David Ricardo – Famed Econimist

David Ricardo

Biography

The famed British economist David Ricardo, who dominated economic thinking throughout the 19th century, was born on the 19th April 1772. Ricardo’s family, who were of Jewish descent, fled to Holland due to a string of persecutions in the early 18th century and from there, his English father, a stockbroker in profession, immigrated to England shortly before Ricardo’s birth. Ricardo would eventually the third child of seventeen.

At the mere age of fourteen, Ricardo was employed by his father to work full-time at the London Stock Exchange, where he quickly acquired the knowledge of the stock market. At 21, his father disowned him and his mother never talked to him again as he broke from his orthodox Jewish faith and decided to marry a Quaker. Despite this, Ricardo set up his own business as a dealer in government securities and soon became extremely rich in an exceptionally short period of time. From there, he was elected into British Parliament in 1819 and served there until his death in 1823.

One Quirky Fact

When David Ricardo died, his estate was worth $100 million in today’s value.

Economic Theory

David Ricardo made a number of economic theories during his life time, which included the value theory, rent, trade theory and policy, protectionism, comparative advantage and the Corn Laws. His most well known theory though, was that of comparative advantage. Through the analysis of the two nations Portugal and England in conjunction with the two commodities of wine and cloth, Ricardo managed to establish the fact that trade would be beneficial for both parties even if Portugal had an absolute cost advantage over England in the two commodities. Ricardo argued that it was possible to gain from trade if each nation chose to specialise completely in the production of the good in which it had a ‘comparative’ cost advantage in production and then trade with the other nation for the other good.

The theory of comparative advantage revolved around the assumptions of

      No transport costs

      Costs are constant and there are no economics of scale

      Only two economics producing two goods

      Assumes that traded goods are homogenous

      Factors of production are assumed to be perfectly mobile

      No tariffs or other trade barriers

      Perfect knowledge, so that all buyers and sellers know where the cheapest goods can be found internationally

How have they contributed to economics today?

Ricardo’s various economic theories and thinking’s had a profound impact on the fundamentals of economics throughout the world. He formalised the classical system with  greater degree of consistency than anyone in his time had done and as a result, Great Britain and elsewhere followed the classical system. His ideas also aided in providing the basis for Marxist critiques of the capitalist system.