Business

DAVID RICARDO (1772-1823)

Ricardo was the second great economist, who also was known for his great financial acumen. He made a fortune in stocks when he was young, then became an economist despite the fact that he had not attended college. In 1817 he published The Principles of Political Economy and Taxation. It put forth his two major theories.

(1) The Ricardo Effect was the theory that when wages are higher, capital-intensive production is favored over labor-intensive production. What does this mean? Since businesses have to pay more for their workers, they're going to concentrate more on investing in new factories and new materials (capital).

(2) The theory of comparative advantage, which is the fundamental idea behind the economics of international trade. It says that if each nation produces the goods that they can make most efficiently (in other words, they have the required natural resources, the right level of technology, enough skilled laborers, etc. to produce those goods), all nations will benefit in the end, by trading for the goods produced by other nations. In other words, a nation shouldn't try to produce everything it needs; it should do what it does best, and count on others to do what they do best. In the end everyone is happy.

Ricardo had another, less optimistic theory, although in many ways he agreed with Adam Smith. He said that population keeps expanding, eventually there won't be enough food to go around, and economic growth will stop. This was similar to the ideas of Thomas Malthus. Together they led to economics being called "the dismal science."