TAXES are a portion of the produce of the land and labour of a country, placed at the disposal of the government; and are always ultimately paid, either from the capital, or from the revenue of the country.
We have already shewn how the capital of a country is either fixed or circulating, according as it is of a more or of a less durable nature. It is difficult to define strictly, where the distinction between circulating and fixed capital begins; for there are almost infinite degrees in the durability of capital. The food of a country is consumed and reproduced at least once in every year; the clothing of the labourer is probably not consumed and reproduced in less than two years; whilst his house and furniture are calculated to endure for a period of ten or twenty years.
When the annual productions of a country more than replace its annual consumption, it is said to increase its capital; when its annual consumption is not at least replaced by its annual production, it is said to diminish its capital. Capital may therefore be increased by an increased production, or by a diminished unproductive consumption.
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.