It is generally accepted that Adam Smith was the founder of modern economics, with his 1776 paper, 'The Wealth of Nations'. If that is true then it could be argued that David Ricardo was his successor. He was undoubtedly one of, if not the most famous economist of the 19th century. In this essay I will show how David Ricardo's school of thought influenced and still influences economics around the world today. Ricardo was born in 1772 into a Jewish family from London; he was the 3rd oldest child in a family of 17.
He was sent, for a short time, to school in Holland but at the age of 14 was employed by his father, who was a stoke broker in the City of London. At the age of 21 he was disinherited from his family for marrying outside the Jewish faith, to a Quaker. He then proceeded to set up his own company in the City of London and in a short time amassed a huge fortune. His interest in Economics was sparked when he read Adam Smiths' 'The Wealth of Nations' when he was in his late twenties.
In 1809 he started writing articles on the bullion controversy and in 1810 released his first major paper on it titled 'The High Price of Bullion, A Proof of the Depreciation of Bank Notes'. This paper later formed the basis for the classical approach to the theory of money. In 1814, Ricardo retired to a newly bought country estate where he continued to write articles and papers on the economics issues of the time, and in 1817 released his most famous paper 'Principles of the Political Economy, and Taxation'.
This paper was based on Adam Smiths' paper but was designed to set it out in a much clearer way. In 1819, after a lot of persuasion by his good friend, James Mill, Ricardo entered parliament, representing a small county in Ireland, he held this post until his death in 1923. Ricardo took economic thinking to a new level with his papers, and the Ricardian school of thought was the most influential school of thought for the majority of 19th century.
During his life he had my three main supporters; James Mill (1773-1836), who as I mentioned above helped pushed Ricardo into parliament but not only that, it has also been argued that he acted as a 'school-master' helping Ricardo who hadn't received a lot of formal education to write his treatise in 1817. The second main supporter was John McCulloch (1789-1864), a Scottish journalist who as Fetter said in 1965 was a 'tireless salesman for Ricardian Economics'. His review of Ricardo's work in 1818 greatly helped to boost the sales of the treatise.
The third supporter was Thomas de Quincy (1785-1859), although he was better known as a writer rather than an economist he was nevertheless a true advocate of Ricardo's theories. I will now look at some of these theories in more detail. In 1810 as I mentioned earlier, Ricardo released his first major work titled 'The High Price of Bullion, A Proof of the Depreciation of Bank Notes'. In this paper he set out what is today known as the Classical Theory of Money.
The paper was written with the hope of reinstating the gold standard. The debate came about because in 1797, under the threat of French invasion, the government informed banks that they no longer had to honour the standard that any note could be taken to a bank and redeemed for the equivalent amount of gold. This was done to stop a run and was successful in doing so. However the government with this disaster avoided didn't reinstate the gold standard and banks continued to issue notes that they could not convert back.
Ricardo argued in his paper that banks, if not forced to stick to the gold standard, would excessively issue bank notes and there would be a surplus supply of money, this would push up the general price and lead to inflation across the board. He was not alone in his thinking and just a few months after the papers release Francis Homer requested a committee be set up to investigate the problem. Ricardo was called to give evidence before this committee and although the gold standard wasn't re-established until an act was passed in 1819 and came into effect in 1821, citing reasons very similar to Ricardo's initial argument ten years earlier.
In 1815 came his next major work, titled 'An Essay on the Influence of a Low Price of Corn on Profits'. In this essay Ricardo introduced his theory of distribution, applicable to the corn market and expanded on the law of diminishing returns, as previously mention by writers such as John Locke. Ricardo in this paper was a great advocate of laissez-faire economics. The background to it was that England were protecting their agriculture by imposing tariffs on imported corn, this had the effect of pushing up prices for corn and so making land that wasn't economically viable before profitable.
This then resulted in landowners pushing up the rents on the land and so reducing profits for the capitalists, this in turn meant the capitalists had less profit to re-invest and so economic growth would slow until in the long run becoming zero. On top of this Ricardo stated that in the long-run diminishing returns would set in. He argued that if a factor of production, in his case land, was kept constant and another factor, for example labour, was increased then the increased returns relative to the extra labour would, after a certain point, start to drop.
Although this theory had been put forward by other writers, it wasn't until David Ricardo set it out, that it was truly noticed. Ricardo took some criticism for this piece notably from his good friend the Rev. Thomas Malthus who argued that the model was for a single-good economy and was over simplified as it had no theory of value in it. So in 1817 Ricardo released his main treatise 'Principles of the Political Economy and Taxation'.