricardo published essays discussing the concept and economic significance of rent. Ideas on both these subjects came to be embodied in classical economics.
Ricardo’s interest in economics was sparked by a chance reading of Adam Smith’s Wealth of Nations (1776) when he was in his late twenties. Bright and talkative, Ricardo discussed his own economic ideas with his friends, particularly James Mill. But it was only after the persistent urging of the eager Mill that Ricardo actually decided to write them down. He began in 1809, authoring newspaper articles on currency questions which drew him into the great Bullionist Controversy that was raging at the time. In that affair, he was a partisan of the Bullionist position, which argued for the resumption of the convertibility of paper money into gold. He wrote a pair of article in 1810 and 1811 articulating their arguments and outlining what has since become known as the “classical approach” to the theory of money.
Many of the fundamental concepts and principles of classical economics were set forth in Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Strongly opposed to the mercantilist theory and policy that had prevailed in Britain since the 16th century, Smith argued that free competition and free trade, neither hampered nor coddled by government, would best promote a nation’s economic growth. As he saw it, the entire community benefits most when each of its members follows his or her own self-interest. In a free-enterprise system, individuals make a profit by producing goods that other people are willing to buy. By the same token, individuals spend money for goods that they want or need most. Smith demonstrated how the apparent chaos of competitive buying and selling is transmuted into an orderly system of economic cooperation that can meet individuals’ needs and increase their wealth. He also observed that this cooperative system occurs through the process of individual choice as opposed to central direction.
In analyzing the workings of free enterprise, Smith introduced the rudiments of a labor theory of value and a theory of distribution. Ricardo expanded upon both ideas in Principles of Political Economy and Taxation (1817). In his labor theory of value, Ricardo emphasized that the value (price) of goods produced and sold under competitive conditions tends to be proportionate to the labor costs incurred in producing them. Ricardo fully recognized, however, that over short periods price depends on supply and demand. This notion became central to classical economics, as did Ricardo’s theory of distribution, which divided national product between three social classes: wages for laborers, profits for owners of capital, and rents for landlords. Taking the limited growth potential of any national economy as a given, Ricardo concluded that a particular social class could gain a larger share of the total product only at the expense of another.
These are some of the Ricardian theories which were restated by Mill in Principles of Political Economy (1848), an essay that marked the conclusion of classical economics. Mill’s work related abstract economic principles to real-world social conditions and thereby lent new authority to economic concepts. The teachings of the classical economists attracted much attention during the mid-19th century. The labor theory of value, for example, was adopted by Karl Marx, who worked out all of its logical implications and combined it with the theory of surplus value, which was founded on the assumption that human labor alone creates all value and thus constitutes the sole source of profits.
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