Today marks a significant birthday, that of the English economist, stockbroker and politician, David Ricardo (1722-1823).
His career began as a successful broker and speculator. It was said that he made £1m by misleading market players into thinking that the French had won the Battle of Waterloo, and then buying stocks and bonds cheaply.
But Ricardo is much better remembered today as an economist. His career in this field started when he read Adam Smith’s Wealth Of Nations (1776). Applying rigorous logic to Smith’s ideas, he made important developments in the theory of rents, wages, profits, taxation and value. In 1809 he argued that the high inflation in England was the result of the over-issuance of banknotes—making him an early monetarist. Like Smith, he opposed protectionism, arguing that the Corn Laws (which restricted wheat imports) made domestic production inefficient and drove up rents.
Ricardo’s greatest contribution to liberal thinking was perhaps his theory of comparative costs (now known as comparative advantage). Countries, he said, could make themselves better off by specializing in what they can produce relatively cheaper (in terms of what else they might have produced) than other countries. Even if a country can produce everything more cheaply (in absolute terms) than another, they are still better to specialize and trade in the goods where they have a comparative advantage.
This principle became and remains one of the key foundations of the argument for free trade. So let’s raise a cheer for David Ricardo, 296 but still going strong—or at least, his ideas are.