GEORGIOS VAROUXAKIS RICARDO, DAVID (1772–1823)

GEORGIOS VAROUXAKIS RICARDO, DAVID (1772–1823)

David Ricardo’s Principles of Political Economy (1817) played a decisive role in setting the argumentative style of modern economics. The work was a systematic critique of central theoretical propositions established in Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations (1776), chiefly concerning price formation and the distribution of income. Ricardo’s focus on questions of value and distribution, and his analytical style of exposition, shaped the literature of English political economy, and can

be seen at work both in JOHN STUART MILL’S own Principles of 1848, and Karl Marx’s Capital Vol. I of 1867 (see MARX AND MARXISM), a work whose chief economic inspiration can be traced back to Ricardo. The formal clarity of Ricardo’s work is however achieved by abandoning the Smithian application of economic analysis to debate on the compatibility of commerce and civic virtue, and the consequences for the civilizing process of commercial values. Moreover, recent scholarship has shown that the

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logical framework developed by Ricardo is not as consistent and clear-cut as it appears. While both of these properties are naturally suggestive of the limitations of modern economics, the influence of Ricardian economics is indirect, there being no lineal descent from the classical economics of Ricardo to the neoclassical economics of the twentieth century. Ricardo’s direct influence was confined chiefly to Britain, and had waned greatly by the 1830s. WILLIAM STANLEY JEVONS famously observed that Ricardo represented a false start for modern economics, and the writings of British economists of the late nineteenth and early twentieth centuries were informed by a social and ethical stance quite foreign to Ricardo. Nonetheless, Ricardo was intellectually liberal and a supporter of reform, qualities that set him apart from his friend and critic ROBERT MALTHUS.

Ricardo was born on 18 April 1772, third son of an Amsterdam Sephardic Jew who had settled in London around 1760, become a leading figure in the local Spanish and Portuguese Jewish community, and subsequently made his fortune on the Stock Exchange. At the age of 11 David Ricardo was sent to Amsterdam to be educated at the Talmud Tora, remaining there for two years, completing his education on his return in Britain and then entering his father’s business at the age of 14. David Ricardo’s independent spirit was demonstrated by his courtship and marriage, at the age of 21, of Priscilla Wilkinson, daughter of a Quaker surgeon. Although the resulting breach with his family was later healed, his renunciation of the Jewish faith was permanent, adopting a commitment to Unitarianism in common with many contemporary progressive rationalists. Although he left his father’s employment, his already solid reputation ensured the continuing support of friends in the City, by 1801 being a member of the Committee for General Purposes of the Stock Exchange during its reorganization. He continued to deal on his own account as a jobber until 1819, although he diversified considerably into the acquisition of landed property in the later years of the Napoleonic Wars, acquiring the manor of Minchinhampton, near Stroud, Gloucestershire, in 1814, including the property Gatcombe Park, which later in the early 1970s became the residence of the Princess Royal. Other purchases followed, including in 1816 the Manors of Bromesberrow and of Bury Court, at the southern end of the Malvern Hills. In 1819 he gave Bromesberrow Place to his eldest son, and it was here that the Ricardo Papers were later discovered. In 1799, during a visit to Bath, Ricardo came across a copy of Smith’s Wealth of Nations, and this chance encounter sparked his interest in political economy, although it was to be 10 years before he began writing on the subject. During his forties

he increasingly adopted the lifestyle of a country gentleman, dividing his time between Gatcombe Park and his house in Upper Brook Street, which now forms part of the site of the American Embassy. At his London house he hosted breakfasts to promote political and economic discussion, which institution contributed to the formation of the Political Economy Club in 1821. In 1819 he became Member of Parliament for the rotten borough (there were twelve electors) of Portarlington in Ireland, a constituency that he never visited. He became an active, but independent, contributor to debates both within the chamber and without, his last contribution being a plan for a national bank, continuous with issues raised in his first economic writings. He died following an ear infection on 11 September 1823 at home in Gatcombe.

Ricardo’s first foray into economic argument concerned the manner in which bank notes depreciated in relation to gold, while coin did not; from newspaper articles of 1809

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he went on to compose the pamphlet The High Price of Bullion, a Proof of the Depreciation of Bank Notes (1810), in which he argued that the reason for the depreciation was the lack of restriction in the issue of bank notes on the part of the Bank of England. What is however immediately striking in this essay is the manner in which the question of the value of a circulating medium is placed in the context of the progress of wealth in different nations, and the effects on commercial relations of differential rates of depreciation between countries—or as we would say today, the relation of domestic inflation to exchange rates and international competitiveness. Shortly after the appearance of the pamphlet a parliamentary committee was established to examine the issue, leading to the ‘Bullion Report’ of August 1810 that endorsed the substance of Ricardo’s analysis. In the ensuing controversy Ricardo defended the Report, and in this way established his reputation as a leading political economist. He had made the acquaintance of JAMES MILL two or three years before, which acquaintance now deepened into a major influence upon Ricardo’s intellectual development. Robert Malthus’s review of Ricardo’s pamphlet in the Edinburgh Review also brought a contact who was to be important in discussion of the economic issues with which Ricardo was increasingly concerned.

