MALTHUS TO RICARDO
E I Coll August 25th 1823
My dear Ricardo,
I am very much obliged to you for giving me your whole view on the subject of value by sending me your letter to M’Culloch.2 I am a good deal engaged just at this moment, or should have answered your previous letter,3 but I cannot return your letter to M’Culloch which I have read with great attention without a few words on its contents. I most fully agree with you in your remarks on his view of the subject. It does certainly appear to be a most unjustifiable and useless mode of applying the term, labour worked up in a commodity to the increase of value occasioned by the time it is necessary to keep it before it is brought to market; but I see no impropriety in saying with Adam Smith and myself that labour will measure not only that part of the whole value of the commodity which resolves itself into labour, but also that which resolves itself into profits. I of course quite agree with you in saying that the great mass of commodities is not produced by labour alone, but by the union of labour and capital; and consequently if I thought that my measure would not measure the profits of capital I would give it up without a moments hesitation; but it appears to me after the maturest consideration of all the objections which have been made to me, that it will measure both the quantity and the rate of profits accurately, and therefore will measure the value of an oak tree as well as of shrimps. You allow distinctly that my measure will measure the value of shrimps or of gold picked up on the sea shore. Now let us suppose for a moment that this gold which before was considered as being brought to market immediately must now be kept for a year before it is exchanged, and that profits were ten per cent, would not the exact difference between the value of the shrimps obtained by ten days labour and of the gold obtained by ten days, be ascertained by adding ten per cent to the labour employed upon the gold; and will not the gold in that case command 11 days labour, while the shrimps command ten, that is, will not the relative quantities of labour which they will command exactly measure the amount of the additional value given to the gold by the element of profits. Moreover if the natural and absolute condition of the supply of the shrimps were the employment of ten days labour, is it not correct to say that the natural and absolute value of the shrimps is measured by ten days labour; and in the same manner, as the gold in the case supposed could not be supplied without the addition of a value of ten per cent to the value of the labour employed, must it not be equally correct to say that the natural and absolute value of the gold in this case is measured by the eleven days labour. Apply this principle to the case of the cloth and wine which you have mentioned in the latter part of your letter, or to the case of the oak tree, and you will find it answer in every instance, whatever may be the variations of profits, or the length of time required to bring the commodity to market, while in all these cases of great variations or great length of time, your measure according to your own concessions would be greatly inaccurate.
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.