RICARDO TO MILL
My dear Sir
I have read rather more than half of the MS which you sent to me with which I have been very much pleased. As far as I am able to judge it contains some very able and just views of the subject on which it treats, which I should be sorry should be wholly lost to the public; but at the same time I am of opinion that it contains some radical defects which will prevent it, as a whole, from effecting much good without considerable alterations. In giving my opinion I hope you will consider me as feeling all becoming diffidence when it is opposed by so ingenious and profound an author, but every man must judge with the portion of understanding which is allotted to him.
…The increase of money in my opinion can have no other effect than raising the prices of commodities. By such means some members of the community are enriched at the expence of others; there is a mere transfer of property, but no creation. Whether those who are enriched will employ their additional income more economically or more advantageously than those who before possessed it, must be matter of speculation only. My opinion however is that by no class are greater savings made than by those who are in possession of fixed monied rents and annuities. As far as they have come under my observation, and I have seen a good deal of monied men, they are amongst the most accumulating of the community.
There appears to me only one way in which any addition would be made to the Capital of a country in consequence of an addition of money; it would be this. Till the wages of labour had found their new level with the altered value of money,—the situation of the labourer would be relatively worse; he would produce more relatively to that which he consumed, or rather he would be obliged to consume less. The manufacturer would be enabled to employ more labourers as he would receive an additional price1 for his commodities; he might therefore add to his real capital till the rise in the wages of labour placed him in his proper sphere. In this interval some trifling addition would have been made to the Capital of the community.
David Ricardo (1772-1823) was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill.
Ricardo’s father, a successful stockbroker, introduced him to the Stock Exchange at the formative age of fourteen. During his career in finance, he amassed a personal fortune, which allowed him to retire at the age of forty-two. Thereafter, he pursued a political career and further developed his economic ideas and policy proposals. A man of very little formal education, Ricardo arguably became, with the exception of Adam Smith, the most influential political economist of all time.
Ricardo was the first economist to make extensive use of deductive reasoning and arithmetical models to illustrate the anticipated reactions to juxtaposed market forces and responsive human action. His modes of analysis have become identified with economics as an academic discipline.
Like Smith, Ricardo believed that minimal government intervention best served an economy. His contributions to economics are numerous and include the theory of “hard money” to hedge inflation, the law of diminishing returns, developed along with his close friend the classical economist T. R. Malthus, and the labor theory of value.
One of Ricardo’s most significant contributions to economics is the law of comparative advantage as applied to international commerce, which grew out of Adam Smith’s division of labor and has become the central argument for free trade and open markets. It implies that countries best serve themselves when they trade with other countries abiding by their respective scales of efficiency. Besides being the most efficient method of international commerce, the comparative-advantage mode of trade also encourages international stability through multilateral business interests and global interdependencies. As Frédéric Bastiat, the French journalist and politician, wrote, “If goods do not cross borders, armies will.”
Throughout the years, several economists have elaborated on fundamental Ricardo themes and developed compelling theorems. Using Ricardo’s assertions about the interrelationships among capital, labor, output, and investment, the Nobel laureate F. A. Hayek posed the Ricardo effect, a retort to John Maynard Keynes’s accelerator principle. Robert Barro of Harvard University used Ricardo’s equivalence theorem to argue that the distinction between government taxing its citizens or deficit spending on credit is inconsequential to the long-term aggregate economy. Gordon Tullock, one of the founders of the public choice school, built upon Ricardo’s rent theory to explain his “rent-seeking” phenomenon, which illuminates the inequitable and monopolistic distribution of excessive gains derived through discriminate government subsidies.