Although Ricardo first came to public attention with this and related publications on the currency question, he is chiefly known to later generations of economists for his Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815), and the development of its arguments two years later in his Principles. The domestic grain market was at this time protected by the 1804 Corn Law that prohibited exports above 54s. a quarter, and imposed a sliding scale of duties on imports, the duty liable falling with the domestic price. Population growth and the impact of the Napoleonic Wars had combined to raise the domestic price of grain, the actual expansion of output feeding through into increased costs and, therefore, rents. The high price of grain came to symbolize a clash between the interest of landlords in high prices, and that of manufacturers in low prices—for grain was a staple foodstuff, and any rise in the price of bread triggered a demand for higher wages. Ricardo’s pamphlet was prompted by parliamentary debate in the February of that year, a new Corn Law being passed in March that abolished the sliding scale and set a level of 80s. a quarter above which imports were free, and below which they were prohibited. This was widely perceived as support for the landed interest, and Ricardo’s analysis sought to demonstrate the connection between wages, profits and rent in the distribution of income. His contribution coincided with the appearance of three other major pamphlets on the question, one of them by Robert Malthus; and their joint significance lies in part at least in the manner in which all four writers shared a new approach to the general question of the production and distribution of wealth. The importance of Ricardo’s essay lies however in the identification of the existence of agricultural rent as a means of regulating the rate of profit between different investments; and in developing this he laid the basis for a systematic treatment of diminishing returns to capital and labour in agriculture. His general conclusion was that profits and wages were fixed in an inverse relationship, so that the higher wages were, the lower profits became. High wages therefore not only posed a short-term threat to manufacturing profit, in the long run the consequent depression of the rate of profit would bring about a decline of investment.

Entries A-Z 553 This argument was expanded in his Principles of Political Economy and Taxation into

a more general treatment of value, capital and profit, developing at the same time a theoretical treatment of the comparative advantages of international trade that has survived in the textbooks of international economics up to this day. Ricardo ignored Smith’s general argument concerning commercial progress, government and civil society, and focused on aspects of his work relating to the level of prices and wages, and returns to investment and the distribution of income. The outcome was a theoretical system that rationalized Smith’s own unsystematic treatment of value, capital, wages, price and profits, presupposing a primarily agricultural economy, in which there was an inherent conflict of interest between manufacturers and landholders, and between landholders and their tenant farmers. The manufacturers wanted cheap bread for their workers; the landholders wanted protection for the high level of rents they were charging their tenants; and the tenant farmers wanted low rents, since there was an inverse relationship between rents and profits. Given Ricardo’s simple assumption that the profits on agricultural investment set the rate of return on capital for the economy as a whole, this meant that protection for the landlord ultimately depressed the rate of profit in the economy as a whole, potentially bringing new investment to an end in a form of stationary state. The original schema of the 1815 Essay thus led to an economic demolition of protectionist policy, arguing that free trade was the most certain way to secure the future prosperity of the nation—a conclusion that he certainly shared with Smith, but which he arrived at by a different analytical route.

There is much common ground between Ricardo’s pamphlet and Malthus’s Inquiry into the Nature and Progress of Rent, but an important point of difference emerged in their treatment of the landed interest. Malthus supported the existence of the Corn Laws on the grounds that they offered protection to agriculture; and in developing this line of argument his sceptical attitude to economic growth based upon an expansion of manufacturing production once more becomes apparent. Malthus, while operating very much in the same kind of Smithian framework as Ricardo, considered that Government intervention was necessary to regulate the growth of manufacturing, in the general interests of social and political stability. This was not however inconsistent with Smith’s arguments concerning a regime of liberty, since, unlike some of his later exponents, Smith had always recognized the impossibility, or even undesirability, of a truly minimalist state—the chief thrust of Smith’s arguments involved a reduction of Government activity as much as was practicable, and not a utopian dismantling of Government’s capacity to regulate the maintenance and growth of national wealth.

Ricardo’s reputation in the years following his death in 1823 emphasized the axiomatic and deductive nature of his political economy, as opposed to the more applied and inductive tendencies of Malthus. This was something of a disservice to Ricardo, in that as an MP from 1819 to his death he actively engaged in parliamentary debate, and was a member of the Select Committee on Agriculture that reported first in 1821 and then again the following year. By now, the problem was the low, rather than the high, price of corn, the 1822 average price of wheat moving towards half the 1815 level. Given the relation of supply and demand for foodstuffs, low grain prices benefit the consumer and sharply reduce farm incomes, so that the historically low prices of 1822 led to agricultural distress. The agricultural interest blamed the low price on deflationary monetary policy, associated with a return to gold, linked of course to the issues with

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which Ricardo had begun his career as a political economist. He steadfastly opposed the protectionist recommendations of the Committee and argued against them in the House, publishing in April 1822 a new pamphlet On Protection to Agriculture, which within two months of its first appearance had to be reprinted three times. His arguments for free trade in grain, and by extension free trade as a general policy, provided systematic support to the free-trade movement in Britain that eventually succeeded in its aims in the 1840s.